M&A: Cross Border Deals, Joint Ventures and Strategic Alliances

Cross border M&A deals: acquirer and target firms are registered in two different countries.

Foreign Expansion/Entry Modes:

• Representative Office:
• is an office established by a company to conduct marketing and other non-transactional operations, generally in a foreign country where a branch office or subsidiary is not warranted.
• Easier to establish than subsidiary or branch, simple, low cost model and less incentives to be regulated.
• Strategic Alliance: 
• an agreement between two or more parties to pursue a set of agreed upon objectives need while remaining independent organizations. 
• The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. 
• The alliance often involves technology transfer (access to knowledge and expertise), economic specialisation, shared expenses and shared risk.
• Forming a contract between foreign partner and local company.
• Joint Ventures:
• a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets. 
• Co-own a local entity between foreign partner and local partner.
• Greenfield Investment:
• the investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist.
• set-up a new factory, start from scratch.

Why Multi National Company (MNC) chooses M&As as the expansion mode?

• Difficulty in selling directly into domestic market --> production cost too high, transaction cost too high, lack of local knowledge.
• Difficulty in establishing a local factory --> lacks of local knowledge, uncertainty in the return of investment.
• Difficulty to entering another expansion mode beside M&A (eg joint venture or an alliance) --> uncertainty about such relationship due to lack of local knowledge and how to resolve conflicts (potential hold-out problems in the future)

How to view cross-border M&A?

An entry mode that acquires local knowledge but allows the MNC to retain control.

Strategic fits between foreign firms and domestic firms:

• Foreign Firms: 
• transfer of technology, brand, governance and organisation, cost of capital/diversification
• Domestic Firms:
• Country-specific marketing skills, distribution channel, connections, tax incentives.

Barriers to cross-border M&A:

• Home bias: cross border M&A targets tend to be from countries that neighbour and have strong links with home country.
• Tax differences.
• Capital control restrictions.

Issues with Cross-Border M&As

• Issues-1: M&A Deal constraint
• M&A necessitate (make something necessary, force to do something) a sale of control of the entire target firm.
• A sale can be difficult when the target and the acquirer have non-overlapping ZOPA. Why can be that the companies create synergies have non-overlapping ZOPA? Yup, maybe because lack of knowledge of other firm assets to value their synergy benefits.
• In this context, a joint venture allows the synergies to be capture.
• Issues-2: Incentives compatibility
• After the target being absorbed, M&A mostly provide no clear performance measures, difficult to design incentives scheme for the target's managers (division). Thus, only an acquirer's shareholders can monitor progress.
• In contrast, a joint venture allows both the acquirer and target to share ownership in a common project --> compatible incentives.