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Wednesday Nov 13, 2024
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The primary incentive for M&A activities are derived from the need to diversify or expand markets, to acquire particular production technologies, to take advantage of work forces with particular skills or to benefit from “good opportunities” to take over a corporation. There are also other economic partnerships between companies thus driving the small competitors away from the market. Trade unions lobby for fair play in such arrangements as business logic tend to enforce redundancies in the short term.
In view of the political and social ramifications, the governments have introduced legislation that would maintain the balance between the need for economic growth and the need to protect jobs.
Large scale M&A are now a highly regulated and must obtain the approval from the competition regulators. All M&A transactions are to be given a mandatory period of review and are required to be conducted in a transparent manner consistent with the competition laws of the country. If the transaction is a cross border bid it would require approval from competition regulators of both countries. There are enormous political ramifications that must be taken into account.
In some circumstances regulatory framework would interfere with the buying decision owing to compatibility and the utility of the product which is necessarily linked to a regulatory requirement. When a government introduces a new legislative framework, citizens are compelled to buy a product that suits or even beats the legislative framework.
The practical effect of these manipulations requires business entities to capture markets either by merging with a similar entity or by acquiring the majority stake of a target company that would augment the market potential of a business entity in an effort to beat the competitors. This often tends to create predators and monsters in the market who wield absolute control over market with limited intervention by consumer and competition authorities.
There has been a steady increase in mergers and acquisitions (M&A) over the last two decades where traditional businesses too have been taken over by hitherto unexpected business. One case in point is the acquisition of Jaguar and Land Rover by TATA Group, which is quite inconceivable.
M&A activities continue to break new ground and according to the London Guardian, “The value of merger and acquisition deals worldwide fell by 10.3% in the first three months of the year to $ 405.9 b (£ 268.5 b), despite a series of mega deals including the $ 27.4 b takeover of Heinz. The total for the first quarter of 2013 compares with $ 452.3 b in the same period in 2012.” M&A now deal with mega billion deals with wide ramifications in the domestic economy.
Risk mitigation in
M&A deals
Once the deal has been concluded there would be host of other risk factors to be considered. The barriers that impede the effective implementation of the M&A transaction would certainly be legal and regulatory implications, tax barriers, import export restrictions, attitudinal barriers such as political interference, disillusionment with workers of the acquired business, tedious approval process and lethargic attitude of the competition authority.
If the M&A transaction is a cross border or an international deal, the host country trade union activity would certainly hamper the operations of the new business entity. It would be prudent to identify the potential clash of interests with trade unions before an M&A transaction is entered into.
Definition of political risk
Political risk broadly defined is the probability of disruption of the operations of companies by political forces and events, whether they occur in host countries or result from changes in the international environment. In host countries, political risk is largely determined by uncertainty over the actions not only of governments and political institutions, but also of minority groups and separatist movements. According to Multilateral Investment Guarantee Agency of the World Bank (MIGA) the definition of political risks includes the following:
Transfer and convertibility restrictions: Risk of losses arising from an investor’s inability to convert local currency into foreign exchange for transfer outside the host country. Currency devaluation is not covered.
Expropriation: The loss of investment as a result of discriminatory acts by any branch of the government that may reduce or eliminate ownership, control, or rights to the investment either as a result of a single action or through an accumulation of acts by the government.
Breach of contract: Risk of losses arising from the host government’s breach or repudiation of a contractual agreement with the investor, including non-honouring of arbitral awards.
Non-honouring of sovereign financial obligations: Risk of losses due to non-compliance of government guarantees securing full and timely repayment of a debt that is being used to finance the development of a new project or the enhancement of an existing project.
Terrorism: Risk of losses due to politically motivated acts of violence by non-state groups.
War: Risk of losses due to the destruction, disappearance, or physical damage as a result of organised internal or external conflicts.
Civil disturbance: Risk of losses due to social unrest.
Other adverse regulatory changes: Risk of losses for foreign investors stemming from arbitrary changes to regulations. (Source: World Investment and Political Risk /MIGA)
Qantas and
Emirates alliance
Qantas Airways Australia and Emirates Airlines Dubai UAE entered into an alliance agreement which was scrutinised by the Australian 
Consumer and Competition Commission (ACCC). The alliance was entered into with a view to benefit from price and capacity coordination on a global network-wide basis.
Qantas had been operating a transit hub at Singapore for flights to and from Australian and European destinations. With this new arrangement Qantas would now operate Dubai as its hub for flights between Europe and Australia. The new alliance changed the business dynamics of air transport in Australia overnight.
The alliance was met with stiff resistance from the Transport Workers Union (TWU) of Australia. It highlighted that with this alliance Qantas and Emirates business decisions would tend to make adjustments in its internal route structures and airport operations which would end up in staff redundancies and retrenchments. The aviation economy at some domestic airports too would suffer due to route structuring.
However Qantas as a global airline had its own benefits. The Australian regulator ACCC authorised the agreement despite concerns from the industry and deal went ahead. The alliance had the political backing at the highest level of decision making in UAE and Australia.
DP World controversy
The impact of the key industries in the global economy is felt when big giants merge or take over the control of assets of competitors thus creating mega deals with political ramifications.
The failed attempt by DP World (Dubai ports) to acquire the control of US ports created a political controversy and the deal fell through. DP World’s deal to obtain the right to operate in US ports engulfed Washington as it was concerned with national security implications. The US was closely scrutinising the security aspects of its ports and airports.
In October 2005, the London-based Peninsular & Oriental (P&O) Steam Navigation Company agreed to be acquired by DP World, a Dubai-based ports company owned by the United Arab Emirates (UAE). On 10 February, DP World won the right to acquire P&O after it outbid PSA International, a Singapore-based company, with a final bid of $ 6.8 billion. As part of the worldwide deal, DP World gained the right to operate in six major US ports, including terminals in the New York/New Jersey area, Philadelphia and New Orleans.
The deal was considered by a Special Committee consisting of US Government agencies. In an unprecedented move even Israel had backed the deal. ZIM, the Israeli shipping company Chairman, said: “During our long association with DP World, we have not experienced a single security issue in these ports or in any of the terminals operated by DP World. We are proud to be associated with DP World and look forward to working with them into the future.”
DP World dropped out of the deal bowing to an unrelenting bipartisan attack in the US Senate over the national security threat the DP World deal would entail. This was a clear political risk factor that should have been taken into account before making the bid to take over US ports.
(The writer is a freelance journalist and a political lobbying and government affairs consultant. He is also a member of the American Association of Political Consultants)
