Cross Border Deals
By Vandana Shroff & Smruti Shah
Posted: 18th June 2013 08:28
The advent of globalisation in general - and a shift of economic power to the emerging economies in particular - has led to a huge spurt in cross-border activity over the past two decades. By definition, a cross-border deal will involve at least two jurisdictions. However quite often, the number may be much bigger as the companies involved may have operations all over the world.
While traditionally, deals were more common between European and North American companies, there is a shift in trend to more deals being focussed on the emerging markets in Asia, Africa and Latin America. Although the recent economic crisis might have reduced the resource pool and the risk taking capacity of the traditional players, cross-border transactions have continued without much disruption, albeit perhaps with altered motivations. Companies are now more keen on distributing their geographical exposure more widely, with the dual aim of achieving higher growth and containing risks.
Being part of what is described as the BRICS grouping of emerging economic powers; India has been witness to increased cross-border deals despite the global economic crisis. Although there are perceived fears arising from uncertainty of the tax position resulting from the Vodafone dispute, the M&A landscape in India has not been significantly marred.
The value of M&A deals involving India rose by 12% in 2012, reaching an aggregate value of US $ 43.4 billion. The figures were driven by the merger of Sesa Goa, a 55%-owned unit of Vedanta Resources, with Sterlite Industries in a deal valued at US$3.9 billion, the largest M&A transaction of the year with a significant Indian element. Also, Indian companies are more confident acquiring overseas companies with Indian acquisitions overseas rising 12% with an aggregate deal value of US $ 11.6 billion. However, the trend of foreign firms acquiring Indian companies has declined 23% to US $ 15.3 billion over the same period. This perhaps reflects the relative strength of the Indian economy which has been somewhat less affected by the global economic crisis than many of the western countries.
Although there may be many different motivations and concerns behind cross-border transactions, the following seem to be common to most:
- Companies are keen to benefit from economies of scale and thus reduce production and management costs
- Companies want to benefit from achieving greater synergies
- Companies are becoming increasingly wary of overexposure to any particular jurisdiction, and want to expand geographically to pervade into the trans-national space
- Some transactions are designed to acquire a competitive advantage over rivals, although these may lead to competition law issues, and would hence require additional legal input
- Companies want to acquire valuable intangible assets such as key employees, intellectual property or technology
They must be satisfied that the deal is likely to create higher value. They will also try to quantify this value, and will have to work out the timeframe over which this value be realised. Also, the company will need to be comfortable that the deal will lead to synergies which will make the combined entity more successful than the individual units. Equally important is having a realistic assessment of the risks involved, and a plan to effectively manage such liabilities. This will require extensive and informed due diligence.
Legal & Regulatory Issues
Despite efforts being underway to achieve some form of uniformity in legal processes for cross-border transactions, there are wide differences in areas of corporate, competition, taxation and security laws, amongst others. For example, a foreign company acquiring an Indian company will be required to comply with the Takeover Code and also follow the guidance and limits imposed by the foreign exchange regulations.
The regulatory roadblocks in doing business in India, such as the legal regime governing takeovers, competition law, and FCPA/ UK Bribery Act is still evolving. Furthermore, the basic company law in India is all set to undergo complete revamp with the Companies Bill, 2012 being passed in the Lok Sabha (the lower house of the Parliament of India) and which is now pending with the Rajya Sabha (the upper house).
As far as dispute resolution is concerned, the recent Supreme Court decision overruling Bhatia International which makes international arbitrations immune from parochial interference by Indian courts comes as a relief, however, the Supreme Court does seem to have thrown the baby out with the bath water by ousting the jurisdiction of the Indian courts to grant interim relief as well.
Given the fast paced change in the regulatory landscape in India, adequate legal advice on local law specific points to ensure that the deal is valid and enforceable in the jurisdiction in question becomes critical. The differences in the legal and regulatory framework may also lead to changes in the nature and depth of the due diligence process. These legal complications become even more pronounced if the transaction involves several jurisdictions as lawyers will have to be engaged in each jurisdiction leading to increased legal and administrative costs.
Another important parameter that is often ignored when formulating M&A strategies is the relevance of the underlying cultural issues. Work ethics and even corporate structures can vary significantly across different jurisdictions. Even among countries with seemingly similar cultural values, huge cultural differences can exist in areas such as office etiquette, communication styles, human resources policies, expected working hours etc. For example, many large Indian businesses are family-owned with a central decision making authority usually headed by the patriarch or a family-controlled board. Although the boards will almost invariably have professional non-family directors and other officials, the interests of the family will affect business decisions. Lack of awareness of these cultural issues may result in disaffection and will eventually lead to economic losses. These cultural issues can also have a detrimental effect in the working conditions of the employees who are used to a different management style.
Ignorance of the political matrix may lead to undesirable economic consequences if and when the political equations result in adverse changes in the legal and regulatory landscape. As an example, while foreign direct investment in the retail sector has been recently allowed, given the extensive lobbying, this has been allowed subject to complex conditions attached to the policy. Other hurdles such as states getting the power to say yes or no to retail, have kept global players from making any announcements so far and a lot depends on the outcome of the 2014 elections.
Cross border deals in India is set to see exponential growth. The GDP growth has eased lately, but is expected to recover. While fiscal slippage, high inflation and socio-political issues continue to remain challenges, the strengths of the Indian market lie in the sheer GDP size, the private equity houses remaining active in India, recent regulatory changes to boost inbound investment (such as foreign direct investment now being allowed in the retail and the aviation sector) and the huge attraction for investment in the infrastructure sector.