Question

In recent years there has been a lot of discussion about the effects of cross-border mergers and acquisitions and how it can bring corporate governance improvements.

Discuss the mechanisms through which this is meant to occur, and critically assess whether the evidence supports actual firm-level governance improvements following cross-border corporate transactions.

Answer 1

Merger and Acquisitions are usually simply referred to as merger, the condition or process in which a company buys another (the target). This condition usually can be done in two ways, either friendly or hostile. In the former case, the two companies involved in a negotiation to merger-related matters in terms of the merger itself, in hostile mergers, typically the target company is unwilling to sell its shares to buyer (bidder), or the target's boards are not known the purchases process made by other entity, and this process usually more complex and even involves the proxy which will play a role in purchasing shares or at any even to influence the shareholders

Moreover

“The merger is the juridical (legal) act of two or more legal persons, whereby one acquires the property, rights and interests and the liabilities of the other by universal succession of title or whereby a new legal person, formed or incorporated by them jointly by such juridical (legal) act, acquires their property, rights and interests and the liabilities by general (universal) title.”

Concept of Cross-Border Merger and Acquisitions

A company in one country can be acquired by an entity (another company) from other countries. The local company can be private, public, or state-owned company. In the event of the merger or acquisition by foreign investors referred to as cross-border merger and acquisitions will result in the transfer of control and authority in operating the merged or acquired company.
Assets and liabilities of the two companies from two different countries are combined into a new legal entity in terms of the merger, while in terms of acquisition, there is a transformation process of assets and liabilities of local company to foreign company (foreign investor), and automatically, the local company will be affiliated.

Since the cross border M&As involving two countries, according to the applicable legal terminology, the state where the origin of the companies that make an acquisition (the acquiring company) in other countries refer to as the Home Country, while countries where the target company is situated refers to as the Host Country.

Corporate governance:

In cross-border acquisitions, the differences between the bidder and target corporate governance (measured by newly constructed indices capturing shareholder, minority shareholder, and creditor protection) have an important impact on the takeover returns. When the bidder is from a country with a strong shareholder orientation (relative to the target), part of the total synergy value of the takeover may result from the improvement in the governance of the target assets. In full takeovers, the corporate governance regulation of the bidder is imposed on the target (the positive spillover by law hypothesis). In partial takeovers, the improvement in the target corporate governance may occur on voluntary basis (the spillover by control hypothesis). Our empirical analysis corroborates both spillover effects. In contrast, when the bidder is from a country with poorer shareholder protection, the negative spillover by law hypothesis states that the anticipated takeover gains will be lower as the poorer corporate governance regime of the bidder will be imposed on the target. The alternative bootstrapping hypothesis argues that poor-governance bidders voluntarily bootstrap to the better-governance regime of the target.