Nigeria: Cross-Border Mergers And Acquisitions Transactions Involving Companies In Emerging Economies

1. Introduction

Cross-border Mergers and Acquisitions (M&A) transactions can be defined as any transactions in assets of two firms belonging to two different economies.¹ Emerging economies have become a pivotal force in reshaping the global business outlook, and cross-border M&A transactions have allowed many companies to access new and emergent markets.

In cross-border M&A transactions, success or failure depends on various factors such as economic conditions, culture, political stability, regulatory environment, etc. The COVID-19 pandemic also affected cross-border M&A activity.² However, M&A activities in emerging economies remained strong, despite the challenges,³ although, in the second half of 2022, it was reported that the volume dropped, but remained above pre-pandemic levels.⁴ From one particular review, it was noted that the top acquiring countries for cross-border M&A transactions are China, India, Brazil, Mexico, Indonesia, South Africa, Russia, Thailand and Turkey.⁵

This article will analyse some factors that contribute to the success or failure of cross-border M&A transactions, advantages and disadvantages of such transactions, the stock market reactions, and how they impact the global economy.

2. Factors that Contribute to the Success or Failure of Cross-Border M&A Transactions

2.1. Due Diligence – This is an important aspect of any M&A transaction and is usually one of the first assignments. Due diligence is the process of evaluating the target company to identify issues that could impact the success or failure of the transaction. The due diligence checklist in M&A transactions typically covers:⁶

• The target company's financial statements and accounting practice;
• The target company's tax liabilities;
• The target company's legal contracts, litigation history, and regulatory compliances;
• The target company's market position, competitive landscape and growth prospects;
• The target company's employment practices, including Human Resources;
• The target company's operations, including supply chain and Information Technology systems;
• The target company's sales and marketing practices.
• The target company's environmental impact and compliance with relevant environmental regulations.

The goal is to make a properly informed decision which aligns with the company's strategic objectives. Due to the peculiarities of emerging economies and operational challenges that are likely to present, the due diligence process may be hampered or impeded by certain factors. There may be issues relating to confirmation of information at the Company's registry, assets, financial records, tax assessments and regulatory licenses. The practice is for acquirers to extract indemnities or discount the value of the targets to provide for the risks occasioned by these issues.

2.2. Cultural Diversity – This is a significant factor to consider in cross-border M&A transactions. Merging two companies from different countries can lead to cultural clashes that may affect the success of the transaction. It is therefore important to understand the cultural nuances of the target company and its host country. For example, in some emerging economies, business relationships are initially built on personal relationships rather than contracts.

Some of the cultural diversity issues that can arise in M&A transactions include:

• It is important to understand the communication style of the business environment to avoid misunderstandings and misinterpretations during negotiations and integration. Internal cultural communication styles may be direct or indirect to convey a message;
• Management which may be ranked or not can affect decision-making processes and the overall management of the merged company, and;
• Corporate culture in a company can be influenced by national culture and could lead to conflicts over values if not adhered to.

Companies are advised to conduct cultural due diligence to reduce the effect of these culturally diverse issues. This will involve identifying potential clashes and developing strategies to address them.

2.3. Political and Regulatory Risk – Emerging economies can be unpredictable, especially politically and economically. Every country has its own set of regulations and laws governing M&A transactions. Therefore, it is crucial to assess the political and regulatory risks associated with the target country, including legal compliance, approvals, and stability. Some examples of political and regulatory risks that can arise in M&A transactions are explained below:

• Emerging economies may have complex and rapidly changing legal and regulatory frameworks that can impact the M&A transaction. This includes challenges related to intellectual property, labour laws, socio-economic and development objectives etc., which may impact the operational aspects of the transaction;
• Political instability, such as regime change, civil unrest, or terrorism can lead to a challenging business environment. Changes in government or civil unrest can impact the safety of employees and the security of assets. The ongoing war between Russia and Ukraine has affected M&A deals due to financial, reputational, and legal risks;⁷
• Nationalisations and expropriations may be authorised by the government over certain industries or companies. This can influence the ownership and control of the merged company;
• Corruption and bribery can be significant challenge in some emerging economies. Companies may need to navigate complex regulatory and legal frameworks to ensure compliance with local laws and regulations.

It is recommended that companies engage regulatory experts to navigate the local regulatory environment. Political risk insurance should be taken into consideration to mitigate potential risks.

2.4. Financing – It is vital to understand the local financial markets and financing options available. Careful consideration must be given to the financial aspects of the transaction, including tax implications, currency exchange rates and financing options.

A few commonly used financing options are:

• Private equity fund;
• Development finance institutions;
• Export credit agencies;
• Multilateral development banks;
• Local banks.

Companies investing in emerging economies should also consider using a combination of financing options to optimise their capital structure.

2.5. Post-merger Integration – Companies must execute this process carefully to ensure a smooth transition. A detailed integration plan that addresses these differences is essential for successful post-merger integration:

• Companies should invest in cross-cultural training to facilitate smooth integration;
• Identification and retention of key talent are critical, with timely plans to ensure they remain with the company post-merger or acquisition;
• Companies should assess the technical capabilities of the target company and develop a technology integration plan that is tailored to the local market;
• Companies should assess the local supply chain environment and have a plan to integrate the supply chains to optimise efficiency;
• A thorough regulatory compliance review should be conducted with a plan to ensure continued compliance with local laws and regulations.

To ensure proper post-merger integration, clear goals and regular communication of progress should be followed. Finally, it is vital for there to be flexibility in the approach to integration, recognising that each industry or market presents distinct challenges and opportunities.

3. Advantages and Disadvantages of Cross-Border M&A Transactions in Emerging Economies

There are several advantages and disadvantages of cross-border M&A transactions.⁸ For this reason, companies must go through the deal with a fine-toothed comb and carefully consider the benefits and drawbacks associated with the prospective transaction.

3.1. Advantages include, but are not limited to the following:

• Increased access to new markets which allows the acquiring company to expand its customer base, enter new markets and increase its footprint. This is quicker than setting up a company from scratch in another country.
• Variegation of products and services helps the acquiring company offer a variety of its product and service offerings. Although most merger companies are in the same industry, the products and services offered are usually different.
• Enhanced cost savings and economies of scale can create efficiencies and consolidation of finances. The economies of scale allow for proportionate savings in cost by the increased level of production.
• Interdependent capabilities combine the competences of the acquiring and target companies, improving their overall position in the market.
• Access to local presence allows the opportunity to have a firsthand understanding of local markets, regulations, and consumer preferences, which can be difficult without a local presence.
• Increased growth potential and profitability can increase the growth potential of the acquiring company by capitalising on the target company's resources, capabilities, and market position.
• Tax benefits may accrue to larger companies in the form of several fiscal benefits and shields.

3.2. Disadvantages include, but are not limited to the following:

• Loss of experienced employees to retrenchments and downsizing due to duplication of manpower and staff strength.
• Reskilling of employees of small companies who do not have the required capabilities to equip them to meet new challenges.
• Diseconomies of scale is the flip side of economies of scale. This can happen where there is rapid expansion and the cost per unit increases.
• Increased prices may occur since consumers tend to pay more for products or services, where there is no competition, and a company has a large market share.
• Potentially lost opportunities as a direct consequence of the time, money, and energy spent in the process of merging two companies or acquiring a company. These investments could have gone into other potential opportunities, that were lost or unexplored.
• Cost of the merger/acquisition, in terms of the costs of hiring legal, regulatory and finance experts are huge factors.

4. Stock Market Reaction to Cross-Border M&A Transactions in Emerging Economies

The stock market reaction to cross-border M&A transactions can be positive, negative, or mixed. The size and nature of the transaction, the target company's financial performance and the regulatory environment in the target country are possible factors. We will look at three of the top emerging economies i.e., China, Brazil, and South Africa.

4.1. China is the leading country in the emerging economies with over 1,000 M&A deals announced (pending and completed) valued at over $107,871.2mn. In January 2022, one of the biggest M&A transactions was between Zhongyuan Bank Co Ltd and Bank of Jiaozuo China Travel Services; Bank of Luoyang Co Ltd; Bank of Pingdingshan Co Ltd valued at $4,496.6mn.⁹ In the past, the acquisition of Sinochem Group Co., by China National Chemical Corp. (ChemChina) was quite notable.¹⁰ When news of this merger was announced in 2015, there was a positive reaction in China's stock market. ChemChina's shares rose by 3.3 per cent, while Sinochem's shares closed up 7.8 per cent after jumping by the daily limit. Their respective positive stock market reactions were ascribed to investors believing that the merger will create an alliance for both companies and help them compete better against global rivals.

The stock market reaction to China's biggest mergers is usually positive, as companies create new unions and increase their earnings and market share by such targeted M&A activities.

4.2. One of the biggest mergers in South Africa's history happened in 2019. Vodacom Group, a leading mobile operator, acquired a majority stake in Safaricom, Kenya's top telecom company, with a value of $2.59bn.¹¹ When the merger was announced, Vodacom's shares on the Johannesburg Stock Exchange (JSE) initially fell by more than 2.5 per cent but became stabilised and ended the day down by only 0.2 per cent. On the other hand, Safaricom's shares on the Nairobi Securities Exchange (NSE) increased by more than 5 per cent.

Another significant merger in South Africa's history occurred in 2016. Anheuser-Busch InBev (AB InBev), the world's largest brewer, acquired SABMiller, the country's largest brewer.¹² The merger was valued at around $107bn and formed a company that controlled around 30 per cent of the global beer market. The reaction in the stock market was positive, with AB InBev's shares rising by around 3.7 per cent on the day the deal was closed. Summarily, the stock market reaction to South Africa's biggest mergers is usually mixed at the outset, but overall, mergers of such magnitude are often seen as positive events by investors.

4.3. One notable example of Brazil's biggest merger was the merger of beer giants Brahma and Antarctica in 1999, creating AmBev, the world's fifth-largest brewer.¹³ During the merger, both companies' shares initially fell on the São Paulo stock exchange, as investors showed concerns about the merger's potential complications. However, soon after the announcement of the new company's formation, the shares recovered and continued an upward trend, showing fervent optimism over the long-term prospects of the merger. In the following year, the merger, the share prices of both Brahma and Antarctica increased steadily.

Another significant merger in Brazil was the combination of two South American airlines, Brazil's TAM, and Chile's LAN, in 2012, creating the world's largest airline by revenue, LATAM Airlines Group.¹⁴ The company's shares rose quickly on the Santiago and São Paolo stock exchanges after the announcement, indicating strong investor support. The merger was hailed as a landmark event in the region's aviation industry and boosted hopes of greater integration between Brazil and the rest of South America.

More recently in 2017, the Brazilian meatpacking company JBS SA's stock prices rose after a proposed merger with the Brazilian food processing giant BRF SA. This merger would have resulted in the ousting of long-standing leader Nestlé as the world's largest food producer; however, the deal crashed, and both companies' shares fell.¹⁵

Just like in South Africa, the initial reaction of the market may be mixed. However, if investors believe the potential gains of the merger outweigh the potential losses, share prices are likely to recover and continue to rise in the long term. This is an indication of optimism about the merged entity's prospects.

5. Impact of Cross-Border M&A Transactions in Emerging Economies

One of the primary impacts of cross-border M&A transactions is that they bring foreign direct investment (FDI) to the emerging economy. This, in turn, leads to job creation, improved infrastructure, and increased productivity. The inflow of FDI also benefits the economy by bringing in new technologies, management expertise and innovation, all of which can result in long-term economic growth and development.

Another impact is that cross-border M&A transactions can lead to increased competition within the emerging market. When foreign companies enter the market through M&A transactions, they introduce new products, services, and business models that can stimulate competition and prompt incumbent companies to enhance their offerings to stay competitive.

Additionally, cross-border M&A transactions can help improve the corporate governance practices of companies in emerging economies by introducing stronger legal and regulatory frameworks that promote transparency and accountability. These transactions can also lead to greater compliance with international business standards, which can enhance the reputation of the country in the global business community.

6. Conclusion

Cross-border M&A transactions in emerging markets have made significant impacts globally. This essay applies the stock market reaction to the acquiring company's announcement of a merger or acquisition as a yardstick for successful M&A transactions. The stock market's reaction to the acquisition announcement reveals its opinion and optimism for the transaction. Therefore, a well-executed cross-border M&A transaction in an emerging economy requires careful research into the target company's market, due diligence, and effective integration to ensure that the benefits outweigh the risks and challenges.

Footnotes

1. See, Chunlai Chen and Christopher Findlay, "A Review of Cross-border Mergers & Acquisitions in APEC", Pacific Economic Cooperation Council (PECC) for the APEC Investment Experts Group (IEG) (July 2002), available at https://www.apec.org/docs/default-source/Publications/2002/7/A-Review-of-CrossBorder-Mergers-and-Acquisitions-in-APEC-2002/02_cti_ieg_ma.pdf accessed 3rd May 2023.

2. See, Daniel Casares-Lauritsen, "Covid-19: The Global Outlook of Cross-Border M&A", Lexology (4 May 2021), available at https://www.lexology.com/LIBRARY/DETAIL.ASPX?G=FC6AA3C2-615F-4328-962A-A127986445B7 accessed 3rd March 2023.

3. See, Fraser Tennant, "All-time high: M&A in emerging markets", Financier Worldwide magazine (February 2022), available at https://www.financierworldwide.com/all-time-high-ma-in-emerging-markets#.ZD0bEnbMLIU accessed 14th March 2023.

4. See, "Global M&A Industry Trends: 2023 Outlook", PricewaterhouseCoopers, available at: https://www.pwc.com/gx/en/services/deals/trends.html accessed 14th March 2023.

5. See, Ping Deng and Monica Yang, "Cross-Border Mergers and Acquisitions by Emerging Market Firms: A Comparative Investigation" International Business Review (2015) 24 1 available at: https://engagedscholarship.csuohio.edu/cgi/viewcontent.cgi?article=1068&context=bus_facpub accessed 14th March 2023.

6. See, Chiamaka N. Anyanwu, "Nigeria: Due Diligence Checklist in Mergers and Acquisitions", Mondaq, (10 April 2023), available at https://www.mondaq.com/nigeria/maprivate-equity/1302266/due-diligence-checklist-in-mergers-and-acquisition accessed 3rd May 2023.

7. See, Christian Hintermann, "Impact of the Russia-Ukraine War on Global Banking M&A" KPMG (18 October 2022) available at https://kpmg.com/ch/en/blogs/home/posts/2022/10/impact-russia-ukraine-war-on-global-banking-mna.html#:~:text=The%20conflict%20has%20impacted%20deals,reputational%20and%20legal%20risks%20involved. accessed on 3rd May 2023.

8. See "Advantages and Disadvantages of Merges and Acquisitions", SAC Attorneys LLP (6 May 2022), available at https://www.sacattorneys.com/advantages-and-disadvantages-of-mergers-and-acquisitions.html accessed 4th May 2023.

9. See, "China: Five Largest Mergers & Acquisitions Deals by Value (LTM June 2022)" Globaldata, (June 2022), available at https://www.globaldata.com/data-insights/macroeconomic/china--five-largest-mergers---acquisitions-deals-by-value--ltm-2087779/ accessed 19th April 2023.

10. See, "China Chemical Merger to Create Group with $152bn Sales", Financial Times (April 1, 2021), available at https://www.ft.com/content/2d3664ca-89fc-4946-b2ec-969e3e81e452 accessed 17th March 2023.

11. See, Matthew Davies, "South Africa's Vodacom buys into Kenya's Safaricom", BBC Africa Business Report (May 15, 2017), available at https://www.bbc.com/news/business-39922634 accessed 17th March 2023.

12. See, "Anheuser-Busch InBev Announces Completion of Combination with SABMiller", AB InBev (10 October 2016), available at https://www.ab-inbev.com/content/dam/universaltemplate/ab-inbev/investors/releases/10October2016/Announcement_of_Completion_of_the_Belgian_Merger.pdf accessed 20th March 2023.

13. See, "Ambev History", Ambev, available at https://ri.ambev.com.br/en/overview/history/ accessed 10th April 2023.

14. See, "Chile's Lan and Brazil's Tam Merge to Create Huge Airline" BBC, Latin America (22 June 2012), available at https://www.bbc.com/news/world-latin-america-18560343 accessed 12th April, 2023.

15. See, "Brazil's BRF, JBS Shares Slump after China Suspends Meat Imports" Reuters (20 March 2017), available at https://www.reuters.com/article/brazil-corruption-food-stocks-idUKL2N1GX0HK accessed 12th April 2023.

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