How to Navigate the Challenges of Cross-Border M&A
Cross-border M&A volume has increased significantly over the past decade in parallel with an overall globalization trend that has seen the maturation of a number of emerging markets. Although the current financial crisis has stalled global M&A activity recently, the crisis may prove to be an inflection point that ushers in a new spate of cross-border deals.
North American and European companies have historically been the most active cross-border buyers, and while companies based in these regions will continue to look across national boundaries for acquisition targets, the next wave of cross-border M&A may be led out of Asia. Chinese companies, in particular, are well-positioned for cross-border acquisitions. Relative to their overseas peers, Chinese corporates are well-capitalized with strong balance sheets and cash reserves.
Many have honed their cost structure through intense domestic competition and refined their corporate strategies to incorporate Western management techniques, in many cases hiring foreign executives. Chinese companies also have the general support of the Chinese government through a "going out" policy that encourages overseas investment. This policy manifested itself most recently through the issuance of new regulations that will make it easier for Chinese buyers to obtain acquisition financing from Chinese banks. For their part, the leading Chinese financial institutions are now large, outwardly-focused and well-capitalized with considerably less exposure to leverage issues than many North American and European banks. Perhaps most importantly, many Chinese buyers have developed an appetite for, and some experience with, cross-border M&A as a result of deals — some successful, some not — during the past several years. The combination of these factors makes China a likely engine for post-crisis cross-border M&A growth. Regardless, the current environment has set the stage for a new wave of cross-border M&A activity.
Why Go Cross-Border?
The rationale that underpins cross-border M&A hasn't changed. Buyers still look to such deals to tap new markets, new customers and new channels; to obtain new technology and brands; to access experienced management; to increase overall scale; to diversify geographically and otherwise; to remove a competitor or potential competitor; to vertically integrate; and to capture synergies from cost-cutting, enhanced purchasing power and cross-selling opportunities. But the current environment has added fuel to the fire — sellers are generally more distressed and therefore more inclined to work with foreign buyers, there is less competition from buyers in the seller's home country, and, most importantly, prices have fallen to attractive levels. Opportunistic buyers are already taking advantage of market dislocations to acquire assets in particular industries — commodities and infrastructure, for example — at historically low valuations.
Despite the rosier environment for foreign buyers, the challenges they face remain considerable. By necessity, cross-border acquisitions implicate multiple legal and regulatory regimes, which in turn require compliance with different rules. Some of those rules may be unique to a jurisdiction or may be incompatible with each other, including with respect to fiduciary duties, securities laws requirements and deal structures. For example, some jurisdictions follow a statutory merger paradigm, while others follow court-mandated schemes of arrangement, and nearly every jurisdiction has its own stock exchange rules, securities laws and corporate law statutes. Political considerations, such as competing national security interests as well as differing policies on foreign investment, antitrust, and labor and employment priorities, further complicate M&A deals and may result in conflicting requirements. Moreover, overseas protectionism and xenophobia compound execution and integration challenges that already make M&A difficult. Cultural differences and the lack of local knowledge to operate in foreign markets and retain local talent decrease the likelihood of success. Inexperience with cross-border investments generally, and with integrating foreign businesses specifically, further decreases the likelihood of success. It is not surprising, then, that a number of recent cross-border deals have failed with notable bad press, highlighting that the repercussions of a failed cross-border acquisition could be considerably worse for the foreign buyer than those of a missed cross-border opportunity.
Improving Chances for Success
How can a foreign buyer improve the likelihood of success for its cross-border deals? With respect to deal execution, the buyer should understand the seller's goals, even if the buyer cannot accommodate each of them. All sellers prefer a fast, easy and non-disruptive process, with certainty of closing once the deal is signed, with as much purchase price paid up front in cash, and with limited post-closing obligations. A foreign buyer can enhance its attractiveness to a seller through advanced planning and by presenting itself as an experienced buyer with the ability to complete complex cross-border acquisitions quickly and cleanly. A foreign buyer therefore needs to fully understand how the M&A process will be conducted in the seller's home country and should retain sophisticated international advisers to help navigate it through the process.
Advanced planning and a detailed review of the target will also help to increase the likelihood that the deal will be successful after closing. Careful due diligence should reveal danger areas that will require post-closing attention, especially if the target business is a carve-out of a larger business of the seller. Due diligence will also help the buyer to better understand the financial statements of the target business, assess its working capital needs, identify cash trapped in offshore subsidiaries, reconcile accounting differences, and facilitate preparation of combined financials. Lawyers, bankers, accountants and other advisors are critical to the due diligence process.
In addition, the foreign buyer should, as early as possible:
- develop working relationships with regulatory authorities in its home country and obtain "outbound" approvals,
- thoroughly understand the regulatory environment of the target's home country (including "inbound" foreign investment rules, securities laws and disclosure obligations), and reconcile it to the requirements of the regulatory regime in its home country,
- give careful thought to potential deal structures in order to anticipate issues, including tax issues and antitrust considerations,
- involve financing sources early in the process, if acquisition financing will be needed,
- consider collaboration with target management, private equity groups, and other partners, and
- develop a public relations strategy and, in certain circumstances, retain a public relations firm to manage public opinion for particularly sensitive transactions.
Integration Plan
Foreign buyers should also conceive a well-thought out integration plan that is sensitive to cultural issues and local practice and that involves and incentivizes local management. As part of the development of the integration plan, the foreign buyer must work to thoroughly understand the local market as well as the relevant stakeholders in the target business, including government and regulatory authorities, employees, suppliers, customers and the local community.
Successfully completing cross-border M&A transactions has never been easy, and it is even more difficult under current economic, geopolitical and financial market conditions. Nevertheless, cross-border M&A activity will continue to increase as buyers and sellers become more comfortable and experienced at working through the issues that have traditionally made such deals complicated and risky, and the global financial crisis will likely accelerate this process by enticing foreign buyers with discount prices. For a number of reasons, Chinese companies, in particular, may lead this next wave of cross-border deals, and, with careful advanced planning, they and other foreign buyers can mitigate the risks and challenges for cross-border acquisitions and improve the likelihood of success.
This article was written by Eric Zabinski and Douglas Freeman, partners and Xiao Jiang, counsel, O'Melveny & Myers LLP and originally appeared in The Deal. |
