Cross-border M&A driving surge in innovative structures

August 2018 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

August 2018 Issue

Cross-border M&A activity is enjoying a boom, with deal volumes at record highs. However, underlying drivers and increased risk factors have created new challenges in successfully closing deals. The result has been a dramatic increase in the use of complex acquisition structures and other measures designed to mitigate risk to provide much needed assurances to all parties while getting the deal done.

The drivers supporting cross-border M&A activity stem from long-term trends in both the economic and business environment. Global economic growth has created benign conditions for corporates, leading to higher earnings and leaving companies with excess cash on their balance sheets that they are looking to put to work. Many US corporates have also repatriated cash as a result of US tax reforms. Perhaps most importantly, prevailing low interest rates have provided companies with access to cheap capital to support their dealmaking activity.

While economic conditions have provided the necessary fuel for dealmaking, global business trends have increased businesses’ incentives to carry out cross-border M&A as part of a search for long-term sustainable growth. Technological disruption, for example, has led many companies that previously did not regard themselves as technology businesses to acquire intellectual property to modernise their business models. Similarly, globalisation presents increased opportunities for even small companies to leverage M&A to expand into new markets. Of these, emerging markets are playing a particularly important role as positive demographics and economic catch-up present companies with significant growth opportunities.

In contrast, barriers to cross-border M&A are also mounting. Trade wars, tariffs, protectionism, physical conflict and instances of rising nationalism are just a few examples of the sorts of geopolitical risks that can have significant impacts on markets and increase the costs and risks of conducting cross-border deals. When investing in countries where there are relatively high geopolitical risks, one should carefully consider whether there are any bilateral investment treaties that could be used as a risk management tool.

Furthermore, the ever-increasing burden of regulation, both at a national and international level, and changing tax laws have added further complexity to structuring deals. This makes it critical to ensure that any legal structuring is thoroughly analysed and the relevant acquisition structures are set up in a robust and sustainable manner.

With drivers and barriers both at all-time highs, this creates a paradox in cross-border M&A – never before have deals been so easy, or so hard. In response, parties are becoming a lot more aware of the risks of cross-border M&A and that setting up the right acquisition structure can have a material impact on the overall success of a transaction. As a result, market participants are more willing than ever to commit resources to ensure the set-up of a robust and sustainable structure.

The structures that parties use to mitigate some of these risks vary immensely, with the most appropriate acquisition structure in a given situation dependent on legal, commercial, tax and financial considerations. Generally speaking, BidCos or acquisition vehicles help businesses to manage risk, comply with local laws and regulations and create efficiencies from a financial, risk and security perspective, as well from an organisational perspective. Typically, investors set up a local BidCo in the jurisdiction of the target company, and depending on the way the deal is financed it may be required to set up multiple legal entities, in order to provide adequate security collateral to the banks and to ring-fence any risks.

Another useful tool in the cross-border toolkit is escrow services that allow a third-party to hold and regulate the payment of funds required between two parties in a transaction. Escrow services benefit both the buyer and seller as it ensures that they are protected equally by an independent agent that will see to it that the agreement is followed in accordance with the escrow mechanism as agreed by parties.

Many of these solutions have existed for several years, but we are observing a boom in their frequency, complexity and the types of companies deploying them. Escrow services, for example, are not in themselves a new innovation, but we are now seeing increasing demand, particularly in markets such as Singapore, the UK, the Netherlands and Turkey.

While in the past BidCos were the reserve of large multinationals seeking major acquisitions, the profile of parties using such structures is shifting. Many parties using these structures are now small and medium-sized enterprises (SMEs), and come from a wide range of fast-growing sectors such as video gaming, online retailers and nutrition companies seeking cross-border deals.

While the outlook for cross-border M&A looks good, with another strong year forecast for 2018, the world looks like an increasingly unpredictable place, with geopolitical events and increasing regulation presenting clear and present challenges to international business. Despite all this, incentives for businesses to expand through cross-border M&A show no signs of abating. As such, technical solutions will be sought after and invested in, and through hard work and innovation, companies and their advisers will continue to find a way to mitigate risk while realising their international ambitions.

Jan Willem van Drimmelen is global head of corporate clients at Intertrust. He can be contacted on +31 (20) 521 4626 or by email: janwillem.vandrimmelen@intertrustgroup.com.

Jan Willem van Drimmelen

Intertrust