How cross-border transactions are a source of value creation

Published On: 11, Dec 2017 | Source:

Manoj Patkar

Over the past year, the Indian economy has gone through a few key structural changes. Implementation of bold reforms like demonetisation and GST by the government have made global business majors take notice of the improving Indian economy fundamentals. While the long-term effects of these reforms are yet to be realised, India's recent jump in World Bank’s ‘Ease of Doing Business Index’ as well as Moody’s rating upgrade for are early indicators that the attractiveness of the economy to global players is set to increase significantly in the near future.

With increasing interest and attractiveness of the Indian economy, both inbound and outbound cross-border M&A in India is expected to increase significantly in the coming few quarters.

There are multiple reasons why incoming foreign businesses or investors look to acquire or invest in their Indian counterparts. Firstly, India has always been attractive for its large untapped and high growth market potential, especially for global buyers from developed markets which are either de-growing or growing at nominal rates. In specific sectors like pharma, India has also developed globally competitive product development and manufacturing capabilities which are value-add for incoming buyers.

Domestic and global businesses benefit

Increasingly, human capital at Indian companies is another strong value creation opportunity for global investors. Well-experienced, educated Indian managers with their ability to work in cross-cultural teams and under constrained environments are a strong asset for the incoming acquirer not just for the Indian businesses but also at a much broader regional or global level. Further, Indian business models can be replicated in other developing markets having similar characteristics to create strong regional businesses for incoming global investors.

On the other side, Indian targets have a lot to gain from potential cross- border transactions especially with global buyers and investors. Not only do global entities bring access to newer and relatively virgin markets like South East Asia, Latin America and Middle East for Indian businesses, but they also get access to capital for future expansions/growth at a lower cost. The incoming foreign investor can bring access to newer technologies to the Indian businesses, which can be leveraged to create the right products for the Indian market.

Indian promoters and managerial teams also improve their skillset drastically with such partnerships through global exposure to best practices, systems and compliance standards, etc. This works as a win–win situation for both entities with the global companies increasing revenues and the Indian counterparts get the backing of a global/pedigreed name which helps them create a better brand.

While inbound M&A transactions in India are not new, the trend for Indian businesses to acquire overseas is still less well established. With strong growth, strengthening currencies and a desire to obtain brands, technology and market access, it is hardly surprising that more and more Indian business majors are buying in mature economies and in other rapid growth sectors — often as part of a series of deals.

Difficult and time consuming

While cross-border transactions can provide a great source of value creation for both the entities, getting a cross-border transaction closed is usually an arduous and time consuming task. The regular deal-making challenges of alignment of strategies between both entities, deal contours negotiations, etc. are further aggravated due to involvement of multi-location cross-cultural teams working across multiple time zones.

Then there are issues like multiple decision making hierarchy in most global corporates and communication/ language barriers. Differences in behavioural characteristics of individuals, working styles, expectation settings, etc. are common nuances to be addressed in almost each and every cross-border M&A transaction.

In the recent IFLR (International Financial Law Review) 2017 Mergers and Acquisitions Report: India, it has been stated that what makes cross-border deals particularly troublesome though are the inherently greater challenges of melding country cultures, communication across long distances and different time zones, dealing with misunderstandings arising from different business norms and even fundamental differences in management style. However, major outbound M&A activity was witnessed in energy and natural resources, cement, healthcare and financial sectors. This is indicative of the fact that cross-border deals have been successful where correct valuation has been met by the Indian promoters’ willingness to factor in major due diligence concerns, including regulatory and compliance issues.

(Writer is the Executive Director & Partner at 7i Advisors LLP, an Investment Banking Firm)