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Cross-Border M&A: Challenges and Pitfalls

 4 min read / 

Short-term trends in M&A deals are common. Over the past 30 years, these have included Japan Inc. on a spending splurge in the United States, the rise of conglomerates, a boom in mobile communications transactions, the dot-com boom, consolidation among giant pharmaceuticals and, most recently, a boom in technology-related transactions.

As the trends come and go, one theme is consistent: the inexorable rise of the cross-border transaction. According to Thomson Reuters, cross-border M&A activity totalled $1.3trn in 2017. Although the figure is a 10% decrease on the 2016 figure, the long-term trajectory is upward in terms of deal volumes and value.

One of the upshots of the rise in international dealmaking is the growing body of data gained on the subject. The cumulative knowledge provided by thousands of these transactions informs future deals. And although the basic tenets of dealmaking are consistent across geographies, there are undoubtedly extra challenges that companies need to be aware of.

A 360-Degree View of the Target

A recurring problem in cross-border transactions is that they are framed differently to domestic transactions. Very often, instead of acquiring a company on its merits, the buyer is buying access to a new market and the growth that market promises. This subtle difference can mean that buyers often don’t know as much about the target company as they should.

In many cases – particularly in smaller deals – accurate data on the target company won’t be readily available. Everything from obtaining historical financial performance and tax returns to outstanding legal cases and contract provisions becomes more difficult as a result. In consequence,  acquiring this data is often significantly more expensive and time-consuming.

While managers can gain informal knowledge on domestic targets by virtue of being in relatively close proximity, this isn’t an option when the target is in a completely separate jurisdiction. Complete background checks on each of the target’s shareholders and managers are required so that buyers know who they’re buying into as much as what they’re buying into.

The Political and Regulatory Environment

There’s a tendency to think that political uncertainty exists only in emerging markets. US firms which have been present in the UK since its decision to leave the European Union in June 2016 would probably beg to differ. In less than two years, cross-border transaction volumes in the UK dropped to 2010 levels, thought to be as a result of the political and economic uncertainty generated by Brexit.

The regulatory environment is arguably even more important than the political. For example, calculating the achievable synergies of cutting staff at the target company can only be done by having a solid knowledge of its country’s employment regulations. The employment laws in Europe for example, where unions have a powerful voice, make staff cuts much more expensive than elsewhere, sometimes making large layoffs financially infeasible.

In fact, there are dozens of regulations that need to be understood in full before a transaction should be considered. When creating a checklist of questions, managers at acquiring companies should be asking: Which jurisdiction takes precedence? How does the tax code differ to our home country? And, what are our pensions liabilities if we acquire this company?

Communication Trumps Cultural Differences

Communication is less a factor of due diligence, and more related to the successful integration of the target company into the acquiring company’s operations. Enough has been written about the cultural gap between firms involved in cross-border transactions to fill the Library of Congress, but essentially the majority can be summarised as failures of communication.

Communication doesn’t mean bombarding the newly acquired employees with the company message.  Primarily it means asking questions through meetings, workshops, and in the case of larger acquisitions, surveys. Establishing open communications will reduce the likelihood of encountering the cultural difficulties for which cross-border M&A transactions are notorious.

Summary

At a time when domestic growth in some industries is sluggish, cross-border diversification can provide a welcome new source of revenue. Growth in the long-tail of cross-border M&A transactions shows that this realm is no longer confined to large corporations and billion-dollar deals: SMEs are also increasingly looking to reap the benefits of globalisation.

Acquiring a foreign entity is not a decision that should be taken without proper consideration. Many of the challenges that arise in acquiring a firm in the domestic market are amplified when acquiring abroad. Being cognizant of this is key to overcoming those challenges, and ultimately, to ensure a successful cross-border acquisition.

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