In our popular public workshop, The Art of M&A Integration, over fifty percent (50%) of the attendees state that their company is either doing or intends to do a cross-border transaction within the next year. While all M&As present challenges, when you start acquiring companies based in other countries or operating across multiple countries the issues and challenges become even more complex. Given the interest by our workshop alums in increasing their effectiveness with cross-border transactions, the M&A Leadership Council will be presenting a 2-day workshop, the Art of International M&A, in San Francisco, March 25 and 26.
I recently had a chance to sit down with Regine Corrado, Partner with Baker & McKenzie, who is one of the principal developers and key presenters of this workshop on International M&A, to gain more insight on this subject.
Jack: Regine, everyone comments that when you start crossing borders the issues and challenges you have to deal with in an M&A grow exponentially. In your experience, what are the main challenges to success for a company doing cross-border acquisitions?
Regine: Substantively, a cross-border acquisition calls for an understanding of local laws, culture and practice in each relevant jurisdiction to ensure that the structuring and implementation of the transaction is legally valid under local law, consistent with local law and implemented with local culture and business practices in mind. While a cross-border acquisition will involve most of the complexities of a domestic acquisition, cross-border acquisitions raise an additional set of issues that are specific to the international context, such as works counsel consultations, foreign investment law and merger control approvals, formalization requirements (e.g., notarial deeds) and translation requirements to name a few. For example, in many jurisdictions (e.g., China), acquisition documents have to be translated into the local language, and the local language version may become the governing version, either legally or practically. Translation of legal documents is a time-consuming, expensive and important step that is often overlooked, and poor translations of legal documents, or bad oral interpretations during negotiations, can easily lead to major misunderstandings, unintended liabilities or lost benefits. From a practical standpoint, a cross-border acquisition is essentially a large-scale, global undertaking involving many moving variables. Managing a cross-border acquisition requires close coordination to ensure that the acquisition is successfully completed in a cost-efficient and timely manner, with minimal error.
Jack: Regine, I have heard you comment that as you do cross-border deals you need to reset expectations as to the timeframe in which things can be done. Can you give me some examples of these?
Regine: I will be happy to. Most timelines of cross-border transactions are driven by labor and regulatory issues. Depending on the structure of a transaction, local works councils may have to be consulted prior to signing or closing of the contemplated transaction. On the regulatory side, procuring foreign investment approvals (e.g., Foreign Investment Review Board approval in Australia) can take several weeks. Most importantly, most jurisdictions have antitrust approval requirements prohibiting the parties to close a transaction prior to approval or the expiry of a suspension period. Depending on the competitive market conditions, antitrust approvals can delay the closing of transactions by several months.
Jack: What have you found to be some of the most successful strategies for mitigating the risks in cross-border M&As?
Regine: A few months ago, Baker & McKenzie commissioned the Economist Intelligence Unit to survey senior executives across a range of high-growth and developed markets to ask, among other questions, what they perceived as the most successful strategies for mitigating execution risk in cross-border transactions. Some of the results were quite surprising. According to the respondents, pre-transaction integration planning is the most successful strategy to ensure a deal’s success, followed by including holdbacks, payments overtime and earnouts in the deal terms; careful communications with investors; employee buy-in and management retention incentive; proactive engagement with industry regulators; partial buy-outs and phased transactions.
Jack: Regine, I was with one professional services firm that was organized by country. When we took on an acquisition in Europe and then one in South America, the executive decision was made that to be truly global we needed to reorganize by line of service and not by country. This posed major challenges. I mainly hold at fault we Americans, who thought “global” was taking US processes and approaches and imposing them on others; dominating conversations because the business language was English, our native tongue; and showing a lack of knowledge about other countries (history, culture, capabilities, etc.). Any advice to us Americans who may be leading a global M&A project as to how we can change our skillset and/or headset so as to avoid some of the mistakes I saw?
Regine: You are asking an excellent question. Striking the optimal balance between global approach and local implementation is one of the most challenging tasks when managing a cross-border transaction. You do want to retain consistency as much as possible to avoid having as many different “deals” and structures as you have jurisdictions. On the other hand, it is crucial to be mindful of local nuances in the law as well as business practices. When imposing a global approach, we often hear from our colleagues and our clients that “this is not how you do things” in that particular country. In situations like this, it Is crucial to work with well thought-through communications to explain the reasoning of the global approach and the guiding principle; i.e., that the global approach prevails but for mandatory local law or business practices. In addition, it truly helps to engage in a dialogue by asking probing questions why the global approach may not work in a particular country. Only when using these tools will it be workable to distinguish fear of change or a new approach from valid reasons to find a local solution that comes as close as possible to the global approach.
Jack: I have to hit you with this blunt question, as I am looking at acquiring a company in another country: are there either particular countries I should avoid completely and/or others that are very difficult to do business in? If you don’t want to answer directly, are there criterion or attributes I want to evaluate carefully before I think about an acquisition in a particular country (i.e., labor laws, government stability, regulatory environment, etc.)?
Regine: So-called “fragile states” are most difficult to do business in. Investors are challenged by weak institutional capacity, poor governance and political instability. However, many of these states are resource rich and therefore very attractive to investors. According to the respondents of our Intelligence Unit cross-border survey, investing in these countries turns out to be very helpful in positioning a company in these markets. However, it will take significant internal and external resources and finesse to navigate around corruption, fraud, and complex, sometimes non-sensical regulations. Looking at the FCPA Corruption Perceptions Index is a good indicator how challenging cross-border investments can turn out. Generally speaking , doing business in less corrupt jurisdictions like Australia, Canada and Western Europe will be much easier than in more corrupt jurisdictions like some jurisdictions in the Middle East, Russia, China, India, and Indonesia.
Thanks Regine for your thoughts and comments. I look forward to the Art of International M&A workshop in March.
Jack Prouty, President of the M&A Leadership Council
Regine Corrado is a Partner at Baker & McKenzie LLP. Her practice focuses on multi-country cross-border mergers and acquisitions, including regulatory matters (e.g., merger control and foreign investment) and the implementation of multi-country corporate restructuring projects.
Founded in 1949, Baker & McKenzie advises many of the world’s most dynamic and successful business organizations through more than 4,100 locally qualified lawyers and 6,000 professional staff in 74 offices in 46 countries. The Firm is known for its global perspective, deep understanding of the local language and culture of business, uncompromising commitment to excellence, and world-class fluency in its client service.