Cross-Border M&A

In a global economy, cross-border M&A is an important strategic instrument for corporate growth. The rapid rise in cross-border M&A from the mid-1990s onwards can be traced back to a number of factors, such as the liberalisation of trade and investment, the deregulation of services, the privatisation of state-owned enterprises and the relaxation of state controls. Cross-border M&A is thus the logical consequence of companies' internationalisation strategies and is used, among other things, to enter new markets quickly around the world. Companies pursuing a cross-border M&A strategy should always weigh up its advantages and disadvantages against greenfield investments (setting up a new company in the new market).

Contents

• What are the advantages of cross-border M&A for companies?
• What needs to be considered in cross-border M&A? – Phases of the international M&A process
• What role do strategic partners play in cross-border M&A?
• Conclusion and advice on cross-border M&A

What are the advantages of cross-border M&A for companies?

Portfolio diversification

As with a share portfolio, companies should try to diversify their sources of income, both in terms of products and geographically. One idea behind this approach is that entering several markets generally yields higher returns on average and reduces dependence on a single market.

Cost synergies

Cost synergies are an important element of the overall synergy effects and an essential result of the integration of the two companies.

Cost synergies are accordingly found above all in the following areas:

• Pooling of administrative resources
• Standardisation of IT infrastructure (e.g. a uniform SAP or CRM system)
• Pooling of purchasing volumes
• Savings on maintenance and other investments
• Outsourcing and centralisation of certain service functions such as payroll accounting, IT helpdesk and recruiting in a separate (legal) unit ("shared services")
• Increase in productivity

Economies of scale

Similar to cost synergies, cross-border M&A usually brings advantages through economies of scale, as additional customers and better allocation of resources reduce unit costs and increase profits.

Intellectual property

The cross-border acquisition of patented technologies can significantly strengthen a company's market position in its home market.

New market

A new market offers a wide range of new opportunities and new customers. Acquiring a company already established in the market not only simplifies access to the new market but, in addition to its existing customers, usually also brings culturally specific know-how about that market.

Access to new talent

It is often easier and more cost-efficient to acquire processes and talent that already work across borders than to build or train them from scratch. The risk involved in integrating processes should not be underestimated, however; if it is ignored, an advantage can quickly become a disadvantage.

Distribution

Although it is generally possible to enter new markets without cross-border M&A, practice has shown that networks as strong as those local companies usually already have can only be built with considerable effort, cost and risk.

Production capacity

Building production capacity is costly and, more importantly, time-consuming. A sudden increase in demand can mean that orders cannot be fulfilled and are lost to competitors. Acquiring capacity across borders not only makes it possible to meet demand but often also reduces production costs.

Tax structuring

Tax structuring also plays a decisive role in financial success. International sources of income or a relocation of the registered office can lead to a considerable tax advantage.

What needs to be considered in cross-border M&A? – Phases of the international M&A process

1. Cross-border M&A as a strategic decision in corporate development

For strategic decision-making in corporate development, the SWOT analysis can be used, for example, which is based on internal strengths and weaknesses combined with an assessment of external opportunities and threats. This resource-based approach has the advantage of being logically coherent, and its results and findings can be communicated relatively easily between internal decision-makers and other stakeholders. An important part of the SWOT analysis is the focus on the most important factors for the planned transaction, whether access to foreign markets, resources, management or technical knowledge, or a combination of these.

2. Preparation and selection of the M&A candidate(s)

Once the decision has been made to pursue a cross-border M&A strategy, one or more candidates are identified, depending on the intended degree of operational integration and the strategic fit sought with the company's current business and overall international strategy. Assumptions made during the strategic planning phase often prove to be wrong only later, in the post-cross-border-M&A integration process. In most cases the strategic focus is given disproportionate weight, while essential factors such as interpersonal, inter-organisational and intercultural friction are overlooked. It is often forgotten that differences in corporate culture between the two companies, as well as the institutional and cultural distance between the companies' home countries, have a strong influence on cross-border M&A. The more intensive the intended integration, the greater the focus on cultural differences must be, and the more important coordinated preparation becomes.

3. Due diligence, valuation and strategic decision

In order to identify suitable acquisition targets and to negotiate and complete the transaction effectively, a thorough due diligence process is required. In cross-border acquisitions this means examining the target company's registered office, facilities and assets. The value of intangible assets must also be determined, for example trademarks, patents, certificates, IT systems, management processes, knowledge and competences. Due diligence is the best opportunity for the acquiring company to find out as much as possible about the target company (e.g. its management style and strategy, internal atmosphere and corporate culture, strategic knowledge and potential future developments). The information obtained is then used to plan the measures required after the takeover in order to enable the subsequent integration.

This process can, however, become very complex in cross-border M&A where psychological, cultural and linguistic differences are significant. Even in a friendly due diligence, the necessary reviews and the gathering of information can then become very complex.

4. Challenges during the negotiation process

Once the target company has been selected and the initial due diligence has been completed, the negotiations on the purchase price usually begin in order to close the deal. Although intercultural and interpersonal skills also matter here, the main focus in this phase lies more on the numerical valuation and the logistics of the financial transaction, while communication with the shareholders of both companies, the press and the management teams also plays a significant role.

5. Post-cross-border M&A integration

Most studies agree that cross-border M&A runs into difficulties because of errors in the integration process, and it has been shown that the human factor plays a decisive role. The leadership and working style and the mindset of managers and employees, individually as well as collectively in groups and departments, usually influence the dynamics, efficiency, working atmosphere and above all the likelihood of success in the post-merger context more strongly than expected.

What role do strategic partners play in cross-border M&A?

The mere fact that a company is for sale makes it interesting in principle, but the far more important question is always whether the company for sale is also suitable as a strategic partner. This usually depends on certain factors that the strategic partner brings with it (e.g. additional business areas, know-how, capacity, capital, market access, innovative new products or sales strength) and on whether the acquiring company needs them. Besides the opportunities, the risks should always be analysed and taken into account. In cross-border M&A, three forms of risk are essentially relevant:

Unequal institutional frameworks

Different institutional structures in the countries concerned and their influence on companies increase the complexity of cross-border M&A. Differences in the institutional environment result from diverging accounting standards, legal provisions, tax regulations and value systems. During due diligence, considerable difficulties can arise because operations and assets are valued differently. The influence of the government on the national economy and its attitude towards foreign investors also play a decisive role. Certain sectors, e.g. the defence industry or press and broadcasting, are usually regulated for foreign investors for reasons of national security alone. National competition authorities can also prevent an intended M&A transaction if the acquiring company would achieve a quasi-monopoly position in the market through the transaction, which would distort competition. Tax competition between countries is also considered a determining factor. Low taxes can attract foreign direct investment, especially from companies in high-tax countries. On the other hand, there is also a risk that tax law favours domestic over foreign companies by granting domestic companies tax credits and special depreciation. Apart from regulation, institutional investor protection is also of decisive importance for a cross-border M&A decision.

Different cultures

Different cultures undoubtedly pose considerable barriers to integration and cooperation within a company. Employees often perceive the influence of unfamiliar cultural factors as disruptive and reject it. The negative effects usually only become apparent after a longer period and are therefore also referred to as "hidden costs".

Poor performance of cross-border M&A

When measuring performance, it is advisable not to base the evaluation of M&A performance on share prices alone. While shareholders of the acquired company see a positive increase in value in the short term, investors in the acquiring company usually have to accept a fall in the share price. The long-term success of the company (which uses the share price only secondarily as an indicator of performance) is, however, usually what matters most. The reasons for poor performance or failure may include insufficient knowledge of the target, an excessive purchase price, an unrealistic assessment of synergy potential or poor integration of the target company. It usually takes years before the success of a cross-border M&A can be assessed and before the integration and the realisation of synergies are reflected in the company's earnings and valuation.

Conclusion and advice on cross-border M&A

Efficient and targeted execution of each individual phase of the cross-border M&A process (search, planning, analysis, valuation, negotiation, development and integration) is an essential factor which, viewed as a whole, makes the difference between failure and a meaningful and profitable partnership. GEMS Schindhelm advises companies on the legal aspects of cross-border M&A transactions involving Türkiye; for questions of foreign law, coordination takes place with the country offices of the Schindhelm Alliance.

For legal advice on cross-border M&A in an individual case, please contact our office.

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