CROSS BORDER MERGER

Globally, in the last decade there has been a flurry of activity in the area of merger & acquisitions. As multinational companies are expanding due to more demand in the market, experts are of the opinion that it will on a rise in the next decade as well. Post the introduction of economic reforms in 1991, Indian industries faced several challenges, both nationally and internationally. The cut-throat competition from international markets forced the Indian companies to opt for merger and acquisition strategies, making it vital for survival[1].

India allowed local companies to merge with overseas firms which will allow the local companies to restructure their business and pave the deck for more listings of securities on capital markets abroad. According to one of the partners of a reputed law firm, earlier only inbound mergers were permitted, but, now outbound mergers are also permissible which means a lot of opportunities would be there for the Indian companies to acquire, restructure, or list on offshore exchanges as well. Indian companies will now be able to merge into foreign companies based in Mauritius, the Netherlands, Singapore, UK, US and UAE.

In simple sense, merger of an Indian company with Foreign Company means one Company acquires another Company that is based in a different country. It is very important to have a clear vision as well as strategy before the Merger or Amalgamation with Foreign Company along with Due Diligence analysis to find the perfect match for the process of Merger or Amalgamation with Foreign Company. Section 234 of the Companies Act, 2013 provides the provisions for the Merger or Amalgamation of Company with Foreign Company. As per the Rule 25A of Companies (Compromises, Arrangement, and Amalgamation) Rules, 2017, a prior approval of RBI is needed.

According to law, mergers in India can happen in more than one way like in case where the assets and liabilities of the merging company are vested in the merged company and the merging company loses its identity. As a result, the shareholders of the merging company  become the shareholders of the merged company. The cross-border mergers are mainly regulated under The Companies Act, 2013, SEBI, Competition Act, 2002, IBC, 2016, Income Tax Act, Transfer of Property Act, 1882 and FEMA. However, for the Indian company to merger with a foreign company, either company must be an Indian company so that the Indian courts can have jurisdiction in the matter to pass necessary orders. In this article, I shall not elaborate on the types of mergers rather the focus will be on types of cross-border mergers along with an example of Walmart acquiring Flipkart.

INBOUND MERGER

This is the type of merger where two companies merge with each other, the resultant company is an Indian company. For example, acquisition of Flipkart by Walmart can be termed as an inbound merger. Here, the foreign company acquires the Indian company but the resultant company is an Indian company.

OUTBOUND MERGER

Under this type of merger, when two companies merge with each other, the resultant company is a foreign company. For example, acquisition of Jaguar and Land Rover by Tata Motors.

CONDITIONS REQUIRED FOR MERGER

  1. Prior approval of the RBI
  2. provisions of Section 230-232 of Companies Act, 2013, should be followed
  3. Approval of National Company Law Tribunal (NCLT), Shareholders, Creditors, Securities and Exchange Board of India (SEBI), and Income Tax Authorities.
  4. Payment of consideration to shareholders of merging company should be provided in cash or depository receipts or partly in depository receipts and partly in cash[2].
  5. The Resultant Company is involved in the Merger, or Amalgamation is required to furnish a report from time to time as per guidelines of RBI.

ACQUISITION OF FLIPKART BY WALMART

PARTIES INVOLVED:
ACQUIREE – Flipkart Pvt. Ltd.
ACQUIRER – Walmart Inc.

The U.S retail giant Walmart Inc picked up 77% stake in India’s largest online retailer Flipkart for $16 billion concluding the country’s largest acquisition and the world’s biggest purchase of an ecommerce company. The deal was completed in 2016. The transaction resulted in the largest exit for private equity and venture capital investors in India and collectively made about $14 billion by selling shares to Walmart. Of the two co-founders, only Binny Bansal remains invested. According to Walmart, the omni-channel expertise, grocery and supply chain knowledge and financial strength will help to fight with Amazon when it merges with Flipkart.

Reasons why Walmart and Flipkart came together

In order to get a good understanding of why Walmart really invested in Flipkart, other than the financials, it is very important to analyse the psych and ideation of the parties involved in the deal. It generally is a four step procedure before any business entity takes any major step to restructure its setup viz  Ideation; Finding a Prospect; Weighing the Pros and Cons; and finally, execution & closure of the deal. The same has been followed in the Flipkart – Walmart Deal.  Walmart plans to use Flipkart’s expertise to expand globally and assured employees that its startup ethos will be nurtured and strengthened. The world of Business is surrounded by cut-throat competition full of rivalries and competition. The Walmart and Amazon Rivalry has a long history going back to the very inception of Amazon, Inc[3].

  1. One of the factors which was common between Flipkart and Walmart was its competition with Amazon Inc. 
  2. While in India, Flipkart was in business, years ago one of the main questions was whether Flipkart was going to sustain in the Indian E-Commerce Markets. Whereas, back in the United States of America, Walmart has closed numerous stores and has been aggressively focusing on the online retailing of goods.
  3. Deep discount effective but cash-burning  has been Flipkart main strategy to fight Amazon. Walmart would give Flipkart not just more funds for the fight but also a formidable ally with great experience in retailing and logistics.
  4.  Flipkart has maintained leadership position in fast growth categories like fashion, electronics, mobile and large appliances. Flipkart, along with its fashion units, controls nearly 40% of Indian online retail. Amazon is close on its heels.
  5. The FDI Laws in India does not allow foreign companies to open front-end stores in India; which was the biggest roadblock for Walmart to sweep in the Indian Markets.  Looking at the past stints of Walmart, in order to enter the Indian Markets, Walmart entered in Joint Venture with Bharti Enterprises, but in vain. Various political and financial circumstances led to the failure and severance of all the ties between Walmart and Bharti Enterprises which also led to the downfall of the public image of Walmart. Besides the US, Walmart is pumping investments in e-commerce in China, Mexico, and Canada.
  6. In China, where the retailer has over 440 stores, it bought a 5% stake in JD.com, the second-largest online retailer in the country, in 2016, India had  made it to the list. “Walmart needed Flipkart possibly more than Flipkart needed Walmart,” said Yugal Joshi, practice director at management consulting and research firm Everest Group. “It didn’t have any shortage of funds and Softbank and others were really invested. It is a strong sign that a global giant found an Indian startup so important for its own online survival in the online market.” [4]For people who had been closely monitoring Walmart and its activities, it was not at all a surprise that Walmart would take this huge leap from brick and mortar stores to coming into the business of e-commerce.  Walmart’s investment includes $2 billion of new equity funding to help accelerate the growth of the Flipkart business. Both companies will retain their unique brands and operating structures in India.
  7. Flipkart has the biggest Client Base of e-commerce customers in India. It has beaten Amazon, Snapdeal, PayTm and all other e-commerce prospects single handedly when it comes to approach of clients and in terms of connect to the masses. Flipkart has 100 million registered users, making it the first online marketplace in India to reach this milestone. A press statement from the company said Flipkart has become the first company to reach this milestone in a single country outside the US and China.
  8. So, to put it in words, Walmart has not merely in a Company with huge e-commerce potential but, they have also gained their access to the Database of Indians which shall provide Walmart a better platform (served in a platter), to reach the masses for whatever product/service they have to offer. For instance, if Walmart wishes to sell a Goat in the Indian Online Markets, they would have a better access to prospect buyers and thus, greater chances of sale. Thus, it is a win-win situation for all. 

The Flipkart deal will also partner Walmart with Tencent and Microsoft, which could lend their technological expertise to e-commerce. Tencent already has a strong position in mobile payments in China with WeChat Pay, which has over 600 million users. Walmart wants to make Flipkart and India the place where it experiments with technology and e-commerce, and then apply what it learns to its global operations. That could very well be the most important part of this acquisition for Walmart.

CONCLUSION

The complex issues in Merger or Amalgamation with Foreign Company depend largely and specifically upon the facts, scale, dynamics, and geographic scope of both the Companies[5]. The process of merger & acquisition of Indian company with a foreign company is both complicated and time consuming at the same time. The merger of Walmart & flipkart brought two big companies under one umbrella and both of them will help each other in their weak areas to tap the Indian market. At present, flipkart is more into white goods and planning to enter daily needs, groceries and on the other hand, Walmart has got the expertise to help it. Going forward in India, the big fight will be only between Amazon and Flipkart (can be termed as Flipwalkart).


[1] https://www.indiaretailing.com/2019/12/27/fashion/4-mergers-and-acquisitions-that-took-place-in-2019/, visited on 07-07-2021 at 13:35hrs.

[2] Sakshi Sharda-Merger or Amalgamation of Company with Foreign Company: Complete Overview, Merger or Amalgamation of Company with Foreign Company – Corpbiz, visited on 07-07-2021 at 16:16hrs.

[3]  https://economictimes.indiatimes.com/small-biz/startups/newsbuzz/walmart-acquires-flipkart-for-16-bn-worlds-largest-ecommerce-deal/articleshow/64095145.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst, visited on 07-07-2021 at 16:55hrs.

[4] https://blog.ipleaders.in/online-retail-market-walmart-flipkart/, visited on 07-07-2021 at 16:59hrs.

[5] Sakshi Sharda-Merger or Amalgamation of Company with Foreign Company: Complete Overview, Merger or Amalgamation of Company with Foreign Company – Corpbiz, visited on 07-07-2021 at 17:02hrs.

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