The challenges of cross-border M&A

March 2025  |  COVER STORY | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

March 2025 Issue

Driven by the increasing globalisation of production, collaboration and communication, cross-border M&A has grown in relevance. According to Statista, international deals rose from less than 500 worldwide in 1985 to almost 8500 in 2023.

Through cross-border M&A, companies can access new markets, reach new customers, create growth, access new talent, diversify products and services, boost market share, benefit from tax breaks, unlock synergies and realise cost savings, among other rewards.

When pursuing a cross-border target company, however, acquirers need to ensure the advantages outweigh the risks and challenges. These deals require an understanding of currency exchanges, interest rates and market volatility. To thrive, hedging strategies and robust risk management frameworks are required. During planning and execution of a deal, companies should take steps to reduce negative factors and increase benefits. Also important is preparing to efficiently integrate people and processes in the post-deal phase.

Recent trends

In 2023, the cross-border market was slower than the peak years of 2021 and 2022. US buyers pursued more outbound deals, up 34 percent in value over 2022, while domestic value rose 2 percent, according to Bain & Company. Brazil proved attractive to foreign investment, even as its domestic dealmaking declined. Asia saw a 60 percent increase in deals from the Middle East as sovereign wealth funds sought to build supply chains and facilitate energy transitions.

2024 showed signs of recovery in the M&A market. According to Dealogic, total global deal value reached $3.58 trillion last year, up from $3.16 trillion in 2023, with no shortage of deals in the $1-5bn range, and a number of notable mega deals over $10bn. An uptick in deal volume was seen in North America, but European and Middle Eastern markets also experienced a rise in deals, with the UK recording robust activity in the technology sector.

The US was the nation most targeted by acquirers, accounting for over $1.6 trillion worth of deal value across more than 10,000 transactions. China, the UK and Japan were the next most targeted markets. Globally, technology, healthcare, utility & energy, finance, and oil & gas were the most active sectors. The average deal size in 2024 was $1.8bn, up from $1.6bn in 2023.

Despite the challenges of ongoing geopolitical uncertainty, high interest rates and inflation, industry professionals remain cautiously optimistic for 2025. Artificial intelligence (AI) and digitalisation are driving deals, with companies seeking to enhance their capabilities. Additionally, sustainability and environmental, social and governance (ESG) criteria are increasingly important. Emerging markets, particularly in Asia and Latin America, are attracting increased interest due to their growth potential. The technology and energy sectors have been particularly active.

US dealmaking

The US, as the world’s largest economy, remains the most sought-after destination for overseas investors. But it is not all plain sailing. Certain factors could provide dealmaking headwinds – particularly the US government’s increasing scrutiny of potential foreign acquirers entering the market. In December 2024, the Treasury Department moved to strengthen the Committee on Foreign Investments in the US (CFIUS) review process. According to the Treasury’s final regulations, CFIUS’s existing compliance and enforcement functions will be enhanced.

Most notably, CFIUS’s authority to gather information about transactions, mitigate national security risks arising from transactions, and penalise those that violate CFIUS’s rules or otherwise fail to comply with its obligations, will be strengthened. CFIUS will also be able to request information about non-notified transactions, have the discretion to require parties to a CFIUS filing to respond to proposed mitigation terms within a fixed timeframe, and issue increased civil monetary penalties for a wider scope of behaviour. These enhancements came after a landmark year for CFIUS’s compliance and enforcement capabilities. The US government has made great strides in recent years to address national security concerns arising from foreign investment, and CFIUS has become a focal point of these efforts.

The private equity factor

Private equity (PE) firms are playing a meaningful role, too, leveraging large capital reserves for buyouts. “We have seen some recovery in cross-border M&A in the last two years and financial buyers feature strongly, whether directly or through investee platform businesses,” notes John Cowie, a director at Moore Kingston Smith Corporate Finance Limited. “There has been a record amount of PE raised in recent times, together with a surge in the number of private debt providers – this money clearly needs to find a home.

“It is interesting to note that sustainability was mentioned as a deal rationale in fewer deals last year than the year before, and we question whether this was because it is became less newsworthy or whether, in a challenging global economy, sustainability becomes secondary to the traditional rationale which buyers cite for international M&A, such as overseas expansion, access to a competitor’s customer base or a deal being earnings-enhancing, to name just a few,” he adds.

As fund sizes increase and competition for US assets intensifies, there has been growing appetite among US sponsors to seek global opportunities. According to Pitchbook, aggregate expected US PE deal volume of $838.5bn in 2024 represented a 19.3 percent increase over 2023 deal volume of $703bn. While 2024’s projected deal volume lags the record of $1.2 trillion in 2021, last year will outpace the 10-year deal volume average of $722.7bn. Yet some investors were reluctant to enter the market, instead waiting on potential rate cuts, improved macroeconomic conditions and policy changes following the November US presidential election. With more clarity emerging since the election, however, there is an expectation that some of the dry powder accumulated by PE firms will begin to target US companies across key industries.

Addressing roadblocks

Effective planning and preparation are essential before embarking on an overseas transaction. To facilitate a smooth process, the right structures need to be in place. Acquirers should investigate various aspects of an acquisition to identify and address potential problems, risks and liabilities.

Due diligence can significantly impact the success of a transaction. It allows acquiring companies to make informed decisions, mitigate risks and enhance the likelihood of successful integration and value creation. The process involves a comprehensive examination of the target company’s financial, legal, operational and cultural aspects. Its importance is even greater with respect to cross-border transactions, given the risks and complexities associated with international transactions.

There are different forms of due diligence, but two key aspects are financial due diligence, which assesses a target’s financial health, including its assets, liabilities, revenues and profitability, and operational due diligence, which evaluates a target company’s business model, supply chain, customer base and competitive positioning.

Another critical factor is culture. Combining two companies often presents a range of challenges from a cultural perspective – not least language barriers. Cultural integration in cross-border M&A significantly impacts the combined entity in the long run. When companies from different countries merge, they not only blend their financial assets and operational structures but also their distinct cultural attributes. These differences can encompass language, organisational norms, leadership styles and local customs, making integration a multifaceted challenge.

Each country has its unique way of doing business, influenced by historical, social and economic factors. Cultural due diligence during the pre-merger phase can help identify and address these differences, by assessing the cultural compatibility of the merging organisations and noting potential areas of conflict.

Through a regulatory lens

Differences in laws and regulations also affect deal execution. Countries have their own unique laws affecting M&A, so there is no ‘one size fits all’ approach.

In cross-border deals, legal and regulatory considerations reflect the complexities and challenges of navigating multiple jurisdictions. Every jurisdiction has its own legal framework, regulatory requirements and compliance obligations, which impact the transaction’s structure and outcome. Acquirers must be cognisant of these requirements.

Due diligence is central to this process, so acquirers undertaking cross-border M&A can understand the regulatory and legal environment of the target company’s home country, identify potential legal risks and develop strategies to mitigate them.

Additional issues include tax implications, which are often central to cross-border M&A. Any company expanding internationally must deal with differing tax laws in the relevant jurisdictions. The complexity of international tax affairs requires companies to adopt a meticulous approach to optimising tax structures and effectively preventing double taxation.

Intellectual property (IP) is likely to raise fundamental questions, too. IP protection is a complex issue and companies must be prepared to conform to the distinctive laws and enforcement mechanisms across jurisdictions.

Labour and employment laws can also be problematic. Harmonising employment contracts, benefits and working conditions, and complying with the laws of different countries, can be challenging. Acquirers need to be well informed to avoid legal issues, a drop in employee morale and loss of productivity.

Further, it may be necessary to obtain regulatory approvals from relevant authorities in both the acquiring and target companies’ countries. Depending on the countries involved, this process can be complex and time consuming as it often involves multiple regulatory bodies, each with its own set of requirements and timelines. A focus on national security, particularly in the tech space, means that stringent compliance requirements could be placed on companies in industries of strategic or national importance, for example. Antitrust and competition laws can impact the feasibility and timeline of a transaction. Failure to secure approvals can result in delays or may even collapse a deal.

In the US, protectionist attitudes related to national security, with expanded powers for CFIUS, may hinder certain cross-border deals. There have also been changes to the nature and scope of foreign investment regimes in other jurisdictions. The UK, the EU and Australia, among others, have enhanced merger review and screening processes to redefine the level of protection they give to domestically important industries.

In recent years, such concerns have intensified due to by the coronavirus (COVID-19) pandemic, Russia’s invasion of Ukraine and other geopolitical challenges which threatened the supply of essential goods and services, the provision of energy sources and the functioning of essential infrastructure.

With transactional risks particularly acute in cross-border M&A, acquirers need to take professional advice in the local market where a target business is based. “Without a thorough understanding of domestic laws and regulation, the M&A process can at best become needlessly drawn out, at worst the deal will fall over, sometimes close to the end of the process when both parties have invested a huge amount of time and resource,” warns Mr Cowie. “This can apply to misunderstandings over local banking covenants, national security legislation, even just knowing whether the seller has the requisite authority to commit to a deal.

“Buyers should not underestimate the value of quality local M&A, diligence and legal advice being given early in the process – it is likely to repay the cost many times over,” he adds.

Upward trend

Looking ahead, cross-border deal flow is expected to increase, though perhaps not to the levels seen in 2021, a near-record year for international M&A. “There is no shortage of money for the right deal, particularly in the ever-popular IT and healthcare industries,” says Mr Cowie. “If global interest rates continue their downward momentum, access to capital becomes ever easier, so it is likely that the upward trend will continue.

“If borrowing costs drop, all things being equal, the price which buyers can pay should grow and this ought to prompt hitherto reluctant sellers back to the negotiating table,” he continues. “Coupled with a strong dollar, the US looks set to continue to top the M&A league tables.”

One tailwind is a potential drop in the US corporate tax rate. While tax is never the sole reason for acquiring a business, a lower rate could boost profitability and make some US targets more attractive than their counterparts in higher tax countries. President Trump’s proposed 15 percent US corporate tax rate would be significantly below other large M&A markets like Germany (30 percent), Canada (27 percent), the UK (25 percent) and France (25 percent).

As the global economy continues to improve, there is an expectation for rising cross-border M&A between the US, Europe, Canada and other ‘Western-style’ nations, such as Japan, Australia and South Korea.

One of the primary risks in any cross-border deal will be the geopolitical relationship between the two countries involved. Flashpoints are likely due to the relationship between the US and China, for example. The second Trump administration’s position toward China will affect cross-border deals over the next four years. Should the US government block a deal from a Chinese buyer, the Chinese government may reply in kind. A ‘tit for tat’ approach would likely restrict deal flow between the two countries.

Geopolitical concerns will be felt most keenly in sectors considered strategic by national governments, such as critical infrastructure, energy and mining. Regulatory authorities may choose to veto potential foreign buyers in these markets, thus limiting the number of potential bidders and potentially driving down the price. When assessing prospects, it would be wise for both buyers and sellers to price any geopolitical risk into a deal, and adjust the valuation accordingly.

That said, certain geopolitical risks may be mitigated through an appropriate deal structure.

2025 may see a revival of cross-border M&A transactions. But navigating the myriad complexities of such deals will require careful planning and coordination.

© Financier Worldwide

BY

Richard Summerfield