Cross-border M&A is a powerful strategy for companies aiming to expand globally, access new markets, and unlock operational synergies. According to statistics by the Ministry of Industry and Commerce, India’s gross FDI inflows crossed US$1 trillion between 2000 – 2024. As the volume and complexity of such transactions increase, robust due diligence has become more critical than ever. It allows acquiring companies to thoroughly assess the financial, legal, and operational health of their target enterprises.
Cross-border mergers and acquisitions within and outside India
Cross-border M&A includes inbound deals, where foreign companies acquire Indian firms, and outbound deals, where Indian companies expand overseas. In 2024 inbound M&A surged by 66%, driven by strong economic growth and regulatory reforms, with IT, manufacturing, and banking leading the way. Outbound activity was also robust, with nearly 300 deals worth US$8.3 billion, led by Indian conglomerates like Reliance and Bharti in markets such as the US, Singapore, and UAE. Regulatory hurdles remain as deals exceeding certain thresholds require CCI approval to avoid anti-competitive concerns, and foreign investments must comply with RBI and FEMA guidelines. These factors continue to shape the evolving cross-border M&A landscape.
Key Barriers to Successful M&A in the Indian Market
- Local Integration/Regulatory Approvals: Adapting to local business norms and structuring entities thoughtfully is key to integration. India’s changing rules require companies to stay informed and get approvals from CCI, RBI, and others which is often a slow, complex process.
- Exchange/Interest Rate Risks: Shifts in exchange and interest rates can significantly impact valuation and success of such a transaction. Currency and interest rate changes can shift costs and financing terms, impacting deal viability and returns.
- Tax & Legal Complexity: While India offers strong growth opportunities, organizations must carefully assess tax impacts and navigate a complex legal system that can be challenging for unfamiliar investors.
Key Areas Covered in Cross-Border Due Diligence
In cross-border M&A, due diligence enables the acquiring firm to assess the target company to identify risks, liabilities, and potential red flags that could affect the transaction.
- Regulatory Compliance: Checks if the target company follows local laws, such as business, competition, and foreign investment rules.
- Litigation check: Reveals hidden legal risks, like lawsuits, environmental problems, staff issues, or tax troubles, that could harm the buyer financially or reputationally.
- Valuation Accuracy: Assessment of the company’s finances to make sure the price matches its real value.
- Intellectual Property Protection: Confirms ownership and legal status of IP like patents and trademarks to avoid disputes and protect asset.
- Contractual Obligations: Reviews critical contracts, agreements, and partnerships to determine their impact on the mergers and acquisitions.
- Cultural Compatibility: Evaluate company culture and management style to identify potential integration challenges post-acquisition.
Conclusion
A thorough and well-planned due diligence process is crucial for success of cross-border mergers and acquisitions. It enables the acquiring company to gain a comprehensive understanding of potential risks, including legal complexities, financial liabilities, and operational challenges.
Effective due diligence not only mitigates risks but also enhances decision-making, ensuring successful post-merger integration.