Professional Documents
Culture Documents
Author is a student of LLB-III. He is Head Study Circle and Joint Editor of QLCian. He
represented Pakistan in “SAARCLAW” INTERNATIONAL MOOT COMPETITION
HELD IN NEW DELHI, INDIA.
The globalization of business over the past decade has spawned a search for competitive
advantage that is worldwide in scale. Companies have followed their customers – who
are going global themselves – as they respond to the pressures of obtaining scale in a
rapidly consolidating global economy. In combination with other trends, such as
increased deregulation, privatization, and corporate restructuring, globalization has
spurred an unprecedented surge in cross-border merger and acquisition activity.1 Cross-
border mergers and acquisitions are an imperative part of the accelerated economic
globalization of our time. Cross-border transaction volume now accounts for almost one-
third of global M&A activity and this number will only increase as business world-wide
continues to expand. The complex legal issues to be handled in such transactions
encompass the coordination of different concepts of corporate governance and capital
market regulations in the laws involved, as mirrored by the intense debate on M&A law
making within the European Union, and for example Germany. Lawyers engaged in the
M&A practice will inevitably be confronted with cross-border transactions and will have
to appropriately counsel their clients in the variable aspects of the law. Cross-Border
Mergers and Acquisitions and the Law, a book based on an international conference held
by the Law Centre for European and International Cooperation (R.I.Z.) in cooperation
with the Centre of Commercial Law Studies, the Asian Institute of International Financial
Law, and the SMU Institute of International Banking and Finance, provides a
comprehensive exploration of the legal implications of a cross-border merger or
acquisition. Applying a comparative approach, the compilation of articles by professors,
practitioners and bankers provides thorough information on topics including Business
Combination Agreements; Securities Regulation and Stock Exchange Listing
Requirements; Tax Considerations; International M&As and International Accounting
Standards; Financial Techniques and Legal Considerations in International Mergers and
Hostile Take-Over; Antitrust Laws in the United States and Europe and their
Extraterritorial Reach; Bank Mergers and Bank Supervisory Law.2
BOX 1.1
Mergers andAccording to Securities
acquisitions (M&A) and Data Corporation,
corporate there were
restructuring are more
a big than
part 2000
of the
announced cross-border acquisitions in 1996 worth over $256 billion. While
corporate finance world. Every day, Wall Street investment bankers arrange M&A this
represents 54% more acquisitions than in 1991, the increase in dollar value been
even more remarkable, tripling during this time period. Clearly cross border M&As
have become a fundamental characteristic of the global business landscape. .3
transactions, which bring separate companies together to form larger ones. When they're
not creating big companies from smaller ones, corporate finance deals do the reverse and
break up companies through spin-offs, carve-outs or tracking stocks. 4
BOX 1.2 One plus one makes three: this equation is the special alchemy of
a merger or an acquisition. The key principle behind buying a company is to
create shareholder value over and above that of the sum of the two
companies. Two companies together are more valuable than two separate
companies - at least, that's the reasoning behind M&A. Mergers are
generally differentiated from acquisitions partly by the way in which they are
financed and partly by the relative size of the companies
In a study conducted in 2000 by Lehman Brothers, it was found that, on average, large
M&A deals cause the domestic currency of the target corporation to appreciate by 1%
relative to the acquirer's. For every one billion dollar deal, the currency of the target
corporation increased in value by 0.5%. More specifically, the report found that in the
period immediately after the deal is announced, there is generally a strong upward
movement in the target corporation's domestic currency (relative to the acquirer's
currency). Fifty days after the announcement, the target currency is then, on average, 1%
stronger. The rise of globalization has exponentially increased the market for cross border
M&A. In 1996 alone there were over 2000 cross border transactions worth a total of
approximately $256 billion. This rapid increase has taken many M&A firms by surprise
because the majority of them never had to consider acquiring the capabilities or skills
required to effectively handle this kind of transaction. In the past, the market's lack of
significance and a more strictly national mindset prevented the vast majority of small and
mid-sized companies from considering cross border intermediation as an option which
left M&A firms inexperienced in this field. This same reason also prevented the
development of any extensive academic works on the subject.
• Process of Combination
Phase 1: Pre-combination
Phase 2: Combination planning and signing of the agreement
Phase 3: Post-combination and implementation of the deal
Strategic reasons for the Acquisition
In recent years “strategic” mergers have gotten a bad name, to the extent that some
pundits have defined strategic mergers as those where the acquiring company overpays.
While the price paid for a company is a critical determinant of the success of the resulting
Acquisition, there is no inherent reason, why mergers that are strategically well
conceived, should go away. In fact, the evidence is quite opposite. The recent merger of
British Petroleum’s (BP) and Mobil’s downstream operations across Europe are a case in
point. The strategic 3 logic for this deal says that size and market power are required to
compete against the other major oil companies and even supermarket chains with gas
pumps, in Europe, and significant cost savings can be realized by eliminating duplicate
facilities and employees, and by rationalizing purchasing and cutting overhead. Although
this merger is not without significant integration challenges, it appears to have a solid
strategic logic, and indeed is considered a blueprint for similar deals among rivals such as
Shell, Texaco, and Amoco. It is also an unusual merger since BP and Mobil are only
consolidating their refining and marketing operations in Europe, and remain rivals
elsewhere. Nevertheless, estimates of cost savings are in the range of $500 million a year,
a figure which, if established and maintained, will clearly make this merger a success.
The keys to establishing an effective strategic logic lie in answering questions such as:
BOX 1.4 How will this merger create value, and when will this value be
realized?
Why are we a better parent for this company than someone else?
Can this merger pass the “better-off” test – will we be able to create more
value (by being more competitive, having a stronger cost structure, gaining
additional competencies that we can leverage in new ways, etc.) after the
deal? 5
These are difficult questions that require careful, objective & pre-acquisition analysis.
The tendency for companies “in the heat of battle” to overstate the real strategic benefits
of a deal is a definite problem that must be guarded against pressures that arise from the
desire to close a deal quickly before rival bidders appear, cultural and sometimes
language barriers that create uncertainty, and the often emotionally charged atmosphere
surrounding negotiations, work against this requirement of objectivity. The best solution
in this case is to enter the M&A mode with a carefully developed framework that
addresses the key questions, and to stick to that framework in evaluating a potential
acquisition candidate even when the seemingly inevitable strains arise. Our own research
and experience indicates that the highest potential cross border M&As tend to be between
firms that share similar or complementary operations in such key areas as production and
marketing. When two companies share similar core businesses there are often
opportunities for economies of scale at various stages of the value chain (e.g., R&D,
manufacturing, sales and marketing, distribution, etc.). For example, although the merger
between British Telecom and MCI remains controversial – and losses associated with
MCI’s push to enter the local telephone service market in the U.S. are not reassuring –
there are opportunities for value creation through common software development, shared
capital investment, and joint purchasing agreements. The strategic logic of combining
complementary assets can also be compelling. These assets, which extend to
complementary competencies in technology and know-how, offer great opportunities for
companies to create value in the right circumstances. For example, MCI will be a much
more formidable competitor in the U.S. telephone market with the backing of BT and its
prodigious cash flow. Other potential complementary benefits of this deal include the
positive impact of MCI’s aggressive market-oriented corporate culture on the more
conservative British Telecom, and the potential of the combination itself to be a well-
positioned global competitor as evolving markets in Europe and the U.S. continue to
deregulate and change. Thus, what we call “economies of fitness” arising from
complementary operations or competencies can be an important source of value creation
in mergers and acquisitions.6
BOX 1.3 Due to the complicated nature of cross border M&A, the vast
majority of cross border actions have unsuccessful results. Cross border
intermediation has many more levels of complexity to it then regular
intermediation seeing as corporate governance, the power of the average
employee, company regulations, political factors customer expectations and
country’s culture are all crucial factors that could spoil the transaction.
Because of such complications, many business brokers are finding the
International Corporate Finance Group and organizations like it to be a
necessity in M & A today.7
Consider all that must go right in any (same-country) acquisition: The two companies
must reach agreement on which products and services will be offered, which facility or
group will have primary responsibility for making this happen, who will be in charge of
each of these facilities or groups, where will the expected cost savings come from, what
will the division of labor look like in the executive suite, what timetable to follow that
will best generate the potential synergies of the deal, and myriad other issues that are
complex, detailed, and immediate. On top of all this the merging companies must
continue to compete and serve their customers in a competitive marketplace. Now, take
all these challenges, and add a completely new set of problems that arise from the
fundamental differences that exist across countries. Consider, for example, for all the
similarities that a global imperative places on companies, the very real differences in how
business is conducted in, say, Europe, Japan, and the United States. These differences
involve corporate governance, the power of rank and file employees, worker job security,
regulatory environments, customer expectations, and country culture – all representing
additional layers of complexity that executives engaged in cross-border M&As must
manage. Is it any wonder that cross border mergers are potential minefields that require
the utmost care? Fortunately, there are some basic principles that will make cross-border
mergers work more smoothly. They can be divided into the imperatives of strategic logic
and acquisition integration.8
Summary of Barriers in Implementation of Cross-Border M&A9
Cross-border mergers and acquisitions (M&A) play an important part in foreign direct
investment (FDI). In the process of cross-border M&A, the enterprises involved will
encounter cultural differences and conflicts. How to integrate these cultural differences
and eliminate the conflicts becomes an important issue for the enterprises. Cultural
integration eliminates conflicts arising from cultural differences by organizing and
amalgamating the values, psychological states and behavior modes of different
communities. The cross-border M&A cultural integration inherits and rectifies the
psychological contract of the target company for minimizing the amount of cultural
conflicts and forming the diversity and unity due to the cultural differences in multi-
national enterprises (Gu & Xue, 2004). Cross-border M&A cultural integration seek to
reduce cultural differences as much as possible in the acquired company. Therefore,
whether the cultural integration is successful or not is critical to the success or failure of a
cross-border M&A. In general, the following problems should be solved in cultural
integration of cross-border M&A. First, it should coordinate the cultural differences of
peoples and states to promote understanding and communicating between the different
communities in one enterprise and to avoid the negative influence arising from the
different thinking models, behaviors, and values. Second, it should coordinate the
different company cultures to eliminate the barriers in leadership styles, communication
models, personnel system, performance appraisals, and social security benefits. Third, it
should establish the company’s core values by integrating diverse cultures to improve the
company’s creativity and competitiveness. Fourth, the effective integration of the
companies’ cultures could provide conditions beneficial for the integration of operations.
Therefore, cultural integration of cross-border M&A plays an important role in helping
the company maximize its capital, technique, sales, and other advantages.
The role of HRM in cross-border M&As before conducting our analysis, we briefly
review the nature of the merger process. The literature has dissected the M&A process
into three main stages: pre-announcement; pre-merger; and integration. The pre-
announcement stage involves due diligence. Issues discussed among potential merging
firms in this stage are M&A strategy and the financial structure of the deal. The pre-
merger stage occurs between the announcement of the merger and its closing date and
includes planning for the integration, such as communicating expected roles in the newly
formed entity. The integration stage implies the physical integration of the various
elements of the M&A following the closing date, including personnel. In theory, HRM
can have an influence on the success of M&As in each stage of the process. For example,
during the pre-merger stages, HRM tends to focus on ensuring legal compliance, such as
with regard to equal opportunity and collective bargaining agreements (Mirvis and
Marks, 1992). HRM can also begin the planning process following deal announcement,
for instance by managing retention agreements and assessing compensation differences
between the potentially merging entities. Nevertheless, evidence and practice indicate
that the main role in which HR can influence M&As is in the integration stage, when
M&A practices and policies are implemented. 11
With the rapid growth in Pakistan's economy, foreign investors are taking a keen interest
in the corporate sector of Pakistan. In the recent years, majority stakes in many
corporations have been acquired by multinational groups. 12
• PICIC by Singapore based Tamasek holdings for $339 million
• Union Bank by Standard Chartered bank for $487 million
Cross-border M&A purchases: Asia Pacific, 1990-1996 (In US Million $) 13
• Prime commercial bank by ABN Amro for $228 million
• PakTel ltd by China Mobile Ltd for $460 million
• Additional
Total 1990-1996 1990
57.6 percent
1991
shares of Lakson 1993
1992
Tobacco company
1994
acquired by
1995 1996
Philip Morris international for $382 million
Deals Value Deals Value Deals Value Deals Value Deals Value Deals Value1 Deals Value Deals Value
Japan 3,178 93,813.371 699 25,132.680 550 8,958.815 320 12,525.037 306 7,193.867 350 10,466.546 498 16,963.018 455 12,573.408
Hong Kong 650 30,907.742 39 1,132.169 55 852.118 80 9,558.622 141 8,388.019 145 3,413.563 111 3,920.997 79 3,642.254
Australia 584 23,683.622 77 2,084.391 71 1,039.310 75 2,733.147 71 2,965.759 106 3,855.686 102 5,568.624 82 5,436.705
Malaysia 356 15,439.766 5 160.151 13 235.455 15 143.348 41 1,219.861 98 7,020.704 86 1,252.910 98 5,407.337
Korea 337 15,200.842 30 475.412 28 374.522 26 778.774 24 846.762 53 3,555.335 95 6,012.351 81 3,157.686
Singapore 518 11,912.602 23 243.150 23 416.790 41 553.801 85 2,117.315 124 1,810.581 115 2,764.603 107 4,006.362
China 187 11,810.122 4 1,336.400 4 102.780 27 1,688.302 70 5,450.280 29 1,635.793 34 200.392 19 1,416.175
Taiwan 163 6,976.457 23 1,259.429 11 136.560 18 1,001.315 23 882.184 20 760.024 45 821.228 23 2,115.717
New 117 4,145.969 31 974.417 11 141.150 17 603.117 17 807.938 15 78.177 11 481.409 15 1,059.761
Zealand
Total 6,390 226,153.71 939 32,985.50 786 12,623.03 652 31,928.90 812 30,854.70 1,010 34,372.21 1,185 42,483.99 1,006 40,964.78
Further Notes
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Press.
• Ali, Imran. 2001a. ‘The Historical Lineages of Poverty and Exclusion in Pakistan’. Paper
presented at Conference on Realm, Society and Nation in South Asia. National University of
Singapore.
• Ali, Imran. 2001b. ‘Business and Power in Pakistan’, in A.M. Weiss and S.Z. Gilani (eds),
Power and Civil Society in Pakistan. Karachi: Oxford University Press.
• Ali, Imran. 2002. ‘Past and Present: The Making of the State in Pakistan’, in Imran Ali, S.
Mumtaz and J.L. Racine (eds), Pakistan: The Contours of State and Society. Karachi: Oxford
University Press.
• Ali, Imran, A. Hussain. 2002. Pakistan National Human Development Report. Islamabad:
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• Ali, Imran, S. Mumtaz and J.L. Racine (eds). 2002. Pakistan: The Contours of State and
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• Amjad, Rashid. 1982. Private Industrial Investment in Pakistan, 1960-70. London:
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Abbrevations