How Does Government Regulation Affect the Success or Failure of Mergers and Acquisitions - Coursework Example

?How does government regulation affect the success or failure of mergers and acquisitions? There are many factors that determine the success or failure of mergers and acquisitions hence, it is important for everyone involved in this process to have a clear understanding of how it works. Thus, this essay seeks to critically analyse the extent to which government regulation can influence the success or failure of mergers and acquisitions. It starts by explaining the meaning of the key terms then followed by a brief outline of the factors that influence this process. Case examples about the impacts of government regulation of mergers and acquisitions will be drawn from USA, Europe and China. The paper is specifically concerned with analysing current issues pertaining to government regulation of mergers and acquisitions in China in comparison to the other developed countries. According to Jackson & Schuler (2000), in a merger, the two firms are supposedly on equal footing after they have been merged where one new company will continue to exist while in an acquisition, it is clear that one firm will take control of the other’s resources. There are various reasons why firms embark on mergers and acquisitions and these include the following: the need to increase their market share, increase their geographic reach as well as responding to new deregulation. In most cases, one major objective of a merger or acquisition is to gain skills and talents of people employed by another company. Therefore, it would be imperative for both parties involved to have a sound understanding of the concept of mergers and acquisitions and no one company should yield more power over another since this would imply easy takeover of another company’s assets and resources. A good deal should be in actual fact beneficial to both parties involved. However, of concern is that these businesses do not operate in a vacuum but in different environments that are characterised by different policies. The advent of globalisation has seen a significant rise in cross border mergers and acquisitions where the large multinational corporations seek to gain a strategic position and competitive advantage in the global market (Zhao 2008). However, this state of affairs can be advantageous to the multinational corporations as they will be able to attain their goal of making profits but it will pose challenges of supervision of these mergers and acquisitions by the host government (Zhao 2008). From this assertion, it can be noted that regulation is somehow important so as to prevent monopolies whereby the dominant multinational corporations can end up reaping huge profits at the expense of the welfare of the general citizens of the host country. Thus, regulation can be defined as “action formed and carried out by government, and it is the normal rule or special action that directly interferes with market allocation mechanism and indirectly change the decision-making of the enterprise and consumer,” (Spulber N.D. as cited in Zhao 2008). As going to be explained below, it is important for the host country to regulate as well as supervise the activities of the investors. Regulation is important as it serves as a measure to prevent the emergence of low efficient competition especially in horizontal mergers (Zhao 2008). In some instances, multinational corporations can merge with the powerful competition in the host country with the aim of controlling the market of the host country. This is not advocated as it destroys competition in the host country whereby the multinational corporations can end up reaping huge monopoly profits at the expense of the citizens of the host country. Competition will become inefficient and this will be against the intention of the host country to promote growth of the economy through equitable means. The main purpose of granting permission to mergers and acquisitions to operate in host countries is to stimulate economic growth, the reason why it is important for the government to regulate the activities of these organisations so as to maintain a healthy environment in the market. The other reason why regulation of mergers and acquisition is important is the need to safeguard the welfare interests of the citizens in the host country. If a monopoly emerges in the market as a result of one dominant organisation controlling the manufacture of particular goods and products, there will be high chances that quality will be compromised since there will be no variety. Such dominant organisations may also end up reaping huge profits while the welfare of the ordinary people will be deteriorating. Though globalisation deregulated trade among the member states, it is important for the host countries to put measures in place that are meant to monitor the activities of the investors. In most cases, multinational organisations have a tendency to repatriate the profits they gain from business operations in other countries to their home countries. In such a scenario, it will be prudent for the responsible authorities to put measures in place that are meant to ensure that there will be equal distribution of wealth which is the essence of allowing the mergers and acquisitions to operate in their countries. Globalisation has often come under fire for creating imbalances between the developing countries and the developed countries. It seems that the mergers and acquisitions from the developed countries will be primarily concerned with asserting their dominance over the host countries which is not advocated. Zhao (2008) suggest that regulation is important in that the host country will ensure the security needs of the people. Security in this case can be in the form of military security or economic security. In some cases, the investors come in the guise of seeking business opportunity while they will be hunting for mineral wealth. If these are not closely monitored, there are likely chances of conflicts erupting which will destabilise peace and security prevailing in that country. This can lead to unnecessary suffering of the people as a result of the actions of the people who will be bent on satisfying their desires at the expense of the innocent people. On the other hand, there is need to regulate the operations of mergers and acquisitions so as to ensure the host country’s economic security. There are different kinds of industries in different countries such as mining or agriculture and these are often regarded as the mainstay of their economies hence the reason why they should not be totally controlled by the investors as this may negatively impact on the welfare of the people as a whole. The factors discussed above are some of the pros for government regulation of mergers and acquisitions in different countries as a way of safeguarding the interests of the citizens. However, to a certain extent, government regulation of mergers and acquisitions negatively impacts on their proper functioning. Indeed, there is need to create a fine balance between the security needs of the country as well as promoting economic growth through the activities of the mergers and acquisitions. In this particular case, a story by Boreign Firms (13 February 2011) entitled, “China: Panel to check mergers and acquisitions” is a good example of a current issue that can be used to illustrate the extent to which government regulation can impact on the success or failure of mergers and acquisitions in a particular country. Each country has different regulatory laws pertaining to the operations of the mergers and acquisitions and in most cases, the aims of these laws are the same. However, as going to be discussed below, it can be noted that some governments have stringent laws that negatively impact on the mergers and acquisitions while others have favourable conditions. In the above mentioned article, Firms (2011), states that, “China is seeking to establish a panel that will check whether merger and acquisition deals struck by foreign firms in the country endanger "national security" as stated by China's State Council.” The story goes on to mention that under the new regulation, which will come into effect in March 2011, a new red tape barrier for doing business in China is likely to be installed. China is regarded as the world’s second-largest economy and has been experiencing double digit growth which has helped it attract more than $105billion in foreign direct investment in 2010. Under the new regulation, foreign investment in key sectors such as military, agriculture, energy and resources as well as key technology sectors will be subject to be reviewed by a "foreign investment security review board" under the cabinet (Firms 2011). The members of this panel will be drawn from the Ministry of Commerce, National Development and reform commission as well as the other relevant bodies. In the name of national interest, China has blocked deals that do not conform to its national plans though it introduced an anti- trust law in 2008 promote competition while at the same time minimising the emergency of monopolies in the interests of the welfare of the citizens. For instance, “in 2009, China rejected Coca-Cola's $2.4bn bid for China's top juice maker Huiyuan and buyout giant Carlyle's $375m bid for Xugong, China's biggest construction equipment maker in 2008,” (Firms 2011). China has always attempted to consolidate huge industries in the hands of a few people who do not include the investors in the form of mergers and acquisitions. The hostility of China towards the mergers and acquisitions can also be illustrated by the stance it took in 2007 when it blocked ArcelorMittal from gaining a majority stake in China Oriental Group. These examples posit to the effect that the regulatory policies imposed by China are restrictive and they do not promote free investment. Though China gained $105 billion in foreign direct investment in 2010 which was 17,9 % more than in 2009, some of the foreign businesses have complained that the Chinese government was hostile and becoming more unfriendly to the investors (Firms 2011). Given the state of affairs in a host country, it can be noted that it will be pretty difficult for the mergers and acquisitions to successfully realise their goals since the environment will be unfavourable. In most cases, cross border mergers and acquisitions fail if the government policies and regulations are hostile towards the investors. In most cases, investors can simply withdraw or even sell their business if they find it difficult to cope with the regulatory policies obtaining in that particular country. Indeed, there is need to create a fine balance between the national interest needs and the need to promote economic growth through foreign direct investment. When the conditions in the market environment of the host country are favourable, there will be likely chances of mergers and acquisitions to successfully operate their business ventures. The new regulation being proposed by Beijing will compel trade associations, government officials, competitors and other related parties to apply for the start of review of a foreign related M&A deal (Firms 2011). This process is mainly comprised of two parts namely the “general review” and “special review” for those who fail the first test. However, a closer analysis of these regulations shows that the process takes a longer period to be completed. Prospective investors may not have the patience to wait for about 60 days while their applications are being processed. This is one major setback anticipated in this proposed regulation and it can negatively impact on the success of the merger and acquisition to be implemented. Under this regulation, any deal that is seen as posing a security threat can be terminated by the responsible authorities. These regulations are unpredictable and they can negatively impact on the success of mergers and acquisitions especially in China. On the other hand, the regulatory framework for the operations of mergers and acquisitions in America is quite flexible and can allow them to successfully operate once they have fulfilled the requirements of the law. Evans (2000) states that Section 7 of the Clayton Act is one of the most important federal laws which stipulate that a merger is not allowed to lessen competition or to result in the emergency of a monopoly. This is done through a an analysis of the market served as well as the type of business involved in and there are different factors such as size of the market as well as number of competitors that are considered. The antitrust regulators in the U.S. have been accommodative to the mergers and acquisitions after they realised that the markets are global. Information related to this assertion can be viewed at . This law is mainly used to safeguard the interests of the other businesses whereby competition is promoted while at the same time discouraging the emergence of monopolies. According to Evans (2000), “The FTC (Federal Trade Commission) and the USJD (United States Justice Department) become involved within the merger and acquisition process by way of the 16 Page Form" (p.13). This 16 Page Form requires the company to disclose the type of transactions involved and description of both companies. This step is necessary as it aims to ensure that the mergers and acquisitions comply with the regulatory laws of the country. Generally, it can be noted that the regulatory framework in the US is supportive for mergers and acquisitions to successfully operate compared to China. A close analysis of the regulatory frameworks of these two countries show that government regulation of mergers and acquisitions has a major role to play with regards to determination of the success or failure of the mergers and acquisition in a particular country. As noted above, government regulation is very important in as far as the operations of the mergers and acquisitions in other countries are concerned. This part of the essay attempts to analyse the regulatory framework for M&A in European Union (EU). Article 101 of the Treaty on Functioning of European Union (TFEU) prohibits organisations which have as their object the prevention, restriction or distortion of competition within common market. Details about the Treaty on Functioning of European Union can be viewed at . In as far as mergers and acquisitions are concerned, the regulations in the EU are very flexible as long as the organisations investing in that region are prepared to comply with the stated laws. Basically, the EU strives to promote competition and this can be achieved when there are many players in the market. The number of these players can be increased through allowing mergers and acquisitions to set up business. In countries where competition is encouraged, it can be seen that it will be easier for the other actors to penetrate the market and this also gives a leeway to mergers and acquisitions to set their business. Where there is competition, there are likely to be many actors in that particular industry. A critical analysis of the regulations of mergers and acquisitions obtaining in developed countries show that they share a lot in common. They are mainly concerned with preventing monopolies while at the same time promoting competition among the organisations operating in their countries including mergers and acquisitions. It can be seen that in developed countries, there are limited cases of deals of mergers and acquisitions being rejected as compared to China which prioritizes the interests of the national security to the extent that it can reject some bids. The legislative systems in the developed countries are specifically designed to prohibit monopoly and promote competition. Transparency is advocated and all mergers and acquisitions are encouraged to comply with the rules and regulations of the countries in which they will be operating. However, the only difference is that the developed countries will always be powerful when they move to the developing countries the reason why the regulatory policies may differ from country to country. Though China introduced the antimonopoly laws in 2008, it still blocked some cross border mergers and acquisitions as a result of different reasons. Whilst the stance taken by China with regards to cross border mergers and acquisitions may be far reaching, it can also be argued that this system is primarily meant to protect the security interests of the country. Instead, it can be noted that multinational corporations from the developed countries have established monopolies in China and this is not the essence of mergers and acquisitions. To a certain extent, each country must put in place policies that are suitable especially with regards to protection of the interests of the people as well as the economy as a whole. Depending with the region, government regulation plays a pivotal role in determining the success of failure of the mergers and acquisitions in different countries they will be operating. The policies formulated by the government affect the operations of the mergers in one way or the other. Over and above, it can be concluded that there are many factors that determine the success or failure of mergers and acquisitions which calls for everyone involved in this process to have a clear understanding of how it works. This essay sought to critically analyse the extent to which government regulation can influence the success or failure of mergers and acquisitions. It has been observed that there are pros and cons of government regulations with regards to the functioning of the mergers and acquisitions. Each country has regulatory policies that are different from others and this mainly depends on the system of governance obtaining in that particular country. Regulation of the M&A is important in that the government will safeguard the security interests of the country while ensuring that these mergers are complying with the regulations of the country. However, to a certain extent, government regulation of the mergers and acquisition negatively impacts on their operations to the extent that some of them will end up pulling out of the country. A case study analysis of government regulation in China as well as America and EU showed that China’s policies on mergers and acquisitions are not that favourable compared to the developed countries. Security concerns are given priority in this country. Many foreign investors looking at acquiring a Chinese entity, are often initially daunted by the web of regulations and maze of government approvals required, in order to be able to actually take control of an entity and commence controlling the entity’s business activities. However, foreign investors need to realize that these paths are well walked and are becoming more transparent and predictable as each day passes. Early communication with legal and accounting advisers, as well as key government departments, is key to getting a deal approved and avoiding the mine fields. (2976 words) References Aquila, F (22 December 2010), Conditions are ripe for an M&A boom in 2011,viewed 08 March, 2011, Bates B et al (2006), Business Management; Fresh Perspectives, Prentice Hall, CT. 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(August 24, 2010), Mergers and Acquisitions by foreign entities in China, viewed 08 March, 2011, < http://www.glgroup.com/News/Mergers-and-Acquisitions-by-Foreign-Entities-in-China-50183.html > Robinson, AA (11-13 September 2003), Mergers and acquisitions-some current issues, Taxation institute of Australia. Zhao, Y (2008), The International Comparison on the Regulations of Cross-border Merger and Acquisition, School of Education, Huazhong University of Science &Techology. Read More