For many companies looking to expanded globally, identifying the right opportunity appears to be the most difficult task according to “Navigating the Risks of the Contemporary M&A Market,” a report on the 2016 strategic buyer survey conducted by the Financial Executives Research Foundation (FERF) in collaboration with Crowe Horwath LLP.
The survey respondents were queried about their cross-border mergers and acquisitions (M&A) experience. Based on input from the respondents with international experience, going beyond their comfort zone to find the right target to acquire was deemed to be the most difficult pre-deal closing task. The survey sponsors convened an international panel from four continents outside of North America to gather insights on the survey responses.
Risks for American acquirers
The panel noted an additional challenge in cross-border acquisitions – even if a company provides the best offer, it may not be selected when alternative buyers come from more highly regarded countries. For a prospective acquirer, knowing how its company will be perceived based on its headquarters location can help avoid running unwinnable races. While an American company might assume that it has an equal or higher chance to close a deal, the desire of some companies to avoid being managed by a perceived hard-driving American mentality may actually be a disadvantage to the American acquirer.
Restrictions on foreign ownership are a further hurdle to expanding globally. In many countries, certain acquisitions require foreign investment approvals, which can be time-consuming and introduce uncertainty into the deal process. This can place overseas buyers at a disadvantage to domestic suitors, particularly in sensitive industries such as defense, resources, and agribusiness, where there is a greater risk that a company will be found to be “not in the national interest.”
Know the environment
For companies without an existing presence in a desired growth region, the difficulty of finding a local target is often compounded by having limited knowledge of the market dynamics and competitive environment. Spending time in a jurisdiction to understand the culture and environment can help support relationship building; this can be especially important in a region with a high-context culture where nonverbal messages are the object of heightened focus. A company may find itself in an unfavorable position if regional nuances are not known and practiced.
The risk of not presenting oneself as experienced in the local culture was also ranked highly by the survey respondents. The international panel confirmed that understanding the culture in target countries is critical for transaction success. Consumer habits and business mindset should be deeply investigated before spending time and energy on a deal opportunity in a foreign country. The deal strategy should include an assessment of the ability and cost to adapt products to local tastes.
Post-close execution, the key to M&A success
Once a deal target has been identified and the deal consummated, the really hard work starts. Ranking their top three risks, the survey respondents selected “adapting sales and marketing efforts to the target country’s culture” as one of their top three risks almost 60 percent of the time.
Sales and marketing tactics can vary significantly by jurisdiction depending on the country’s culture and regional advertising laws. Understanding the culture, competitive environment, and advertising laws can help to more swiftly adapt to effective sales and marketing techniques. At an initial stage, the appointment of in-region branding and marketing advisers may help ease the transition.
The international panel commented that synergy capture is much more difficult in a cross-border deal due to the need to adapt sales and marketing strategies, language differences, and cultural nuances.
Workforce restructuring
Restructuring of workforce was the second-most frequent risk to deal success selected by respondents, with workers’ involvement, timelines, and costs being surprises to first-time acquirers. Many Western European countries have protective labor laws. For instance, in some countries, it is necessary for the target company to inform and consult its works council before signing the deal.
Respondent demographics
The survey examines insights on the risks inherent in contemporary M&A execution from 180 senior finance professionals from public, private, and not-for-profit domestic and international organizations.
To learn more about the biggest risks faced by companies pursuing a deal, download the study “Navigating the Risks of the Contemporary M&A Market” today.