All About Cross-Border M&As
By Mona Pearl
Editor’s Note: This article includes excerpts from Grow Globally: Opportunities for Your Middle-Market Company Around the World. Copyright 2011 by Mona Pearl. Reprinted with permission of John Wiley & Sons Inc.
The global recession, technological advancement, and globalization have fueled mergers and acquisitions at home and abroad. Prices are down, technology and innovation are on the rise, and conducting business without borders increases the number of potential customers exponentially. Some companies, faced with continued pressure to grow profits and the added benefit of cash on the balance sheet, see these deals as virtually mandatory. Executives and deal makers across the globe surveyed by Accenture, with results published in “Cross-Border M&A: Handle With Care,” estimate that 20 percent of projected future growth will come from acquisitions. Not surprisingly, the same Accenture survey revealed that the majority of respondents expect their next M&A deal to be a cross-border transaction. However, this research also shows that companies find these deals substantially more difficult than domestic acquisitions.
Managing cultural differences, integrating across borders, and establishing a clear organizational structure and lines of responsibility are cited by survey respondents as particularly difficult yet critical to the success of cross-border deals. Difficult or not, it is clear that global M&A is no longer just an option to ponder — it is part of the new reality.
Why Consider Cross-Border M&A?
U.S-based businesses are being acquired by foreign investors, and that brings global competition to your doorstep. It is no longer a choice whether to participate in cross-border business. It is buy or be bought. Engage or be engaged. U.S.-based business leaders can’t ignore opportunities abroad any more than foreign investors can ignore the opportunities in the United States. But the long-term success of M&A depends on strong leadership, a forward-thinking mind-set, thorough due diligence, cultural awareness, and a well-planned post-merger integration process.
Each step is critical to getting it right the first time. When done right, the advantages are numerous.
Advantages Of Global M&A
Companies choose M&A for a variety of strategic reasons: to obtain new technology, new brands, complementary products; to gain access to experienced management/workforce; to exert control over the supply chain; to gain economies of scale; improve distribution channels; or to remove a competitor. Plus, it is a relatively safe and economical strategy when compared to other expansion options, when executed correctly.
Another significant advantage is the built-in customer base that flows naturally with the purchase of a popular brand. For some domestic businesses, M&A abroad may represent the only tangible option for growing market share in a slumped domestic economy.
In the first decade of the 21st century, global M&A activity has increased substantially as this business model is a natural progression for businesses gaining experience and confidence abroad. The current global crisis is further fueling cross-border M&A with sellers generally more distressed and, therefore, more inclined to work with foreign buyers. Also, there is less competition from buyers in the seller’s home country even with prices falling to attractive levels.
When contrasted to building a business abroad from scratch, consider these important benefits of expanding through M&A:
* An existing, successful business is already functioning and properly set up and may require only minor changes to continue successfully.
* The workforce of the business will already be in place and well organized. The buyer just needs to develop a relationship with the workforce and discover what motivates them.
* Marketing initiatives and contacts will be firmly established.
* The customer base and revenue stream will also be set up.
* A well-developed company can ease access to capital if it has a sound business plan and available cash flow.
So Where Do Things Go Wrong?
Cultural disconnects are among the leading causes of failed mergers, which then leads to major losses and can be one fundamental that can make or break the deal. How does a company determine what’s important/material? A company needs to understand the business strategy and how to run it in the target country; how the strategy is implemented and how its key stakeholders are related to the strategy — customers and markets, products, vendors, employees (operational, technical/engineering, etc.).
Pursuing expansion and growth in the global market through M&A requires an entirely new perspective and understanding of due diligence and risk assessment, and that’s proving to be a significant obstacle for most U.S. businesses. Acquiring or merging with a foreign company necessitates due diligence that extends way beyond financial numbers and reaching agreeable terms. Rather, the critical (and often overlooked) aspects of any due diligence process should be strategic and cultural in nature. These are the issues that are more likely to cause real problems than numbers alone. Long-term success of an M&A deal is equally dependent upon dealing effectively with differences in corporate cultures; maintaining employee, stakeholder, and customer loyalty in a foreign company; and gaining a workable understanding of that company’s human and business values. Due diligence is much more than making sure the numbers work.
Unfortunately, the majority of due diligence, fact finding, risk assessment, and investigative resources are focused solely on fundamental “hard” challenges such as infrastructure, EBIDTA, and ROI. However, more than 80 percent of the real risks associated with international M&A are derived from “soft” challenges. Soft challenges originate from cultural differences, corporate transparency, and systems of doing business in a new country such as legal, labor, accounting, and cultural integration issues. Understanding the corporate culture along with the culture of the country or region plays a crucial role in securing the long-term success of any M&A deal. While profits, EBIDTA, and ROI are important matters, these considerations represent just the tip of the iceberg — the visible tip.
Culture Beats Strategy: The Perils Of Culture, Language And Distance
In many cross-border M&A deals, the effort involved in cultural integration proves more difficult and just takes longer than expected. Part of the problem stems from the strictures of “political correctness,” which discourage any overt references to national differences out of a fear of creating offense. Other problems arise from a lack of understanding of the basic rules that govern how business is conducted in different cultures. For example, when working with Japanese colleagues, anyone who fails to understand the importance of maintaining the appearance of harmony and agreement (even when neither actually exists) risks creating serious discomfort among coworkers or causing offense at meetings with behavior that would otherwise be viewed as perfectly acceptable.
Plan With The End In Mind
Too often, the real difficulties and challenges of M&A surface months after deals are signed. Then, the tough questions that should have been addressed in the front-end due diligence process start flowing. For example:
* How will this newly acquired enterprise be integrated into the existing company?
* Will it operate independently or as a department?
* How will the integration be made smooth and seamless?
* How will the acquiring company deal with duplicate departments, systems, vendors?
* How will the new business be operated the day after that deal was sealed?
* Will this organization structure produce loyalty?
* Will the employees and managers stay?
* What will the local reaction be to any proposed changes?
* What is the new competitive landscape?
The answers to these questions and many others come from gathering the right information through due diligence in a cultural context, and having a strategic plan, i.e., how will the company operate in the new structure from day one? Companies need to look internally at their strengths and weaknesses in relation to their action plans. That means evaluating corporate resources, manpower, internal knowledge, and their own culture (perception, loyalty, motivation) before determining whether expansion opportunities are viable and warrant penetration into new markets.
Yardsticks To Success
While the art of cross-border post-merger integration is still evolving, there are two best practices that can be distilled from observing the most successful deal practitioners:
1. Set clear expectations, and invest in high-quality, two-way communication.
2. Acknowledge cultural differences but simultaneously create a common corporate culture with a single goal: achieving high performance.
3. Be humble. The brash, pushy approach of the rugged U.S. businessperson won’t work in the global arena.
4. Educate your team on cross-cultural communication.
5. Ask for help. Seek guidance from an experienced, “hands on” international business expert — someone who thoroughly understands how to plan your global expansion and growth and help you avoid the landmines.
Innovative, collaborative, and forward- thinking competitive strategies are the key to success in the future. Don’t settle for the same old cookie-cutter global expansion plan that your competitors are already utilizing. It will only skim rewards off the top. Take the initiative to thoroughly evaluate potential markets, get to know the local people, and design a custom business model that will maximize the opportunities of those markets and deliver on your globalization goals. Plan, commit, act and execute with confidence to achieve success.
Mona Pearl is the founder and COO of BeyondAStrategy Inc., and an expert in global corporate expansion strategies. She is the author of the book Grow Globally: Opportunities For Your Middle Market Company Around The World. Learn more at www.monapearl.com