Chapter 1

CHAPTER 1

INTRODUCTION

1.1. Meaning of Mergers and Acquisitions

Mergers and acquisitions are set to become a vital feature of future planning of
corporate globally. Many commercial goals like growth synergy, profit, survival, are
all there for the corporate to achieve in the near and far future. Mergers suggest the
consolidation of two or more companies. The word acquisition conveys that one
company has been either acquired or sold to another. Cross-border mergers
acquisitions account for the bulk of contemporary foreign direct investment. They are
the important influence on the evolution of the space economy. “Many of the most
interesting research questions derived from these contextual relations which are
addressed with reference to issues of embeddedness at various geographical scales
and also by linking these issues to aspects of employment and territorial
development.”1 “Backed by the liberalisation of outward investment policies, cross
border acquisition of Indian companies rose from a meagre $ 23 million to$ 29 billion
from the year 1990 to 2007.”2 The 1980s witnessed Chinese aggression in globalising
its economy and causing a huge impact on cross-border mergers business process in
the entire world. In the 1990s, India also witnessed liberalization regime under the
leadership of the late P.V. Narasimha Rao government. It is often argued in the light
of the about facts of China and India globalising their economies, that companies
from developing markets are often forced to undertake and explore the possibility of
cross-border mergers in order to face the challenges of liberalisation domestically
because of the increased competition and removal of protectionism. “Firms from
emerging markets are compelled to undertaker cross-border acquisition in order to

1
Keith Chapman, Cross Border Mergers/Acquisitions: A Review and Research Agenda,
VOL. 3, JOURNAL OF ECONOMIC GEOGRAPHY, 309, 334, (JULY 31, 2003)
2
Report of United Nations Conference on Trade and Development UNCTAD 2013.

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 Chapter 1

survive liberalisation.”3 In the United States of America (USA), the merger is a

combination question in which only one corporation survives and the merged
corporation goes out of existence.

In a merger, the acquiring company acquires the assets and liabilities of the merged
company. The statutory merger also refers to this type of transaction of the business.
The process has to be completely in compliance with the rules and regulations as
mentioned in the specific law. The most common law is the Delaware law, and many
companies follow both state and foreign law. Importance of mergers and acquisitions
of the specific company in different parts of United States under different state laws is
different from law relating to Cross-Border Mergers and Acquisitions (CBMAs). It is
to be noted that subsidiary merger is different from the statutory merger in which, the
substitute merger of the targeted company becomes a subsidiary or part of the
subsidiary of the parent company. For instance, General Motors of Electronic Data
Systems is an example of its subsidiary merger. There is also a provision for reverse
subsidy merger. Generally, a company can expand its activity by acquiring the shares
of another company or by taking control of the affairs of the company.

Acquisition of another company, if such a company is a listed company, is referred to

as takeover or substantial acquisition. In India, the Competition Act of 2002 and the
erstwhile Companies Act, 1956 recognize such takeovers, subject to specific
regulations through Security and Exchange Board of India (SEBI), substantial
acquisition and shares and takeover regulations of 1997. Once a company takes over
or acquires another company, the natural process would be to amalgamate such
acquired company with itself or with another company to form a new company. Thus,
amalgamations and takeovers are different from others because here mere taking over
by purchasing of the shares happens. While in mergers, there is enough of the organic
synergetic oriented integration process of two entities which are different both in
space and time across the globe. The SEBI takeover regulations do not apply to the
acquisition of shares of the unlisted company. The guidelines issued under the new
Companies Act 2013 address this issue.
3
Gubbi, Aulakh, Ray, Sarkar, and Chittoor: Do International Acquisitions by Emerging Economy
Firms Create Shareholder Value? 41(3), THE CASE OF INDIAN FIRMS JOURNAL OF
INTERNATIONAL BUSINESS STUDIES, 397-418, (2010).

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 Chapter 1

The word merger has not been defined in the erstwhile Companies Act, 1956 nor in
the Companies Act, 2013. However, this term has been defined under the Income Tax
Act, 1961. The Companies Act, 2013 makes a reference to amalgamation and the
National Company Law Tribunal (NCLT) also refers to it. Amalgamation is to
compound, to consolidate or to combine the business interest of firms. In England,
according to the Halsbury‟s laws, this mentions, that “neither reconstruction nor
amalgamation has a precise legal meaning.”4 Amalgamation is a blending of two or
more existing undertakings into one undertaking, the shareholders of each blending
company becoming substantially the shareholders in the company which is to carry on
the blended undertakings.

“Expert on International CBMAs advocate solicitor, K R Sampath, however defines

merger as an arrangement whereby the assets of two companies become vested in,
under the control of, one company which may or may not be one of the original two
companies, which has its shareholders all, or substantially all the shareholders of one
or both of the emerging companies exchanging their shares either voluntarily or as a
result of the legal operation of the shares in the other or a third company.”5 “Section
900 of the English Companies Act 2006 is very similar to the erstwhile Companies
Act 1956 Section 394 which provides that an application is made to the court for
sanctioning a compromise agreement arrangement but the members are creditors for
the purpose of the amalgamation of two or more companies or the whole or any part
of the undertaking or property is to be transferred to another company the court has
specific powers to enable the reconstruction of the companies generally.”6

In India, the terms amalgamation and merger are used interchangeably. According to
accounting standards and also the tax laws, we have two types of amalgamations
namely firstly, through merger and secondly through purchase. It can be inferred that
amalgamation means mixing up or uniting together and amalgamation is not an
extension although the identity of the amalgamated unit and integrated unit with one

4
JAMES PETER HYMERS BARON MACKAY OF CLASHFERN, HALSBURY‟S LAWS OF
ENGLAND VOL. 72, 1461, 1103, (2008)
5
K R SAMPATH, LAW AND PROCEDURE ON CORPORATE RESTRUCTURE LEADING
TO MERGERS/ AMALGAMATIONS, TAKEOVERS, JOINT VENTURES, LLPS AND
CORPORATE RESTRUCTURE, 23-29, (2017.)
6
Company Act, 1956 in comparison to English Company Act, 2006 (as brought by Mr Sampath).

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another is a non-organic unification of the two entities rather than undertakings of the
fusion of one with the other. Section 2 1(b) of the Income Tax Act commission in
relation to companies which means the merger of one or more companies with other
company or the merger of the two or more companies to form amalgamation becomes
the property of the amalgamated company by virtue of amalgamation. Secondly, all
the liabilities of the amalgamating company or the companies immediately before the
amalgamation, by fourth in value of the shares in the amalgamating company or
companies become the shareholders of the amalgamated company by virtue of
amalgamation. This definition is only indicative and the strictest interpretation is not
allowed in other aspects of the implementation of the provisions as mentioned in a
new Company Act, 2013.

The matrix of the global economy plays a vital role in cross-border mergers and
acquisition atmosphere. The global financial crisis in the year 2008 which oversaw
the catastrophe in several financial institutions and the tsunami in the stock markets
had an adverse impact on the speed and the coverage of cross-border mergers
acquisition transactions.

1.1.1. The matrix of the global economy

“Emerging market companies pushed for legitimacy in foreign markets by conducting

cross-border acquisitions.”7 How Indian companies generate value in their cross-
border acquisitions is a matter of research. For the past 10 years after 2008, the cross-
border mergers and acquisition landscape significantly was pushed towards the larger
companies. Young companies and overvalued companies with a higher industry
adjusted rating are more likely to make an acquisition, than the companies with the
highest stake by a single promoter. “Competition in domestic industry as measured by
Herfindahl-Hirschman Index (HHI), increases the probability that is consistent with
the results as reported in the various research findings.”8 “Companies belonging to
business groups with large boards are the firms that make an acquisition and firms in

7
Rao-Nicholsona, R., & Ayton, J. Euphoria in Financial Markets, VOL.38, INTERNATIONAL
BUSINESS AND FINANCE, 494–508, (2016).
8
Bekke, T., & Whited, T.. Which firms follow the market? An analysis of corporate investment
decisions. VOL. 23(5), THE REVIEW OF FINANCIAL STUDIES, (1941–1980). (2010).

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 Chapter 1

competitive industries are also likely to make a cross-border acquisition than a

domestic acquisition.”9 There were many changes in the law in India with reference
to all the affected provisions in different segments which have an impact on the
activity of the CBMAs, which include, among others the following namely-

 Firstly, foreign investment rules,

 Secondly, the Indian Taxation Regime and

 Thirdly, currency movements

One cannot negate the impact of political factors which include elections and other
game changers like the demonetisation and the introduction of the goods and services
act (GST).

1.1.2. Types of Mergers and Acquisitions

Mergers are subdivided into horizontal, vertical, conglomerate types. A horizontal

merger occurs when two companies inorganically combine. However, competition law
comes into the picture in India; the antitrust law comes into the picture in the United
States of America if the horizontal mergers result in the post-merger firm having such a
huge market power that it threatens the competitive spirit among other participants in
the market. The 1998 merger of two petroleum giants, EXXON and MOBILE who
created a merger of US$ 79 billion is a classic example of a horizontal merger.

Vertical mergers are conjunctions of companies having chronological vendor supplier

or buyer-seller relationship. There are examples of cross-border vertical mergers and
the classic example is the 1993 Pharmaceutical giant namely MERCK, acquiring the
containment services corporation MEDCO for US$ 6 billion.

The third type of merger is conglomerate merger which occurs when the companies are
not in any competitive relationship and also do not have any vendor-supplier
relationship. General Electric company, the world leader in many segments of industrial

9
Hhi-Herfindahl-Hirschman Index (HHI) - Investopedia.The Herfindahl-Hirschman index (HHI)
is a commonly accepted measure of market concentration. It is calculated by squaring the market
share of each firm competing in a market, and then summing the resulting numbers, and can
range from close to zero to 10,000.

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 Chapter 1

products and services is a classic example of conglomerate mergers. Procter and Gamble
(P&G) which is a consumable item global giant, acquired Gillette in the year 2006 in the
segment of household products. Similarly, Oracle and PeopleSoft, in the business of
application software merged horizontally in the year 2004. In the Communications
arena, ESBC community and Ameritech are the examples. In the year 1998, Nations
Bank and Bank America became the examples of commercial banking.

In vertical merger, the corporate value chain involving-

1. Inbound Logistics,

2. Operations Related Logistics,

3. Marketing,

4. Distribution and Sales Logistics,

5. Customer Support Logistics plays an important role.

“If the integration takes place from inbound logistics to customer support, it is termed
forward integration and if the integration takes place from customer support to
inbound logistics it is called backward integration. The best example of forward
integration is the IC SC ID acquiring Office Max in the year 2003 for $4.01 billion.
The best example of the backward integration is America Online purchasing Time
Warner in the year 2000.”10

1.1. 3. Meaning of Cross-Border Mergers and Acquisitions

Section 394 of the Companies Act, 1956, deals with CBMAs. However, it is silent about
the manner in which the consideration would be discharged. “One of the most important
features of the present wave of M&A is the presence of large number of Cross-Border
M&A (CBMAs) deals.”11 The new Act of 2013 introduces pragmatic reforms for
M&A‟s in making the process easier, faster and cleaner for companies. Some of the

10
Acording to Gugler,Mueller, Yurtoglu,and Zulehner (2003), horizontal, conglomerate, and
vertical mergers accounted for 42 percent, 54 percent, and 4 percent, respectively, of the 45,000
transactions analysed between 1981 and 1998.
11
Saraswathy Beena, Cross-Border Mergers and Acquisitions in India: Extent, Nature and
Structure. WORKING PAPER 434, (July, 2010), http://test.cds.edu/wp-content/uploads/
2012/09/wp434.pdf, (Last visited on May 15,2018).

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 Chapter 1

highlights include: setting up of National Company Law Tribunal (NCLT) to hear and
decide on M&A proposals, cutting down on the probability and scope of objection to
M&As and easier as well as wider participation of share-holders through postal ballot
approval. “These along with others, more creative and hurdle-free approaches are there
towards M&As.”12 “Cross-border M&A supported by technological advancements, low
cost financing arrangements and robust market conditions, have made deal- makers
confident and think more creatively about their growth strategies.”13 “It will be used as a
whole to mean the transactions where operating enterprises merge with or acquire
control of the whole or a part of the business of other enterprises, with parties of different
national origins or home countries”14

“In short Cross-border M&A is more difficult than domestic M&A, lot of think about
due diligence process, a qualified, experienced due diligence team can help ensure
that you have thoroughly considered all relevant factors, understand the legal
requirements associated with your proposed transaction”15 “CBMAs have become
topics of interest mainly because they help a firm to enter new international markets
and there by enhance their ability to compete in global markets.”16

“CBMA with an existing firm as a strategy is less costlier than that of developing the
necessary production capability and capacity.”17 “Construction of new facilities takes
time and it may be more profitable to acquire the existing facilities of another
company.”18 “Synergy is important as it signifies team work, coactions, harmony and
alliance. CBMAs are synergetic for combined sales offices, staff facilities, plants
management, etc, which lower the operating costs.”19 “Synergies are different types

12
M&A booster- New Companies Act has it all easy and clean – IN HOUSE COMMUNITY,
httpt//www. Inhouse community.com.(Last visited on May 15,2018).
13
Earnest & Young L.L.P. “Mergers and Acquisitions in the newer of Companies Act 2013”,
ASSOCHAM, 14, ( Feb- 2014).
14
https://www.ey.com/Publication/vwLUAssets/Assocham_White_paper_Companies_Act/
%24File/Assocham_White_paper_Companies_Act.pdf , (Last visited on May 17, 2018)
15
OECD New Patterns of industrial globalization: Cross-Border Mergers and Acquisitions and
strategic alliances, 14 (2001).
16
KPPB Law firm, Inbound and Outbound Mergers and Acquisitions, https//www.KPPB law,
com/...inbound and outbound Mergers and Acquisitions/ , (Last visited on 16.05.2018).
17
MICHAEL A. HITT ET, AL, MERGER AND ACQUISITION- A GUIDE TO CREATING
VALUE FOR SHAREHOLDERS, 149(2001).
18
JACK BROYLES ET AL, FINANCIAL MANAGEMENT HANDBOOK, 378, (1983).
19
VERMA, J.C., CORPORATE MERGERS AMALGAMATION AND TAKEOVERS, 77(2009).

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such as manufacturing synergy, operations synergy, financial synergy, managerial

synergy, marketing synergy, etc. As an illustration, Mahindra & Mahindra Ltd
(M&M) acquired Jiangling Motor Company Group (JMCG) that will make
company‟s entry into tractor manufacturing synergy.”20 “To gain access to new
markets a foreign company prefers to merge with a local established company which
knows behaviour of market and has established customer base.”21 “In a free
competitive and globalised world, it is necessary for a company to be placed in such a
manner that it is in position to compete with the best in the world.”22

In India, the first Company legislation is Joint Stock Companies Act, 1850, which was
based on the English Companies Act, 1844. This Act recognized companies as
distinct legal entity but did not introduce the concept of limited liability, it was
recognized first time by the Companies Act 1857, but the concept were not extended
to banking & Insurance companies. This right, afterwards was extended to banking
company also in the year 1858. This Act was replaced by Companies Act, 1913,
which based on the English Companies Consolidation Act 1908. At the end of 1950,
the Government of independent India appointed a Committee under the Chairmanship
of Sri H.C. Bhalla for the revision of the Indian Companies Act, This Committee
submitted its report in March 1952. On the recommendation of the Committee the
Companies Act 1956 was enacted which come into force on 1st April 1956. This Act
consists of 658 sections and fourteen schedules was the largest of all the legislative
enactment passed by the Indian parliament so far, once again this Act largely followed
the English Companies Act 1948. The Companies Act, 1956 brought to light several
lacunae and defects in its provisions. Therefore the Act is amended several times, the
major amendments were introduced in the years, 1960, 1962, 1963, 1964, 1965, 1966,
1967, 1972, 1974, 1977, 1985, 1988,1991,1993,1996,2000,2001, 2002,2006. The
enactment of the Companies Act, 2013 is one of the most significant legal reforms in
India in the recent past, aimed at bringing Indian Company law in tune with global

20
Bio-Tech & Genetics , BUSINESS LINE FINANCIAL DAILY, THE HINDU, 3, (Kolkata edn.
November 10, 2004).
21
KAUR, G, CORPORATE MERGERS AND ACQUISITIONS, 273, (2005).
22
Bhasin, “Merger and Acquisition: An Overview,‖ MANUPATRA NEWSLINES, 1, Issue-7, 11,
(Dec 2006) , www.lawjournals.org/download/270/4-1-66-948.pdf , (Last visited on May 10,
2018 ).

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 Chapter 1

standards, incorporated recommendations made by various Committees such as J.J.

Irani Committee, the Naresh Chandra Committee, and Vepa Kamesam Committee
etc. The Company Bill, 2008 was first introduced in the Lok Sabha on 23rd October
2008, to replace existing Companies Act, 1956. Due to dissolution of the Lok Sabha
the bill was re-introduced in the Parliament in 2009 subsequently sent to the Standing
Finance Committee. The Committee presented its report in August 2010. Again the
bill referred to the Committee in 2011 with the inclusion of certain new provisions.
The Bill was passed by both the houses, in Lok Sabha on 18th December, 2012 and in
Rajya Sabha on 8th August, 2013, and became an Act called Companies Act, 2013. It
received the assent of President of India on 29th August, 2013, it made effective from
1st April, 2014. This Act comprises of 29 chapters, 470 sections and has 7 schedules.
This marked a landmark event in the history of Indian corporate law. The Companies
Act 2013 again was amended by the Companies (Amendment) Act 2015 which
received the assent of the president on 25th May, 2015. It was notified in the Official
Gazette on 26th May, 2015. The Companies (Amendment) Bill 2017 introduced in
Lok Sabha on 16th March, 2016. The Companies (Amendment) Bill 2016 was
referred to the Standing Committee on Finance on 12th April 2016.

“The Government, after considering the suggestions of the Committee gave notice of
amendments as approved by the cabinet to the Lok Sabha. The Companies
(Amendment) Bill 2017 was passed by Lok Sabha on July 27, 2017 and received the
assent of Rajya Sabha on 19th December, 2017.”23 “This Bill was passed to amend
the company‟s law to strengthen corporate governance standards, initiate strict action
against defaulting companies and help improve ease of doing business in the country.
The Bill provides for more than 40 amendments to the Companies Act, 2013”24

1.1.3.1 Prior approval from R.B.I. is mandatory

“Section 234(2) of Companies Act, 2013 states that a foreign company may merge
with a company registered under this Act or vice-versa. However such a merger
23
Corporate Professionals, “An Overview of The Companies (Amendment) Bill, (July 27, 2017),
http://www.companiesact.in/Companies-Act-2013/News-Details/20759/An%20Overview
%20of%20The%20Companies%20(Amendment)%20Bill,%202017 (Last visited on May 10,
2018 ).
24
Cross Border M&A, THE ECONOMIC TIMES,( Dec 19, 2017.) .https://economictimes.
indiatimes.com/markets/stocks/news (Last visited on May 10, 2018).

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requires prior approval of the Reserve Bank of India. The scheme of merger may inter
alia provide for payment of consideration in Cash or in Depository Receipt or a
combination of the two.”25 For the purpose of this sub-section, the expression
“Foreign Company” means any company or body corporate incorporated outside
India irrespective of the fact of whether having a place of business in India or not.

1.1.3.2 Central Government Responsibility of Framing of Rules in Consultation

with the R.B.I.

“Section 234(1) provides that the Central Government may make Rules, in
consultation with R.B.I in connection with mergers and amalgamations provided
under this section.”26 The coverage, consistency (both within and with other existing
laws) and clarity of such rules will be important criteria.

1.1.3.3. National Company Law Tribunal (NCLT)‟s Approval

The Companies Act 2013 creates a new regulator, N.C.L.T who upon its constitution
will assume the jurisdiction of High Courts for sanctioning mergers. The Tribunal will
consider the merger application there after company concerned has obtained an
approval from the R.B.I and complied with the provisions of section 230 to 232 of the
New Act and the Rules.

1.1.3.4 Permitted Jurisdiction for Outbound Merger

The Companies Act, 2013 has now opened its doors for outbound mergers, such
mergers are only permitted with a foreign company incorporated in a

1. Jurisdiction whose securities regulator is a member of the International

Organization of securities Commission‟s Multilateral Memorandum of
Understanding (MOU) or a signatory to the bilateral MOU with Securities and
Exchange Board of India (SEBI) or

2. Whose Central Bank is a member of the Bank for International Settlements (BIS)
and

25
Sec. 234(2), THE COMPANIES ACT, 2013.
26
Sec. 234(1), THE COMPANIES ACT, 2013.

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3. A jurisdiction which is not identified in the public statement of Financial Action

Task Force (FATA) as:

3.1 A jurisdiction hearing a strategic Anti-money Laundering.

3.2 A jurisdiction combating the financing of Terrorism deficiencies to which

counter measures apply.

3.3 A jurisdiction that has not made significant progress in addressing the
deficiencies.

3.4 A jurisdiction that has not committed to an action plan developed with the
FATF to address the deficiencies.

4. Valuation: “1. In case of outbound merger, the foreign company should ensure that
its valuation is conducted by a valuator who must be a member of a recognized
professional body in their country and such valuation must be in accordance with
internationally accepted principles on accounting and valuation.”27

A declaration to this effect is required to be attached with the application, for

obtaining R.B.I approval in out bound merger but the law remain silent on such
requirement for Inbound merger.

5. Fast Track Merger: Section 233 of the Companies Act, 2013 introduces the
globally accepted concept of „Fast Track Merger Process‟ which introduce a slightly
simpler procedure for mergers and amalgamations of certain companies including
small companies as well as holding and its wholly-owned subsidiary companies.
Provisions under Companies Act, 1956 which deal with traditional mergers and
amalgamations are time consuming and costly processes as it includes clearances
from many regulatory bodies and every type of company must go through this route.
There was a need to simplify and expedite the procedure for the merger of small
companies, holding subsidiary companies and companies where the interest of third
parties is not involve. The present Act enables these companies to undergo merger
and amalgamation procedures quickly, simply and within fixed time duration.

27
http://www.mondoq.com/India, (Last visited on May 26, 2018).

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 Chapter 1

Cross-border mergers also regulated by the R.B.I under the Foreign Exchange
Management Act 1999 (FEMA) to harmonize the scope of cross-border merger. RBI
has released (as on April 26, 2017) the Draft Foreign Exchange Management (Cross-
border Merger) Regulations 2017 (Draft Regulation) that prescribed certain guidelines
to be followed in case of both in bound as well as out bound mergers.

1.1.3.5 Penalty

“Every offence under the new Act [except those referred to in offences under sec-
212(6)] shall be deemed to be non-cognizable.”28 “Within the meaning of Sec-439(2),
Criminal Procedure Code, 1973, no court shall take cognizance of any offence under
this Act which is alleged to have been committed by any company or any officer
thereof, except on the complaint in writing of the Registrar, a shareholder of the
company, or of a person authorized by the Central Government.”29 “For violation of
the proceeding relating to sanction of Reconstruction and Amalgamation of
Companies under section 232 of the Companies Act, 2013, the transferor company or
a transferee company, as the case may be, shall be liable to a fine, not less than one
lakh rupees but which may extend to twenty five lakh rupees and every officer of such
transferor or transferee company who is in default, shall be punishable with
imprisonment for a term which may extend to one year or with fine which shall not be
less than one lakh rupees but which may extend to three lakhs rupees or with both.”30

The Companies Act, 2013 under section 234 allows merger of a foreign company
with an Indian one. There are two types of mergers here. One is the inbound merger
with one other. The second one is outbound merger. Notified jurisdictions have also
been added recently in the notification in the month of April, 2017.

The Company Act, 2013 lays down the criteria for the mergers and acquisitions with a
foreign company. Indian Company can make payment to shareholders of a foreign
company by way of, cash or depository receipts subjected to the requisite guidelines
and approval of the laws pertaining to CBMAs as mandated in the Companies Act
2013. There was an interesting case recently between MOCHIP semiconductor

28
Sec. 439(1), THE COMPANIES ACT, 2013.
29
Sec. 439(2), THE COMPANIES ACT, 2013.
30
Sec. 232(8), THE COMPANIES ACT, 2013.

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 Chapter 1

Technology Limited, a California based company which merged with an Indian company
in Hyderabad. Practical experience around the world after correct observation needs to be
made in the form of a law in India so that the mergers and acquisition process across
countries and continents will be smoother and will not the repetitive in terms of the
mistakes that happened elsewhere. Bloomberg DNA report on mergers and acquisitions in
their law report makes the above issue clear when the law report mentions in that, “this is
not the time for a quick and dirty decision making process, as there is no one size fits all
solution available. Chief among the factors influencing the decisions are, the long term
strategy the company, its degree of international exposure and the familiarity with new
market ,the extent of resources that it can commit, the degree of risk it is willing to incur,
it‟s network of existing relationships, the general industry environment in which it
operates, and the particular characteristics of it‟s products and services.”31 The transferee
company filed the petition for amalgamation and the name of the transferor organisation
was not added as a party to the writ. The point that discussed was whether the Indian Court
has jurisdiction to pass an order of acquisition in respect of the company incorporated
outside India which winds up as a foreign company. The notification, 2017 April throws
light on this and hence there is no longer any requirement for ambiguity in this connection.
In the current time of 2018, most of the Cross Border Mergers and Acquisitions take place
in technology and information communication fields. E-commerce giant like Walmart is in
the news nowadays for taking over the India E commerce Company Flipkart. Both
Walmart and Flipkart use ecommerce plat forms, software innovations on a daily basis. “A
Technology business that pursues a merger and acquisition strategy is purchasing access
not just to the tangible and intellectual property assets of the target but also to valuable
trove of country specific information, experience and capability including the collective
skill set of the workforce of the target. A Technology business that possesses relatively
little familiarity with the host country and its economy may shy away from a greenfield
investment in favour of mergers and acquisition options.”32

31
Viswanath Pilla, Moschip Acquires Three Companies in Semiconductor and iot Space,
LIVEMINT,( September 12, 2016.), http://www.livemint.com/Companies0Rw6QxR2YuZu
V60pMRBAoJ/MosChip-acquires-three- companies-in-semiconductor-and-IoT-sp.html, (Last
visited on May 16, 2018.)
32
Viswanath Pilla, Moschip Acquires Three Companies in Semiconductor and iot Space,
LIVEMINT,( September 12, 2016.), http://www.livemint.com/Companies0Rw6QxR2
YuZuV60pMRBAoJ/MosChip-acquires-three- companies-in-semiconductor-and-IoT-sp.html,
(Last visited on May 16, 2018.)

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The Companies Act, 1956 does not permit Indian company to merge with a foreign
one. Section 234 of the Companies Act, 2013 mandates the mode of mergers and
amalgamations between companies registered under this act, incorporated on the
jurisdiction of other countries. With the prior approval of the RBI, they come under
the provisions of the Companies Act, 2013 and as per the terms and conditions of the
scheme of merger amalgamation can provide for the payment of consideration to the
shareholders of merging company in cash or partly in cash and partly in Indian
Depository Receipts (IDRs). The Companies Act, 2013 especially allows for both
inbound and outbound mergers, post-April, 2017.

1.1.3.6 Cultural Gaps: Types and Impact

Current Indian initiatives in taking over start up companies in Europe and in the USA,
has to take into their stride the aspect of cultural gap. Cultural gap becomes a critical
factor in continental Europe as well as in Latin America and Africa including Southeast
Asia and China. „The oft-noted cultural gap that complicates cross border mergers and
acquisition transactions goes beyond legal and regulatory variations to encompass all
manner of linguistic, relational, values based and other differences arising from the
distinct social and business traditions that participants bring to the table. Divergent
language requirements, negotiating styles, non verbal communication modes and even
attitudes towards the legal profession carry the potential to impede the negotiation,
execution and implementation of The Deals if not proactively anticipated and addressed.
Cultural obstacles are most often effectively addressed through early recognition,
communication and planning, close cooperation with local counterparties, partners and
advisors, and a pragmatic readiness to do as the Romans do.‟

1.1.4. CBMA & Due Diligence

Due diligence is of great importance in Cross Border Mergers and Acquisitions.
While cultural gap is expected to be tackled within the framework of the best
practices of human resources as well as the law, due diligence is more managerial and
legal than any other part of the Cross Border Mergers and Acquisitions. “Due
diligence is the process of obtaining and validating crucial information about the
business of the target and identifying potential liabilities, risks, other significant issues
affecting the business and the proposed merger and acquisition transaction. Diligence
is necessary to determine the exact nature and characteristics of what is purchased,

14
 Chapter 1

verified evaluation and other key commercial, identify and allocate risks, determine
optimal transaction structure and process.”33

1.1.4.1. Types of CBMAs

According to the notification of April 2017, Ministry of Corporate Affairs,

Government of India, there are two types of CBMAs and they are firstly inbound
CBMAs and outbound CBMAs. Some are efficient and some are not.

1.1.4.2. Magnitude of CBMAs.

“The magnitude of mergers and acquisitions mentions many waves in mergers and
acquisitions and most of the researchers agree that there are five such waves of activity,
often called as merger waves in the history of United States of America.”34 “The
following diagram mentions the surges in the activity of CBMAs till 2015. Enforcement
system capability is important. The probability of deal completion is positively
associated with levels of economic freedom of countries of acquirer and of target.”35

Fig. 1.1: Cross Border Mergers and Acquisitions Values in 2015

Source: Merger market Global and Regional M&A: First Half 2015

33
Viswanath Pilla, Moschip Acquires Three Companies in Semiconductor and iot Space,
LIVEMINT,( September 12, 2016.), http://www.livemint.com/Companies0Rw6QxR2YuZuV6
0pMRBAoJ/MosChip-acquires-three- companies-in-semiconductor-and-IoT-sp.html, (Last
visited on May 16, 2018.)
34
Calomiris, C.W. & Karceski, J. Is the bank merger wave of the 1990s efficient ? lessons from
nine case studies. MERGERS AND PRODUCTIVITY. 93-161 (2000).
35
Jianhong, Zhang & He, Xinming & M. Van Gorp, Désirée. Economic Freedom And Cross-
Border Acquisitions From Emerging Markets Into Developed Economies, 59. THUNDERBIRD
INTERNATIONAL BUSINESS REVIEW. 313–331 (2016).

15
 Chapter 1

An important theme for the year 2014 is the return of big deals in CBMAs with 95
deals having a value of over US $ 5 billion, more than the double of what happened in
the year 2013. The same is reflected in the year 2015, 2016 and 2017 comparatively.
Private equity investors and cash-rich investors have access to liquid cash and hence
there has been a surge in the availability of credit for highly rated takeovers. This
provides an opportunity for big-ticket transactions.

Cross border mergers entail several complexities linked by the overall outlook of a
specific market, government stability, ease of doing business, in the region and
availability of financing options, regulatory framework etc. Industry characteristics are
of great importance in Cross Border Mergers and Acquisitions. The effect of these
distinct characteristics to value creation is also dependent on the bilateral cross-country
relations in terms of the institutional distance, variations in language, and diplomatic
connexions. “Acquiring companies in service Information Technology industries where
post acquisition autonomy is more important in value creation outperform those in
manufacturing industries where post acquisition integration is preferred. Results also
show institutional distance and language difference is strength and this relationship; in
contrast, diplomatic relationship weakens the link.”36 In the year, 2014, cross-border
mergers and acquisition deals for value in India stood at US dollars 139.9 Billion.
Representing an 82.6% increase in the value compared to 2013, the average deal size for
cross-border deals from US $ 453.9 billion in 2014 compared to US $ 291.4 billion in 2013
and also crossing the record figure of US $ 437.7 billion in the year 2007.

36
Zhu, Hong & Xia, Jun & Makino ET AL., How Do High-Technology Firms Create Value In
International M&A? Integration, Autonomy and Cross-Border Contingencies, JOURNAL OF
WORLD BUSINESS, 50 10.1016/J.JWB.(January 1, 2015).

16
 Chapter 1

Figure-1.2: CBMA in India and the World

Source: UNCTAD, 2014

Will Martin of the University of Minnesota made an interesting observation in that,

CBMAs transactions amplified issues that arise in domestic merger and acquisition
transactions. The interplay between varying National laws can create awkward legal
contradictions or overly burdensome regulation over the transaction. Apart from
issues like corporate governance, regulatory approval by Federal Trade Commission
(FTC) and Department of Justice (DOJ), securities and tax issues also are of primary
importance in case of United States of America. The scrutiny of the Internal Revenue
Code (IRC) is much more impactful in case of CBMA. Non-exempt securities issued
as per merger consideration also needs to undergo the compliance requirements of the
1933 and 1934 acts and the state blue sky laws. In United States of America, the tax
considerations are very stringent in case of the merged entity rather than the tax
considerations on the merger of subsidiaries. Hence it is felt that it is better to plan for
better tax savings merger of subsidiaries than a merger of companies. Martin affirms,
“The US corporate tax rates exceeds the rate of all other industrialized countries.
Accordingly, foreign companies seek to minimise the assets that become subject to
tax in the USA. The greater tax eats away at the profits from the transaction. A direct
major subjects the entire merged entity to the US corporate tax. Moreover, the direct
merger gives dissenting shareholders significant veto power because their approval is

17
 Chapter 1

required to approve the merger and amend the organisational documents to resolve
any contradictions between National laws. The merger of subsidiaries presents a more
workable option. This structure circumvents the United States higher tax by allowing
the foreign Corporation to isolate its non-merger assets. This structure also prevents
dissenting shareholders from blocking the deal because the parent company is no
longer a party to the Merger. Finally the merger of subsidiaries allows the acquiring
company to cherry-pick certain assets without giving the acquire undue influence over
operations of the parent.”37

Figure 1.3: Extent of CBMA in the World: Value and Number

Source: UNCTAD, 2014

One point to keep in mind, according to the report of Financial Express published on
January 1st 2018, is that, in the year 2018, India is likely to witness CBMAs worth

37
Will Martin, Cross Border M&A Transactions; Using Subsidiaries t185o Simplify Complicated
Legal Issues, AMERICAN BAR ASSOCITION, www. americanbar.org/will martin/ (Last
visited on May 16,2018).

18
 Chapter 1

dollars US $ 50 billion only because of plenty of stressed corporate assets on offer,

attempting valuations quantum jump of 170% in valuations. Over 70% of the number
of transactions in the year 2017 was witnessed there. 944 transactions out of which,
280 are of cross-border type in the year 2017 and US $ 32.4 billion because of
CBMAs. According to the Chamber of Commerce, this is an improvement compared
to figure of only 195 cross-border transactions in the year 2016 with a value of US $
10.3 billion. Thus, one can see a jump of 3 times in value and 60% jump in the in
terms of transactions from the year 2016 to 2017. “The Chamber identified the
following sectors in which there is a quantum jump namely firstly, healthcare,
secondly telecom, thirdly energy, fourthly real estate, fifthly, media and
entertainment, sixthly banking, seventhly insurance, eighthly oil, ninthly cement, and
lastly consumer products. Secretary-General, D.S. Rawat, of Associate Chambers of
Commerce felt, CBMA opportunities in the year 2018 would remain robust given the
fact a lot more assets continue to remain under stress.”38

Big ticket projects referred to the National Company Law Tribunal under the Insolvency
and Bankruptcy Code (IBC) would see a change in the promoters in areas like real estate,
etc. “The Chamber of associate commerce also suggest of using the guidelines and
legislative support in the Income Tax Act, 1961 and the Competition Act, 2002 to boost
mergers and acquisitions activity in India. Mr Rawat further maintains that amendments in
the Stamp Act 1899, to bring uniformity of stamp duty in all India states particularly to all
transactions can prove to be a catapult for the future CBMAs in India.”39

1.2. CBMAs at the Global Level

Two most important countries for CBMAs globally are the UK and the USA. In so far
as the UK is concerned, the following issues are of great importance.

1.2.1. Cross-Border Mergers in UK

The Companies (Cross-Border Mergers) Regulations 2007 implement the European

Directive on Cross-Border Mergers of Limited Liability Companies (Directive

38
Rawat, D.S., of Associate Chambers accessed from website of Associate Chambers of
Commerce on 20.04.2018.
39
Ibid

19
 Chapter 1

2005/56/EC). This makes it possible for a transferor company to transfer assets and
liabilities to a transferee company, without the transferor company needing to go into
liquidation. The merger must involve at least one company formed and registered in the
UK and at least one company formed and registered in an EEA state other than the UK.
“It is also possible for a limited liability partnership (LLP) to carry out a cross border
merger. The relevant legislation is part 10 of The Limited Liability Partnerships
Regulations 2009.”40 “This legislation applies certain modifications to the regulations,
to take into account the different structure of an LLP and a company.”41 The
information in this guidance booklet can be read as if it were applied to both
companies and LLPs.

(i) Merger by Absorption

“This is where one or more companies transfer all their assets and liabilities to another
existing company. Every transferor company is dissolved without going into
liquidation.”42

(ii) Merger by Absorption of a Wholly Owned Subsidiary

“This is where a company transfers all its assets and liabilities to another company
which holds all the shares or other securities representing its capital. The transferor
company is dissolved without going into liquidation.”43

(iii) Merger by Formation of a New Company:

“This is where two or more companies transfer all their assets and liabilities to a new
company formed for the purposes of the merger. The transferor companies are
dissolved without going into liquidation.”44

1.2.2 The Pre-Merger Requirements

A UK merging company should apply to the court (in the UK this will be the High
Court or the Court of Session) for an order certifying that the company has properly

40
Application of COMPANIES ACT 2006, (2009).
41
THE COMPANIES CROSS BORDER MERGERS REGULATIONS, 2017.
42
COMPANIES ACT 2006, www.companieshouse.gov.uk, 5, (Sept 2013) (Last visited on May
11, 2018).
43
Ibid(3.b).
44
Ibid(3.c).

20
 Chapter 1

completed the pre-merger acts and formalities for the cross-border merger. The court
may also, at the request of a creditor or member of a UK merging company, require
the UK company to seek the approval of creditors or members to the terms of the
merger. There are also obligations to inform employees of the details of the merger.
Other requirements may apply depending on the type of merger taking place. A
completed cross-border mergers form CB01, enclosing either a copy of the draft terms
of merger or confirmation that the draft terms are available on a website. A copy of
any court order summoning a meeting of members or creditors made under regulation
11 of the Companies (Cross-Border Mergers) Regulations 2007.

These documents must be delivered to the Registrar at least two months before the
first meeting of the members (for England and Wales, the Cardiff office; for Scotland,
the Edinburgh office; for Northern Ireland the Belfast office).

“Variables such as exchange rates, and stock prices, influence the number and the
direction of CBMA vary between companies in the United States and each of the four
European countries: Germany, Italy, the United Kingdom, and France. Research done
through logit models suggest that bond yields explain the trends in CBMA, and the
multi-regression models indicate that US stock prices to be a good explanatory
variable. The results suggest that foreign acquisitions occur more frequently when
bond yields in the country of the acquire or higher than those from the country of the
company being acquired. A depressed stock market of USA relative to the foreign
stock markets encourages foreign acquisition of the US companies.”45

More than 250 research studies were carefully studied, reviewed, consolidated, and
integrated and the following valuable findings were made. The research reports
studied covered International Law regarding cross-border mergers, international
business, strategic management finance, and economics. “This study further covered
the seven strands: Macroeconomic and financial markets environment, institutional
and regulatory environment, political environment and corruption, tax and taxation
environment, accounting standards and valuation guidelines, cultural environment,
and geographical environment. The review and discussions are framed through Home
45
Vasconcellos G.M., and Kish R.J., “Journal of Multinational Financial Management”, Vol- 8, P-
431 – 450, issue 4, Nov, 1998.

21
 Chapter 1

-Host country, West- South, and South West directional flows. The review suggests
that better the host country‟s institutional laws with regard to financial markets,
taxation and corporate governance, the higher the number of inward acquisitions. The
geographical distance, regulatory distance, and cultural distance between developed
and developing economies are more likely to be moderated by the market size, natural
resource base, and the week institutional loss especially corporate tax and capital
gains tax of the target country.”46

The global economy witnessed recovery after devastating results due to worldwide
recession in the years 2008 and 2009. This sovereign debt crisis of Europe and several
geo-political animosities across the continents constrained the natural expansionism
of cooperative executive conference. Even though, China witnessed domestic rates of
growth much above the global average, yet, slowing down of the bass is an indication
of turbulence of the global economy. While it is a fact that the domestic growth in the
United States exceeds most of the Western European countries, compared to the
previous history of the United States, the growth rate still is only modest. With
revenue growth constrained by sluggish global recovery, corporations are
restructuring aggressively to eke out additional market share. Continued low interest
rates and brilliant stock markets are fuelling a recovery in corporate restructuring
activity with more companies and willing to take no for an answer pursuing hostile
takeovers. “Other companies continue to streamline operations to increase product
and market focus by divesting or spinning off business not considered germane to
their corporate strategy. Corporate restructuring run the gamut from reorganizing
business units to takeovers and joint ventures to divestitures and spin-offs and equity
carve-outs.”47

In the United States, the Securities Acts of 1933 and 1934 form the foundation of the
starting of Security Exchange Commission (SEC). The Security Act of 1933 and 1934

46
En, Xie. and Jie, Liang, Country-Specific Determinants Of Cross-Border Mergers And
Acquisitions: A Comprehensive Review And Future Research Directions, 52 JOURNAL OF
WORLD BUSINESS. 127 – 183 (February 2017).
47
DONALD DEPAMPHILIS, MERGERS, ACQUISITIONS, AND OTHER RESTRUCTURING
ACTIVITIES. 32 (2009).

22
 Chapter 1

are also the repositories of regulator regulations related to security administration. For
the sake of convenience, the Congress of the United States of America transferred
partially certain duties of the SEC to autonomous institutions like the New York
Stock Exchange (NYSE). NYSE is an autonomous body and self-recruiting in itself,
however, operates under the overall control of the SEC of the USA.

The SEC, in the glorious traditions of decentralized administrative law, and in

implementing the principles of delegation and democracy and efficiency, transports
some of its workloads for better education through specialised scrutiny after creating
institutions of global eminence like the Financial Accounting Standards Board
(FASB). Under the Sarbanes-Oxley Act, 2002, SEC is supervising the Public
Company Accounting Oversight Board (PCAOB). The main duty of PCAOB is
advance, assert, administer standards that guide auditors in administering and
qualifying Corporate Financial Reports (CFRs). The proclaimed objective of Sarbanes
Oxley Act, 2002 was to accomplish increased corporate transparency in connection
with financial statements. However, the real estate crisis and the banking crisis in the
United States in the years of 2008 and 2009 leaves much to be desired. In the case of
CBMA, this aspect becomes even further complicated. State legislation also has a
significant impact on governance practices by requiring corporate chapters to define
the responsibilities of boards and managers with respect to shareholders. The SEC, the
Federal Trade Commission (FTC), and the Department of Justice (DOJ) discipline
companies with inappropriate governance practices through formal and informal
investigations, lawsuits and settlements. In the year 2003, the SEC approved new
listing standards that would put many lucrative plans to a shareholder vote, and,
therefore giving investors of more than 6200 Companies listed on the NYSE, the
Nasdaq. In January 2007, SEC implemented additional disclosure requirements for
chief executive officer pay and perks that exceed US $ 10000 in value.

“Federal security laws impose a number of reporting, disclosure, and anti-fraud

requirements on acquirers initiating tender offers. Section 14(D) S of the Williams
Act requires that any individual or entity making a tender offer resulting in owning

23
 Chapter 1

more than 5% of any class of equity must file S scheduled 14(D)-1 and all solicitation
materials with SEC.”48

There is a concept of hostile takeover which goes against the management

entrenchment theory. “Hostile takeovers, or the threat of such takeovers, have
historically been useful for maintaining good corporate governance by removing bad
managers and installing better ones.”49

“Indeed, there is evidence of frequent management turnover even if takeover attempt

is defeated because takeover targets are often for financial performers.50” “An
alternative is the shareholder interest theory, which suggests that management
resistance to proposed takeovers is a good bargaining strategy to increase the purchase
price to the benefit of the target companies shareholders.”51

At various levels of the government, regulators exercise their legal power to ensure
fair play in the business field. All the regulations draw their power of enforcement
through the law. Judicial review always guides regulator‟s actions. Some regulations
are common to all companies while some are specific to industries. In the USA too,
there are general and specific regulations. The general regulations include federal
security, antitrust, environmental laws, racketeering laws, and employee benefits
laws. The specific laws include areas of banking, telecommunications, insurance,
defence contracting, public utilities, real estate, transportation, pharmaceuticals,
chemicals, nanotechnology etc.

Worldwide mergers and acquisition activity has exceeded dollars 3 trillion for the
fourth consecutive year. It is all set to accelerate in the year 2018. The final month of
2017 was kept by 3 blockbuster transactions as against the threat of disruption from

48
DONALD DEPAMPHILIS, MERGERS, ACQUISITIONS, AND OTHER RESTRUCTURING
ACTIVITIES. 32 (2009).
49
MORCK R, SHLEIFERA, VISHNY RW: CHARACTERISTICS OF TARGETS OF HOSTILE
AND FRIENDLY TAKEOVER. AUERBACH AJ, CORPORATE TAKEOVER: CAUSES
AND CONSEQUENCES, CHICAGO, UNIVERSITY OF CHICAGO PRESS. 6-9 (1988).
50
ECONOMIC REPORT TO THE PRESIDENT WASHINGTON D.C.US, GOVERNMENT
PRINTING OFFICE,(2003).
51
Frank J, Mayer C, Hostile takeovers and the correction of managerial failure, 40/1 JOURNAL
FINANCIL ECONOMIC. 163-181 (1996).

24
 Chapter 1

the likes of Amazon Face Book (FB), and Netflix which are using their size and scale
to push into new sectors. As Amazon is entering into pharmacy business in the USA‟s
biggest drug store chain CVS health agreed to acquire Healthcare insurance for about
US & 69 Billion.

Figure 1.4: CBMA Flows

Source: Thomson Reuters, 2017

This is a fourth straight wave of mergers and acquisitions touching a figure of US $ 3

trillion mark. The head of global investment banking at Goldman Sachs feels that
most of 2017 has been slower for the megadeals. Momentum around large deal
activity will continue to next year as it can be seen that a number of industries
undergoing many strategic shifts and further consolidation. “The US remains the
most active region with US $ 1.4 trillion of deals through the value of mergers and
acquisitions and the number of deals struck in 2017 climbed to over 12400 record
figure that was driven by a surge of transactions with a value of less than US $

25
 Chapter 1

1 billion.”52 “The largest deal of the year 2017 which is to be resolved as Broadcom
purchasing through a hostile takeover for a US $ 130 billion of the rival chipmaker,
Qualcomm. Broadcom planned to oust Qualcomm in March 2018 but it was opposed
by national security concerns of the USA.”53

In addition to the scrutiny of the deals increasingly by the shareholder alertness the
antitrust environment in many developed markets appear to be tightening. In the year
2010, AIA, the Asian Business of USA insurer, AIG accepted take over from
Prudential the British insurer, for a sum of rupees for sum of US $ 35.5 billion. There
was an expectation of win- win situation for both the companies. However,
immediately after this cross border merger, there was a 20% drop in value of each of
the company‟s shares. “The demise of this deal highlights the risks and barriers
regularly encountered by would be dealmakers as they brave a volatile merger and
acquisition market to seek opportunities outside their home markets.”54

According to Clifford Chance, “CBMA environment is being made more difficult by

the speed at which the economic and regulatory environment is changing - the twist
and the terms of the market mean that buyers and sellers need to be well prepared,
have flexible strategies, and react quickly to the latest challenges. Buyers and sellers
who develop creative solutions - bridge valuation gaps, for example or circumvent
regulatory difficulties - will have an edge on success in the new era of CBMA.
Existing practices for risk assessment also need to evolve to the developing
environment. Equally important is the need to overcome language, cultural and
management challenges, inherent with expansion into new markets and
geographies.”55

Matthew Layton continues his advice and affirms that, “Overcoming these challenges
is a necessity. Cross-border deals can be effective sources of significant value creation
and can present attractive opportunities for companies to seek growth in a new market

52
www.treasury.gov/resourcecenter/international/pages/CFIUS.aspx (last visited on 12, April
2017).
53
JAMES K.JACKSON, CONGRESSIONAL RESEARCH SERVICE PAPER CFIUS .15-30
(2018).
54
MATTHEW LAYTON, EXECUTIVE SUMMARY, THE CLIFFORD CHANCE HEAD OF
CORPORATE 5 (2017).
55
DONALD DEPAMPHILIS, MERGERS AND ACQUISITIONS BASICS, 5 (2010).

26
 Chapter 1

or accelerate expansion in which they already have operations. The present time may
be a good time to embark on cross-border activity - mounting to suggest that deals
executed during the period of high volatility offer greater long-term value to than
those undertaken in study or market conditions.”56

“People think of cross-border deals as risky, but my view is that it is more risky for
long term health of the business not to pursue these deals. Yes, there are short-term
risks moving into new markets, Emerging economies but, companies face a much
bigger strategic risk from not being there at all.-term health of the business not to
pursue these deals.”57

“CBMAs causes increased challenges over and above those encountered on domestic
deals. However, the challenges should not find companies to loose the potential
benefits that can be derived from the well-planned - well executed - transactions as,
cross border deals - powerful accelerators of growth ambitions.”58

Noorie Kaju Tanaka, head of copper investment for Mitsubishi Corporation, while
discussing the key risks and success factors for CBMAs expressed the following
view, For me - the most important key to success is having a global network,
internally and also externally. When doing cross-border deals, having knowledge on
the ground is very important - we need to engage with our local stakeholders from our
internal Global network. And we also need to use our relationships with our joint
venture partners. There are two reasons for this- first it helps us mitigate risk, monitor
exposure. The second, even more important, information from these partners and
added to our internal network. Cultural integration is definitely something we need to
bear in mind it - a vital factor we need to work together with our investment partners
to overcome the cultural gap.

“Cross-border deals are certainly more risky one such risk is currency fluctuation; -
what makes this particularly difficult is that it is near impossible to manage. One other
risk of the cross-border deal, especially when going into an emerging market, is

56
DONALD DE PAMPHILIS, MERGERS AND ACQUISITIONS BASICS, 6 (2017).
57
DON MULLIGAN, MERGERS AND ACQUISITIONS BASICS 6 (2012).
58
DONALD DEPAMPHILIS, MERGERS AND ACQUISITIONS BASICS 18 (2017).

27
 Chapter 1

overpaying for assets as a result of increasing competition in these markets. This is

not to say that cross-border transactions don‟t also represent a great opportunity.”59

1.2.3. CBMA: Competition Law in India

The Foreign Direct Investment (FDI) policy adopted post-1990 in the liberalisation arena
in India was mainly intended to work for transfer of sophisticated technology and
marketing and managerial capabilities, employment creation, export promotion at etc. The
Monopolies and Restrictive Trade Practices Act, 1969(MRTP ACT) was replaced by
Competition Act, 2002 while the Competition Commission of India (CCI) replaced the
three-decade-old MRTP Commission. CCI resulted in inbound transactions increasing but
the CCI also ensures that there is fair play and there is no return of the monopoly.

1.2.4. CBMA & Global Waves

Globally, the three distinct CBMAs waves are observed since 1990 are in terms of both
value and volume. They are from 1990 to 2003 with 2002 from 2003 to 2009 with peak
2007 and from 2009 to 2013 with peak 2013. Researchers observe that the merger waves
are associated with economic prosperity and business cycles. The steep decline in
transactions immediately following the peak of the years 2000 and 2007 are associated
with the World Trade Centre attack in the year 2001 and the global economic financial
crisis during 2008-9. The association is also noticed for merger waves that occurred before
1990. Previous years of liberalization witnessed very few of the number of cross-border
mergers and in values. Mergers and acquisitions and their values in India were negligent.
In India too, the CBMAs saw swings in the year 2014, 2015/2016 even though there was a
slump in 2017 because of demonetization and introduction of the GST. However, mergers
and acquisitions activity subsequently witnessed upswing.

1.3. CBMA and Indian Tax Reforms

Deng Xiao Ping is considered the father of reforms in modern China. In India, the
credit of a similar work goes to the late Prime Minister Shri P.V. Narasimha Rao.
Shri P.V .Narasimha Rao became the Prime Minister in the year 1991 when India was
59
Ibid 20

28
 Chapter 1

facing the biggest economic crisis in its history. “The year 1991 is quoted as the year
of radical change in entire world structure - a year which led to phenomenal reforms
in the spheres of politics and economy. This is the year when the cold war between
the two superpowers came to an abrupt end; a year where Gorbachev decided to
realign Russian policies to suit a world order- built on cooperation and support.”60

1991 witnessed fundamental modifications in the government in terms of financial

policies as well as tax reforms. “ Initially the rigours of the Indian Income Tax
legislation were sought to be tampered and fundamental changes in Income Tax Act,
like taxation of companies as an entity by themselves were introduced. Changes in the
regulatory atmosphere were also embarked on. Capital market reforms were brought
in by strengthening the Securities and Exchange Board of India (SEBI). Reforms in
the Insurance sector initiatives with the setting up of R.N. Malhotra committee which
was followed by the setting up of insurance regulatory body in 1996. Banking reforms
had also been carried out alongside. All these are significant indicators of the attempt
of the nation to position itself as an integral part of a global system - dictated by a
feeling that India cannot isolate itself in an otherwise converging world economic
situation.”61 The history of Income Tax in India during the British regime starts with
the Income Tax Act, 1922. Till the year 1991, the Indian Income Tax system is a
continuation of the principles enshrined in the Act of 1922. The case law of the
British courts influenced the tax tribunal‟s interpretation of the Income Tax Act and
that of, including High Courts and Supreme Court. Chapter VI-A was added to the
Income Tax Act during the 1970s after the famous Garibi hatao program of the then
Prime Minister, Shrimati Indira Gandhi. Even though the industrial resolution policy
took place in the early 1950s, with the public sector expected to take the commanding
heights of the economy, suitable modifications to the Income-Tax were only made in
the 1970s with the introduction the chapter VI-A.

“ Until 1991, the Indian tax system was a mixed bag. On the one hand the government
had offered tax sops with respect to industrial undertakings/ export activities while, on
the other, there were income tax levies even on undistributed income of certain

60
Rangachari N., Chennai November 2007, K.R.RAMAMANI MEMORIAL LECTURE, (2007).
61
Ibid 1

29
 Chapter 1

companies - much like the Controlled Foreign Corporations regulations prevalent in

the USA.”62 “Controlled Foreign Corporation (CFC) rules are the features of an
income tax system designed to limit artificial deferral of tax by using Offshore low
text entities. The rules are needed only with respect to income of an entity that is not
currently taxed to the owners of the entity. Generally, taxpayers must include in their
income, all accounts correctly, if any. Enacted in the year 1962, in the USA these
rules, include most of the features of the CFC rules used in other countries. They were
designed especially under subpart (f) rules to prevent US regions and resident
individuals and corporations from artificially differing otherwise taxable income
through the use of foreign entities. United States property specifically includes
obligations of or investments related in related parties, with a physical status in the
US, and the stock of a domestic Corporation. Subpart (f) income includes the
following Foreign Personal Holding Company Income.(FPHCI), foreign base
company sales income, foreign-based companies services income, foreign-based
company oil related income, insurance income. Under the US Tax rules, the foreign
entity may be classified for us tax purposes as a corporation or a flow-through entity
somewhat independently of its classification for the foreign purpose. Another law of
importance in the CBMAs scenario is the Tax Increase Prevention and Reconciliation
Act of 2005 which is also called TIPRA. This act prevents several tax provisions from
sun setting in the near future. The two most notable pieces of the Act are the
extension of the reduced tax rates on capital gains and dividends and the extension of
the Alternative Minimum Tax (AMT) reduction. A Controlled Foreign Corporation
(CFC) is any Corporation organised outside the US that is more than 50% owned by
the US shareholders.”63

The Foreign Investment in Real Property Tax Act of 1980 also called FIRPTA, 1980
is a tax law of United States that imposes the income tax on foreign persons disposing
of the real property interest in the United States. Purchases of real property interests
are required to withhold tax on payment other property withholding may be reduced
from the standard 15% to an amount that will cover the tax liability, application in
advance of the sale to the IRS the internal revenue service. FIRPTA overrides most
62
Ibid 3
63
Wikipedia CFC (last visited May 14, 2018).

30
 Chapter 1

non-recognition provisions as well as those remaining tax treaties that provide the
exemption from tax for such games. President Obama signed the law of protecting
Americans from Tax Hikes Act (THA) of 2015, on 18th December, 2015. “The Act
includes significant changes to tax laws relevant to private equity, state and mutual
fund investors and managers. In particular, it contains important modifications to the
Foreign Investment in Real Property Tax Act (FIPRA) of 1980 are the rules
applicable to the Real Estate Investment Trust also called as REITs and Regulated
Investment Companies are also called RICS.”64

Taxpayers in the United States may face various penalties for values related to
federal, state, and local tax matters. The Internal Revenue Service (IRS) is primarily
responsible for charging these penalties at the federal level. Tax rules vary widely,
and are administered by the state and local authorities and, not always taken into
account in every matter related therein. Penalties maybe monetary or may involve
forfeiture of the property. Criminal penalties may include jail term but are imposed
only by a federal judge after a defendant is convicted. “The most monetary penalty is
based on the amount of tax not properly paid. Penalties may increase with the period
of non-payment. Some penalties are fixed dollar amounts and others are fixed
percentages of some measures required to be reported.”65 “There are over 150 kinds
of civil penalties in the United States Internal Revenue Code (USIRC), using in
CBDT which is reflected in the amount of applicable files.”66 “Taxpayers and washer
holders of Controlled Foreign Corporations (CFC) must file form 5471 with respect to
each controlled foreign corporation.”67 “Penalties for failure to timely file are US
$1000-50000 per-form, plus possible loss of foreign tax credits. Intentionally filing of
material false tax returns is a criminal offence. A person convicted of committing tax
fraud, or aiding and abetting another in computing a tax fraud, may be subject to
forfeiture of property”68 “and/ or jail term.”69

64
Wikipedia, (Last visited May 28, 2018).
65
Sec 6651- Sec 7344 Sub F Internal Revenue Code, 26 USA 2010.
66
Alan J. Tarr, Civil Tax Penalties, US Income Portfolio 634 BLOOMBERG BNA 16-30 (
2012).
67
Sec. 6038, 26 UNITED STATES CODE, INTERNAL REVENUE CODE, 2010.
68
Sec. 7301-7328, 26 UNITED STATES CODE, INTERNAL REVENUE CODE, 2010.
69
Sec. 7201-7217, 26 UNITED STATES CODE, INTERNAL REVENUE CODE, 2010.

31
 Chapter 1

“Conviction and sentencing are through the court system. Responsibility for
prosecution is on the Department of Justice, United States of America and not on the
Internal Revenue Service (IRS). Penalties may be assessed against cracks, protesters
who raise arguments that income tax laws are not valid or those who otherwise file
frivolous returns or Court petitions.”70 “The most relevant penalty for those who
commit frauds in the scenario of the cross-border mergers and acquisition is one of
tax advisor penalties. The penalty is applied to the people who promote tax shelters”71
or “who fail to maintain and dispose of list of reportable transactions”72 with their
customers and clients or undertakings. The monetary penalty here can be very severe.

While there are many motivations driving a company to go for a CBMA, pre empted
competition as a motivator works across many industries. The urge to snap up a
company with an alternative and attractive portfolio of assets generally results in a
feeding frenzy in hot markets. “Some examples of frenetic mergers and acquisition
activity in specific sectors include dotcoms telecoms in the late 1990s and commodity
energy producers in 2006 and 2007 and Biotechnology companies in 2012 and 2014.”73

Corporate Law firms are popular among companies looking to expand externally
through a merger or acquisition especially companies with international borders. Such
deals are more complex as they involve different laws governed by the different
jurisdictions and thus require very specialised legal handling. The International Law
firms are best suited for this job with their expertise on multi-jurisdiction matters.
Some of them are as follows.

“Audit and accounting firms are also required to handle the merger and acquisition
deals in auditing, accounting and taxation. These organisations have expertise in
assessing the value of assets, through appropriate audits and also through advice on
taxation issues.”74 In cases where cross-border merger or acquisition is involved,
stock taxation part becomes critical and such companies fit well in such situations.

70
Sec. 6702, 6673, 26 UNITED STATES CODE ,INTERNAL REVENUE CODE, 2010.
71
Sec. 6700, 26 UNITED STATES CODE, INTERNAL REVENUE CODE, 2010.
72
Sec. 6707A, 26 UNITED STATES CODE, INTERNAL REVENUE CODE, 2010.
73
Mergers And Acquisitions (M&A), INVESTROPEDIA, https://www.investopedia.com/terms/
m/merger sandacquisitions.aspixzz5FMn02Pg1 , (Last visited May 16, 2018).
74
Wachtell, Lipton, Rosen & Katz, Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”),
Cravath, Swaine & Moore LLP, Sullivan & Cromwell LLP,

32
 Chapter 1

“Audit and account expect these companies have other experts on their panel to
manage any aspect of the deal well. Some of the well-known forms from this category
with specialised services in the mergers and acquisitions are KPMG, Deloitte, Price
waterhouse Coopers (PwC) Earnest & Young(EY) and understanding these
companies together or tagged as the big four.”75

The leading management consulting and advisory firms guide clients through all
stages of a merger or acquisition process – cross industry or cross-border deals. These
firms have a team of experts who work towards the success of the deal right from the
initial phase to successful closure of the deal. The bigger companies in this business
have global footprint which helps in identifying targets based on suitability in all
aspects. The firms work on the acquisition strategy followed by screening to due
diligence and advising on price valuations making sure that the clients are not
overpaying and so on. Some of the well-known names in the business are AT
Kearney, Bain and Company, The Boston Consulting Group (BCG), McKinsey and
L.E.K. Consulting.

The Indian tax law is a continuation of the past and a curious innovation in the present
and extrapolation of benchmark practices of others in future. “In a challenging
economy, making every rupee count is part of the corporate DNA. At most
companies, planning plays an important role in achieving that goal one area that is
drawing increasing attention is the issue of economic nexus. The legal concept of
nexus determines whether a business has enough of a presence in a country to become
subject to its taxes it was, the extent of physical presence in a country that triggers a
company‟s tax liability in that country. Soft of economic Nexus means that the tax
nexus exist whenever a business has delivered or derived revenue or income from a
customer in a country, the business has no property, employees or other significant
physical presence in the territory. Globally, tax in corporations are on the basis of the
concept of economic nexus is gaining significance.”76

Taxation from the sources as well as from the residence basis has become a custom in
the 20th century especially when the companies are expanding their businesses across
75
Rangachari N., Chennai November 2007, K.R.RAMAMANI MEMORIAL LECTURE, 3 (2007).
76
Ibid.

33
 Chapter 1

international borders. This feature of double taxation was not a welcome step for
many developing countries, and therefore, League of Nations, as well as its successor
the United Nations and the Organisation of Economic Cooperation and Development
(OECD), are responsible for nearly 2500 bilateral income tax treaties which make any
country to avoid double taxation. Pure residence taxation is not feasible for the
following reasons. Firstly, countries will never part what their right to collect tax from
the foreigners doing business within their territory. Secondly, the residence-based
taxation will evaporate revenues for least.

“Pure source taxation is also an option but has been favoured by some commentator,
including academics from developing countries. The major problem with that option,
is that it enables investors especially transnational corporations to play countries
against each other to obtain the lowest force base tax rate - system of tax savings
arbitration. Competition already exists for active business income. The semiconductor
chip manufacturer, Intel, for e.g. legally avoids paying tax on any one of its income
outside the US by obtaining tax holidays from the various countries where it located
its facilities.”77

Controlled foreign corporations regimes are there in the United States and the OECD
countries also introduced the same to combat the tax avoidance devices. “Such
regimes enable the residence country to compare the parking of the foreign income in
a subsidiary company or other entity formed in a low tax haven by taxing its income
directly as part of the income of its parent or owners in the ultimate country of the
residence.”78

“Domain International Initiative against international tax avoidance, the drive of

Organisation of Economic Development and Cooperation (OECD) against harmful
tax practices, tries to do so by strengthening both source and residence taxation, but
only by the rich organisation of economic cooperation and development countries,
and by attacking tax havens, which are for developing countries. An effective means
to bring this about would be to impose withholding taxes at source on payments to
non-cooperative countries. The OECD has also tried to combat preferential tax
77
Rangachari N., Chennai November 2007, K.R.RAMAMANI MEMORIAL LECTURE,5 (2007).
78
Ibid 5.

34
 Chapter 1

regimes, defined as those aiming at having to attract mobile capital with no genuine
business activity.”79

“In India, under the scheme of the Income Tax Act 1961 the relevant section,”80
“
provides that it is the total income of every „person‟ which is taxable. Section
2(31),”81 “in turn, defines „person‟ as including a „company‟, which in terms of the
provisions of Section 2(23A), includes a „foreign company‟ as well. Section 6(4) of
the Act lays down that a company, unless it is an Indian company or unless it is
controlled or managed entirely from India, cannot be said to be resident in India. A
foreign company, which is not wholly controlled or managed in India is, therefore, a
non-resident so far as residential status under the Act is concerned.”82

“Another provision further lays down that as far as a non-resident assesses are
concerned scope of total income of such an assesses confined to (i) an income which
„accrues or arises in India‟ or is „deemed to accrue or arise in India‟, and (ii) an
income which is received or is deemed to be received by or on behalf of such foreign
company. This elementary analysis makes it clear that under the IT Act, so far as
foreign companies are concerned, taxable unit is a foreign company and not its branch
or PE in India, even though the taxability of such foreign companies is confined to (i)
an income which „accrues or arises in India‟ or is „deemed to accrue or arise in India‟,
and (ii) an income which is received or is deemed to be received by or on behalf of
such foreign company.”83

In the case of Cross Border Merger and Acquisitions (CBMAs), contracts are signed
and executed at places of non- residents of either the owners of the business or their
subsidiaries as a normal way of practice and it creates more often than not many legal
complications. “The Indian IT Act does not provide for any special mechanism for
taxation of the permanent establishment of foreign enterprises except, the presumptive
basis for certain types of incomes such as those mentioned under the following

79
Ibid 6.
80
Sec. 4, INCOME TAX ACT, 1961.
81
Sec. 2(31), INCOME TAX ACT, 1961.
82
Sec. 6(4), INCOME TAX ACT, 1961.
83
Sec. 5(2), INCOME TAX ACT,1961.

35
 Chapter 1

sections.”84 According to informed observers, it is ironic that while the Indian IT Act
deals with the scope of income deemed to accrue or arise in India, at great length and
visualising possibly all sorts of deeming fictions, not much elaboration about the
scope of income which accrues arises in India in the hands of a tax entity which has a
fiscal domicile abroad. The doctrine of taxing based on economic nexus was accepted
by the supreme court of India. “In a case, Supreme Court held that under Section 5
read with section 9 of the Income Tax Act,1961 the income accruing or arising in
India, an income which accrues arises to the foreign enterprises in India can only be
such portion of the income accruing a diverging to such a foreign enterprises is
attributed to its business carried out in India.”85

“The concept of territorial nexus was fundamental in determining the taxability of any
income in India, that income from the offshore supply of equipment and services by the
foreign company outside India would not be taxable in India early because the
equipment was supplied in relation to a turnkey project in India.”86 Mr. Justice SB
Sinha, in the instant case, has observed that, the contract was executed in India and by
entering into a contract in India, although a contract will have to be carried out outside
India would not make the entire income derived by the contractor to be taxable in India.

Historically, capital knows no boundaries or geographical limitations. The institutions

that belong to the financial sector are supervised, regulated and maintained by
independent regulators in most cases, and, in some cases like the UK and Japan by a
single regulator. In India, it is SEBI.

1.3.1. CBMA and Cyber Business

Business conducted through internet connects to globally located customers. This

aspect causes a crisis in cross-border arena as a legal issue. Transactions that may be
legal and valid in one jurisdiction may not be enforceable in others. Creation of wealth
through cyberspace would also in time the use of Offshore Financial Institutions (OFI)
to store the wealth. This would constitute an elaborate and often untraceable form of tax

84
Secs. 44 BB, 44 BBA , 44BBB, 44D, IT ACT 1961.
85
Hyundai Heavy Industries Company v. Union of India, 18.05. 2007. SC.
86
Ishikawajima Harima heavy cricket v. Directorate of Income Tax, 04.01 2007. SC.

36
 Chapter 1

avoidance. It is not only a threat to National Sovereignty but it also overrides traditional
principles of taxation namely transgression of the traditional notion of political and
monetary autonomy. “As wealth is generated through the means of cyberspace,
mechanism and monetary control would become difficult. Taxes on cyberspace would
be one method of getting some amount of monetary control.”87

1.3.2. CBMA and Financial Sector

“The financial sector witnessed convergence throughout the world. Financial sector
promotes interdependence among institutions and to work seamlessly and flawlessly it
needs to adopt global standards so that financial sector institutions will function
smoothly throughout the world. Globally, financial sector works through the three
following tripartite interceptors namely- a) banking b) insurance and c) capital
market. Free flow of capital has been and universal reality from times immemorial.
The Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI),
Insurance Regulatory Development Authority (IRDA) are discharging these roles.
The regulatory bodies are part of a universal set up which has persuasion powers on
the national bodies. These regulatory bodies have set up almost common regulations
regarding the establishment, management, functioning, accounting, policies to be
followed and solvency measures of the integral bodies with the result that there exist
today, in the financial sector, a regime of close association and congruence. A similar
common approach emphasizes the need for the adoption of a common account
standard, to be adopted by all those countries that want to come together. Everyone of
us knows for a fact that this is still a dream to fructify. Amongst developed countries,
basic differences on the fundamentals of the accounting standards to be followed. The
UK has a system of accounting standards; so is the USA. We have a set of standards
that keeps evolving and tries to synthesise what is good for the local conditions.
Enterprise that has raised capital in different markets are now called upon to file
statements and disclosures in each country based on in the individual requirements of
law and regulations followed in that country.”88

87
Rangachari N., Chennai November 2007, K.R.RAMAMANI MEMORIAL LECTURE,10
(2007).
88
Rangachari N., Chennai November 2007, K.R.RAMAMANI MEMORIAL LECTURE,18
(2007).

37
 Chapter 1

1.4. CBMA and Legal Due Diligence

Legal intelligence is a key component of any CBMA deal. It should not be
misconstrued as a simple procedural hurdle. Enforcement efforts by regulator
worldwide and the political demands for corporate accountability are at an all-time
high and must be considered in corporate acquisitions or restructurings. US anti-
bribery and antitrust laws present particularly important issues given the international
breach, of successor reliability and the US operator‟s active role in cross-border
enforcement. Non U.S. companies whether incorporated in Asia, Europe or elsewhere
must be aware of the issues these laws present and tailor-make their legal due
diligence protocols appropriately to assess the risks.

In today‟s global environment, legal due diligence is not simply a procedural hurdle.
It is a key component of any international M&A deal. Enforcement efforts by
regulators worldwide and the political demands for corporate accountability are at an
all-time high and must be considered in corporate acquisitions or restructurings. M&A
deals can create, or transfer to the target company‟s true value cannot be determined
without considering all the relevant legal issue, and it makes legal due diligence an
essential step in any CBMAs deal.

“The U.S. anti-bribery and antitrust laws present particularly important issues given
their international reach. The spectre of successor liability and U.S. regulators play
active role in cross-border enforcement. Non- U.S. companies whether incorporated
in Asia, Europe or elsewhere, must be aware of the issues these laws present and
tailor their legal due diligence protocols appropriately to assess the risk.”89

“In the Indian context also, knowledge about the anti-bribery and antitrust laws of
the United States of America is important because India conducts cross-border
mergers and maximum with the companies incorporated in the USA. The US
Foreign Corrupt Practices Act (FCPA), 1977 broadly prohibits payments to foreign

89
TIMOTHY A. MACKEY ET AL, CORPORATE ACCOUNTABILITY REPORT 13 CARE
(2015).

38
 Chapter 1

government‟s officials to obtain a retail business.”90 “The FCPA applies to any

entity listed on a US Stock Exchange, person or business, and certain persons are
entities acting within the US.”91 The Department Of Justice and the Security
Exchange Commission ensure the implementation of the doctrine of successor
liability in the United States. “Successor liability applies to all kinds of Civil and
criminal liabilities, FCPA violations are no exception.”92

Successor liability is an article of faith among Cross-Border Mergers and Acquisition

(CBMA) practitioners as an entity seeking to acquire another entity without being
saddled with the liabilities in acquiring such assets. “Most jurisdictions, including
Massachusetts, follow the traditional Corporate Law principle that the liabilities of a
selling resistor Corporation are not imposed upon the successor corporation which
purchases its assets.”93

“Successor liability can be a serious issue for buyers as it makes acquiring companies
liable for any criminal acts carried out by the target prior to deal completion.”94
“Successor liability is a particularly important issue for corporates looking to expand
into emerging territories where local business practices may differ considerably from
developing regions. Territories like China, a popular location for Foreign Direct
Investment (FDI) remain rife with potential FCPA risk.”95

FCPA guidelines also clearly makes the acquiring company to be careful about the
risk that the acquired company does not involve in fraudulent activities like paying
rights to foreign country officials. Legal due diligence related to the FCPA can begin
with some basic enquiries by the acquiring company that do not require information
from the target such enquiries include among others the following-

a. Whether the target company operates in a country with history or culture of

bribery and corruption.

90
Sec 78dd-1, 78dd-2 15 U.S.C. Criminal Division of the U.S. Department of Justice and
Enforcement Division of the U.S. Securities and Exchange Commission (SEC) A RESOURCE
GUIDE U.S. FCPA 2012.
91
Sec 78dd-1, 78dd-2 15 U.S.C.; FCPA GUIDANCE 2 2012.
92
Sec 78dd-1, 78dd-2 15 U.S.C. FCPA Guidance 2 P28 2012.
93
Milliken and company v. Duro Textiles LLC, 451 Mass. 547 556, 887, N.E,2D 244, 254 [2008].
94
www.transparency.org/research/cpi/overview. (Last visited on April 24, 2018).
95
www.financierworldwide.com ,June 2015, (Last visited on May 26, 2018).

39
 Chapter 1

b. Whether the target company operates in an industry where bribery or corruption

are more likely to happen, for example, in the industry in which participants bid
for government contracts.

c. Whether there are any publicly reported cases of bribery by the target company or
any one of its competitors.

“Due diligence in the legal angle also include the review of sales and financial data,
customer contracts and third-party distributor agreements of the target company and
risk-based analysis of customer base of the target company and also audits of a
sample number of transactions for bribery and corruption risks and forensic audit
reports if any.”96

Corporate liability and corporate law and accountability report also mention that the
above steps can protect a company from an anticipated foreign corrupt practice act
liability related to cross-border mergers and acquisition activity. They continue to
write that if a target company is reluctant to provide this information, the company
may infer that there could be any issue related to corrupt practices at the target
company. The report further advises that a company engaged in international mergers
and acquisition activity with the target company under the scrutiny of the FCPA
should not move forward without conducting the due legal diligence.

1.4.1. CBMA and Legal Due-diligence in Antitrust/Competition Matters

Competition and Antitrust matters are important part of the legal due-diligence during
cross-border mergers activity. The antitrust laws present the same risks as the FCPA
in connection with CBMAs in case of the United States. The antitrust regulations have
international application and they also scrutinize successor liability. “USA Antitrust
Laws do not apply only to the US actors. Instead, their scope is defined by the
prescribed conducts effect on the US commerce in the United States, an increasingly
low threshold in the global economy, and one that may be less a parent in and merger

96
www.financierworldwide.com ,June 2015, (Last visited on May 17, 2018).

40
 Chapter 1

and acquisition deal than the defined territorial boundaries of operations of a target or
primary place of business.”97

“In December, 2011 the Department of Justice (DOJ) executed a non-prosecution

agreement with Wells Fargo Bank as the successor to the previous Bank in connection
with an investigation of bid rigging and other fraudulent conduct by Wachovia Bank
and its employees prior to its merger with Wells Fargo”98 “the instant case has been
well illustrated across electronic and print media.”99

Due-diligence in the Antitrust arena needs necessary care to cover the history or
culture of collusion or anti-competitive behaviour that the target operates in a
concentrated industry with few actors and significant barriers to market entry and
whether there are any publicly reported cases of collusion or other anti-competitive by
the target entity or any one of its direct competitors. The following five scrutinise are
of considerable importance in the case of the due diligence of Antitrust arena -

A. Antitrust complaints program including manuals and policies, administration, and

the details of administrators.

B. List of competitors, in order to review the list for potential antitrust risks,

C. List of trade associations or advocacy groups consultant‟s advisors and joint

venture details.

D. List of board of directors, executives and owners of the target company. Legal
due diligence by visiting the sites of companies to test whether any pending
antitrust investigation is there against the target company in the offing.

The two most important Antitrust Law and Regulations in the case of US are -

1. Hart-Scott-Rodino Act also called HSR Act, 1976

2. The Sherman Act, 1890

97
Hartford Fire Ins. Co. v. California, 509 U.S. 764,795-96 (1993); 15 U.S.C. 6a.
98
United States v. Wilshire Oil Co. of Texas, 427, Texas Court
99
www.justice.gov/atr/public/press_releases/2011/278076a.pdf , (2011), (Last visited May 25
2018).

41
 Chapter 1

“The HSR Act prohibits parties involved in a deal from transferring beneficial
ownership or control prior to the expiration of statutorial-imposed waiting. The US
government is to assess the anti-competitive effects if any, of merger or acquisition
either domestic or cross border and if the two merging companies are competitors, in
which case united pre-merger conduct may be constitutive violation of the Sherman
Act which prohibits agreements in restraint of a trade, price fixing bid rigging, and
market allocation.”100

“The Corporate Law and Accountability Report (CLAR) of 2015 advises that one
should never share commercially transaction counterparty information without first
consulting and such information is twisted- for example for valuation purposes -
create a wall between the due diligence team and the commercial, either through
hiring external Advisors or by limiting communicate organisation.”101

“The report concludes, that the legal due diligence is a critical component of any
International cross-border mergers and acquisition deal. US Anti-bribery and Antitrust
Laws present particularly important considerations because of their extraterritorial
application and the post-closing Spectre of successor liability for companies engaged
in CBMA deals. A meaningful due diligence protocol should include enquiry and
must be designed to assess the risks posed by the target entities under these legal
regimes.”102

1.5. CBMA and the Legal Provisions in India

The following are the legislative acts in India with reference to the topic of CBMAs.

(i) The Companies Act, 2013 section 234

(ii) The National Company Law Tribunal Act, 2016

(iii) The Reserve Bank of India Act and Reserve Bank of India Rules, 1934.

100
Legal provisons Sherman Act 1890.
101
TIMOTHY A. MACKEY ET AL, CORPORATE ACCOUNTABILITY REPORT 13 CARE
(2015).
102
Ibid P4.

42
 Chapter 1

(iv) The Security Exchanges Board of India Act and Takeover Rules, 1992.

(v) The Competition Act of India, 2002.

(vi) The Competition Controller of India Rules, 2003.

(vii) The Insolvency and Bankruptcy Code, 2016.

(viii) Income Tax India 1961 and Amended Rules, thereafter.

(ix) The Trade Union Act, 1947.

(x) The Stamp Duty Act, 1897.

(xi) The Contract Act, 1872.

(xii) The Human Rights Act, 1993.

(xiii) Rules regarding Prevention of Sexual Harassment at Workplace, 2008.

(xiv) The Pollution Control Act, 1955.

(xv) The Environmental Protection Act, 1986.

(xvi) The Compensatory Forestation Act, 2016.

(xvii) The Foreign Exchange Management Act, 2002.

(xviii) The Prevention of Money Laundering Act, 2002.

(xix) The Goods and Services Tax Act, 2017.

(xx) The Prevention of Corruption Act, 1988.

(xxi) The Limited Liability Partnership Act,2008.

43
 Chapter 1

1. 6. Rules and Regulations

The following rules of various important organisations in the Finance Ministry and
the Corporate Affairs Ministry of Government of India, also apply to the transactions
of CBMAs and have to be taken care during the pre-integration integration and the
post-integration of the implementation of processes of CBMAs.

1.6.1. Serious Fraud Investigation Office- SFIO

Serious Fraud Investigation Office (SFIO) was set up by the Government of India by
way of a resolution dated 2nd July, 2003. From the government website of SFIO, the
following relevant information is made available here. At that time SFIO did not
enjoy a formal legal status. It carried out investigations within the existing legal
framework under section 235 to 247 of the erstwhile Companies Act, 1956.

Section 211 of the Companies Act, 2013, has accorded statutory status to the Serious
Fraud Investigation Office (SFIO). By virtue of various other provisions of the
Companies Act, 2013, SFIO is vested with the requisite legal authority to conduct
investigation. An investigation into the affairs of a company can be initiated by the
Central Government and entrusted to the Serious Fraud Investigation Office under the
following circumstances:-

(a) On receipt of a report of the Registrar or inspector under section 208

(b) On intimation of a special resolution passed by a company that its affairs are
required to be investigated
(c) In public interest
(d) On request from any Department of the Central Government or a State
Government

SFIO comprises experts from various relevant disciplines including law, banking,
corporate affairs, taxation, capital market, information technology, forensic audit etc.
The investigation report filed by the SFIO before the designated court shall be
deemed to be a report filed by a police officer for framing the charges.

44
 Chapter 1

Table- 1.1: List of Completed Investigations (FY wise)103

Source: Website of SFIO, Government of India

Prosecution

 The number of Prosecution Cases filed by SFIO in various designated Courts and
Forums as on 15.03.2017 are as under:

Table-1.2: Prosecution Cases SFIO

Sr. No Details of Cases filed Number of Cases

1 Cases filed before designated Courts 1138

2 Cases filed before ICAI / ICSI and other forums 79

3 Cases filed before NCLT 20

TOTAL 1237

103
http://sfio.nic.i (Last visited on May 25, 2018)

45
 Chapter 1

 The number of Conviction, Acquittal and disposed off cases on technical ground
cases as on 15.03.2017 are as under:

Table 1.3: Conviction, Acquittal SFIO

Sr. No Particulars Number of cases

Total number of successful Conviction (Criminal Court

1 92
/ ICAI / ICSI / NCLT)

Total number of acquittal cases (Criminal Court / ICAI /

2 45
ICSI / NCLT)

1.6.1.1. Directorate of Revenue Intelligence- DRI.

The following information is made available here from the authentic source of
websites of DRI, Government of India, Ministry of Finance.

The Central Excise and Customs administration, which was previously deployed
during the British Rule mainly for the collection of revenue, was called upon, in the
wake of independence, to shoulder the responsibility of guarding the tariff wall along
the country‟s vast coastline and land frontiers. Many handicaps such as want of
trained manpower and adequate resources in the form of equipment‟s and absence of
precise intelligence made our frontiers more vulnerable to economic exploitation.
Added to it was the temptation to evade taxes and controls which was fuelled on
account of growing demand for foreign articles which otherwise were subject to high
taxation rates and non-tariff barriers on account of the need to foster indigenous
industry and to conserve the country‟s fast dwindling foreign exchange reserves.

A need was felt to have a centralized agency in India to deal with cases of violations
of Customs laws, having ramifications beyond the geographical jurisdiction of
localized field formations and for collection, co-ordination and correlation of
intelligence with respect to violation of these laws and also to furnish specialized
know-how. A beginning was made in 1953, when a nucleus cell,
christened „C.R.I.B.‟ (Central Revenue Intelligence Bureau), charged with the
responsibility of dealing with all matters connected with anti-smuggling and anti-

46
 Chapter 1

corruption in the Customs and Central Excise organizations all over India was
constituted. It was a small unit consisting of an Assistant Collector and two
Superintendents within the Directorate of Inspection (Customs and Central Excise),
New Delhi but working directly under the Central Board of Revenue.

By its very composition, a cell like C.R.I.B., could have a very limited scope for
wider activities. But various studies undertaken in this small Cell itself revealed that
the menace of smuggling had established deep roots in India, which, in turn, spelt out
the dire need for establishing a well-organized Central anti-smuggling Organization
for planning and directing the anti-smuggling efforts of the various Custom Houses
and Central Excise Collectorates throughout India in a scientific manner for
successfully meeting the menace of organized smuggling.

Various studies were undertaken by C.R.I.B. and suggestions were submitted to the
Government of India in the Ministry of Finance (Revenue Division) The proposals
made by Chairman, Central Board of Revenue and Finance Secretary dealing with the
re-organization of Central Revenue Intelligence Bureau and creation of the
Directorate of Revenue Intelligence makes for an interesting reading as it provides an
insight into the history of, rationale behind and expectations from DRI. The Chairman
noted that

“Till about 1955, the officers of the CRIB undertook adhoc investigations or
enquiries, at the instance of the Board, and these were mostly enquiries against senior
officers accused of corruption. The Bureau could not devote its attention to anti-
smuggling measures on any organized pattern until after the taking over of anti-
corruption work by the Vigilance wing, and the availability of its full complement of
officers about a year ago. In this year, under the personal guidance of Member
(Central Excise) the Bureau took up co-ordination of Inter-Collectorate work against
smuggling and helped the Collectorates with experienced personnel in the
investigation of major cases. Amongst the more important cases developed wholly or
partly with the help of officers of CRIB may be mentioned those of Soirat and Webb
who were caught while attempting to export Rs. 2.5 Lakhs in currency, Dana and Frey
who attempted to export about Rs. 9 Lakhs in currency through Attari and the un-

47
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earthing of the smuggling racket at Jamnagar headed by Talab Haji Hussain and
seizure of gold valued at at over Rs. 30 Lakhs, currency of 8 lakhs of rupees and
about 25 vehicles including motor cars, auto rikshaws etc. and the current
investigation into the seizure of Rs. 1.5 Crores worth of diamonds from Shri Zainal
Ali Raza of Bombay. In particular, the mopping up of the smugglers on such a large
scale at Jamnagar has virtually broken up a powerful and organized gang, whose
activities introduced about six to eight crores of rupees worth of gold every year into
the country and export of currency or other goods and services of equivalent value out
of it.”

As per the statement of the then Finance Secretary, Government of India, the
following are the essential features of the organization:

 It is designed to collect and collate information and to strike swiftly;

 It is officer-intensive and the ministerial staff has been kept at a minimum;

 Although small, it is a high-powered organization so that it can issue instructions

to Collectors and can command the confidence and respect of the other State and
Central organizations with which it has necessarily to deal in order to become
effective.

 It will consist of selected officers, that is, those who by temperament and
experience, are equipped to do this specialized kind of work;

 It will have no routine job of its own in the sense that it is required to collect a
certain amount of revenue. It will have complete liberty to act on „hunches‟ and
only the ends will justify the means it adopts.

“The Directorate of Revenue Intelligence was thus constituted on 4th December 1957,
for dealing exclusively with the work relating to the collection and study of
information on smuggling activities and the deployment of all anti-smuggling
resources at the all India level, besides arranging training for the intelligence and

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Investigation officers of the Custom Houses and Central Excise Collectorates

deployed on similar work.”104

1.6.1.2. The Enforcement Directorate-ED

Directorate of Enforcement is a Multi-Disciplinary Organization mandated with the

task of enforcing the provisions of two special fiscal laws – Foreign Exchange
Management Act, 1999 (FEMA) and Prevention of Money Laundering Act, 2002
(PMLA). Besides directly recruiting personnel, the Directorate also draws officers
from different Investigating Agencies, viz., Customs & Central Excise, Income Tax,
Police, etc. on deputation. On 11th March, 2011, after the approval of Government the
Directorate underwent a massive restructuring becoming a force of 2064
Officers/Staff from 758, simultaneously raising number of its offices from 21 to 49
across India. However, process is still underway to have a full contingent of work
force and to have all the 49 offices functional.

The origin of this Directorate goes back to 1st May, 1956, when an „Enforcement
Unit‟ was formed, in Department of Economic Affairs, for handling Exchange
Control Laws violations under Foreign Exchange Regulation Act, 1947 (FERA „47);
this Unit was headed by a Legal Service Officer, as Director of Enforcement, assisted
by an Officer drawn on deputation from RBI, besides 03 Inspectors of Special Police
Establishment; besides Delhi Hqrs., to start with, there were 02 branches – at Bombay
and Calcutta. In the year 1957, this Unit was renamed as „Enforcement Directorate‟,
and another branch was opened at Madras. The administrative control of the
Directorate was transferred from Department of Economic Affairs to Department of
Revenue in 1960. With the passage of time, FERA‟47 was repealed and replaced by
FERA, 1973. For a short period of 04 years (1973 – 1977), the Directorate remained
under the administrative jurisdiction of Department of Personnel & Administrative
Reforms.

With the onset of the process of economic liberalization, FERA, 1973, which was a
regulatory law was repealed and in its place, effective 1st June, 2000, a new law –
Foreign Exchange Management Act, 1999 (FEMA) came into operation. Further, in

104
http://dri.nic.in/main/history (Last visited on May 25, 2018).

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tune with the International Anti Money Laundering regime, Prevention of Money
Laundering Act, 2002 (PMLA) was enacted, and entrusted for its enforcement to the
Directorate, w.e.f. 01.07.2005.

Carved in the role of a multi-dimensional Organisation, the Enforcement Directorate

enforces two laws; “FEMA, a Civil Law having quasi judicial powers, for
investigating suspected contraventions of the Exchange Control Laws and
Regulations with the powers to impose penalties on those adjudged guilty and PMLA,
a Criminal Law, whereby the Officers are empowered to conduct enquiries to locate,
provisionally attach/confiscate assets derived from acts of Schedules Offences besides
arresting and prosecuting the Money Launderers.”105

1.6.1.3. The Central Excise and Customs Duties Rules and Regulations

With the passage of annual budget in 2018, the central board of excise and custom
(CBEC) has been renamed as central board of indirect tax and custom (CBIC). This
was essential due to enactment of goods and services tax(GST) which has
consolidated many indirect tax into one tax.

With excise duty, service tax, alongside nearly a dozen other central and state
levies being subsumed in the Goods and Services Tax (GST), the ambit of the apex
indirect tax authority has widened.

Through Finance Bill, 2018, the government amended the Central Boards of
Revenue (CBR) Act, 1963, as well as the Central Goods and Services Tax Act,
2017, replacing CBEC with CBIC.

The re-organisation of field formations of the CBEC for implementation of GST

and its renaming to CBIC was approved by Finance Minister Arun Jaitley in March
2017. GST was introduced on July 1, 2017. “With legislative approval not in place
for the change of name, CBEC has been notifying all rules and provisions of the
new indirect tax regime. As per the reorganisation plan, the CBIC will supervise
the work of all its field formations and directorates and assist the government in

105
http://www.enforcementdirectorate.gov.in/, (1999), (Last visited on May 25, 2018).

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 Chapter 1

policy-making in relation to GST, while continuing central excise levy and

Customs functions.” 106

The CBIC will have 21 zones and GST Taxpayer Services Commissionerate.

1.7. Recent Experiences of CBMAs in India

“Acquisitions could be motivated by many factors which among other things , rational
choice outcomes arising out of a desire for efficiency gains or monopoly gains; driven
by a rider mentality or an Empire building strategy by acquiring company managers;
prompted by private information on valuation differences; a reaction to
macroeconomic disturbance; could be driven by managerial hubris.”107

1.7.1. Examples – Shree Renuka Sugars

Wilmar Sugar (WSH) is a promoter of Shree Renuka Sugars. In a tweet, the

Competition Commission of India (CCI) said it has approved the “acquisition of
additional equity stake in Shree Renuka Sugars by Wilmar Sugar”. Last year, Shree
Renuka Sugars had informed BSE in a regulatory filing that its board had approved
issue of up to 50 crore compulsorily convertible preference shares (CCPS) at Rs16.27
each to WSH.

“WSH (is) making an additional investment of Rs 783.96 crore in Shree Renuka

Sugars (SRSL) for the purpose of up- front repayment and settlement of part of the
debts and to fund working capital requirements of SRSL, as per the filing. As per
December 2017 last quarter, WSH holds 27.24% stake in SRSL.”108

Singapore-based WSH is a wholly-owned subsidiary of Wilmar International and is

the main holding company for the Wilmar Group‟s global sugar and ethanol
businesses, including assets in Australia, New Zealand, Indonesia, Morocco and
Myanmar. Shree Renuka Sugars is a global agri-business and bio-energy corporation.

106
http://www.newindianexpress.com/business/2018/mar/31/ (Last visited on May 25, 2018).
107
Eckbo, B. E., Horizontal mergers, collusion, and stockholder Wealth 11 JOURNAL OF
FINANCIAL ECONOMICS 1–4 (1983).
108
Eckbo, B. E., Horizontal mergers, collusion, and stockholder Wealth 11 JOURNAL OF
FINANCIAL ECONOMICS 241–273 (1983).

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The following are the examples of recent nature in connection with the CBMAs in
India. “Sugar manufacture Wilmar International Limited entered into a partnership
with Shree Renuka Sugars for the US $200 Billion. This partnership with Wilmar will
help Shree Renuka Sugars to enhance its global reach and augment the inherent
capability of sugar manufacturing.”109

Mylan Incorporation acquired women Healthcare business of Famy Care Limited.

Mylan spent the US $800 million for the above acquisition. The purpose of the above
acquisition was to shift Famy Care in North America, Europe and Australia and
provide Mylan with an enhanced and vertically integrated platform that will
accelerate the company‟s growth in the important Global Women‟s Health Care. “US
pharma major has completed its $750 million acquisition of female
healthcare business of Famy Care.

The deal allows Mylan to tap into the female contraceptive and healthcare segment in
India. The deal was announced in February and it received a clearance from Cabinet
Committee of Economic Affairs (CCEA) already.

The transaction brings Mylan, a broad women‟s care portfolio, strong technical
capabilities and dedicated hormone manufacturing, which, when combined with
Mylan‟s expansive global commercial footprint and supply chain infrastructure, will
create a leading women‟s healthcare franchise, the company announced today.

Mylan CEO Heather Bresch said “We look forward to building upon our existing
commercial presence in emerging markets by leveraging our global supply chain and
operational excellence to further accelerate our growth. This will include building
upon our existing women‟s care portfolio in India and expanding our reach in support
of Family Planning 2020, a global partnership that aims to enable 120 million more
women an girls to use contraceptives by 2020.

Mylan, among the top five generic companies globally, has been expanding its
presence in India for a while. It entered India in 2007, with a $730-million buyout

109
https://www.livemint.com/Money/AsGIFzgPefhqOG2MDvpLhP/Wilmar-Sugars-additional-
stake-buy-in-Shree-Renuka-gets-CCI.html, (Feb 28 2018), (Last visited on April 25, 2018).

52
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of Matrix Laboratories. In 2013, it acquired the specialty injectables unit of

Bengaluru-based Strides Arcolab for $1.75 billion.

“Mylan and Famy Care have an exclusive partnership dating back to 2008, under
which Famy Care develops and supplies over-the-counter (OTC) drugs to Mylan for
distribution to customers in the US and a few other markets. In the US, Famy Care
and Mylan have a portfolio of 12 approved products, with Abbreviated New Drug
Applications (ANDA) for 30 drugs pending the approval of the Food and Drug
Administration (FDA).”110

Started in 1990 by Jyotiprasad Taparia, Famy Care is “the third-largest maker of over-
the-counter contraceptive pills and injectables and the largest producer of copper-Ts
globally. Other major products from the company include rings for tubal ligation and
condoms. Famy Care recorded revenue of Rs 400 crore last year”.

1.7.2. Examples of the Outbound Transactions

“The Indian Oil Corporation (IOC) acquire a minority interest in the Pacific
Northwest LNG project. The cost of this CBMA outbound transaction is around
dollars US $ 900 million. Located in British Columbia, Canada the project provides
access to substantial gas reserves for export to overseas markets via Liquefied Natural
Gas (LNG) in and helps in providing long-term supplies to Indian Oil Corporation
Limited.”111

Indian Oil Corporation, India‟s largest oil firm, signed a deal to buy a 10 per cent
stake in shale-gas assets and a linked Liquefied Natural Gas (LNG) project in British
Columbia for US $ 900 million.

110
Mylan completes acquisition of Famy Care's female healthcare biz, BUSINESS STANDARD
( November 20, 2015 ), http://www.business-standard.com/article/companies/mylan-completes-
acquisition-of-famy-care-s-female-healthcare-biz-115112000968_1.html (Last visited on April
25, 2018)
111
PTI, IOC to buy stakes in Petronas' LNG project for $900 million , THE ECONOMIC TIMES,
(Mar 07, 2014),https://economictimes.indiatimes.com/industry/energy/oil-gas/ioc-to-buy-stakes-
in-petronas-lng-project-for-900-million/articleshow/31616528.cms(Last visited on April 25,
2018).

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The acquisition of stake in Progress Energy Resources Corp‟s shale gas assets and
Pacific North West LNG for Canadian $ 1 billion (US $ 900 million) marks IOC‟s
maiden entry into North America.

Cognizant Technology Solutions Corporation acquired Trizetto Corporation. The

above situation had a value of US dollars 2.7 and it is an all-cash deal to expand in the
Healthcare software industry this acquisition makes Cognizant to deliver end-to-end
solution rose Healthcare organisations to improve overall efficiency, drive innovation,
and embrace next-generation delivery models made possible by Digital Technologies.

Analyst believe that the company‟s 2014 deal was an outlier in its overall acquisition
strategy. Cognizant Technology Solutions was eyeing US $ 1.5 billion of potential
revenue cumulatively from TriZetto Corporation, a health care information
technology software and solutions firm it acquired in 2014.

A larger acquisition like this would offer greater growth impacts to the company, said
an analyst. . The acquisition, which analysts term an outlier in the company‟s overall
acquisition strategy, has opened a market to 245,000 health care providers, 350 payers
(insurance firms) and 180 million lives. “Trizetto was the outlier in this strategy, as
Cognizant spent.”112

On 20th November, 2014, Cognizant Technologies, a global leader in information

technology, consulting and business process services, announced it has completed the
acquisition of TriZetto Corporation.

“Cognizant‟s Healthcare and Life Sciences practice is committed to helping change

millions of lives for the better by partnering with clients to build solutions to
healthcare challenges, continually improve the way they do business, set the pace in
clinical development, strengthen their regulatory infrastructure, and increase
competitiveness. With approximately $2.5 billion in annualized revenue, Cognizant‟s
healthcare practice is consistently ranked among the top 10 on the Healthcare
Informatics Top 100, Cognizant serves 28 of the top 30 global pharmaceutical

112
Gireesh Babu ,Cognizant eyes $1.5-billion revenue from TriZetto, BUSINESS STANDARD
(January 3, 2017 ), http://www.business-standard.com/article/companies/cognizant-eyes-1-5-
billion-revenue-from-trizetto-117010200782_1.html (Last visited on April 25, 2018).

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companies, 16 of the top 20 health plans in the U.S., 4 of the top 5 pharmacy benefit
management companies in the U.S., 9 of the top 10 biotech companies, and 12 of the
top 15 medical device companies. With a large team of dedicated professionals
including doctors, pharmacologists, physicians, biomedical engineers, pharmacists,
biostatisticians, medical writers, and GXP consultants, the practice provides domain-
aligned consulting, IT, business process and analytics solutions globally.”113

Mitsubishi Corporation and Tata Consultancy Services reached an agreement to

establish a new IT services company through the merger of the three subsidiaries,
namely will combine Mitsubishi Corporation Group‟s Information Technology
Service Provider i.e. Frontier Corporation, TCS Japan Limited and Japan TCS
Solution Centre Limited a joint venture between Mitsubishi Corporation and TCS
Japan.

Mitsubishi Corporation (MC) and Tata Consultancy Services (TCS) have reached an
agreement to establish a new IT services company through the merger of three
subsidiaries. The merger will combine MC Group IT service provider IT Frontier
Corporation (ITF), Tata Consultancy Services Japan Limited (the Japanese arm of
TCS), and Nippon TCS Solution Center Limited (NTSC), a joint venture between MC
and TCS Japan. TCS and MC will each contribute 51% and 49% of initial investment
capital for the new company, respectively, with operations scheduled to start on July
1, 2014, with headquarters in Tokyo. The venture will serve to deepen the
collaborative framework between both companies as they pool their individual
capacities to create synergies that deliver improved customer service and achieve
sustainable growth.

By combining the customer service strengths and knowledge of the Japanese market
developed by MC and ITF with the competitively priced IT services offered globally
by TCS, the new company will make a contribution to upgrading the quality of IT
services in Japan and improving its global competitiveness. In so doing, the new

113
Teaneck, N.J., Cognizant Completes Acquisition of TriZetto, Creating a Fully-Integrated
Healthcare Technology and Operations Leader, PRNEWSWIRE (Nov. 20,
2014), http://news.cognizant.com/2014-11-20-Cognizant-Completes-Acquisition-of-TriZetto-
Creating-a-Fully-Integrated-Healthcare-Technology-and-Operations-Leader (Last visited on
April 25, 2018).

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company will not only expand its presence in the Japanese market, but will also seek
to provide speedy and efficient IT services that strengthen the capacities of Japanese
companies to launch operations overseas. The new venture will also bolster the IT
support structure for MC Group offices and subsidiaries worldwide by providing the
upgraded and expanded IT platforms that are necessary for facilitating business
development.

As an MC Group IT services firm, ITF has drawn on expertise developed from

working with MC Group clients to provide services to a range of other Japanese
enterprises. Japanese companies, including MC Group companies, have been rapidly
increasing their overseas business activities in recent years and consequently, the need
for competitive global IT support services and networks has also rapidly grown. The
launch of this new venture will serve to strengthen the capacity of MC and ITF to
more adequately respond to such needs.

“As India‟s largest global IT firm, with a global presence in 46 countries, TCS applies
its unique Global Network Delivery Model® to provide highly competitive, high-
quality services to customers. This TCS-MC partnership will, by way of the new
company, seek to expand the Japanese market, while at the same time contributing to
upgrading Japan‟s IT services and strengthening its competitiveness.”114

India bull‟s Real estate acquires property in London Mayfair for a cost of US dollars
to 50 million. Mayfair market London neighbourhood, the wealthy people of British
neighbourhood. Indiabulls Real Estate Ltd. won approval to develop as many as 41
apartments and a five-star hotel on Hanover Square in London‟s Mayfair district,
according to the Westminster Property Association.

“The project, acquired in 2017 for UK £ 155 million (US $ 240 million), was already
approved by Westminster Council. The hotel would be having 51 bedrooms and a
public bar, according to a filing on behalf of the New Delhi- based developer. The site

114
Mitsubishi Corporation, Mitsubishi Corporation and Tata Consultancy Services Merge
Subsidiaries to Form New IT Services Joint Venture, PRESS ROOM (April 21, 2014)

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is now valued at UK £ 230 million by broker CBRE Group Inc. following the
approval, as per the statement by Indiabulls.”115

1.8. CBMA and the Practices in India and Abroad

Identification of gaps between the legal practices and efficient implementation styles
in India and the corporate giants of the United States of America and Europe who are
the major partners of outbound logistics in case of India is of great relevance. The
government of India and business organisations are actively associated with the task
of reducing the gap that is found both in terms of law and implementation among
institutions in India and abroad. For instance, the Government of India established an
institution called the Indian Institute of Corporate Affairs, IICA, in Gurugram,
Haryana.

“IICA has been established by the Indian Ministry of Corporate Affairs for capacity
building and training in various subjects and matters relevant to corporate regulation
and governance such as corporate and competition law, accounting and auditing
issues, compliance management, corporate governance, business sustainability
through environmental sensitivity and social responsibility, e-Governance and
enforcement etc.

One of the Wings of IICA, the Indian Corporate Law Service (ICLS) Academy, has
the responsibility for conducting the Induction & Advanced Training for Probationary
Officers (POs) belonging to the ICLS recruited through the common examination of
Civil Services Examination (CSE) conducted by the Union Public Service
Commission (UPSC).

“The Institute has been designed with an eye on the future to provide a platform for
dialogue, interaction and partnership between governments, corporate, investors, civil
society, professionals, academicians and other stake holders in the emerging 21st

115
Neil Callanan, India bulls wins approval for London Mayfair luxury homes, LIVE MINT, (Oct
21 2015). https://www.livemint.com/Companies/b8k699G811kJZRnKPDV6FP/Indiabulls-wins-
approval-for-London-Mayfair-luxury-homes.html (Last visited on April 25, 2018)

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century environment.”116 An institution called the Indian Institute of Corporate

Affairs has been recently started to look into identifying this gap both in policy and
legislation and in implementation.

The purpose of this research is to identify such emerging gaps than to fill them up as
part of pre-integration exercise in due diligence and to avoid the costly mistakes
which has an impact on the reputation of the countries is to do business environment
and also to prevent the corporations in the country both public sector and the private
sector from losing the touch with the latest in the technological development abroad.

Pre integration exercise in due diligence is required to avoid the repetition of mistakes
that happened in the past in this CBMA arena. Occurrence of any contra variant
incidences in India unfailingly levies undesirable impact on the reputation. In an
increasingly wired world, full of the presence of the consultants and commentators,
with coverage on a daily basis of all affairs of business, economics, and public life, it
is essential, to be on the right side of the law and to conduct due diligence with full
effort and sincerity. The recent example of the CBMA which was committed in 2018
between the Vodafone and Idea is a case in point.

1.9. CBMA and International Experience

“Scott Whitaker is a partner with Global PMI partners. In a webinar and blog talk,
with John Lester, Director of Sales and Marketing, he discusses many issues related to
CBMAs. He has worked in healthcare, telecommunications, fun games, chemicals, oil
and gas, industrial retail, and consumer durables. The area of his work includes
Canada, China, and Africa on a variety of assignments. He questions many
assumptions regarding CBMAs in the international arena.”117 Whitaker feels,

116
Indian Institute Of Corporate Affairs, MCA (2005).
http://www.mca.gov.in/MinistryV2/iica.html (Last visited on April 25, 2018).
117
https://www.youtube.com/watch?v=rVMOyZ7CgDU&t=307s (Feb 16, 2016), (Last visited on
April 12, 2018).

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“Companies are successful 50% of the time and the success is in being able to deliver
on the original deal of objectives.”118

“Peter Drucker, the famous Guru of modern management, felt that culture eats
strategy for breakfast and Scott comments on that issue in the following words that,”
119
there is no such thing called adopting common culture. Legacy cultures are
difficult to fully eradicate and the reality is that one ends up having a diaspora of
cultures based on one‟s acquisition history.

“Leaders who set a strong vision and business goals can help align these legacy
cultures and get folks all pointing in the right direction. Cultural integration efforts are
an important part of managing mergers and acquisitions and require detailed planning
especially around communications, Change management, and patience and
consistency is most often the key to success.”120

1.10. CBMA and General International Experience of Learning

Importance
The revolutions in the international arena of the Information and Communication
Technologies (ICTs) which all started in the early 1980s and which peaked by the
end of the year 1999, with the advent of cell phones and broadcasting at a cheaper rate
was a real telecommunications revolution. This revolution made global
communications possible at the speed of light and hence the year 1999 is always
categorized as the best year for the cross-border mergers.

“CBMA activity has become a major strategic tool for corporate growth, especially
for multinational corporations.”121 “According to Michael Hit, a cross-border merger
is a transaction in which two firms with their home operations being in different areas.
The main purpose of the CBMAs is generally to create value through the newly

118
https://www.youtube.com/watch?v=rVMOyZ7CgDU&t=307s(Feb 16, 2016), (Last visited on
April 12, 2018).
119
Late Peter Drucker is an internationally famous management guru this quotation was used by
Scot Whitaker in his youtube interview accessesed on 12, April 2018.
120
WHITEKAR, SCOTT., CROSS-BORDERS MERGERS AND ACQUISITIONS 2 (2016).
121
P.Morosini, S. ET AL, National cultural distance and cross-border acquisition performance.
29(1) JOURNAL OF INTERNATIONAL BUSINESS STUDIES 137-158 (1998).

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formed company that could be generated by the involved companies operating as

independent entities. Thus, CBMAs are always geometric in their anticipatory growth
rather than arithmetic.” 122

Another purpose of cross-border mergers has always been found to be one of

increasing the efficiency and effectiveness of the company‟s bottom line as well as
the top line of post-merger scenario. The current century show increased globalisation
despite the crisis in the year 2008 of the collapse of banking sector internationally and
the loan crisis that occurred in the United States with a cascading effect on the entire
global economy. The challenges of globalization notwithstanding, opportunities were
plenty and hence CBMAs as activity saw a phenomenal growth in the first quarter of
the current century and continue to grow. While it is redundant to argue here whether
globalization is linked to the historical factors of decline in the feelings of nationalism
across both developed and developing economic regions of the world, suffice it is
here to say that for the capital, an opportunity to CBMAs is enough of attraction that
the national or domestic pressures to concentrate in a loss-making firm in the Nation
is to be discarded by the firms innate logic of making profit and survive in the area of
increased competitive environment in the world.

Post-Merger CBMA tend to increase the competitiveness of the sectoral industry.

Sometimes, even the national economies of smaller countries are affected by such
CBMAs especially if such CBMAs happen in small economies of Africa or Latin
America. Professor Michael Rouse of Ibey Business School correctly pointed out that,
“Organisations that are particularly effective in completing cross-border transaction
use a set of values, wealth creating, form specific resources and capabilities that
cannot be easily imitated or substituted”123. “Professor Rouse continues to observe
that organisation learning is important for competitive advantage.”124

122
Countries agreed to the integration of the companies on the relatively equal basis. Driving the
decision to blend operations on relatively equal basis is the fact that the two companies have
capabilities that, when combined, are expected to create competitive advantages that will
contribute to success in the Global Marketplace. A cross-border acquisition is a transaction in
which an expanding firm buys either a controlling interest or all of an existing company in a
foreign country. Often, the acquired firm becomes a business unit within the acquiring firm‟s
portfolio of business.
123
https://www.ivey.uwo.ca/faculty/directory/michael-rouse/ (Last visited on April 25, 2018).
124
M.J. Rouse, U.S. Daellenbach,. Rethinking research methods for the resource-based perspective
20 Isolating sources of sustainable competitive advantage. STRATEGIC MANAGEMENT
JOURNAL 487-494( 1999).

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1.10.1. CBMA and Domestic Experience of Learning Importance

The scenario of mergers and acquisitions in India as on today is better described as

cautious optimism. Even though volume-wise, there is a decrease, value wise there is
an increase according to the 2017 reports. Cement and energy in inbounds
acquisitions and oil gas and mining in the outbound acquisitions areas are creating
value addition as of today.

The amendments to procedures in relaxing regulations through providing self-

certification mechanism, creating tax exemptions for the promotion of cross-border
merger facilitating legal support through Fast Track patent examination, digitalizing
clearances and permission post portals through proper modification of existing rules
or some of the initiatives being undertaken by the government. Insolvency and
Bankruptcy Code (IBC), 2016 was introduced for reducing the time limit in the
insolvency process and also for realising the Non-Performing Assets (NPAs) of the
public sector banks. The introduction of the Goods and Services Tax (GST), 2017 and
the initiative the demonetization also was expected to contribute to the process of
liberalisation and process improvement.

1.10.2 CBMA and Prevention of Corruption Act, 1988 and Foreign Direct
Investment Rules

Efforts are being made by the government to bring in changes on being plant in Foreign
Exchange Management Act, 1999 through policy is promulgated by the Department of
Industrial Policy and Promotion (DIPP) on par with the best benchmarked practices in the
world in order to facilitate more investment and also to facilitate level playing field for the
investors from abroad. Similar amendments are also being planned to the FEMA, 1999
and Department of Industrial Policy and Promotion. Industrial Disputes Act, 1947, is also
being looked into. The Banking Regulation Act and the RBI Act, 1934 are being
amended so that the Companies Act, 2013 and the Banking Acts including the Banking
Regulation Act, 1934 are all on similar path.

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1.10.3. CBMA and SEBI

The shares and takeover regulations 2011 code of the SEBI along with the code of the
capital and disclosure requirements 2009 and the service code of prohibition of insider
trading regulations 2015 are all being brought under one platform to remove
confusion and to facilitate convergence. Similar amendments are also plane plant in
sector-specific regulation mechanism par pharmaceuticals, civil aviation, robotics,
Information Communication Technologies, shipping, rail construction, banking and
nanotechnology.

1.10.4. Motives for CBMA

Growth, enlarging, marketing arena, chasing raw material and reducing labour cost,
leveraging intangible assets and invoicing tax liabilities are some of the motivations
for CBMAs.

1.10.5. CBMA: Culture and Corporate Governance

Culture being an important arena, coupled with differences in governance issues of

implementation are important parts of due diligence in CBMA. Administrative Law
and corporate culture coupled with systems of governance encouraging the rule of law
ore of vital importance for proper CBMA goals.

1.10.6 CBMA: Emerging Countries

According to the current practice of apportionment of economies of the world, there

are three major typologies. They are- a) developed countries, b) emerging countries
and c) developing countries. Emerging countries witness aggression in local
government regulations, class of confiscatory tax policies and restrictions on cash
remittances. Motivations for work are different in emerging countries when compared
to the developed countries.

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1.10.7 CBMA: Specific Types of Mergers

In addition to horizontal and vertical mergers the specific CBMA are congeneric
merger conglomerate mergers, which take care of the special situations in the
environment of CBMA.

1.10.8 CBMA: Competition Law, 2002

The infamous MRTP Act, 1969 was replaced by more fair Competition Act, 2002.
Competition Commission of India was created to regulate and implement the law of
the Competition Act, 2002. The Competition Commission of India, CCI is expected to
regulate combinations and is likely to cause an appreciable adverse effect on
monopoly.

1.10.9 CBMA: Stamp Duty Act

Stamp Duty Act, 1897 provides for registration and payment of duty to the competent
authority. It covers the following legal requirements namely transfer inter-vivos stamp
duty to be levied on conveyance deed oblique instrument and stamp duty rate to be
prescribed in the schedule of the stamp act.

1.10.10. CBMA: Judicial Infrastructure

The Company Act, 2013 and the newly created National Company Law Tribunal
(NCLT), National Company Law Appellate Tribunal (NCLAT), apart from the
judicial review of the High Courts and the Supreme Court of India are part of the vital
judicial infrastructure.

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LITERATURE REVIEW

1.11. Introduction
Research in CBMA as an emerging field of global economic activity is of vital
importance. Review papers regarding to CBMAs point out the following -

i. “Global and regional perspectives”125

ii. “Stylized reviews on theoretical foundations”126

iii. “Post-merger integration issues”127

iv. “Reviewing the M&A stream largely through accounting and finance lens”128

v. “Bibliometric papers”129

vi. “Sectoral areas like Banking and CBMAs”130

1.12. CBMAs: Meaning

CBMAs are referred as a most aggressive and “one of the fastest ways to enter a
foreign market.”131 “A merger / acquisition includes minimum two companies from

125
Hopkins, H. D. Cross-Border Mergers and Acquisitions: Global And Regional
Perspectives, 5(3) JOURNAL OF INTERNATIONAL MANAGEMENT. 207-239. (1999).
126
Chapman, K. Cross-Border Mergers/Acquisitions: A Review and Research Agenda. 3(3)
JOURNAL OF ECONOMIC GEOGRAPHY. 128,309-334 (2003).
127
Oberg, C. & Tarba, S.Y. What do we know about post-mergers integration following
international acquisitions?,26 ADVANCE IN INTERNATIONAL MANAGEMENT. 469-492
(2013).
128
Martynova, M., & Renneboog, L. A Century Of Corporate Takeovers: What Have
We Learned and Where Do We Stand? 32(10) JOURNAL OF BANKING & FINANCE, 2148-
2177 (2008).
129
Ferreira, M. P., Santos, J. C., de Almeida, M. I. R., & Reis, N. R. Mergers & Acquisitions
Research: A Bibliometric Study of Top Strategy and International Business Journals, 1980–
2010, 67(12) JOURNAL OF BUSINESS RESEARCH, 2550-2558 (2014).
130
Alba, J. D., Park, D., & Wang, P. Corporate Governance and Merger and Acquisition (M&A)
FDI: Firm-Level Evidence from Japanese FDI Into The US,19(1) JOURNAL OF
MULTINATIONAL FINANCIAL MANAGEMENT, 1-11 (2009).
131
BUCKLEY, P. J., & CASSON, M. C. THE FUTURE OF MULTINATIONAL ENTERPRISE.
LONDON: 56(1976).

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two different Countries.”132 In global arena, CBMAs involve “an acquirer firm and a
target firm whose headquarters are located in different home countries.”133

They characterize “higher valuation, acquirers with deep pockets and often involve
cash payment and hostile deals, together, create a complex process among acquirer
and target firm.”134

1.12.1.CBMAs: Inbound Outbound Mergers

Further, CBMAs are two types (a) inward (b) outward deals. A host countries
companies gets acquired when a domestic component acquired by foreign Multi -
National Companies (MNC) is referred as cross-border inward acquisition. Similarly,
when a domestic company acquires a firm located in foreign country result in
investment outflow is termed as cross-border outward acquisition.

The Critical Factors of CBMAs are “(a) firm-level factors (e.g., firm size, financial
resources, multinational experience, local experience ,product diversity, and
international strategy),(b) industry-level factors (e.g., technological intensity,
advertising intensity, and sales force intensity), (c) and country-level factors (market
growth in the host country, cultural distance, exchange rate, GDP change, political
uncertainty, institutional laws).”135

1.12.2. CBMA: Taxation

“Trigger additional taxation of the target‟s income in the form of non-resident

dividend withholding taxes and acquirer-country corporate income taxation.”136 In

132
Shimizu, K., Hitt, M. A., Vaidyanath, D., & Pisano, V. Theoretical Foundations of Cross-
Border Mergers and Acquisitions: A Review of Current Research and Recommendations for The
Future. 10(3) JOURNAL OF INTERNATIONAL MANAGEMENT. 307-353(2004).
133
Mondaq, India: Merger Regime Under The Companies Act, 2013, PSA, ( January 28, 2014)
http://www.mondaq.com/india/x/289180/Corporate+Commercial+Law/Merger+Regime+Under
+The+Companies+Act+2013 (Last visited on May 17, 2018)
134
Hopkins, H. D. Cross-Border Mergers and Acquisitions: Global And Regional Perspectives,
5(3) JOURNAL OF INTERNATIONAL MANAGEMENT. 207-239 (1999).
135
Boateng, A. ET AL, An Analysis of The Inward Cross-Border Mergers and Acquisitions in The
UK: A Macroeconomic Perspective, 22(2) JOURNAL OF INTERNATIONAL FINANCIAL
MANAGEMENT & ACCOUNTING. 91-113(2011).
136
Huizinga, H. ET AL, Who Bears The Burden Of International Taxation? Evidence From Cross-
Border M&As, 88(1) JOURNAL OF INTERNATIONAL ECONOMICS. 186-197(2012).

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this vein, di Giovanni (2005) found that M&A activity increases due to policy
development of capital tax treaties between local and global components.
“Acquisition events of abroad increase with proportion to openness of the host
economy subjected to world economy conditions.”137

1.12.3.CBMA: Valuation

Regarding value creation, a survey by KPMG reported that “only 17% of cross-border
acquisitions created shareholder value, while 53% destroyed it.”138

1.12.4. CBMAs: Attrition

As commenting on layoffs following CBMAs, it was found that 31% of executives

left after acquisition while a great extent of these executives left within two years of
the deal and75% of the top-level officials leave by fifth year of the deal. In fact,
termination of executives following CBMAs about 35%, which is significantly higher
than the domestic deals about 24%.

1.12.5 CBMAs: Economic Systems

“Target country‟s economic system, economic indicators, legal protection, intellectual

property rights and political environment influence the selection of entry mode
decision,”139 besides internal factors (transaction, product, resource). “The
determinants of FDI or acquisition mode include policy-perspective (e.g., openness,
product-market regulation, corporate tax rates and infrastructure) and non-policy
perspective (e.g., market size, distance, factor proportions, political stability and
economic stability).”140

137
Moskalev, S. A. Foreign Ownership Restrictions And Cross-Border Markets For Corporate
Control, 20(1) JOURNAL OF MULTINATIONAL FINANCIAL MANAGEMENT. 48-70
(2010).
138
as cited in Shimizu et al., 2004, p. 308.
139
Luo, Y. , Determinants Of Entry In An Emerging Economy: A Multilevel Approach, 38(3)
JOURNAL OF MANAGEMENT STUDIES, 443-472 (2001).
140
Fedderke, J. W., Romm, A. T., Growth Impact and Determinants of Foreign Direct Investment
Into South Africa, 1956–2003. 23(5) ECONOMIC MODELLING, 738-760 (2006).

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1.12.6. CBMAs: Risk Management

“The risk factors relating to foreign market entry include (a) general stability risk, (b)
ownership/control risk, (c) operating risk, (d) transfer risk, and (e) investment and
contractual risk.”141 “Foreign investment, indeed, leads to a change in the ownership
of existing production facilities, instead of a relocation of economic activity. On the
other hand, an acquisition involves the transfer of an asset between two owners who
are taxed differently, which generates taxable income.”142 “Indeed, choice of
acquisitions is one of the prospective market entry modes in the internationalization
process.”143 Of course, acquisitions provide a rapid means to get access to the local
market, for example, access to distribution outlets in forward integration.

1.12.7 CBMA: Sovereignty

“A CBMA takes place with the consent of at least two countries. In a transaction, if
one country does not approve any of the terms explained in the given negotiation
document, ultimately deal becomes delay or unsuccessful.

Hence (a) Governance system, (b) constitutional framework, (c) legal environment,
(d) trust and relationship, and (e) culture play a key role in (i) international negations,
(ii) deal completion and (iii) firm performance.”144

1.12.8.CBMAs: Market Legacies

“The CBMAs are happening for many years and as the concept, CBMAs originated in
the Europe late 1990s, covering 120 years, as of 2018. Before World War-I (1914-
1918), the German banking system and large banks at Berlin, grew by merging with
local banks, and thereafter, German banks became popular globally by aiding the

141
Rasheed, H.S. , Foreign Entry Mode and Performance: The moderating effects of Environment ,
43(1) JOURNAL OF SMALL BUSINESS MANAGEMENT. 41-54 (2005).
142
Becker, J., Fuest, C. , Taxing Foreign Profits With International Mergers and Acquisitions,
51(1) INTERNATIONAL ECONOMIC REVIEW. 171-186 (2010).
143
Andersen O., Internationalization And Market Entry Mode: A Review of Theories And
Conceptual Frameworks, 37(special issue) MANAGEMENT INTERNATIONAL REVIEW.
27- 42 (1997).
144
Barbopoulos, L.,ET AL, Foreign direct investment in emerging markets and acquirers‘ value
gains, 23(3) INTERNATIONAL BUSINESS REVIEW. 604-619 (2014).

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external growth through mergers and acquisitions of industrial enterprises”145 Based

on a sample of 35 German company mergers during 1870-1913, Kling also found that
previous mergers have made subsequent acquisitions due to improvement in (a)
economies of scale, (b) macroeconomic conditions, (c) success of former mergers and
(d) market structure.

1.12.9 CBMAs: Merger Waves

“There were six varieties of merger waves from the beginning of the year 1900 that
led substantial industrial restricting across the globe, but largely focused on European
countries.”146 The horizontal mergers targeted at creating monopolies during 1880-
1904, dominated the first European merger wave. The second merger wave led to
increase vertical mergers or vertical integration during 1919-1929. The third merger
wave considered for the period 1950-1960 that aimed at creating large conglomerates
while expanding the businesses in the form of diversification. The fourth merger wave
(1983-1989) discovered new forms of consolidation, in other words, hostile takeover
bids and leveraged buyouts in which the development was due to technological
progress in biochemistry and electronics, as well as the creation of new financial
instruments and markets (e.g., the junk bond market). “The fifth merger wave (1993-
2000) emerged the new term CBMAs due to globalization, economic boom, stock
markets development, foreign direct investment and other initiatives (e.g., financing
international deals), and growth in internet and telecommunications sector.”147 “The
sixth merger wave (2003-present) is largely motivated by lower asset valuations and
global financial crisis embarked in the 2007.”148 For “the period 1980-1990, the world
FDI flows have almost tripled in which FDI has become a major form of international

145
Kling, G., The long-term impact of mergers and the emergence of a merger wave in pre-World-
War I Germany, 43(4) EXPLORATIONS IN ECONOMIC HISTORY. 667-688 (2006).
146
Bertrand, O., & Betschinger, M. -A. Performance Of Domestic And Cross-Border Acquisitions:
Empirical Evidence From Russian Acquirers,40(3), JOURNAL OF COMPARATIVE
ECONOMICS, 413-43(2012).
147
Goergen, M.,& Renneboog, L., Shareholder Wealth Effects Of European Domestic And Cross-
Border Takeover Bids, 10(1), EUROPEAN FINANCIAL MANAGEMENT. 9-45(2004).
148
Alexandridis, G., ET AL, How Have M&As Changed? Evidence From The Sixth Merger Wave.
18(8) EUROPEAN JOURNAL OF FINANCE. 663-688 (2012).

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capital transfer.”149 As reported by the UNCTAD, value of cross-border deals

accounted for 26% of total acquisitions during 1986-2000, and then it rose from 0.5%
to 2% of worldwide GDP for the period 1980-2000. “In fact, roughly 80% of foreign
direct investment by developed economies took place in the form
mergers/acquisitions.”150 Based on private data, “some researchers reported that value
of global M&A activity has increased from US$3.3 trillion in 1999 to US$3.5 trillion
in 2000, then observed lower trend, but soared again to a record high of $4.5 trillion
in 2007 [47% of deals were reported to be cross-border in nature,”151 and “further
reported lower volume in 2011 about US$3.5 trillion.”152 In case of cross-border
deals, volume has increased from US$2.1 trillion in 2007 to US$2.6 trillion in 2012
(Reis, Ferreira, & Santos, 2013).

1.12.10. CBMAs: 20th Century Experiences

“In case of large cross-border deals completed in the last century, lies the 1987 the UK
based British Petroleum (BP), which offered US $ 7.56 billion for its outstanding 55%
equity stake in US based Standard Oil.”153 Similarly other mega-mergers include (a)
AOL/Time Warner (US$399 billion) in infotainment, Exxon/Mobil (US$86 billion) in oil,
(b) Travelers/Citigroup (US$73 billion) in financial services. “The CBMAs include (a) UK
based Vodafone acquisition of German‟s Mannesman for US$186 billion in
telecommunications sector, (b) Daimler/Chrysler (US$ 40 billion) in automotive industry,
(c) Deutsche Bank/Bankers Trust (US$10.1 billion) in financial services industry.”154

“Global financial crisis, during 2007-2008 saw ABN AMRO, a Dutch bank acquired
by the UK based Royal Bank of Scotland (RBS) against the counter-bid made by
149
Roy, S., & Viaene, J. -M., 46(2) On Strategic Vertical Foreign Investment, JOURNAL OF
INTERNATIONAL ECONOMICS. 253-279 (1998).
150
Gregory, A., & McCorriston, S. Foreign Acquisitions By UK Limited Companies: Short- And
Long-Run Performance, 12(1) JOURNAL OF EMPIRICAL FINANCE. 99-125 (2005).
151
Reus, T. H., & Lamont, B. T., The Double-Edged Sword of Cultural Distance in International
Acquisitions, 40(8) JOURNAL OF INTERNATIONAL BUSINESS STUDIES.1298-1316
(2009).
152
Ahammad, M. F., & Glaister, K. W. (2013). The pre-acquisition evaluation of target firms and
cross border acquisition performance. International Business Review, 22(5), 894-904.
153
Gray, S. J., & McDermott, M. C. (1987). International mergers and takeovers: a review of trends
and recent developments. European Management Journal, 6(1), 26-43.
154
Angwin, D. Mergers and Acquisitions Across European Borders: National Perspectives on
Preacquisition Due Diligence and The Use Of Professional Advisers, 36(1) JOURNAL OF
WORLD BUSINESS. 32-57 (2001).

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Barclays.”155 In addition, “it is stylized fact that due to financial crisis and lower asset
prices emerging market multinationals have been diversifying their products and
services to developed economies through acquisition route.”156 For instance, China-
based Lenovo acquired the computer division from US based IBM and the same
company bought Motorola from the US based Google‟s portfolio business.

1.12.11. CBMAs: Leftover Deals

Based on the Thomson Financial M&A database for the period 1982-2009, Zhang,
Zhou, and Ebbers (2011, p. 226) reported that 210,183 deals found to be unsuccessful
(460,710 deals completed) out of 670,893 acquisition events. Zhang and He (2014)
described the case and effect as follows-

a. Nationalistic sentiments grow as a reaction to the instabilities.

b. Economic nationalism greatly affected foreign firms‟ market entry and operations.

“Many reasons motivated the recent CBMA wave in different parts of the world,
especially in emerging markets, following the 2007-08 global financial crisis. It has
been discussed in previous studies that multinational enterprises consider inorganic
growth options (mergers, acquisitions, joint ventures) as an inevitable and valuable
growth entry strategies.”157

1.12.13. CBMAs: Transactional Economies

“Economists argued, that mergers occur due to significant industry shocks”158 and “stock
market booms”159 and “consolidation among industries and regions has also uplifted the

155
Ferreira, M. A., ET AL., P. Shareholders at The Gate? Institutional Investors and Cross-Border
Mergers and Acquisitions, 23(2) REVIEW OF FINANCIAL STUDIES. 601-644 (2010).
156
Reddy, K. S. Beating The Odds! Build Theory From Emerging Markets Phenomenon and The
Emergence of Case Study Research – A ―Test-Tube‖ Typology, 2(1) COGENT BUSINESS &
MANAGEMENT. 99 (2015).
157
Meschi P. -X., & Métais, E., International Acquisition Performance andExperience: A
Resource-Based View. Evidence From French Acquisitions in The United States (1988-2004),
12(4) JOURNAL OF INTERNATIONAL MANAGEMENT. 430-448 (2006).
158
Ovtchinnikov, A. V., Merger Waves Following Industry Deregulation, 21(1) Journal of
Corporate Finance. 51-76 (2013).
159
Sorensen, D. E., Characteristics of Merging Firms, 52(5) JOURNAL OF ECONOMICS AND
BUSINESS. 423-433 (2000).

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worldwide M&A market.”160 Whereas, “the 20th Century market for corporate control
activities has been largely induced by significant economic initiatives such as (a)
globalization, (b) deregulation, (c) financial liberalization policies, (d) government
policies, (e) regional agreements, (f) elimination of bureaucrat hurdles, (g) technological
development, (h) new markets, (i) new international trade and investment agreements, (j)
trade liberalization in developed markets, (k) easy of foreign entry and ownership
restrictions, (l) cross-country trade linkages, (m) integration of global financial and product
markets, (n) faster communication of ideas, (o) greater integration of capital markets, (p)
bullish managerial and investor sentiment, (q) establishment of international accounting
standards and shareholding systems, (r) corporate governance and capital market
development.”161

1.12.14. CBMAs: Emerging Economies

“ Interestingly, emerging markets have reported substantial progress in terms of

economic growth, inbound and outbound investment/acquisitions deals and faster
development in communications sector due to the recent amendments relating to
institutional laws that answer foreign investment, corporate control and acquisition
patterns, especially in countries like China and India.”162 Moreover, the M&A market
has become much bigger compared to previous Centuries and supported by the deal-
making industry of consultants, corporate lawyers, investment banks and corporate
finance specialists (Berggren, 2003).

1.12.15. CBMAs: World Market 1994‒2013

“A great amount of direct international investment characteristically appears in the

outward sense of acquisitions.”163 For example, “number of international acquisitions

160
Shimizu, K., Hitt, M. A., ET AL., Theoretical Foundations of Cross-Border Mergers and
Acquisitions: A Review Of Current Research and Recommendations For The Future. 10(3)
JOURNAL OF INTERNATIONAL MANAGEMENT. 307-353 (2004).
161
Alexandridis,G., Mavrovtis, CF., & Travlos, N. G., How Have M&As Changed? Evidence From
The Sixth Merger Wave, 18(8) EUROPEAN JOURNAL OF FINANCE. 663- 688 (2012).
162
Chari, A., Ouimet, P. P., & Tesar, L. L., The Value Of Control in Emerging Markets, 23(4)
REVIEW OF FINANCIAL STUDIES. 1741-1770 (2010).
163
Becker, J., & Fuest, C., Taxing Foreign Profits With International Mergers and Acquisitions,
51(1) INTERNATIONAL ECONOMIC REVIEW. 171-186 (2010).

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has increased from 23% of total volume in 1998 to 45% in 2007.”164 The figure 1.18.1
& 1.18.2 show “the market performance in various category of countries.
Interestingly, one can find four cycles in the market trend, namely growing period
(1994-2000), declining, but promising period (2001-2006), financial crisis period
(2007-2008), and recovering, but reversing period (2009-2013). For instance, number
of deals (deal value) of word economy cross-border M&As has markedly increased
from (US$94.48 billion) in 1994 to 10,576 (US$959.34 billion) in 2000, 12,199
(US$1,045 billion) in 2007, and thereafter expectedly turned down to 9,794
(US$331.65 billion) in 2012 and to 8,624 (US$348.75 billion) in 2013 because of
global economic crisis and its adverse effect on overseas capital flows.”165

1.12.16. CBMAs: Value of Deals

In case of share by economic group for deal value, developed economies have accounted
at an average to 83% but declined significantly from 88% in 1994 to 68.7% in 2013,
while developing (transition) economies accounted at an average to 15% (2%) but
increased appreciably from 11.6% (0.05%) in 1994 to 32.4% in 2013 (5% in 2011).
Similarly, it was found that impressive rate of growth to the market for cross-border
M&As in both developing and transition economies while it contrasted in developed
economies. For example, average rate of growth in deal value for world economy
(developed, developing, transition economies) reported to 25% (26%, 33%, 92%). It is
proposed that firms from emerging markets have taken advantage of the lower asset
valuations in developed markets due to economic crisis (and, with adequate deep
pockets), which really increased their speed in the internationalization process.

However, this is indeed a recovering, but not a promising trend in the current
economic condition experiencing all over the world. Market will recover when a
country adopts systemic economic policies, transparent monetary system and efficient
financial markets, offers investment-based incentives, and maintains high-impact
coordination with rest of the world.

164
Erel, I., Liao, R. C., & Weisbach, M. Sdeterminants Of Cross-Border Mergers and Acquisitions,
67(3) JOURNAL OF FINANCE. 1045-1082 (2012).
165
UNCTAD ,World Investment Report: Investing in the SDGs: An Action Plan.
UNITED NATIONS PUBLICATIONS. (2014)

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Fig 1.5: Number & Value of coss-boarder inbound M&As by the status of economic
group, 1994-2013

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 Chapter 1

1.12.17. CBMAs: Non Economic Factors

“Some studies analyzed announcement returns, post-merger operating performance,

human aspects, post-merger integration, cultural aspects in integration, banking and
finance mergers, econometric based papers and general case studies.”166 Researchers
examined many cross – discipline factors but only covering the USA, the UK. “A few
scholars have examined the M&A research from the lens of industrial organization,
economics, sociology, accounting and law.”167 “Same scholars have mostly focused
on econometric-based work and debated about the interrelation between the expansion
of large-scale enterprises, external growth, and mergers.”168 There are two important
observations. First, large extant scholars have investigated M&A transactions using
quantitative research tools. In other words, there is inadequate literature using
qualitative research tools. For instance, “Haleblian et al. (2009) found that 3%
publication rate for case-based research in M&A. Second, literature on cross-border
M&As is relatively tiny or limited when compared to domestic M&As”169 and
greenfield FDI (Neary, 2007). “Further, previous literature (e.g. determinants)
generally does not distinguish between FDI through M&A or greenfield
investment”170and “mode of entry in a foreign market.”171

166
Tuch, C., & O‟Sullivan, N. The Impact Of Acquisitions On Firm Performance: A Review Of The
Evidence, 9(2) INTERNATIONAL JOURNAL OF MANAGEMENT REVIEWS. 141-170
(2007).
167
Bengtsson, L., & Larsson, R. , Researching Mergers & Acquisitions With The Case Study
Method: Idiographic Understanding Of Longitudinal Integration Processes, CENTRE FOR
STRATEGIC INNOVATION RESEARCH, http://www.bth.se/csir. (Last visited on May 26,
2018) Also In: Y. WEBER (EDS). HANDBOOK FOR MERGERS AND ACQUISITIONS
RESEARCH, 172–202 (2012).
168
Gugler, K., Mueller, D. C., & Weichselbaumer, M. The determinants of merger waves: an international
perspective, 30(1) INTERNATIONAL JOURNAL OF INDUSTRIAL ORGANIZATION. 1-15
(2012).
169
Moskalev, S. A., Foreign Ownership Restrictions and Cross-Border Markets ForCorporate
Contro, 20(1) JOURNAL OF MULTINATIONAL FINANCIAL MANAGEMENT. 48-70
(2010).
170
Hijzen, A., Görg, H., & Manchin, M., Cross-Border Mergers and Acquisitions and The Role of
Trade Costs, 52(5) EUROPEAN ECONOMIC REVIEW. 849-866 (2008).
171
Canabal, A., & White, G. O., Entry Mode Research: Past and Future, 17(3) INTERNATIONAL
BUSINESS REVIEW. 267-284 (2008).

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“Importantly, very few scholars have CBMA research using integrative approach
from different disciplines and research methods.”172 “The need is of stream
multidisciplinary or interdisciplinary approach.”173 “More positively, strategy
research in emerging economies not only has become an integral part of strategy
research in general, but also has led the charge in advancing theories by drawing
attention to the context-specific nature of strategic management.”174 “In recent
studies, scholars have focused on impact of nationalism and institutional factors on
foreign acquisitions success.”175 Eventually, it is established that CBMA research is
recent and less voluminous than local MAs.

1.12.18. Determinants of CBMAs

“Internationalization is a process through which a firm increases its level of

involvement in foreign markets over time, and traditionally consider it as a series of
events that take place over time.”176 Scholars have developed various conceptual
frameworks relating to FDIs, CBMAs deal success, post-merger integration
management, strategic alliance and cross-country cooperative strategies while using
empirical techniques.

It can be felt from studies that focus on CBMAs ranging from a basic merger process
to deal-specific factors and firm-specific attributes to macroeconomic determinants.
Reviewing studies are with the following associated to (a). legal environment, (b).
corporate governance and (c). international taxation. They are influenced by which

172
Bengtsson, L., & Larsson, R., Researching Mergers & Acquisitions with The Case Study
Method: Idiographic Understanding of Longitudinal Integration Processes. Working Paper,
2012/4, Centre for Strategic Innovation Research, UK: Edward Elgar (2012)
http://www.bth.se/csir. also in: y. weber (eds), Handbook for Mergers and Acquisitions
Research, 172– 202.
173
Oviatt, B. M., & McDougall, P. P., Defining International Entrepreneurship and Modeling The
Speed of Internationalization, 29(5) ENTREPRENEURSHIP THEORY & PRACTICE. 537-
553(2005).
174
Xu, D., & Meyer, K. E., Linking Theory and Context: ‗Strategy Research in Emerging
Economies‘ After Wright Et Al. (2005), 50(7) JOURNAL OF MANAGEMENT STUDIES.
1322-1346(2013).
175
Serdar Dinc, I., & Erel, I., Economic Nationalism in Mergers and Acquisitions, 68(6)
JOURNAL OF FINANCE. 2471-2514 (2013).
176
Casillas, J. C., & Acedo, F. J., Speed In The Internationalization Process of The Firm.
International, 15(1) Journal of Management Reviews. 15-29 (2013).

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are being specific determinants of the foreign market entry strategies was also done.
(i) deal-specific factors, search by (ii) firm-specific factors motivating to participate in
overseas investment deals, (iii) the role of learning and prior acquisition experience
matters in international deals. (iv) the impact of country-specific characteristics on the
success of cross-border acquisitions.

1.2.19 CBMAs: Deal-Specific Factors

It can be argued that “deal-specific factors are as deal size, payment mode, non-
compete fee, break-up fee, M&A advisors and importantly ownership control,
together influence both acquirer and target in overseas acquisitions environment.
More specifically, there is significant need for both M&A advisor‟s and local players
when firms from developed countries target firms in emerging economies, and vice-
versa. It refers that M&A advisors role is crucial in international acquisitions for
various reasons, for example, to gain knowledge of host country institutional
framework, to conduct due diligence program, and finally to look after legal
procedures.”177

1.12.20. CBMAs Firm / Industry-Specific Factors

Gonzalez, Vasconcellos, Kish, and Kramer (1997) found that firms acquiring US-
based firms have better liquidity ratio, while targets have low price-to-earnings ratio.
Paul and Wooster (2008) examined a sample of 173 US-based firms from 15
industries that invested in transition countries characterize sales growth and greater
advertising intensity participate in overseas deals to capture market share and first-
mover advantages. Firms in concentrated industry invest with high-equity
commitment besides seeking market advantages. While, firms featuring better
intangible assets (e.g., technology advantage) likely to delay entry due to weakness of
intellectual property laws in the given host country.

Zhu et al. (2011) investigated motives of acquiring firms making partial acquisitions
in emerging markets on a sample of 1,171 domestic and 537 cross-border deals for the

177
Epstein, M. J., The Determinants and Evaluation of Merger Success, 48(1) BUSINESS
HORIZONS. 37-46 (2005).

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period 1990-2007. They found that foreign firms acquire target firms featuring big
size and financial performance that associated to less competitive industries in host
emerging markets. They reported no significant difference for long run abnormal
returns between domestic and cross-border partial deals.

1.12.21. CBMAs: Due Diligence In Organisational Learning

Learning is a continuous process, both in and out of house/place of work. Scholars

defined the organizational learning as “just positive experience transfer, or the
appropriate generalization of prior experience to a subsequent event”178. An
organization of a sole entrepreneur or of a group of entrepreneurs learn knowledge on
different business strategies in three channels, namely

a. Learning-by-doing,

b. Learning from prior experience and

c. Learning from others/observations.

“Organizational learning play an important role in firm‟s internationalization

strategies.”179

“Few studies postulated that prior knowledge or experience in overseas business

positively affect subsequent foreign market entry strategies in the same host country
or different countries.”180 “The research on learning-by-observing, learning-by-doing,
or learning from repetitive acquisitions has recently discussed in the M&A.”181 In a
survey-based study, Very and Schweiger (2001) identified 55 influential problems in
acquisition process of domestic and cross-border deals based on 26 middle market
firms in France, Germany, Italy and the U.S. They found that acquirers prior

178
Barkema, H. G., & Schijven.M., how Do Firms Learn To Make Acquisitions? A Review Of Past
Research and An Agenda for The Future, 34(3) JOURNAL OF MANAGEMENT. 594-
634(2008).
179
Barkema, H. G., & Vermeulen, F., International Expansion through Start-Up or Acquisition: A
Learning Perspective. 41(1) ACADEMY OF MANAGEMENT JOURNAL. 7-26 (1998).
180
Very, P., & Schweiger, D. M., The Acquisition Process as A Learning Process: Evidence from A
Study of Critical Problems and Solutions in Domestic and Crossborder Deals, 36(1) JOURNAL
OF WORLD BUSINESS. 11-31 (2001).
181
Aktas, N., Bodt, E. D., & Roll, R., Learning from Repetitive Acquisitions: Evidence from The
Time Between Deals, 108(1) JOURNAL OF FINANCIAL ECONOMICS. 99-117 (2013).

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experience with host country positively result in making further successful deals in
the same country. In other words, lack of experience with specific country creates
significant problems in overseas deals ranging from negotiations breakup to post-
merger integration difficulties. Further, few firms entering in unknown country face
newness liabilities (e.g., legal, tax, constitutional, and local political systems) and they
usually appoint local M&A advisors to hedge both localness and foreignness
problems. In particular, Nadolska and Barkema (2007) examined a sample of 1,038
foreign acquisitions of 25 firms representing the Netherland over three decades. They
found that each firm has made three overseas deals per year, which had notable
experience with 25 international deals, 17 local deals and six overseas joint ventures.

They suggested that frequency of firm acquisition board increases with proportion to
increase in firm‟s participation in local and international deals. While focusing on
resource dependence theory, “Lin et al. (2009) analyzed 126 alliances and 74 M&As
during 2001-2005 period, representing US and Chinese firms. They found that firms
gaining knowledge on networks, learning, and institutions enhance the tempo of
acquisition process and thereby positively result in deal completion. Hence, relational,
behavioural and institutional factors determine the success of negotiations. By
contrast, for a sample of 291 deals during 1988-2004”182 and “for a sample of 731
deals during 1988-2006”183 representing French acquisitions in the U.S. economy
found that acquisition experience of acquiring firm has no impact on acquisition
performance in terms of abnormal returns. It infers that acquisitions undertaken by
prior experience firms do not influence the stock returns around sequel acquisition
announcement.

1.12.21.1. Organisational Learning By Doing

In the view of learning-by-doing, Collins et al. (2009) examined foreign acquisitions

involving US firms as acquirers. The observations include

182
Meschi, P. -X., & Métais, E., International Acquisition Performance and Experience: A
Resource-Based View. Evidence from French Acquisitions in The United States (1988–2004),
12(4) JOURNAL OF INTERNATIONAL MANAGEMENT. 430-448 (2006).
183
Meschi, P. -X., & Métais, E., Do Firms Forget About Their Past Acquisitions? Evidence From
French Acquisitions in The United States (1988-2006), 39(2) JOURNAL OF MANAGEMENT.
469-495 (2013).

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(i) Firm size, product diversification, exchange rate and degree of internationalization
were found to be positive with international acquisition activity, while country-specific
factors such as political uncertainty and cultural differences were found to be negative;

(ii) Prior acquisition experience in local and international settings influences the
subsequent acquisitions; albeit, experience in overseas deals influences more than
the experience in local deals;

(iii) Previous overseas acquisition experience within a host country reported to be

significant impact on subsequent deals in that country.

1.12.21.2 Organisation Learning By Observing

In the context of learning-by observing (from industry peers), Francis et al. (2014)
examined a sample of 317 cross border acquisitions conducted by US firms in
developing nations during 1993-2010 period.

They reported few interesting findings

(i) Positive relationship between learning from past acquisition experience of

industry peers and acquisition completion;

(ii) Acquiring firms usually learn from peers due to information spill overs through
media coverage (print and electronic) and that learning appreciably influences
the success of their negotiations;

(iii) No significant relationship between learning-by-observing attributes and

cumulative abnormal returns of acquiring firms around acquisition
announcement, except high-tech industry targets.

1.12.21.3 Organisational Learning by Other Means

While studying sequential cross-border acquisitions (frequent acquirers), Zhu(2011)

investigated stock performance of acquirers for 2,712 transactions involving 70
acquiring nations and 145 target countries between 1978 and 2008. They found that
54% of sample acquisitions created positive stock earnings around the announcement.
On average, acquiring firms experienced similar returns (positive/negative) in both

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previous and subsequent deals. Few acquiring firms experienced constant returns
when the time elapsed between subsequent deals is shorter that induced by investor
sentiment and choice of cash payments.

Likewise, Al Rahahleh and Wei (2012) analyzed stock returns for a sample of 2,340
merger deals representing 1,122 frequent acquiring firms over 17 emerging markets
for the period 1985-2008. Unless reporting strong relation, acquiring firms
participating in subsequent deals have experienced a declining pattern in stock returns
around that announcement, and that level of decline in stock returns was more for
firms with developed markets. In case of successful first acquisitions, bidder stock
returns were decline, strong for 10 markets.

More specifically, Ahammad and Glaister (2013) analyzed a survey of 65 responses

involving 591 international acquirers in UK during 2000-2004 period and reported
that in-depth evaluation of target firm business, products and financial performance
improves the success of cross-border acquisition. For example, target size found to be
positive influence on acquisition performance. They also suggested that acquiring
firms employing greater resources and putting more efforts result in acquisition
success if the given target size is greater.

Thus, here, it can be concluded that path-dependent learning, sophisticated experience

in international deal making and prior experience within a host country have strong
influence on future cross-border deal activity accountable for deal negotiations,
integration and firm performance.

1.12.21.4. CBMAs: Country-Specific Factors

An international merger/acquisition completion influences by both home and host

a. Country characteristics,

b. Institutional laws,

c. Economic indicators and

d. Political environment.

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“A great degree of empirical studies responsible for different samples in different

countries suggested that cross-border determinants such as economic performance,
institutional and regulatory framework, political environment, cultural differences and
physical distance between home and host countries significantly affect foreign market
entry strategies: green field investments and acquisitions.”184

On the other hand, host country government usually restricts or puts numerous
conditions on inbound acquisitions compared to green field investments, because
acquisitions provide ownership and controlling benefits to foreign enterprises.

1.12.21.5. CBMAs: Economic/Financial factors

The design of the financial system plays a key role in macroeconomic policies,
especially capital market and its regulatory framework. “The type of financial
institutions that should be established, the design of the regulatory system, and the
role of government policies related to stabilizing and controlling the financial system”
are the most determinants of a financial system.”185 “Business and trade performance
and international equity rises when there is a significant economic liberty; in unison,
cost of external financing also decline if there is a substantial development in capital
markets.”186

Chandler (1980) described that most merger/acquisition transactions noticed in US

and UK is to control competition while “they become instruments to improve
industrial productivity through rationalization and centralization”.

“Scholars suggested that mergers influenced by specific industry shocks and

technological advancements.”187 In particular, economic growth or recession
determines the country‟s inward and outward investments. “Japanese outward M&A

184
Meschi, P. -X., & Métais, E., International Acquisition Performance and Experience: A
Resource-Based View. Evidence from French Acquisitions in The United States (1988–2004),
12(4) JOURNAL OF INTERNATIONAL MANAGEMENT. 430-448(2006).
185
Hermes, N., & Lensink, R., Financial System Development in Transition Economies, 24(4)
JOURNAL OF BANKING & FINANCE. 507-524(2000).
186
Francis, B. B., Hasan, I., & Sun, X., Financial Market Integration and The Value Of Global
Diversification: Evidence for U.S. Acquirers in Cross-Border Mergers and Acquisitions, 32(8)
JOURNAL OF BANKING & FINANCE. 1522-1540 (2008).
187
Harford, J., What Drives Merger Waves, 77(3) JOURNAL OF FINANCIAL ECONOMICS.
529-560 (2005).

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purchases have declined in 1990s and outward investments by Asian countries

reported declining trend due to 1997 currency crisis.”188 Chen et al. (2009) too
suggested that firm investment decisions not only influenced by internal funds (e.g.,
deep pockets, arranging funds from subsidiaries), but also affected by outside
investors who participate in capital markets.

“These external markets become imperfect and then not accessible (or, accessible at
high transaction costs) for firm managers due to major uncertainties in
macroeconomic policies such as legal codes, contract enforcement and information
disclosure systems, which in turn affect the financial development and economic
growth of the given country.”189

“Harford (2005) empirically proved that high stock market valuations influence
merger waves. The lower inflation rate in home country attracts more inward M&A
investments (sales), while higher inflation rate stimulate local firms to purse more
outward M&A deals (purchases) in other countries where inflation rate is low.”190

1.12.21.6 CBMAs: Country Specific Factor of North America

“It is noticed of growing research interest on CB-M&As in other emerging and Asian
markets.”191 In the early study, Vasconcellos et al. (1990) investigated the
determinants of CB-M&As involving US firms. They reported that economic
performance, exchange rates, technology and product diversification positively impact
on acquisition activity, while information effects, monopolistic power, inefficiencies
and institutional laws restrain the acquisition activity. Indeed, US bidders acquired
firms located in foreign countries when economic projections of host country become

188
Kang, N., & Johansson, S., Cross-Border Mergers and Acquisitions: Their Role In Industrial
Globalisatio,. OECD SCIENCE, TECHNOLOGY AND INDUSTRY WORKING PAPERS.
2000/01 (2000).
189
Beck, T., Demirgüç-Kunt, A.,ET AL., Institutional Laws, and Mergers and Acquisitions in
India: A Review/Recommendation, LAW, POLITICS, AND FINANCE. (2001), http://dev3.cepr.
org/meets/wkcn/5/567/papers/levines.pdf (Last visited on May 21, 2018)
190
Uddin, M., & Boateng, A., Explaining The Trends in The Cross-Border Mergers and
Acquisitions: an Analysis of Macro-Economic Factors, 20(5) INTERNATIONAL BUSINESS
REVIEW. 547-556 (2011).
191
Ang, J. B., Determinants of Foreign Direct Investment in Malaysia, 30(1) JOURNAL OF
POLICY MODELING, 185-189 (2008).

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buoyant, strong association with dollar and low transaction cost for external
borrowing.

“Vasconcellos and Kish (1996) examined both US and Canadian deals during 1982-
1990 period and suggested that high (low) debt yields in (Canada) US motivate
Canadian firms to acquire US firms, while the other observation was reverse. The
short-term effect between Canadian dollar and US dollar de-motivate Canadian
acquisitions of US firms, and higher price-to-earnings ratio in US market encourages
US acquisitions of Canadian firms and the other result was reverse, but not true for
price-to- earnings ratio in Canadian market. After that, same researchers have
examined US and European deals (France, Germany, Italy and the UK) during 1982-
1994 period.”192 “They suggested that factors such as exchange rates, diversification,
economic conditions in the home country, acquisition of technological and human
resources favour international acquisitions, while factors such as information
asymmetry, monopolistic power and government restrictions and regulations un-
favour such deals”193

In addition, foreign acquisitions occurred when bond yields in the home country were
higher than the host country, albeit, exchange rate found to be better explanation of
acquisition activity among bond yields, level of equity markets and exchange rates at
both home and host markets. By contrast, Akhigbe et al. (2003) reported a significant
decline in exchange rate exposure after acquisition announcements based on the
sample of 156 overseas transactions involving US firms for the period 1990-1996.
Thus, exchange rate risk plays key role in assessing the stock performance of
acquiring firm shareholders.

“Based on gravity model, di Giovanni (2005) examined CBMAs dataset during 1990-
1999, and found that financial markets environment and institutional factors
significantly affect both inbound and outbound capital flows. Size of financial
markets was one of the determinants when a local firm acquires a firm abroad. Factors

192
Vasconcellos, G. M., & Kish, R. J., Cross-Border Mergers and Acquisitions: The European–US
Experience, 8(4) Journal of Multinational Financial Management, 431-450 (1998).
193
Vasconcellos, G. M., Madura, J., & Kish, R. J., An Empirical Investigation of Factors Affecting
Cross-Border Acquisitions: The United States Vs. United Kingdom Experience, 1(3) GLOBAL
FINANCE JOURNAL, 173-189 (1990).

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such as telephonic traffic, common language, bilateral service agreements and

bilateral capital tax agreements attracted more inbound M&A investments, while
factors such as bilateral distance and high tax rates discouraged such investments.”194
The author estimations indicated that a one per cent rise of the stock market (credit) to
GDP ratio had associated with a 0.955% (0.133%) increase in CBM& As activity.
Likewise, Hijzen et al. (2008) analyzed the role of trade costs in explaining the cross-
border acquisitions in 23 OECD countries for the period 1990-2001. Based on the
tariff-jumping argument (cost of overseas transaction increases with increase in trade
barriers), they found that trade barriers have negative impact on cross border
investments, but less negative for horizontal mergers. Hence, the size of financial
markets in home and host countries positively determined the number of foreign
acquisitions.

1.12.21.7 CBMAs Country Specific Factor of Europe

In the European market, Coeurdacier et al. (2009) examined the determinants of

mergers during 1985-2004 period and found that profitability has been a key motive
of mergers in both manufacturing and service sectors, and 10% decrease in corporate
income taxes between target and bidder country would increase the outflows
associated to manufacturing sector by 68%. They also evidenced that degree of
protection and trade barriers negatively affect acquisitions in services sector across
countries, and countries joining European Union favoured both kinds of mergers:
horizontal and vertical.

While studying the impact of country risk ratings on acquiring firms in cross-border
deals, Kiymaz (2009) examined a sample of 210 US large-deals for the period 1989-
2003. They reported that US-based bidding firms experienced significant stock
returns on the announcement day. They suggested that country risk factors such as
political, economic, and financial risk ratings have considerably explained the
announcement wealth gains. Indeed, bidders have received higher wealth gains when
a firm targeted in developed countries and such gains are related to GNP growth rate.

194
Feito-Ruiz, I., & Menéndez-Requejo, Cross-Border Mergers and Acquisitions in Different
Legal Environments, 31(3) INTERNATIONAL REVIEW OF LAW AND ECONOMICS, 169-
187. (2011).

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The stylized fact was that better financial markets and stable political environment
positively affect the announcement returns.

1.12.21.8. Emerging Economies

In case of emerging markets, for Latin America region, Pablo (2009) examined the
determinants of cross-border acquisitions for a sample of 868 transactions between
1998 and 2004. The author highlighted that number of acquisitions are positively
affected by the economic freedom and business conditions in a target country.
Bidding firms participate in overseas acquisitions with overall better economic
environment than buyer participate in local deals. When target firm faces higher cost
of funding than the acquirer, which in turn enhances the chances of acquisition
occurrence. Importantly, target firms in countries with better economic performance,
deregulation of overseas investment policies, less government intervention were keen
to participate in overseas deals.

1.12.21.9. Developing Economies

In the African market, Fedderke and Romm (2006) analyzed the international capital
flows in South Africa for the period 1960-2002. They found that investment inflows
are horizontal rather than vertical, which in turn imply a positive technology spillover
from foreign to local capital. “The major positive determinants of the FDI include
economic openness, real GDP growth rate and increase in exports, while negative
factors include increased imports, political uncertainty, and strict regulations related
to foreign capital. In a recent study focusing the same region,”195 Agbloyor, Abor,
Adjasi, and Yawson (2013) explained the relation between financial market and FDI
flows for two groups banking sector in 42 economies (1970-2007) and stock markets
in 16 economies (1990- 2007). They suggested that countries featuring advanced
banking system developed stock markets, better infrastructure facilities, and more
open capital accounts, leads to attract more FDI inflows, while higher levels of
inflation discourages capital inflows.

195
Agbloyor, E. K., Abor, J.,ET AL., Exploring The Causality Links Between Financial Markets
and Foreign Direct Investment in Africa, 28(1) RESEARCH IN INTERNATIONAL
BUSINESS AND FINANCE 118-134 (2013).

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1.12.21.10. CBMAs: Asia – Pacific Region

In a relevant study on China and India, Wang (2013) analyzed the fiscal
decentralization explaining FDI flows. They concluded that the net benefits of FDI for
host country first decreases, and then increases with FDI. They also suggested that too
much fiscal decentralization negatively influence the sovereign incentives in terms of
source-based tax income.

“Conversely, Blonigen (1997) explored a link between exchange rates and FDIs
whilst proposed a model where the assets acquired in an acquisition are easily
transferable within the organization, which tend to generate returns in any currency.
The author found that FDI flows significantly occur due to the asset-seeking motive
(to acquire a complementary asset (e.g., technology)). In fact, currency movements
also affect foreign deals (Erel et al., 2012).”196 Similarly, Lee (2013) examined five of
the top investing countries [Australia, Canada, Japan, the UK and the US] for CB-
M&As during 1989-2007 period. The author showed that exchange rate is
determining the inbound-FDI to the US economy but not for inbound-FDI to other
developed markets. An important learning is that merger or acquisition is a complex
process that depends on many factors within the economic system and capital
markets.

1.12.21.11. CBMAs: Law, Rules and Regulations

“Since the beginning of 21st Century, the dynamic view of finance and law has
received significant attention in strategy research.”197 Finance scholars postulated that
quality of financial and capital markets laws enhance the given country‟s stock
markets that rapidly improve economic growth and prosperity.

1.12.21.12. Regulatory Frame Work

Thus, the most important determinant of cross-border investments and acquisitions in

economics, strategy, finance is referred as “a country‟s institutional and regulatory

196
Fedderke, J. W., & Romm, A. T., Growth Impact And Determinants Of Foreign Direct
Investment Into South Africa, 23(5) ECONOMIC MODELLING. 738-760 (2006).
197
Agbloyor, E. K., Abor, J., Adjasi, C. K. D., & Yawson, A., Exploring The Causality Links
Between Financial Markets and Foreign Direct Investment in Africa, 28(1) RESEARCH IN
INTERNATIONAL BUSINESS AND FINANCE, 118-134. (2013).

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framework. “By and large, institutional rules, regulations, procedures and guidelines
related to trade in one country obviously not same with other countries. Indeed, every
country has created its own legal system (e.g., India–common law) for both economic
and social security. Host country government often imposes high degree of
restrictions (e.g., ownership structure) and levy higher taxes not to collect more
revenue but largely to protect local companies.”198

The economic security is an important tone for institutional laws. Hence, a country‟s
policy framework related to foreign trade (exports and imports) and investments
determine the success of foreign market entry strategies such as FDI, joint ventures,
exporting, licensing, and importantly, acquisitions. “La Porta et al. (2000) mentioned
that common law countries have strong investor protection laws, French-civil law
countries have weak laws for shareholder protection, and German and Scandinavian
countries have middle range protection laws. They also suggested that “strong
investor protection is associated with effective corporate governance … and efficient
allocation of capital across firms”. In particular, the regulatory system is induced by
three reasons: owning private benefits by protecting local companies (for private
benefit), bureaucratic self-interest, and political extraction.”199

1.12.21.13. Investor Interest

“On the other hand, international direct investments affect host country‟s institutional
quality and economic progress.”200 “For instance, degree of investor protection
between home and host country significantly affects capital market transactions, in
turn, result in firm value, ownership structure and financing choices.”201 In fact,
“countries that have better quality of laws and implementation procedures protect

198
Fedderke, J. W., & Romm, A. T., Growth Impact and Determinants of Foreign Direct
Investment Into South Africa, 23(5) ECONOMIC MODELLING. 738-760 (2006).
199
La Porta, R., Lopez-De-Silanes, F., ET AL., Law and Finance. 106(6) JOURNAL OF
POLITICAL ECONOMY, 1113-1147 (1998).
200
Alfaro, L., Kalemli-Ozcan, S., & Volosovych, V., Why Doesn't Capital Flow From Rich to
Poor Countries? an Empirical Investigation, 90(2) REVIEW OF ECONOMICS AND
STATISTICS. 347-368 (2008).
201
Bris, A., Brisley, N., & Cabolis, C., Adopting Better Corporate Governance: Evidence from
Cross-Border Mergers, 14(3) JOURNAL OF CORPORATE FINANCE. 224-240 (2008).

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intellectual property, respect copyright laws, and preserve property rights.”202 After
reviewing prolific studies in M&A research, it is known that better the host country‟s
laws accountable for financial markets, accounting, taxation and new company
registration, then higher the cross-border inward acquisitions.

Importantly, “a growing research interest was found among scholars in developed and
developing countries in analyzing the impact of institutional quality aspects,
institutional distance, political intervention and economic nationalism [preference for
natives over foreigners in economic activities] on cross-border M&As completion.”203
The stream of reacquisition phase of cross-border acquisitions is limited and grants
further research, particularly when investment comes from developed country to
developing country.

1.12.21.14. Investment Climate

Based on economic estimations, Lucas (1990) postulated that weak institutional laws,
less economic performance and foreignness were being the causes behind poor
investments in developing countries when involving developed countries as home-
based sources. While extending the Lucas paradox, Alfaro et al. (2008) also found
that institutional quality has been most legitimate attribute explaining the paradox
why capital does not flow from rich to poor countries. In other words, human capital,
government policies and asymmetric information affect the amount of capital flows,
while government instability, corruption, weak law and order, and inefficient
bureaucratic administration found to be exemplar observations referring lack of
capital flows to poor nations.

While examining the determinants of cross-border M&A deals, Rossi and Volpin
(2004) suggested that countries characterize stronger investor protection and better
accounting standards have reported significant growth in M&A activity. In particular,
they found a great deal of target firms in countries with poor shareholders protection,

202
Jory, S. R., & Ngo, T. N., The Wealth Effects of Acquiring Foreign Governmentowned
Corporations: Evidence from US-Listed Acquirers in Cross-Border Mergers and. Acquisitions,
21(24) APPLIED FINANCIAL ECONOMICS. 1859-1872 (2011).
203
Dikova, D., & Sahib, P. R., Is Cultural Distance A Bane or A Boon for Cross-Border
Acquisition Performance, 48(1) JOURNAL OF WORLD BUSINESS. 77-86 (2013).

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and hostile deals, stock payment and premium were high in countries with higher
investor protection.

1.12.21.15. Standards

Following this, Bris and Cabolis (2008) analyzed role of investor protection in cross-
border acquisitions for a sample of 506 deals involving 39 target and 25 acquiring
countries for the period 1989-2002. They suggested that stronger the accounting
standards, then better the investor protection in acquiring country and higher the
premium in overseas deals compared to local deals.

1.12.21.16. Corporate Governance

Likewise, Martynova and Renneboog (2008b) reported that “national corporate

governance system and its quality has significant impact on cross-border acquisitions.
Target shareholders received higher takeover premium in countries with strict
regulations and government control than bidding shareholders in countries with
similar attributes. In a recent paper, Kim and Lu(2013) examined a sample of 527
cross-border acquisitions in 33 countries and found substantial growth in cherry
picking”204 following corporate governance reforms by strong investor protection
bidder countries, while this was negative in target countries. They suggested that
countries characterize weak shareholders protection prevent poorly performing firms
from gaining access to international capital. Firms from developed economies found
to be motivated by their home-country corporate governance practices to select
partners in host emerging countries and such firms have created maximum returns for
their shareholders.

1.12.21.17. Flexibility of Law

While explaining the link between host country institutional laws and cross-border
joint ventures/acquisitions, Moskalev (2010) found that better the relaxation (favor) of
host country government-laws, then more the cross border acquisitions to cross-
border joint ventures. The author also described that the likelihood of foreign

204
Bris, A., & Cabolis, C., The Value of Investor Protection: Firm Evidence from Cross-border
Mergers, 21(2) REVIEW OF FINANCIAL STUDIES, 605-648 (2008).

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acquisitions success directly explain the deregulation of government laws relating to

international investments.

1.12.21.18. Developing Countries

“Alguacil, Cuadros, and Orts (2011) examined a sample of 26 developing countries

during 1976-2005. They found that countries favoring foreign investment and
relaxing ownership rules have received significant direct international investments,
especially from developed countries. Indeed, the improvement in government laws
not only attracted inward investments, but also positively enhanced the political and
economic systems of that host countries. Whilst making conclusions from
comparative investigation,”205 Hur, Parinduri, and Riyanto (2011) examined a sample
of 165 countries (developed and developing) for the period 1997-2006. They also
reported that quality of institutional laws and regulations relating to financial markets,
taxation and foreign ownership have captured the difference in cross-border M&A
flows between developed an developing countries. Hence, the increase in overseas
M&A flows explain the less improvement in institutional laws for developing
countries, while it is direct proportionate for developed countries.

In particular, Zhang et al. (2011) examined the impact of institutional laws on cross-
border acquisitions completion for a sample of 1,324 announced deals accounting
Chinese acquirers during 1982-2009. They found that success rate of overseas
acquisitions announced by a Chinese firm is lower if - target country characterizes
weak institutional framework, target industry is sympathetic to national security, and
acquirer is a government firm. The success rate significantly differs for various
reasons, for example, success rate for deals involving government firm (41%) is lower
than deals involving private targets (58%) and deals involving listed company targets
(53%). acquisitions completion through three ways: national security, national growth
strategy and foreign relations. “For example, a given announced deal explains the
national growth strategy has positive impact on deal completion. The speed of

205
Hur, J., Parinduri, R. A., & Riyanto, Y. E., Cross-Border M&A Inflows and Quality of Country
Governance: Developing Versus Developed Countries, 16(5) PACIFIC ECONOMIC REVIEW.
638-655 (2011).

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announced deal completion found to be Likewise, in a recent study,”206 “analyzed the

influence of economic nationalism”207 on cross-border inward acquisitions in China
for a sample of 7275 announced deals during 1985-2010. They found that economic
nationalism has significant impact on cross-border high when the deal considered as
safe and helpful for economic development that accountable for a country with good
foreign relations.

Using hand-collected data, Serdar, Dinc and Erel (2013) examined the government
reaction to big takeover attempts for a sample of 197 local and 218 foreign bids in 15
European Union nations over the period 1997-2006. They found that the respective
government has restricted 75.7% of bids, while it has supported only 17.1% of bids.
They suggested that trust has been major influential factor in government reactions to
big takeover attempts. For example, government likely supports when foreign firms
acquire a local firm represent a country with higher level of trust. Importantly, they
observed that government favors domestic deals over foreign bids due to differences
in institutional quality aspects and social-economic-political environment.

1.12.21.19. Stock Market

Based on secondary sources of case studies, Geppert et al. (2013) examined 12 large
acquisitions made by four MNCs in the global brewery industry. They observed that
stock market volatility led to higher risky acquisition deals by MNCs from open
economies in which institutional differences between countries significantly affect
managerial risk taking in such international acquisitions. In a conceptual paper
explanting the link between institutional distance and CBMAs completion, Reis et al.
(2013) proposed three view of institutional environment- economic, political and social
institutions, and thereby suggested that countries with higher institutional quality of
environment attract significant number of cross-border acquisitions. The opportunity
cost of acquisition increases with proportion to delay in cross-border deal completion.
Lastly, they propounded that more the institutional distance between acquiring and target
countries, then higher the chances of abandon the announced deal.

206
Zhang, J., & He, X., Economic Nationalism And Foreign Acquisition Completion: The Case of
China, 23(1) INTERNATIONAL BUSINESS REVIEW. 212-227 (2014).
207
Ibid

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1.12.21.20. Legal Gaps

It has been proved that differences in legal tradition between target nations explain the
acquirer returns around cross-border acquisition announcements. For European deals,
Feito-Ruiz and Menéndez-Requejo (2012) examined the impact of legal environment on
cross-border acquisition decisions for 447 deals during 2002-2007 period. They noticed
that acquiring firms pursue foreign acquisitions due to higher benefits of the internal
capital markets in countries with weak institutional laws. The valuation of diversified
acquisition was positive when the firm has high levels of ownership, but it resulted in
negative when that firm located in a country with strong legal environment.

It can be understood, in the light of above discussion, that quality of laws, investor
protection, regulatory procedures and corporate governance systems between home
and host countries eloquently affect cross-border deals.

1.12.21.21. Instability, Transparency, Unaccountability and Corruption

“A country‟s economic progress, financial development and institutionalization is not

only influenced by quality of laws and their implementation, but also affected by the
local political environment.”208 In particular, based on politics and finance view,
ruling political party persuades the government to create and rule certain policies (not)
favouring foreign investment, both inward and outward flows. Crittenden and
Crittenden (2012) mentioned that most emerging markets characterize political and
legal instability. Political influence or intervention will be high in cross-border inward
acquisitions with developing countries like China and India. In previous studies, Root
(1968) stated that “market opportunity and political risk are the most influential
factors in investment decisions”.

Regarding the impact of political environment on FDIs in Germany and Japan,

Schöllhammer and Nigh (1984, 1986) suggested that German firms invest in less
advanced-economies, internal political conflicts in less-advanced host countries
adversely affect border-crossing investments. While, intergovernmental relationships
and relative weight of economic environment issues play key role when the
208
Beck, T., Demirgüç-Kunt, ET AL., Institutional Laws, and Mergers and Acquisitions in India: A
Review/Recommendation, LAW, POLITICS, AND FINANCE (2001), http://dev3.cepr.org/
meets/wkcn/5/567/papers/levines.pdf (accessed 1-Dec-2013).

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investment made by Japanese firms. In a recent empirical case study, Wan and Wong
(2009) argued that the cross-border oil deal between CNOOC in China and Unocal
in US has become unsuccessful due to higher level of political barriers, which further
resulted in significant decline in market value of non-merging oil companies in US.

More specifically, “Cao and Liu examined the performance of cross-border

acquisitions around national or country level election for a sample of 58,507
transactions, which responsible for 47 countries during 2001-2009 period. They found
that number of international acquisitions has significantly increased during the year
just prior to the national election year, and that incremental growth report in period
seven to twelve months prior to the election month, together to escape from political
uncertainty. In fact, acquiring firms have chosen targets in countries with less or
better institutional development than home country in that period. Hence, they did not
report any significant impact in the election year, the year two years prior to the
election year and the year one/two years after the election year.”209

1.12.21.22. Corruption

Corruption has been cited as one of the most national characteristics in attracting
direct international investments and cross-border acquisitions. It has been referred as
“the abuse of public power for private benefit.‖210 Few authors also cited that the
definition of corruption captures unethical behaviours like “bribery, campaign finance
abuse, cronyism, fraud, embezzlement, kickbacks and side payments.”211 “It largely
occurs in three ways such as bribery, extortion and embezzlement.”212 It has defined
in the International Country Risk Guide as “a measure of corruption within the
political system that is a threat to foreign investment by distorting the economic and

209
Cao, C., & Liu, G. (Poli w/p). Political uncertainty and cross-border mergers &
acquisitions.available at: http://zicklin.baruch.cuny.edu/faculty/accountancy/events-research
workshops/ Downloads/SWUFE-Chunfang_Cao.pdf (accessed 12-Dec-2013).
210
Rodriguez, P., Uhlenbruck, K., & Eden, L., Government Corruption and the Entry Strategies of
Multinationals, 30(2) ACADEMY OF MANAGEMENT REVIEW. 383-396 (2005).
211
Malhotra, S., Zhu, P., & Locander, W., Impact of Host-Country Corruption on U.S.and Chinese
Cross-Border Acquisitions. 52(6) THUNDERBIRD INTERNATIONAL BUSINESS REVIEW.
491-507 (2010).
212
Crittenden, V. L., & Crittenden, W. F., Corporate Governance in Emerging Economies:
Understanding the Game, 55(6) BUSINESS HORIZONS, 567-574 (2012).

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financial environment … into the political process.”213 “It has been estimated across
the world about US$1 trillion annually.”214 While making our argument stronger and
reachable, we wish to reproduce some important observations appeared in the recent
empirical study.

“A survey by the World Bank of 3,600 firms in 69 countries found that 40% of the
responding companies had engaged in some kind of unethical behaviour: paying
bribes to facilitate their international operations… a survey by Control Risks and the
Simmons & Simmons involving 350 MNCs in seven countries … reported that 43% of
the respondents felt they had lost a new business because a competitor paid a
bribe”215.

“Nevertheless, corruption has been a major economic problem in developing

countries in which higher corruption result in attracting less overseas inward
investment flows.”216 Further, emerging countries, for instance, BRIC economies
have higher corruption ratings than advanced countries (Transparency International).
It is found that Very few studies examining the impact of host country corruption on
inward foreign direct investments, but noticed a growing interest in this filed. For
example, Weitzel and Berns (2006) analyzed a sample of 4,979 international and local
takeovers to reveal premiums paid for targets, and found that higher levels of
corruption in host country result in lower premiums that paid for local acquired firms.
They also inferred that target shareholders have received significantly lower returns
around acquisition announcement due to higher corruption. Malhotra et al. (2010)
examined a sample of 10,236 cross-border acquisitions involving bidding firms from
the US and China for the period 1990-2006. They reported that

213
Bris, A., & Cabolis, C., The Value of Investor Protection: Firm Evidence from Crossborder
Mergers, 21(2) REVIEW OF FINANCIAL STUDIES. 605-648 (2008).
214
Kaufmann, D. (2005), Myths and realities of governance and corruption. In A. Lopez- Carlos,
M. E. Porter and K. Schwab (eds.) The World Economic Forum, Global Competitiveness Report
2005-2006, 81-98, New York: Palgrave Macmillan.
215
Malhotra, S., Zhu, P., & Locander, W., Impact of Host-Country Corruption on U.S.and Chinese
Cross-Border Acquisitions, 52(6) THUNDERBIRD INTERNATIONAL BUSINESS REVIEW.
491-507 (2010).
216
Barbopoulos, L., ET AL., Foreign Direct Investment in Emerging Markets and Acquirers‘ Value
Gains, 23(3) INTERNATIONAL BUSINESS REVIEW. 604-619 (2014).

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(i) Both US and Chinese firms make higher number of acquisitions in countries
with less corruption,

(ii) US bidding firms make more number of deals, larger size of transactions in less
corrupt economies, and

(iii) Chinese bidders often easy doing in international acquisitions with corrupt
countries and found a positive relationship between transaction value and
corrupted target-country.

1.12.21.23. Behaviour of Government Servants

In addition, “behaviour of government officials and bureaucratic administration

influence the international investments.”217 Indeed, “terrorism found to be one of the
facets of international politics that has considerable impact on capital markets, and
thereby affect cross-border investments, and economic and social security.”218

This research uses the following model, developed by Dr. B.N. Ramesh, IPS.

“H=A-M-D, where

H=Honesty,

M=Monopoly,

D=Discretion,

A=Accountability”219

1.12.21.24. Tax and Taxation Issues

“Both home and host country governments levy taxes to hedge the sovereign costs
such as public administration, social welfare and development and security. A given
country has three kinds of tax instruments such as source-based corporate income tax,

217
Kaufmann, D. (2005), Myths and realities of governance and corruption. In A. Lopez- Carlos,
M. E. Porter and K. Schwab (eds.) The World Economic Forum, Global Competitiveness Report
2005-2006, 81-98, New York: Palgrave Macmillan.
218
Crittenden, V. L., & Crittenden, W. F., Corporate Governance in Emerging Economies:
Understanding the Game, 55(6) BUSINESS HORIZONS. 567-574 (2012).
219
Dr. Ramesh B.N Ph.D. Thesis Antecedents Of Maoist Movements And State Responce: A Study
Of Andhra Pradesh , IIT Kharagpur, India, 2011.

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and residence-based taxes like tax on dividends and tax on interest income.”220 In a
normal course of action, governments usually change tax tariff to improve sovereign
income, which in turn enhances the economic infrastructure of the country. At the
same time, changes in tax laws and tariff also influence the cross-border investments,
inflows and outflows. For instance, “an increase in local corporate tax motivates
domestic firms to invest in other countries that in turn increase the production and tax
revenue of the country.”221 Further, “such tax laws also affect organization
structures222 following the overseas merger or acquisition.”223 In Huizinga et al.
(2012),the authors described that international acquisitions “trigger additional taxation
of the target‟s income in the form of non-resident dividend withholding taxes and
acquirer country corporate income taxation”. In Petruzzi (1988), the author stated that
taxation is prone to be a reason for merger waves in which proposed a model of
shareholder behavior under the principles of double taxation. The author advocated
that “a tax should impose on mergers while taxing dividend income (p. 109). In
addition, political stability and systemic tax system make a nation investment friendly
or hostile.”224

“Indeed, most economics, finance and accounting scholars suggested that tax
environment”225 is the most important determinant of cross-country deals like
alliances, joint ventures, mergers, acquisitions and takeovers few accounting and
economic researchers suggested that „tax advantage‟ is one of the major reasons
behind the progress in international deals. “By contrast, the aforesaid researchers
showed that a country‟s financial markets legal infrastructure, banking guidelines,

220
Becker, J., & Fuest, C., Taxing Foreign Profits With International Mergers and Acquisitions,
51(1) INTERNATIONAL ECONOMIC REVIEW. 171-186 (2010).
221
Becker, J., & Fuest, C., Tax Competition‒Greenfield Investment Versus Mergers and
Acquisitions. 41(5) REGIONAL SCIENCE AND URBAN ECONOMICS. 476-486(2011).
222
Huizinga, H., Voget, J., & Wagner, W., Who Bears The Burden Of International Taxation?
Evidence From Cross-Border M&As. 88(1) JOURNAL OF INTERNATIONAL ECONOMICS.
186-197 (2012).
223
Ibid.
224
Ezeoha, A. E., & Ogamba, E., Corporate Tax Shield Or Fraud? Insight From Nigeria.
International, 52(1) JOURNAL OF LAW AND MANAGEMENT. 5-20 (2010).
225
Ezeoha, A. E., & Ogamba, E., Corporate Tax Shield or Fraud? Insight From Nigeria.
International, 52(1)Journal of Law and Management. 5-20 (2010).

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taxation issues and political events would adversely affect deals, especially border-
crossing investments and acquisitions.”226

A basic research question is posed by Collins, Kemsley, and Shackelford (1995),

Kaplan (1989a), and Scholes and Wolfson (1990) which is ―does taxation affect
merger or acquisition transactions?‖ The authors suggested “because of structured
tax reform there is a great deal of rise in tax burden while taking over a firm where the
other one has foreign tax credit in its local environment”. Becker and Fuest (2010)
described that the optimal repatriation tax framework in an event where capital
involves a change of ownership. They suggested that tax subsidies or exemption
schemes are constructive if ownership advantage is a public good within the foreign
MNC.

“Double taxation results in the form of non-resident dividend withholding taxes, and
parent country corporate income‟ taxation of repatriated dividends.”227 “Hebous, Ruf,
and Weichenrieder (2011) examined the impact of differences in cross-border tax rates
with respect to the location for a subsidiary of MNC. They showed that location
decisions of merger or acquisition investment has less affected to differences in tax rates
compare to location decisions of greenfield investment. Erel et al”228 found that larger
differences in corporate income tax rates attract foreign investment. Ang (2008)
suggested that direct international investment inflows have reacted negatively due to host
country‟s decision on „increased corporate taxes‟. “Huizinga and Voget (2009) analysed
the direction and volume of cross-border M&As following international taxation
involving European countries, Japan and the US during 1985-2004 period. They found
that countries that levy higher overseas double taxation leads to less attract the parent
firms of newly established MNCs. They also pointed that due to elimination of
worldwide taxation by US government has reacted positively in which number of parent

226
Bris, A., & Cabolis, C., The Value of Investor Protection: Firm Evidence From Crossborder
Mergers, 21(2) REVIEW OF FINANCIAL STUDIES. 605-648 (2008).
227
Ibid,p 649.
228
Huizinga, H., & Voget, J., International Taxation and The Direction and Volume of Cross-
Border M&As, 64(3) JOURNAL OF FINANCE. 1217-1249 (2009).

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organizations after overseas acquisition have improved from 53% to 58%.”229 „A

country‟s tax policies, tax structure, and tax incentives and schemes‟ are factors that
influence CBMAs.

1.12.21.25. Accounting and Valuation Issues

“CBMAs asset valuation models to define the value of target firm undertaking both
anticipated future cash flows and individual tax burden.”230 Fernandez summarized
ten methods of firm valuation, free cash flow, equity cash flow, capital cash flow,
adjusted present value, business risk adjusted free cash flow and equity cash flow,
risk-free rate-adjusted free cash flow and equity cash flow, economic profit, and
economic value added, and found that these methods always give the same value. The
authors also described that there is no superior or better method in firm valuation.
“Allen and Rigby (2003) argued that value conclusions for software firms largely
depend on qualitative, not quantitative analysis of the company. Few scholars argued
that there is a hasty plunge down in acquirer‟s cash flows after buying a company
against higher valuation of target, because of competitive buyers and other
macroeconomic factors.”231

1.12.21.26. Information and Symmetry and CBMAs

Previous scholars have extensively cited that M&As create synergy to the acquiring firm;
for the reason that, acquirers pay a premium for target shareholders. Premium may be low
or high, which determined on the basis of both internal and external factors. “An acquirer
knowing more about target firm may pay less premium compared to an acquirer
unknowing or knowing less about target firm due to information asymmetry. Lesser the
information asymmetry, then more the active bargaining process that will determine the
better value. Premium paid to target shareholders also influenced by external factors such

229
Huizinga, H., Voget, J., & Wagner, W., Who Bears The Burden of International Taxation?
Evidence From Cross-Border M&As, 88(1) JOURNAL OF INTERNATIONAL ECONOMICS.
186-197 (2012).
230
Hohler, K. The Introduction of The Exemption System for Foreign Profits and its Effects on
International Acquisitions–The UK and Japan Regaining International Tax Competitiveness,
14(3) JOURNAL OF APPLIED ACCOUNTING RESEARCH, 224-247 (2013).
231
Baker, M., Pan, X., & Wurgler, J. (2009). The Psychology of Pricing In Mergers and
Acquisitions. Availableat:http://www4.gsb.columbia.edu/null/download?& exclusive=filemgr.
download & file_id=72904 (accessed 30-Nov-2011)

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as number of competitive bids,”232 “nature of the business, controlling power of the

industry, stock market conditions, and institutional rules of the host country233, and social
and behavioural factors.”234

1.12.21.27. CBMAs: Synergy

“Most acquisition deals have failed to create synergy for acquiring firm shareholders
due to overpayment or high premium paid for a target firm that influenced by higher
anticipated cash flows.”235 As to support this streak, Malhotra and Zhu (2013)
examined the premiums paid by bidding firms in international acquisitions for a
sample of 2,350 deals during 1995-2008 period. They concluded that “the premium
paid by bidders in foreign acquisitions relates positively to prior premiums paid by
foreign acquirers in that host country”, but it also depends upon time between focal
and immediately prior overseas deal.

Gonzalez, Vasconcellos, and Kish (1998) examined a sample of 76 deals in US

market and found that overseas firms characterizing higher return-on-equity have
targeted undervalued US companies both to reduce acquisition costs and to improve
the efficiency of target. They also reported that exchange rate has no significant
impact on valuation of target firm. “Based on business cycle approach, Coakley, Fu,
and Thomas (2010) analyzed a sample of 302 bidding and target firms in UK between
1986 and 2002. They found no sector long-run misevaluation either for bidder or for
target, while bidding (target) firms were overvalued (undervalued) in short-run.
Specifically, Louis and Urcan (2012) investigated the impact of IFRS”236
(International financial reporting standards) on the level of cross-border acquisitions
involving IFRS adopting countries. They found countries that adopted 2005 IFRS
guidelines have received significant cross-border investment compared previous

232
Hopkins, H. D., Cross-Border Mergers and Acquisitions: Global and Regional Perspectives,
5(3) JOURNAL OF INTERNATIONAL MANAGEMENT. 207-239 (1999).
233
Akerlof, G. A., The Market For "Lemons": Quality Uncertainty and The Market Mechanism.
Quarterly, 84(3) JOURNAL OF ECONOMICS. 488-500 (1970).
234
Malhotra, S., & Zhu, P., Paying for Cross-Border Acquisitions: The Impact of Prior Acquirers‘
Decisions, 48(2) JOURNAL OF WORLD BUSINESS. 271-281 (2013).
235
Epstein, M. J., The Determinants and Evaluation of Merger Success, 48(1) BUSINESS
HORIZONS. 37-46 (2005).
236
Louis, H., & Urcan, O., The effect of IFRS on cross-border acquisitions. Working paper,
available at: (2012).

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years, and such investments have made by non-IFRS adopting countries and other
IFRS adopting countries. Further, inflows of such investment is found be higher in
countries where that government implement high quality regulations.

1.12.21.28. Geographical Factors

In the industrial organization and economics literature, “geographical and disease

endowments affect the economic and institutional development of the country, which
is referred as endowment view.”237 “It infers that the distance between home country
(acquirer) and host country (target) play significant role in international deal
negotiations.”238 “Mostly, empirical studies have captured the geographic distance as
the distance (in kilometers) between the capital cities of the target nation and bidder
nation.”239 For example, Coeurdacier et al. (2009) reported that physical distance
influences when European firms acquire targets in developing countries. Based on the
transaction cost economics theory, Rose (2000) postulated that cost of the merger is
direct proportion to the distance in which more the distance, then more the transaction
cost of an international acquisition.

1.12.21.29. Cultural Factors

Culture has been one of the major country-specific characteristics that affect the
whole M&A cycle: pre-merger decision-making, negotiation and deal structuring, and
post-merger integration.

“Indeed, there is a growing interest in recent studies examining cultural distance and
its impact on cross-border acquisition success, particularly in emerging markets”240 to
summarize few studies that directly support the theme of this review.

Hofstede (2001) defined culture as “the collective programming of the mind, which
distinguishes the members of one category of people from another.”241 “In the

237
Beck, T., Demirgüç-Kunt, ET AL., Law, politics, and finance. (2001). Available at:
http://dev3.cepr.org/meets/wkcn/5/567/papers/levines.pdf (accessed 1-Dec-2013).
238
Chapman, K., Cross-Border Mergers/Acquisitions: A Review and Research Agenda, 3(3)
JOURNAL OF ECONOMIC GEOGRAPHY, 309-334 (2003).
239
Coeurdacier, N., De Santis, R. A., & Aviat, A. (2009). Cross-border mergers and acquisitions:
Financial and institutional forces. Working paper series no. 1018, European Central Bank.
240
Ahern, K. R., Daminelli, ET AL, Lost in Translation, The effect of cultural values on mergers
around the world, JOURNAL OF FINANCIAL ECONOMICS, IN PRESS. (2012).

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organization perspective, culture is referred as beliefs, assumptions and values among

different shared groups defining conduct, leadership styles, procedures and customs,
and thereby influence on individual commitment that leads to impact on productivity
of organization.”242

“In the national context, culture postulates language, religion, cast, food, habits, and
set of related rituals, which influence the economic progress and national security.
Further, national culture (home and host) has been considered as a great influential
country specific determinant in firm internationalization.”243 “In particular, culture
distance between home and host country affects both cross-border deal completion
and post-acquisition integration success.”244 “It has also been referred as “a double-
edged sword with costs and benefits.”245

In a survey-based paper, Angwin (2001) discussed the impact of national culture

distance on acquisition management using survey report of 142 top executives
involved in international M&As. The author suggested that national culture
differences significantly influence both deal completion phase and post-merger
integration phase, and therefore acquiring firm managers should pay more attention to
due diligence and to use of professional advisors in pre-acquisition phase. While
discussing media discourse surrounding intercultural mergers, Halsall (2008) analysed
two mergers that accountable for UK and Germany: Vodafone acquisition of
Mannesmann, and disposal of Rover by its parent firm-BMW. The author suggested
that two mergers influenced by two different countries of capitalism and governance
structures. Specifically, et al. (2009) examined a sample of 800 cross-border deals for
the period 1991-2004, and found that cultural distance has significant positive relation

241
Reus, T. H., & Lamont, B. T., The Double-Edged Sword of Cultural Distance in International
Acquisitions, 40(8) JOURNAL OF INTERNATIONAL BUSINESS STUDIES. 1298-1316
(2009).
242
Larsson, R., & Lubatkin, M. (2001). Achieving acculturation in mergers and acquisitions:an
international case survey. Human Relations, 54(12), 1573-1607.
243
Larsson, R., & Lubatkin, M., Achieving Acculturation in Mergers and Acquisitions: An
International Case Survey, 54(12) HUMAN RELATIONS. 1573-1607 (2001).
244
Chakrabarti, R., Gupta-Mukherjee, S., & Jayaraman, N., Mars-Venus Marriages: Culture and
Cross-Border M&A, 40(2) JOURNAL OF INTERNATIONAL BUSINESS STUDIES. 216-236
(2009).
245
Reus, T. H., & Lamont, B. T., The Double-Edged Sword of Cultural Distance in International
Acquisitions, 40(8) JOURNAL OF INTERNATIONAL BUSINESS STUDIES. 1298-1316
(2009).

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with long-term stock performance of acquiring firm, but bidder shareholders lose
abnormal results in three years of acquisition year. They also suggested that cash and
friendly acquisitions perform better than other payment mode deals, and “culturally
distant acquisitions do better than culturally proximate acquisitions.”246 Malhotra et
al. (2011) analyzed the relationship between cultural distance and cross-border
acquisitions for a sample of more than 100,000 deals during 1976-2008 period. They
found that cultural distance has a curvilinear relationship with equity mergers.
Bidding firms likely to acquire higher equity stake in related industry. Similarly,
Ahern et al. (2012) examined a sample of 20,893 cross-border deals involving 52
countries between 1991 and 2008. They suggested that national culture distance prone
to reduce number of overseas acquisitions in the given host country. In fact, more the
cultural distance (and, trust, hierarchy, and individualism) between home and host
countries, then lesser the number of cross-border deals.

Acquiring firm shareholders gain higher stock returns in cross-border deals (3.64%) to
local deals (2.52%), which is also true with less cultural distance. In case of impact of
culture on post-CB-M&A performance, Dikova and Sahib (2013) suggested that
cultural distance on acquisition performance depends on previous acquisition
experience of acquiring firm. It refers that sophisticated prior experience in
international deal making significantly improves the acquisition performance.

As Reddy feels, that, “Overall, it can be concluded that macroeconomic factors

financial (e.g. GDP, bilateral trade relations, exchange rate and interest rate), markets
regulations (e.g. Stock market development, quality of accounting standards and level
of investor protection), institutional environment (e.g., government reaction, political
intervention, international taxation, judicial system), and geographical factors (e.g.,
distance, culture), together affect cross-border acquisitions success/completion.”247

246
Malhotra, S., Sivakumar, K., & Zhu, P., Curvilinear Relationship Between Cultural Distance
and Equity Participation: An Empirical Analysis of Cross-Border Acquisitions, 17(4)
JOURNAL OF INTERNATIONAL MANAGEMENT. 316-332 (2011).
247
Reddy, K. S., Macroeconomic change, and cross-border mergers and acquisitions: (2015). The
Indian experience, 1991-2010. Available at: http://mpra.ub.unimuenchen.de/63562/1/MPRA_
paper_63562.pdf (accessed 26-Apr-2015).

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“During the last century, various theories and studies distinguishing national culture
have been established,248 but one of the most common and influential studies of
culture is “Hofstede‟s (1980) model of cultural dimensions. However, there has been
strong polemics with the Dutch researcher to be outdated and unimplemented for
modern societies.”249 We decided to focus on Hofstede‟s model (1980) in spite of
considerable criticism, since it is proven for more than 35 years that the model helps
to understand national culture and enables to compare the cultural dimensions among
countries.

“In the past there used to be an exclusive focus on strategic and financial antecedent
variables in studies of post-merger performance.”250 “Since the nineties the
researchers began to concentrate on softer, social and cultural issues, which imply an
important determinant of the result of the post-merger performance of international
acquisitions.”251 Many studies, articles and books research the effect of culture in
general on cross-border acquisitions. Nevertheless, there have been surprisingly few
empirical and statistical studies, which have tested this contention. Existing studies do
not show unambiguous identical results, but rather quite the opposite. “On the one
hand, some studies report positive or unrelated effects of culture on the M&A
performance”252 but on “the other hand researchers argue that national cultural
differences do not have an effect on the post-merger performance.”253

To compare the post-merger performance with Hofstede‟s cultural dimensions one

can follow the argumentation and data of Ahern, Danielli and Fracassi (2010), which
presents the influence of culture on post-merger performance in international
acquisitions by means of Collectivism versus Individualism. Further, according to the
research of Huang et al. (2017), who focussed on Hofstede‟s dimension Power

248
Ibid.
249
Ibid.
250
Ibid.
251
HOFSTEDE, G. CULTURE'S CONSEQUENCES: COMPARING VALUES, BEHAVIORS,
INSTITUTIONS, AND ORGANIZATIONS ACROSS NATIONS, (2nd ed.) (2001).
252
Ahammad, M. F., & Glaister, K. W., The Pre-Acquisition Evaluation of Target Firms and Cross
Border Acquisition Performanc, 22(5) INTERNATIONAL BUSINESS REVIEW. 894-904
(2013).
253
Hailey Mooney., Citing data sources in the social sciences: do authors do it, Data Services and
Reference Librarian Michigan State University Libraries, 517-884

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Distance, the purpose is to illustrate that the results are not by hazard but empirically
documented in two autonomous studies.

1.13. CBMAs: Theoretical Background

“The main focus in the cultural aspects is on the key cultural dimensions model of
Hofstede (1980). Together with the rising number of CBMAs deals, also the
importance of non-economic factors, which are influencing a successful integration of
the target company have started to be taken into consideration.”254 One of the most
significant factors is the question regarding cultural differences between acquiring and
acquired companies, since the successful over-bridging of different cultural
backgrounds might lead to higher performance in terms of profit.

The term culture has to be subdivided into different factors, which influence all cross-
borders deals. The focus hence is on the impact of national culture on organisations.
One of the most influential works is the study of Hofstede (1980), which does not
only emphasize the influence of culture on M&A deals, but also describes four key
dimensions enabling comparison of different national cultures. The first dimension
Individualism versus Collectivism refers to “the degree which individuals are
supposed to look for themselves or remain integrated into groups.”255 “In
individualistic countries, the contractual relationships are based on bilateral
advantages, while in collectivistic societies they are based on moral foundations.
Organisations in highly individualistic societies emphasise the importance of freedom
and financial rewards for achievement that promotes the innovation and leads more
easily to empowerment of employees. This is also positively associated with
employee morale and post-acquisition performance.”256 “People in individualistic
countries are rather compatible with society‟s cosmopolitan orientation and
extroversion, which may facilitate the interaction of different national cultures after
the merge or acquisition.”257 This dimension also influences the M&A negotiations

254
www.grin.com,businesseconomics,Miscellaneous (2017), (Last date visited on May 27, 2018)
255
HOFSTEDE, G. CULTURE'S CONSEQUENCES: COMPARING VALUES, BEHAVIORS,
INSTITUTIONS, AND ORGANIZATIONS ACROSS NATIONS, (2nd ed.) (2001).
256
John Blake, European accounting harmonisation: Myth or reality, VOL. 12 EUROPEAN
MANAGEMENT JOURNAL. 332-337 (1994).
257
THE IMPACT OF CULTURAL DIFFERENCES ON THE POST-MERGER PERFORMANCE
IN INTERNATIONAL ACQUISITIONS,WWW.hausarbeiten.de/document/373-480,(2017)

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impressively, because the decisions in individualistic societies are usually made by a

limited number of top managers, in collectivistic countries just the opposite.
“Collectivism affects the need of stable relationships between the managements of both
companies. Therefore, a stable relationship, which of course takes more time to be
established and might be reflected by lower performance, has to be built.”258

Another dimension is Power Distance, which describes that “the extent to which the less
powerful members of organisations and institutions accept and expect that power is
distributed unequally.”259 “In the case of M&A deals, the difference in power distance
might lead to unequal acceptance of subordinates and managers in both companies in
terms of respect and social acceptance and may result in friction when firms try to
merge.”260 “Especially in large power distance societies, where it might lead to problems
with accepting and respecting the “new” management team if the leaders treat employees
as equals, this is difficult.”261 “On the contrary in low PDV-driven cultures egalitarianism
is considered as an ideal. Hence people are insensitive to differentiate in their hierarchical
positions and seek to treat each other as homogeneous.”262 “Third dimension Masculinity
versus Femininity opposes “tough” masculine societies with preference of assertiveness,
decisiveness and achievement to “render” feminine societies that have more preferences
on cooperation, modesty, life-work balance and interpersonal relationships.”263

“Organisations in feminine cultures strive for equality and therefore the managers and
subordinates are on the same level. Also, the feminine businesses may be rather a
cooperative venture”264 because “they are more likely to resolve conflicts through
compromise and to strive for agreement.”265 “On the other side in masculine cultures the

258
files.eric.ed.gov/fulltext/Ej000428.pdf (Last visited on May 28,2018)
259
Issues in Informing Science and Information Technology Volume 6, 2009 A Gary J. DeLorenzo,
Data Driven Conceptual Analysis of Globalization — Cultural Affects and Hofstedian
Organizational Frames,THE SLOVAK REPUBLIC EXAMPLE(2009), iisit.org/ /IIsItv6p461-
470Delorenzo670.pdf (Last visited on May 16, 2018).
260
Deepak K. Datta, Organizational Fit And Acquisition Performance: Effects Of Post ‐Acquisition
Integration, 12 STRATEGIC MANAGEMENT JOURNAL , 281-297 (1991).
261
Ahern, K. R., Daminelli, D., & Fracassi, C., Lost in translation The effect of cultural values on
mergers around the world. JOURNAL OF FINANCIAL ECONOMICS, IN PRESS. (2012).
262
Huang, T. -Y., Hu, J. -S., & Chen, K. -C., The Influence of Market and Product Knowledge
Resource Embeddedness on The International Mergers of Advertising Agencies: The Case-Study
Approach, 17(5) INTERNATIONAL BUSINESS REVIEW. 587-599 (2008).
263
GEERT HOFSTEDE, CULTURE'S CONSEQUENCES: COMPARING VALUES, BEHAVIORS,
INSTITUTIONS AND ORGANIZATIONS ACROSS NATIONS , SAGE PUBLICATIONS .2003
www.socresonline.org.uk/9/2/hofstede.html
264
www.grin.combusiness economics, Miscellaneous (2013), (Last visited on May 29, 2018).
265
Ibid,2003, p. 436.

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organisations are based on internal competition and achievement, which is measured by

accomplishment.”266 “The last dimension Uncertainty Avoidance describes the extent of
society‟s tolerance for ambiguity.”267 “In countries with low uncertainty avoidance fewer
written rules and less structured activities might be found and people tend to be more
tolerant to different ideas and practices. The trust enables better integration process and
therefore facilitates the post-merger cooperation.”268 “Therefore, the number of M&A
deals usually will be higher in those countries.”269. “By contrast in higher uncertainty
avoidance societies, organisations incline to present a great resistance to change, a lower
acceptance of conflicts, a reduced labour mobility and a lower tolerance for foreign
managers.”270

“Cultural distance based on the four above mentioned dimensions (PD, ID, MA and UA)
defines the degree to which culture of one country differs from culture of another
country.”271 “Table 2 shows the cultural dimensions in different countries, especially that
ID and PD are negatively correlated. Diversification of the dimensions for M&As
between Scandinavian and English-speaking countries, which have an individualistic, low
power distance and low uncertainty avoidance society may be seen as ideal.”272

“As Hofstede argues, companies as well as their employees are strongly influenced by
their own national culture, which might result in negative interaction and problems within
culturally distant firms. Those may lead to a decrease of loyalty, commitment, satisfaction
and finally to less production in the postmergers cooperation.”273 “The reason for the high
failure rate of performance in M&As is validated by several empirical researches as the
national cultural distance, where the management, organisations‟ structure, HR and codes
of ethics are diverse.”274

266
Ibid, 2003, p. 313.
267
Ibid, 2003, p. 436.
268
Zak, P. J., And Knack, S, Trust and Growth, ECONOMIC JOURNAL.(2001) www.scribd.
com/document/294602423/Zak-p-jAnd...(Last visited on June 5, 2018)
269
Ahern, K. R., Daminelli, D., & Fracassi, C., Lost In Translation? The Effect Of Cultural Values
On Mergers Around The World, JOURNAL OF FINANCIAL ECONOMICS. (2012).
270
www.grin.combusiness economics, Miscellaneous (2013), (Last visited on June 5, 2018).
271
www/0.gsb.columbia.edu/1988_JIBS_Kogut_Singh.pdf, (2017), (Last visited on June 6, 2018).
272
Ahern, K. R., Daminelli, D., & Fracassi, C., Lost In Translation? The Effect Of Cultural Values
On Mergers Around The World, JOURNAL OF FINANCIAL ECONOMICS.(2012).
273
www.researchgate.net/profile/Christing panasian(Last visited on May 29,2018).
274
Deepak k. Datta & George Pujari, Cross-Border Acquisitions: An Examination Of The Influence
Of Relatedness And Cultural Fit On Shareholder Value Creation In US Acquiring Firms, 35(4)
JOURNAL RESEARCHGATE MANAGEMENT_INTERNATIONAL REVIEW. 337-
359 (January 1995).www.researchgate.net/publication/264790190_cross.

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METHODOLOGY

1.14 Methodology Research Objectives Research Questions and

Hypotheses

Figure 1.6: USACBMA Model

Source: Made by the researcher

1.15. Research Objectives

1. To suggest legal steps for standardization of procedures in detection and
prosecution of frauds in CBMA cases.
2. To identify gaps among legal structures and functioning of biggest CBMA partner
of India namely United States and India.

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 Chapter 1

3. To suggest effective implementable measures for enforcement of prevention of

money laundering laws through misuse of liberalized policy regime of CBMAs.

4. To suggest implementable changes and initiatives in making serious fraud

investigation office (SFIO) and Directorate of Revenue Intelligence (DRI)
effective enough for preventing frauds in the name of CBMAs.

5. To make due diligence in all related legal arena of economic behaviour of

business activity synergetic with Global Trends for advantageous India.

6. To study The Company Act 2013, The Competition Act 2002 and the regulators
like SEBI, RBI in line with the Global standards, both in policy making and policy
implementation, through adequate legal reform.

1.16. Research Questions

The following are the research questions to address the research objectives mentioned
above.

1. Whether the provisions of the Competition Act and the RBI guidelines and the
SEBI rules enough to embolden the spirit behind section 234 of Companies Act
2013?

2. Whether the national Watchdog Agencies like SEBI, RBI, DRI, ED adequately
empowered to face the possible frauds under the guise of CBMAs?

3. Whether policy measures linked to vectorial acceleration of legal reform in India?

4. Whether there exist gaps in laws of USA and India especially in the light of
address by deputy Attorney General, department of justice, United States of
America on 24th November 2017?

5. Is global index of ease of doing business linked to tangible progress in doing

business as per law?

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 Chapter 1

6. Is the fraud prevention and detection mechanism in India adequate to safeguard

the genuine interests of entrepreneurs, of both foreign and Indian origin in case of
CBMAs?

1.17. Hypothesis
The following is the hypothesis in connection with the above research questions and
Research objectives.

H1. Scrapping of laws and coordinated reform is indifferent to ease of doing business
and CBMA promotion.

Figure 1.7: Research Design of CBMA

Source: Made by the researcher

The following is a research model of CBMA in India (Fig. )

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 Chapter 1

Figure 1.8: Indian CBMA Model

Source: Made by the researcher

1.18. Empirical Study Methodology

An empirical study, where in 3 different sample sizes were selected based on the
occupation and professional practices of the individual, was done in order to identify
the gaps faced by the population in the understanding of the legal and administrational
frameworks pertaining to CBMA. The 3 questionnaires were framed keeping in mind
the amount of exposure these groups of individuals have in the field of CBMA, its
implications and applications. The first included an in-depth discussion with legal
aids-lawyers and advocates , petitioners, press and consultants. The second
questionnaire focused more on the administrative side and was addressed to
administrative and executive officials - officers of ICLS, IAS,IPS and other officials.

The final questionnaire emphasized on the legal framing of laws (existing and drafting)
and other logistical details pertaining to existing laws and were answered by individuals
with maximum experience in the field, Judges, prosecutors, entrepreneurs and chiefs of
Chamber of Commerce. This empirical study helped in the understanding the gaps and
further in framing implementable remedies to reduce those gaps.

110