Cross-border M&A activity has increased over the past decade and the economic crises have done little to disrupt the trend. Businesses embarking upon a cross-border merger or acquisition will still face significant challenges, but there are steps buyers and sellers can take to maximize success.
Cross-border deals were once more common between European and US businesses, however, this is waning alongside the growing appetite to move into emerging markets.
Of course, China is becoming involved in cross-border M&A in a big way and the government is keen to present itself as an attractive option to foreign companies and investors. Other markets in Asia and in Latin America are also opening themselves up as lucrative hosts for M&A activity whilst businesses in developed nations are increasingly turning to these relatively low-cost M&A options in emerging markets as a way to stimulate growth.
Although the geography of the activity has shifted somewhat, the reasons businesses go cross-border hasn’t changed.
Cross-border M&A usually takes place for the following reasons:
• Businesses want to increase their overall scale, synergies or cross-selling opportunities
• They want to move into new markets, with new customers and new trade channels
• Companies are keen to remove a competitor or integrate a competitor to expand
• They want to take on talented new management, brands or technology
Although there are obvious advantages to cross-border M&A, it does not come without its challenges, which are numerous and usually fall into one of two categories: cultural and legal.
Cultural Challenges
Firms that attempt to merge with, or take over, foreign businesses without ensuring they are aware of the idiosyncrasies of their particular working culture, could be setting themselves up for a fall. Even among English-speaking nations, huge cultural differences exist within the workplace in many areas, including human resources, performance expectations, communication and office environments.
Employee disengagement can arise if the buying company fails to grasp the local reward structures, practices, processes and ethics. According to a report by culture and communication skills consultancy, Communicaid, 40 per cent of corporate revenue is spent on human resources and a large percentage of managers leave their roles soon after a merger or acquisition. This suggests that businesses can benefit hugely from investing time, money and effort into ensuring they are aware of the local working culture to help their new staff adapt – and indeed to adapt around their new staff.
Legal Challenges
Although increasing globalization means deals that would never have occurred two decades ago are now commonplace, buyers and sellers should not overlook the regulatory challenges they are likely to face when merging with or acquiring a foreign company.
Regulations in areas of security, competition and corporate law are bound to differ greatly between countries – particularly when doing deals with businesses based in emerging economies. The political environment should be taken into account of course, and markets should also be reviewed in terms of their approach to antitrust legislation, employment regulations and contractual obligations before deals are considered.
Some prospective dealmakers will find that the differing approaches to these matters in foreign countries simply make a merger or acquisition impossible where industry regulations are widely incompatible.
Increase Chances of Success with Advance Planning and Due Diligence
Analysts at O’Melveny & Myers LLP claim that there are a number of steps M&A dealmakers can take to maximize the changes of their cross-border deal succeeding. Many of these are simply based around carrying out thorough and well-managed due diligence to uncover any danger areas. They also urge businesses to undertake a detailed review of the target business and market to ensure they understand how the deal will be conducted and legislated for in the target country.
Experience is a key advantage in cross-border deal making and businesses need to present themselves as buyers that will complete a deal cleanly and quickly to minimize the chances of sellers pulling out.
About Merrill DataSite
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