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Spare no detail.

Amit Khandelwal

With increasing importance on globalisation of businesses, cross-border transactions have become the quickest way of achieving the objective. The world over cross-border transactions by companies have been increasing. While 2005 saw a total of 329 deals valued at $17 billion, 2006 witnessed approximately 390 deals but with the value nearly double of the previous year ($32 billion). And, according to Bloomberg, 2007 has already seen 282 deals, valued a t around $30 billion, with only half the year gone by. . Businesses that get acquired typically have a presence in multiple geographies.

Cross-border mergers and acquisitions (M&A), although presenting many of the same issues as domestic deals, are usually more complex and rife with surprises and other pitfalls, more so when the number of geographies involved in the transaction increases. The sheer range of concerns has expanded as the speed and volume of international deals have increased.

Significant amount of pre-work is required in evaluating such transactions and identifying and addressing issues that need to be addressed to realise the intended benefit. Often, transactions do not achieve their intended objective; either because of improper pre-work (due diligence and structuring of the transaction) and/or because of lack of proper integration efforts immediately after the transaction is consummated.

It is imperative for an acquirer or an investor to conduct a thorough due-diligence on the target company. The matters to be covered in the due diligence start with understanding the social and economic conditions of the country where the target operates and then understand the business — the regulations that govern it, the cultural aspects, the synergies, the impact of transaction on the existing business of the acquirer, and so on. The purpose of such due diligence should be to identify the value drivers that need to be protected, and the risks that need to be managed.

To conduct effective due diligence it is a must to have an experienced team that has a good understanding of, among other things, the market, business practices, accounting standards, tax laws, political and social conditions and cultural aspects of the geographies where the target operates.

Lack of understanding of the local environment often leads to destroying exactly what is most valuable in the transaction. Many a times, companies, post-acquisition, lose much of the human capital which could have been the main reason for the acquisition. This happens because of a lack of understanding of the culture of the organisation being acquired, thereby leading to a situation that the employees, post-acquisition, do not find the place to be fit for themselves.

Those who have experienced M&A in cross-border situations will agree that the business culture is different among geographies. Language barriers, different working environment and culture have proved to be major obstacles to uniting the workforce behind a common vision. Understanding what this difference means for due diligence will help investors approach this process with appropriate expectations and may help achieve greater transaction success.

The appetite of Indian Inc. to acquire businesses abroad, especially in the West, has grown in the last few years. Even globally the last few years have seen a bull-run in M&A.

There are several risks in cross-border transactions that need to be understood and managed. One is country risk, arising from an amalgam of factors such as political stability, commitment to economic policy and currency fluctuations. Though secondary country risk data is available from rating agencies, it is important to complement this with independent investigations.

Often, regulatory and legal issues such as antitrust clearances, competition laws and tax implications prove to be the stumbling blocks.

For instance, excess liquidity in the Indian money market and continued inflow of foreign inflows compelled the Government to place fresh set of restrictions on ECBs (external commercial borrowings) and bring investment in non-convertible preference shares under ECB guidelines.

It impacted fund flow to real estate projects and resulted in the reining in of real estate prices, affecting thereby valuations of such companies. Loss of fiscal advantages such as tax exemptions on transfer of ownership to a foreign company can erode margins significantly, thereby failing to meet the deal objectives.

What can also spring as a nasty surprise is the lack of understanding of country-specific financial reporting requirements. Listed companies in India need to understand the impact of acquisition on the revenues, earning per share and the consolidated financial statements. Further, accounting of goodwill arising out of the acquisition is also an issue which many companies grapple with.

Indian investors with limited cross-border experience take time to understand the multiple levels of reconciliation and the true profitability of the business which is being acquired. Key reconciliations may include following:

Information memorandum versus statutory accounts.

Stories in this Section
Calculation of piecework-based earnings

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