Many companies look to grow their business through mergers or acquisitions of companies outside their own country and while this brings many opportunities it can also bring risks. But with sound advice such risks are worthwhile, and the right deal can bring significant value to the parent company.
For any ambitious business acquiring or merging with a company overseas is an ideal way to increase profits and access new markets. But doing deals outside your home jurisdiction can bring many hurdles at each step of the process – even in countries that appear closely aligned. If a deal is to be concluded successfully and add value in the future, then it is crucial that all potential risks are understood and mitigated against prior to its conclusion. Understanding risk can also help to ensure that the integration process is as smooth as possible after the deal has been completed.
For a cross-border deal, regulatory issues often pose the biggest risks. Whether the regulations relate to the country or the sector of the acquired entity, they can cause significant headaches throughout the deal process. Comprehensive due diligence at an early stage of the deal is crucial for mitigating risks – so choosing an adviser with knowledge of the country or sector (or both) of the target business, along with a network of local professional contacts, can help to ensure there are no unwelcome regulatory surprises.
Tax is another risk that must be factored into a cross-border deal as each country has its own tax rules that can differ markedly. Again, engaging advisers who have experience in the country and/or industry can be vital in helping acquirers to understand local tax rules and avoid any pitfalls to ensure compliance.
Similarly, legal requirements can also vary markedly between jurisdictions and can pose significant risks to a deal. Legal aspects need to be understood at an early stage – even when investigating an opportunity – to ascertain if a deal can proceed.
Politics and instability in the target company’s jurisdiction can pose another risk, although some regions are more unstable than others, such as Latin America and the Middle East. While some political or economic events can happen with little or no warning, comprehensive due diligence should be able to gauge the risk of instability increasing in the future. If this is the case, strategies can be put in place to mitigate the effects of any volatility. If the risk is deemed too great, the deal can be shelved entirely. Of course, mergers and acquisitions are also about the people involved, and issues with management should not be underestimated.
Clarity of purpose and clear communication is crucial, so understanding any cultural challenges from the outset can pre-empt any management issues and help retain key personnel once the deal has been completed to ensure a smooth transition. Here, an advisor with experience in the country of the target is important, but just as crucial is their negotiating skills.
Once a deal has been completed, there will still be a myriad of issues to overcome when integrating the acquired business that are likely to be different to those in the pre-deal phase including cultural differences, incompatible technologies and the challenge of operating in different languages or time zones.
Due diligence can flag some of these issues prior to the completion of the deal and devising a post-deal integration plan, including defined targets for performance improvement, can help to ensure the deal is successful.
All these factors – and more – present risks to any deal, but with comprehensive planning and the right advice at the right time from experienced professionals, the deal can realise the value that was hoped for when it was first plotted. In the following global guide each legal advisor talks candidly about how multinationals need to understand how to manage risk in different jurisdictions to ensure they comply with the range of regulations – and to ensure business success.