International mergers and acquisitions (M&As) involve one firm taking control of all or a majority share of a foreign-owned company’s stock.
By their nature, large M&A transactions are risky and may be complex. These risks and complexities can be intensified in cross-border deals. Whether it is due to language barriers, international tax laws, business culture, legal issues and intricacies, or other risk factors, caution is needed.
Here we introduce cross-border M&As and address the inherent risks and the benefits of these international transactions.
What is a cross-border M&A?
A cross-border M&A is a way for corporations to enter new, foreign markets and tap into a whole new potential customer base. Acquiring a proven brand overseas or in a foreign country or region is a less risky way to access potential growth in an international market than starting from scratch.
International M&As give firms a rapid way to diversify into new markets to offer their proven products and services. Although the numbers of cross-border M&As are reasonably consistent, the total value of deals has risen 22% to $419 billion since 2016.
The strategy can have pros and cons, including local tax laws, political environment, not to mention having to comply with a combination of domestic and international regulations.
Risks of cross border M&A
There are many potential risk areas to consider when planning an international M&A. Cross-border M&As have higher levels of built-in risk. Traditional or domestic risk assessment frameworks may not be applicable to assess cross-border deals.
The following risks account for this heightened level of alert for acquiring organizations:
- Local, regional, and international tax laws
- Sourcing the target organization’s company records and financial history
- National and regional political environment in the target organization’s country
- Target organization and its host country’s adherence to US requirements such as the US Foreign Corrupt Practices Act, plus other regulatory guidelines.
Key areas to focus on
With this in mind, due diligence teams need to be able to focus on the following areas when conducting research for potential international M&A deals:
- Deal planning is important before, during, and after a complex cross-border M&A.
- Handling negotiations and having the detail close at hand for a more proactive approach
- Assessing the prospective target market and potential fit of the target business — this involves compiling data for the cultural integration of the two organizations.
Benefits of cross border M&As
According to research by Deloitte, these areas can be managed more effectively through longer planning windows and data-enabled decision-making. These needs are more magnified with cross-border deals.
Comprehensive planning plus integration strategies are vital to ensuring cross-border mergers & acquisitions run smoothly from research to execution. To avoid the situation of aborting a deal following extensive investment, a detailed analysis of key issues is essential. These commonly fall into factors such as taxation, regulation/trust, acquisition company shareholding/investment structure, and local labor laws.
Extensive deal planning is required for successful cross-border M&A deals. This is especially true in the case of intensively regulated industries such as pharmaceutical, banking, or chemical manufacturing. In this type of deal, there is also an added layer of complexity that two sets of already complicated organizational structures would need to align to deliver results.
Well-considered cross-border deals key in on the simplification of those structures and the work that would be required for efficient alignment. Doing this early in the deal planning process means that administrative costs can be kept to a minimum post-acquisition. It also helps the acquiring firm to plan for local licensing requirements and stakeholder engagement. A good deal-room tool enables this information to be shared efficiently between the key stakeholders to make this happen.
Cross-border deals are commonplace in large enterprises. They allow corporations to diversify portfolios and operate incompatible regulatory environments. A cross-border acquisition also enables firms to develop cost and scale efficiencies.
These benefits can be applied across the business in other areas such as talent acquisition, new language capabilities, additional production capacity, and product portfolio expansion.
To plan all these factors in detail on a corporate level requires intricate and rigorous deal planning. Cross-border acquisitions & mergers involve multiple stakeholders working in a highly regulated environment. The need for robust security and audit compliance is extremely high. International M&As can be extremely lucrative or become costly mistakes, so even greater levels of due diligence are essential to mitigate the risk.