Risks and Benefits of Cross-Border M&A

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When you enter into an M&A deal here in the States, and the other business entity is also located here, the process is fairly straightforward. It’s long, complicated, and comes with its own risks, but since the laws governing the deal, and the cultures of the people involved in the deal, are the same, it’s a fairly step-by-step process. 

However, not every M&A deal is made between two companies in the same country. 

As the world has branched out and become more interconnected, businesses frequently try to enter deals with companies in entirely different countries. 

The general steps of the M&A process are present with this “cross-border M&A” process, but there are also new risks and benefits that have to be considered. 

Today, we’re going to walk you through the potential risks and rewards of executing a cross-border M&A deal. 

Cross-Border M&A Risks

First, we’re going to get the more negative side of cross-border M&A out of the way. There are several benefits that you might get from a cross-border deal, but the risks tend to be fairly complicated and difficult to predict.

1: Increased Business Risk

All M&A advisors worth their salt will tell you that every M&A deal has a business risk involved. Even if you do your due diligence and get all the best help while facilitating the deal, the other entity might be able to omit crucial data, key information about the local industry, long-term projections, etc. 

When that happens, it can be devastating. You might have thought you were acquiring a brand that was performing extremely well, just to find out that the local market of that brand was starting to fade quickly. That would leave you with a far smaller target audience than you initially thought when you made the deal. That’s not the only example, either. Any sort of omission or exaggeration can leave you in a situation similar to that. 

Now, imagine that the company you’re making the deal with is halfway across the world, has a different way of doing things, and you’re at a disadvantage when it comes to verifying every small detail of the company’s data. The risk of you entering a bad deal rises dramatically in that case. 

Of course, this isn’t meant to make you think that every international business is trying to scam you or make a deal that simply isn’t in your best interest. It is more than possible, and actually happens quite frequently, that you can find reliable, honest, business entities that will handle the deal with the utmost devotion to ethics and finding a mutually beneficial solution. 

This simply means that, because there are so many new factors involved, your risk level is considerably higher, and you have to go the extra mile to protect yourself. 

2: Cultural Differences

There are cultural differences between companies here in the States, and those cultural differences can very easily end an otherwise great deal in disaster.

Cross-border M&A problem - cultural differences

For example, you can have a company that focuses on giving employees a lot of freedom and the ability to challenge existing processes to find better solutions, and you can have a company that sticks to the books, doesn’t take kindly to people stepping out of their role, and generally functions how most people view a business.

When those two types of companies try to merge, they don’t tend to work well with each other. The workplace culture is just too different. 

That has actually happened before, and it has been the driving factor behind some of history’s most disastrous M&A deals

Now, think of how dramatically different cultures can be between not only two companies but two entirely different countries. 

Not only do you have to worry about the differences between the two companies, but you have to consider that the talent from both sides is used to dramatically different ways of doing things. Talent is the backbone of any business, and it has to be able to work cooperatively for a business to be successful. 

Luckily, this is one risk that is fairly easy to avoid. You just have to do your due diligence and learn how the other business operates.

Most of the M&A failures that stem from this issue don’t occur due to a lack of knowledge surrounding cultural differences. They fail because they ignore those cultural differences or don’t find useful solutions around them. 

If you know your workplace culture and what your talent expects, and you put in the effort to learn the same details about the company you’re making a deal with, you can make an honest decision.

If the differences will affect key operations dramatically, it’s usually better not to go through with the deal. If the differences won’t impact how either side handles its responsibilities, then it might not matter. 

3: Taxation

Taxation is a huge problem for every company. This necessary evil isn’t just part of life in the United States, either. It’s a staple of every governed nation in the world.

Cross-border M&A problem - taxes and taxation

However, when you do M&A deals domestically, you have the advantage of both parties dealing with the same tax laws. There might be minor deviations depending on the nature of each company, but for the most part, both sides are dealing with the exact same issues. 

That makes it easier to predict your tax liability for a sale, and it makes it easier to plan for the long term if you’re going to stay in the business and start dealing with the taxes of an acquired business. 

However, every country has its own tax laws. When you merge with a business across borders, or you acquire one, you can’t just ignore the tax laws affecting the other entity in its nation of origin. 

This can affect the purchase because you might have to pay more in taxes after the transaction takes place. It will certainly affect the long-term operation of anything done across the border because you have to learn an entirely new tax code to stay compliant in another country. All the while, you still have to meet your obligations for your business dealings here in the US. 

This can be a difficult challenge to overcome, and it largely comes down to the team you have handling the taxation side of your business. As you know, taxes can ruin a business, and when they’re complicated to this degree, it takes extra effort to avoid that

It’s also crucial to know what your obligations will be before you seal the deal in an M&A process. If the tax obligations are going to be too much of a problem, it might be a reason to turn away from the deal. 

4: Regulatory Risks

You’re used to operating your business a certain way, but what happens when you acquire an international business, and its country of origin regulates businesses differently?

Cross-border M&A problem - law regulations

For a silly, exaggerated example, let’s pretend that you operate a chemical manufacturing company with global customers. You work in the US, and for some reason, it’s perfectly fine for you to dump all your waste in the local river, pay your employees $1 an hour, and skip everyone’s lunch breaks.

Now, you’ve acquired a similar company in Japan, you turn it into an extension of your company, and you quickly find out that none of that is allowed. Would you be able to rework how you do everything to meet the regulations in your new location’s country of origin? Probably not

Again, that’s a silly example of how regulations can affect the deal and your company afterward, but there are lots of ways regulatory differences can affect your ability to operate smoothly. If that happens, it could ruin your business as a whole. Not just the half that’s operated elsewhere. 

You have to understand the regulations that you’ll have to abide by. If you have to deal with regulations now, you already know that it’s more complicated than it sounds. 

5: Political Risks

This is probably the most unpredictable risk in cross-border M&A. Foreign affairs is a complicated business, and the world is constantly being restructured by it. Whether something happens in one country, and US investors start boosting or pulling investment capital in response, or two countries go to war, and suddenly there’s an embargo or sanctions limiting business dealings, it doesn’t matter what your personal political stance is on any given issue.

It will affect you if you do an M&A deal with a company that is from a country going through that situation. 

The worst part is you never know for sure what’s going to happen. You might think that merging with a British company is a great idea and unlikely to be affected by anything, and suddenly, politicians can’t get along. So, they start sanctioning each other. That’s unlikely due to the political stability between those two countries, but not every opportunity is going to be as straightforward. 

In general, you need to understand the foreign and domestic relationships affecting the country that your potential business partner is in. 

If a company’s country of origin isn’t politically stable, or it is showing signs of becoming unstable, it’s best to avoid cross-border M&A with it

Cross-Border M&A Benefits

We’ve highlighted several concerning risks that are part of any cross-border M&A deal, but it’s not all doom and gloom. It can actually be a massive opportunity for your business, and the rewards definitely make those risks worthwhile in many circumstances.

1: Overall Expansion

One of the main goals of any company is to grow. Branching into an entirely new country is probably the ultimate way to do that. This ties in with the other benefits we’ll talk about, but overall, you’ll get the opportunity to grow your business substantially.

2: New Supply Line Opportunities

Not every M&A deal is done to create a new location or take advantage of an existing company’s presence. Sometimes, it’s a solid way to create new supply line opportunities. You develop a foothold in an entirely new area with different resources at different prices.

Cross-border M&A benefits - new supply line opportunities

You might be able to source a key resource for your product at a fraction of the price, cut out a lot of your supply problems, and overall, become far more efficient.

3: A New Target Audience

Let’s say you have a retail business in the US, but you acquire a similar company in Australia. Now, you have direct access to an entirely different target market. This opens up new sales opportunities, marketing potential, and more.

4: The Ability to Leverage Different Regulations and Taxation Laws

If you noticed, some of the most potentially damaging risks had to do with the varying regulations and taxation laws that other countries have. That’s true, but it can also work to your advantage.

Depending on the laws and regulations in the country you’re expanding into, you might actually be able to save money, work around overt regulatory processes you currently deal with, or pay less on key transactions due to tax laws. 

Again, this factor can go either way. The only way to leverage it effectively is to fully understand the laws and regulations of the country your targeted acquisition is in. 

5: Brand Recognition

When branching into a new country, you don’t have to completely restructure the acquired business. Instead, you can get the same opportunity to leverage an existing reputation that you get when you buy a company here or merge with it.

The existing company’s brand recognition can work in your favor in several areas, and it can make growing among a new demographic a lot easier than if you simply opened your own location there.

Weighing the Risks and Benefits of Cross-Border M&A

The benefits of cross-border M&A can completely change your business for the better. In some circumstances, it’s an even better opportunity than domestic M&A. 

However, it can get complex quickly, and you have to weigh the pros and cons for each individual circumstance. 

For that, you need help. 

Final Ascent can help you navigate the complex world of cross-border M&A, weigh the risks and benefits of any given deal you’re considering, and provide the guidance you need to secure the best M&A deal possible.
Contact Final Ascent today.

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