Cross-border M&A: Rewards, Risks and Integrated Transaction Management
Globalisation has become an integral part of the economy. The results are tougher competition, increasing cost pressure and the associated need to adapt the established processes at a multinational level. Today, this applies to multinational companies as well as to medium-sized companies.
As a mechanism for fostering growth and increasing shareholder value, M&A is an important tool. In particular, cross-border mergers and acquisitions (M&A) can be a useful springboard for those eyeing expansion and future prosperity. Cross-border M&A has emerged to quickly gain access to new markets and customers. Cross-border deal activity continues and companies will need to weigh the risks and rewards of engaging in these ventures against making greenfield investments.
Advantages of cross-border M&A include expediting time to market, gaining access, scale, brand recognition and mitigating competitive moves. At the same time, companies are acknowledging the challenges posed by cross-border deals in terms of market assessment, regulatory evaluation, cultural fit and deal structure evaluation.
M&A market development and forecast
Based on international data*, global M&A activity in 2019 was down 6.9% compared with 2018 (which was a historical high), but still above 2016 and 2017 levels. Cross-border transactions have been reduced in the same time period by 6.2%. Taking a deeper look in the different regions of the world, transactions developed in different ways. While APAC and Europe report a significant downturn, MEA, Japan and Latin America report an increase. Also, Inbound and Outbound transactions evolve in different ways.
Figure 1 - M&A Market Datasource*: Baker McKenzie, Mergermarket, Deloitte - own illustration
M&A professionals expect that global deal-making will experience a continued hangover in 2020 due to ongoing worldwide economic uncertainty and the risk of a global recession. The deal flow in the next years will be mainly driven by technology, market consolidation, investor activism and private equity.
However, acquisitions do remain an important growth strategy for companies worldwide. It’s expected that economic conditions will improve by sometime in 2021 and the forecast predicts a subsequent uptick in transaction activity – especially in cross-border transactions.
The rewards of cross-border M&A
Several drivers create a considerable business case for cross-border M&A transactions. Saturation or slowdown in core markets and the need for diversification are the primary drivers. But regulatory uncertainty in home markets and high repatriation costs of overseas earnings, technology and productivity enhancement synergies are important drivers as well.
Based on these general considerations, companies take the extra effort of cross-border M&A transactions only if they can achieve substantial rewards from the specific target. Historically, the most important reward was to diversify the revenue streams of companies; either in product diversification or geographic diversification (portfolio diversification). At the same time, a regulatory environment which ensures investment protection or generates substantial tax benefits is a meaningful reward which can be realised (favourable regulatory environment).
By entering a new market through acquisition, companies can aid cost efficiencies if it increases sales (cost synergies). Besides costs, new markets create access to new customers and allow to scale fast (scale efficiencies), whilst besides these key rewards, companies can realise other rewards like access to new talents, adding new distribution networks or securing new product technologies.
The risks of cross-border M&A
Like with every strategic decision, rewards come with some specific risks. Due to the fact that every country has different tax laws, tax is a considerable risk. At first glance, getting tax security seems tedious, but getting blindsided by tax regulations can be very costly (tax). Besides tax regulations, other countries have different regulations for products, operational management, human resources, etc. This risk enforces a detailed analysis of the regulatory landscape of the target. A country’s political stability can also begin to totter, especially in the case of a change in Government; not only for developing countries but also for mature states (political landscape). In addition to “hard” facts, differences in culture and talent should not be forgotten.
Due to these risks, acquiring companies may have to recalibrate their perceptions of risk and their traditional due diligence process to address both common and unique risk factors that accompany cross-border M&A transactions. The deal team will need to focus on common risk factors such as national and regional tax laws, availability, accuracy and reliability of the target, company’s financial information, the country’s political stability and the target’s compliance with the required regulations.
Integrated M&A Maturity Model for efficient cross-border M&A deals
The complexity of cross-border M&A forces companies to establish efficient structures and processes. With integrated M&A transaction management, all necessary components for a successful transaction can be bundled. This approach ensures that all necessary experiences in merger & acquisition projects in terms of integrated control tools, project management tools and more are in place. With M&A 4.0 oriented platforms and tools it´s possible to increase process and cost efficiency, transaction security and the speed of the transaction.
Executive summary for cross-border M&A
Companies can generate significant rewards in cross-border M&A and increase their corporate value. Executives should plan ahead, conduct thorough due diligence and closely manage pre- and post-deal execution.
Below are some leading practices, based on the experiences of several M&A deals:
- Establish a sound M&A organisation through an integrated M&A maturity model.
- Ensure that the deal objectives/rewards are known and managed in all phases of the M&A lifecycle.
- Integrate all due diligence activities and manage the specific cross-border risk proactively.
- Optimise the deal structure to meet the deal objectives/rewards.
- Define the overall integration scope, approach and plan for achieving both day 1 and end-state goals.
About ARTEMIS Group and the Author
ARTEMIS Group is an international and cross-sector corporate finance and M&A consulting boutique for start-ups and medium-sized companies, active in the market since 2001. The core services cover mergers & acquisitions, corporate finance and advisory services. Based on a wide strategic partner network, ARTEMIS Group has a footprint in all relevant markets.
Torsten Adam, Managing Partner at ARTEMIS Group, has more than 25 years of work experience in mergers & acquisitions, corporate finance and advisory services. His core competencies are in the M&A transaction management, cross-border projects, structured and project finance as well as advisory services. He has been involved in numerous projects in the fields of automation & digitalisation, renewable energies & cleantech, agriculture & food and FinTech/financial services. Adam has overseen various cross-border M&A transactions with involvement from Asia, Africa, the Americas and Europe.