Cross-border M&A integration

April 2019  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

April 2019 Issue

Cross-border M&A is a key instrument for generating shareholder value and entering new markets. It allows companies to pursue new technologies, capabilities and products while driving growth, innovation and transformation.

According to Willis Towers Watson, however, the number of cross-border deals is expected to decline globally this year, amid regulatory hurdles driven by rising protectionism. Mega-deals – transactions valued at more than $10bn – will be particularly impacted by global uncertainty caused by Brexit and the threat of global trade wars. US acquirers, for example, are more likely to target domestic deals in 2019 and beyond. “There is an increased focus on jobs, and making sure that cross-border deals do not result in an outflow of jobs from the US,” notes Jonathan Corsico, a partner at Simpson Thacher & Bartlett LLP. “The focus is on whether the jobs are staying and also whether, from a PR angle, it can be touted in a press release that the jobs are staying.”

According to Andrew J. Sherman, a partner at Seyfarth Shaw LLP, recent trends and developments, including Brexit, nationalistic policies in North America, South America and Europe, and unexpected shifts in regulatory policies, can frustrate, discourage or derail cross-border transactions. “India’s recent change in policy toward non-domestic retailers, for example, had a significant impact on Amazon and Wal-Mart,” he says. “Notwithstanding many recent successes, including cross-border deals in technology, consumer products and healthcare, most companies still face significant challenges in getting cross-border transactions completed efficiently and cost effectively.”

Yet there is still a reasonable appetite for cross-border dealmaking globally. In 2018, acquisitions of US companies were a feature of the global M&A market. Approximately 16 percent of all US-targeted deals involved non-US acquirers, according to Wachtell, Lipton, Rosen & Katz. German, French, Canadian, Japanese and UK acquirers accounted for approximately 60 percent of the volume of cross-border deals involving US targets, with buyers from China, India and other emerging economies accounting for approximately 10 percent. The first half of the year was particularly bright. According to Mergermarket’s ‘Global & Regional M&A Report H1 2018’, cross-border M&A totalled $740.3bn, up 11.6 percent on the $663.4bn recorded in H1 2017.

Companies across jurisdictions are keen to undertake deals for a number of reasons, including gaining access to favourable regulatory environments, driving cost synergies and acquiring intellectual property. Despite the ongoing Brexit crisis, the UK is still an attractive investment destination for overseas acquirers; Willis Towers Watson expects it to remain a top target for foreign buyers in the coming years, though perhaps not at recent levels.

According to a Deloitte report, ‘The state of the deal: M&A trends 2019’, around 33 percent of survey respondents said that at least half of their M&A deals involve acquiring targets operating principally in foreign markets. US-based investors said they would continue to look abroad for deals in 2019. The areas of geographic interest appear to be shifting as more executives seek targets in Asia.

“The attitudes of corporate development leaders at companies of all sizes and in all industries across the globe toward cross-border M&A remain generally bullish as a result of our increasingly global economy,” suggests Mr Sherman. Buyers from China, for example, often look to bring products and services back home, to bolster their offerings in a vast and increasingly sophisticated domestic market. Acquirers in Japan and European markets such as Italy, Portugal and Germany, where populations are aging, may be drawn to cross-border M&A in order to bolster their international presence and increase routes to market.

But, cross-border M&A can be hard to get right. According to Communicaid, the failure rate may be up to 70 percent, with few deals said to enhance shareholder value. Post-merger integration challenges can jeopardise value creation. To help avoid this, acquirers should build an accurate picture of the target’s operations. They should be ready to navigate any political and regulatory issues and select the right speed for the integration. It will be vital to bridge the cultural gap between the two organisations and manage the foreign ‘fear factor’ that can linger when companies pursue overseas targets.

Issues such as tax law, regulatory hurdles and political stability must all be factored into a deal. Corporate culture and talent retention must be considered.

According to Mr Sherman, the biggest challenges that companies face during cross-border M&A include legal and strategic due diligence, logistical challenges caused by language, geographic and time differences, cultural norms, regulatory issues, human resource policies, and time delays in securing third-party and regulatory conditions to closing. “Many companies fail to embrace these challenges or grossly underestimate the time and expense that may stand in the way of overcoming these challenges in a manner aligned with their transactional objectives,” he says.

Well-planned integration of the target into the acquirer is key to a successful deal. But this can be hard to achieve and when done poorly can cause deals to fail. Poor cultural fit is a core reason for failure, and this is magnified in cross-border dealmaking. Poorly aligned expectations, behaviours, practices, processes and structures can render a merger ineffectual.

Merging parties must overcome both national and organisational culture differences by creating a new culture that recognises, reconciles and embraces such differences to create positive outcomes for the new organisation. “Integration planning is a critical component of all M&A deals, but especially so in cross-border deals because of the additional difficulties presented through language barriers, time zone differences and cultural differences,” explains Mr Corsico. “One of the keys to a smooth integration is establishing a strong working relationship with employees at the target company, and establishing that relationship early – well before closing. It is important to incentivise the employees at the target company to become invested in the integration and to focus on becoming part of the post-closing company. This investment is both financial, paying bonuses to target employees for a job well done, for example, and cultural, such as making the target employees feel like part of the larger company family.”

Companies often underestimate the importance of cultural fit, failing to appreciate differences between the way companies operate, including the attitudes and behaviours of staff and senior management. Risk appetite and decision-making processes, for example, may be worlds apart.

National cultural identities can also have a significant impact. National cultures are derived from common experiences and beliefs and it is essential for an acquirer to understand these nuances. This will help not only with deal negotiations, but also in the post-acquisition stage when the acquirer must shape the new corporate culture. National culture is often more deeply rooted than organisational culture, and thus can be a stronger predictor of merger resistance. “Companies must develop a post-closing integration plan to address both tangible challenges such as IT integration and IP assignments, as well as addressing some of the intangible challenges, such as a post-closing cultural fit, leadership, engagement, reward and cooperation, teamwork and overall synergies among and between the companies,” says Mr Sherman.

According to the Harvard Business Review (HBR), companies should be prepared to negotiate around culture. Senior management should begin the process by “conducting a cultural assessment to understand how people, practices and management” reflect the differing standards and management structures between the target and acquiring companies. HBR notes that while some organisations may have more rigid, top-down, hierarchical management structures, others may have looser, more collaborative styles which may not be easily integrated. Amazon’s acquisition of Whole Foods is a prime example, which led to cultural clashes and a yearly net income drop of over $600m. According to HBR, acquiring companies should: “Determine the pros and cons of their current levels of tight-loose, as well as the opportunities and threats posed by merging cultures. How might sacrificing some discretion for structure, or vice versa, enhance or harm each organisation? Above all, they should identify areas for compromise: Tighter organisations need to identify domains where they can embrace greater looseness, and looser organisations need to think about how they can welcome some tight features.”

When preparing for a deal, companies can use different methods to compare the cultures of the two organisations and outline the expected strengths and weaknesses after the transaction completes. The C-suite is key to this comparison, says Dr Finn Majlergaard, a post-merger integration expert at Gugin. “The C-suite must be committed all the way throughout the dealmaking process. Nobody likes change processes and it is important that the C-suite team communicates clearly and shows the values that are going to define the new organisation. Companies do not create value by reading about it in a ‘powerpoint’ presentation. Companies adopt a value when employees see their peers exercising that value,” he adds.

If a deal is to be successful and generate value, the acquirer must know what it is buying, both in terms of physical assets and cultural compatibility. Cultural due diligence should form part of the process with the human resources (HR) department playing a significant role. The leadership team also needs to identify synergy opportunities, assesses potential financial and operational risks, and plan for the post-completion phase. “Companies need to develop more comprehensive and robust checklists and identify local resources that will be responsible for addressing the challenges of completing cross-border mergers,” notes Mr Sherman.

Communication is also vital. Senior management must prioritise effective communication, ensuring it forms a core part of pre- and post-merger planning. Acquirers should employ a variety of communication channels and methods to ensure that they connect meaningfully with all employees.

When initiating post-merger integration, the acquirer must ensure that it employs the best strategies to guarantee the combined business fits perfectly into the market with beneficial aims and aspirations. M&A is a complex, risky undertaking which requires companies to identify strategic and financial issues prior to completion and determine the best course of action to correctly align two entities. For cross-border transactions, the risks increase exponentially. Cultural components must be considered if companies are to successfully integrate diverse organisations, and this requires planning.

© Financier Worldwide

BY

Richard Summerfield