2017 is on track to be a record-breaking year for cross-border transactions. Acquirers proposed or announced deals with a combined total value exceeding $1.17 trillion in the first half of this year alone, according to Bloomberg BNA.
Provided this pace doesn’t hit a major snag, the total cross-border deal volume for 2017 will clock out at $2.3 trillion or more. This would exceed the 2007 record-high of $2.24 trillion.
That’s an impressive amount - until we remind ourselves which number will not be available. Once all has been said and done, how many of these international M&A transactions will actually have resulted in a successful outcome?
This will be much harder to measure. Reliable statistics are hard to come by, the failure rate of cross-border mergers and acquisitions is rumored to be somewhere between 70% and 90%.
Even if we’re more optimistic, conservative estimates still put it at more than 50%. Which begs the next question when acquiring or merging with a company abroad: What will go wrong?
Here’s my answer: Pretty much anything that can - if you don’t prepare for it.
Having led or been intimately involved with M&A acquisitions, 29 alone during my 12+ years tenure as CFO of a leading U.S.-based packaging automation manufacturer, I think I have a pretty good idea where to pay extra attention.
1. Prepare for a different legal, regulatory and compliance landscape.
In international deals, federal laws like the Foreign Corrupt Practices Act (FCPA) suddenly become more prominent. While many countries have their own anti-corruption laws, in some places it is quite common to openly get away with as much as possible without much regard to the law.
When American companies embark on an acquisition in the U.S., they go into it with the understanding that parties on both sides of the deal know the laws that apply and comply with them. The usual disclaimers about due diligence still apply.
When acquiring a business abroad, we cannot expect partners who have never even heard of FCPA or the Sarbanes-Oxley Act (SOX) or many other laws and regulations that apply to automatically comply with them.
U.S. buyers have to know what to look for and need to ensure compliance with all relevant federal laws on both sides of the deal.
2. Respect cultural differences.
Communicating and leading across cultural boundaries is a process fraught with peril. Don’t underestimate cultural differences when planning an acquisition. When the Daimler-Chrysler merger fell apart so famously in 2007, cross-cultural conflicts played a major role in its failure.
Integrating a seller who "stays on" and assumes a leadership role in the combined organization into what’s now the buyer’s business can be a challenge anywhere. Add in cultural differences, different languages and communicating across time zones, and things can get complicated very fast.
Business owners who have been their own boss for 20 or 30 years often struggle when they have to face the fact that they are no longer the sole decision maker and need approval from HQ for certain decisions.
Some seasoned leaders may feel "embarrassed" or fear losing face when they have to seek and wait for approval on decisions that they routinely used to make on their own. I cannot overstate how important it is to head off and address such issues openly and upfront to prevent avoidable surprises or frustrations on the back end.
3. Beware local labor concerns and employment laws.
In every acquisition, people are concerned about losing their jobs. They are afraid of losing benefits. They fear change.
How can we build the trust needed for a smooth transition? I’ve written before on this blog about one important aspect of building trust when doing business abroad. When acquiring a foreign business, we first focus on getting the senior leaders and key managers on board before the acquisition.
When employees see that their leaders have developed a relationship based on trust, they are more likely to go along too.
In my current company, many of our managers that come from acquired businesses go on to be our most vocal supporters and help us purchase and integrate other businesses.
In some countries, leaders who need to be involved will include unions, which frequently play a much bigger role than their counterparts in the U.S. Workers' councils, supervisory boards and other forums for employees and stakeholders who review management decisions also exert - often significant - influence.
Example Germany: Tesla founder and CEO Elon Musk learned this lesson the hard way when his company acquired the German manufacturing automation specialist Grohmann Engineering.
Terminating people can require huge severance payments. It’s also good to keep in mind that non-compete agreements are not enforceable in some countries, or "less enforceable" than we are used to in the U.S.
4. Get ready for new taxes and accounting practices.
Concepts some U.S. companies are not familiar with include the Value Added Tax (VAT) - calculated based on the increase in value of a product at each phase of its making or distribution - and Statutory Reporting requirements.
It may come as a surprise to some buyers that the financial statements of its newly acquired foreign subsidiary will become part of the public record in its home country.
In Germany, for example, most companies are required by law to submit their financial statement and management report electronically to the federal gazette, the Bundesanzeiger for publication.
In accounting, different laws may apply to the hiring of auditors. In France, for example, companies are required to hire an auditor for a 6-year period. During that period, it will be nearly impossible to change auditors.
5. Address safety concerns and consider the political climate.
If you have done business in Brazil, for example, you may have been as shocked as I was at how many people mentioned matter-of-factly how they had been held up at gunpoint.
And those were the locals. Now imagine what can (and too often does) happen to visiting business travelers whose appearance and behavior can make them stand out just enough to attract unwelcome attention.
In places like Saudi Arabia, it’s not uncommon that companies have facilities out in the desert, two or three hours from any bigger city.
Employees who visit from abroad are put up in dormitory-style structures, where they have to contend with power outages and other inconveniences.
Some refuse to go back. How can your acquisition abroad be successful if your folks from HQ don’t want to go there?
Useful Cross-Border M&A Resources
Buying and selling: Cross-border mergers and acquisitions, and the US corporate income tax [PDF] - EY Business Roundtable (2017)
Michael Gestrin: Cross-Border M&A on the Rise [PDF] - OECD Global Forum on International Investment (2017)
Successful Mergers and Acquisitions: What You Can Learn From Them - Aperian Global Blog (2016)