Why Are Companies Crossing Borders To Initiate Mergers And Acquisitions?
By Lawfarm Team January 16, 2022
By Siddhant Dutta
With the MNCs rising and looking for more opportunities, it has been seen that companies are now merging with companies from other nations to establish their presence in different countries. This has been seen as an alternative to the traditional form of doing business in different countries since earlier companies used to come to another country and it took a long time to get clearances and licenses from the Government of the said country to set up their business. In the last 30-40 years, the world has observed that cross border mergers have increased at a fast pace.
To define what cross border merger is, it is a collaboration between 2 or more companies that are incorporated in different countries. These companies try their methods to increase their growth rates and improve their product standard to fight in the global market. One of the best examples is the collaboration between Singapore Airlines and Tata which made “Vistara”, a premium-class Airline. But the question arises why do companies merge with other companies abroad? Why do they not set up their firms over there and compete with their rivals? The reasons for that are below:
Global And Domestic Market Support
Due to the LPG policy which came in 1991 during the Narsimha Rao Government, the Financial Markets in India are now globalised thanks to the rapid development of technology. Markets like National Stock Market (NSE), Bombay Stock Exchange (BSE) etc. have helped in increasing the Foreign Direct Investment which led to an increase in cross-border mergers. Better Finance-related policies by the Government boosted the confidence of the Indian Companies to expand their bases abroad and merge with others to become Global Brands.
2. Competitive And Challenging Markets
In every sector, there is domestic as well as international competition which makes the companies realise their need to expand their bases abroad. International Recognition helps the companies to work in the way of cross-border mergers which lead to standard up-gradation in their products so that the company’s product can compete with the international brands. This recognition also helps in boosting the Country’s image abroad and subsequently helps in attracting more foreign investments.
3. Exploring New Opportunities
With the new markets emerging, it is necessary to make sure that your company is fully ready to compete in the market. To maintain their growth and standard, companies tend to look beyond the domestic markets to accelerate their capacity. Cross-border mergers help in the development of the companies involved and thus accelerate their growing speed. With the latest tech available, it is now easier to get in touch with the customers abroad as well as the parent country.
4. Improvement In Quality
As the company merges with foreign companies, automatically their product’s quality improves due to the support in Research & Development (R&D) from foreign companies. Collaborating with Foreign companies also helps in the growth of the brand among the customers. We can take the example of Maruti Suzuki where Maruti used to be a normal, boring type car manufacturer which used to make the Maruti 800. But after the merger with Suzuki, the technology and the design of the cars developed and we can see how Maruti Suzuki has become one of the Prominent Companies in the Automobile Industry.
Now, as we have seen why companies do cross-border mergers, it is important to know about the types of cross-border mergers-
When a Foreign company merges with an Indian Company or buys its shares, it’s called an inbound merger. For example, Etihad Airways and Jet Airways
2. Outbound Mergers
When an Indian company buys the share of a foreign company or merges with it, it’s called an outbound merger. For example, Merger between Facebook and Reliance Jio.
Talking about the regulation of cross-border mergers in India, Section 234 of the Indian Companies Act, 2013 lays down the guidelines and the legal process for Cross-border Mergers. Compliances like permission from the Reserve Bank of India (RBI), Discharging Consideration in the form of cash or depository receipts etc. Other than the Companies Act, laws like the Competition Act, 2002, Income Tax Act, 1961, Transfer of Property Act, Indian Stamp Act and others also regulate cross-border mergers in India.
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