Smith Holland M&A Resources
Navigating complex cross-border M&A transaction risks and opportunities.
In today’s world of globalization and interconnectivity, borders that divide our countries are disappearing for businesses. Gaining access to new markets, products, customers and technology has never been easier for companies looking to expand. As businesses grow, cross-border mergers and acquisitions (M&A) have emerged as a global trend that continues to surge. While these M&A deals allow companies to quickly enter new markets around the world, this strategy includes both opportunities and risks that need to be considered before entering into cross-border M&A transactions.
Cross Border M&A
There are many studies and articles regarding cross-border M&A transactions but they all have one common theme, growth. With technology today, global markets are becoming easier to access and therefore, bringing tremendous value to companies looking to expand. The most fascinating figures involve the size of cross-border M&A deals compared to volume of transactions year over year (YOY). Data shows that the size of these deals have increased exponentially whereas the number of transactions has remained stagnant. As a result, this illustration demonstrates how businesses are searching for international expansion and prepared to pay more money to access those growing markets around the world.
Opportunities of Cross-Border M&A
It goes without saying, there are numerous opportunities of cross-border M&A deals. While there are more details involved with international transactions, data reveals that the benefits outweigh the inconveniences. Of course, cross-border M&A deals require more time and money but opportunities such as portfolio diversification, regulatory environment and new customers are among the main advantages of deciding whether or not to pursue an international M&A transaction.
The number one reason companies consider cross-border M&A deals is portfolio diversification. The common idiom, “Don’t put all your eggs in one basket” simply means you risk losing everything by focusing on only one goal or option. It is wise to diversify your investments and that goes for businesses as well. Cross-border M&A transactions allow companies to hedge themselves by adding additional revenue streams through product and geographical diversification.
Favorable regulatory environment, cost synergies and scale efficiencies are among the next top opportunities businesses consider when evaluating cross-border M&A deals. Countries are not all created equal and that goes for regulatory environment as well. Some markets are more heavily regulated and others not as much, this can be an advantage to companies paying attention. Cost synergies and scale efficiencies allow businesses to reach higher capacity quicker and with less cost through cross-border M&A deals vs setting up shop from scratch. Companies are able to reach new customers much faster and more efficiently, which can provide valuable cost benefit analysis if done correctly.
Intellectual property is another important reason. If a competing business has a corporate advantage through registered patents or technological innovations, a cross-border M&A deal gives another company the ability to purchase that technology or those patents cheaper than research and development costs in the long run.
The access to new markets and new talent are some of the most logical reasons business owners contemplate a cross-border M&A deal. The immediate saturation of a new market with new customers gives companies instantaneous expansion of revenue streams and sales revenues. With the access to new talent, businesses also gain the advantage of experience and local skill set which may be much less expensive when compared to training new employees.
Other opportunities that companies benefit from when considering a cross-border M&A deal are distribution networks, production capacity and tax structuring. A business can have a great local distribution network but a new market can be complicated when trying to figure out logistics abroad. Acquiring a company in another country that already has an established distribution network in place may be less costly than building new. Entering a foreign market means new customers with increased orders and products. Without proper production capacity in place, customer orders can be shipped late or become unfulfilled and disappointed or angry customers is not the best way to introduce your business in a new market. Not to be overlooked, tax structuring can be the difference in millions of dollars when taking into consideration international sales revenues or transferring a headquarters to another country.
Risks of Cross-Border M&A
With every opportunity there are risks involved. Although cross-border M&A deals can be very lucrative for most companies, there are of course risks that need to be highlighted before entering an international transaction. The most common risks include tax law, regulatory landscape, political stability and financial information.
Tax law, regulatory landscape, compliance and political stability are the top risks to consider on cross-border M&A deals. As stated earlier, not all countries are created equal and that goes for taxes as well. Tax laws, regulatory landscape and compliance are ever changing and may not stay the same. Complex and confusing international laws and even political changes in governments are all details to consider when investing in another country abroad. What is profitable now could easily change and due diligence in these areas should be not taken lightly.
Financial information, culture and talent can also be risky. Geographical culture and talent can be diverse in another country so having a local manager in place to take care of human resource issues are important. Even with local managers in place, cultural priorities can change for the better or worst. International financial information can be more difficult to verify or assess and often times, cross-border M&A valuations are based off misleading data.
Cross-border M&A deals are growing YOY and access to new international markets generate enormous value for companies looking to expand globally. There are numerous opportunities which allow businesses to diversify their portfolio and increase scaling efficiencies, but financial and regulatory risks need to be taken into consideration with every cross-border M&A transaction. Since cross-border M&A deals can be complicated, especially during due diligence, it is imperative to have an experienced middle market mergers and acquisitions firm on your side to increase the probability of a successful closing. While cross-border M&A deals can be very lucrative, not hiring an expert M&A advisor that has been through the international deal life cycle could end up costing you more than you gain.
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