Own Goals in Cross-Border M&A

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The acquisition of a foreign company figures highly on the agenda of many executive teams as the quest continues for new markets and improved economies of scale. Such transactions pose a considerable amount of risk and that’s why management must ensure the strategy is sound and the legal and cultural differences are understood, so a clear plan for integration is in place once a deal has been signed.

There will always be an element of risk associated with purchasing another business, domestically or abroad. Here are five of the most common howlers that CEOs need to avoid when they decide to go shopping overseas:

1) Assuming too much

It’s a dangerous game for management teams to make assumptions about foreign markets. Jim Wilkinson, Group Finance Director at online gaming company Sportingbet, says: “Every country has a different culture to the UK, with different rules and regulations, so you need to understand everything from holiday times, payment processes, bonuses, how they actually work, levels of remuneration, and how quickly people expect integration processes to happen.

“In the US, for example, where I’ve done a couple of acquisitions, management have expected all the redundancies to happen straight away, whereas in other countries, particularly in parts of Europe, they don’t expect redundancies to happen at all. Understanding how people expect you to manage them afterwards is important.”

Aleen Gulvanessian, Partner at law firm Eversheds, comments: “Local teams mustn’t be left to make assumptions which might be inappropriate in the foreign country, so you conduct the transaction in the way you would locally at your peril when dealing with a cross-border acquisition. It’s very easy to think that there won’t be a problem and just not be aware of something potentially critical.”

There will be differences, legal and otherwise. Ian Bowles, CEO at software provider Allocate, says: “It’s a mistake for an acquiring company to automatically assume that their way of doing things is absolutely correct and try to do things exactly in the way they would in their own territory, and I’ve been a recipient of this rather than a manager of it.

“There are legal and process differences and you need to understand the working environment and customer environment. You’ve got to be culturally sensitive when you acquire something overseas. You can endorse corporate standards but you’ve got to do it in a way that is acceptable to the team you’ve acquired or you’ll create misunderstandings and false barriers that’ll make smooth integration more difficult.”

Nothing kills a deal quicker. Jim says: “The biggest single mistake is cultural, where people assume that it’s the same as the country they’ve already operated in, and if you want to destroy value very quickly then do the acquisition and watch the management team walk as you end up with a rudderless company.”

2) Inexperienced management

As an acquirer, you need people you have absolute faith in on the ground. Paul Budge, UK & Ireland Managing Director at consumables distributor and outsourcing business Bunzl, says: “Because we’re very decentralised as an organisation, when we do an acquisition, the person that’s going to run that business, whether they are from the acquired company or our own resources, is going to be working remotely, so it has to be someone we absolutely trust.”

Bob Emmins, Finance Director at ABF Ingredients, says: “You’ve got to have a local presence. You can’t run it from the head office or another geography. You’ve got to have people that know the geography, the language and customers, the legal practices in particular and some of the local nuances that are applicable in that market, otherwise you’ll be very lucky to conclude the deal and you will not integrate it.”

It’s a case of getting the balance right. If the acquirer brings its people in and drives change too quickly or, by equal measure, too slowly, then the value in a company can quickly be eroded. Alan Howarth, Non-executive Chairman of telecoms specialist Cerillion Technologies, says: “The first 100 days of any M&A activity is key to an enhanced future business. Too often there appears to be a lengthy period of inertia where fear of the unknown travels across the combined business.

“The desire for change – always underestimated – is seldom found beyond those that initiate any such programmes. So the board has a responsibility to communicate the advantages and consequences the changes will bring to the new corporation. All too often, senior executives work very hard in this period but in isolation.”

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3) Post-deal lethargy

Another danger is that the process of integrating two businesses can be lost on executives. They get excited about the value creation on the balance sheet but forget the hard part lies in knitting the companies together. Aleen says: “We find that where the acquirer is disappointed with the target they’ve acquired, it’s often because you’ve got a different team dealing with the integration post transaction to the team that was involved with actually doing the deal.

“You should be thinking about integration during the course of the deal process. Where your team doing the deal overlaps with the one conducting the integration post acquisition, you tend to find the most successful transaction.”

Jim says: “You need to keep control of it from your head office; you can’t just leave it up to the local team. This means a lot of time is spent on the phone and it requires frequent visits to the country while you’re conducting the negotiations and due diligence, and once you’ve made the acquisition you need to physically be there.”

There are no shortcuts. Alan says: “In my experience, both in terms of mounting an international acquisition and more importantly integrating the target organisation with the host, success revolves around the understanding of culture and change. The more you appreciate the drivers and operating style of the acquired business the greater your likelihood of successful integration. Due diligence pays scant attention to the less quantifiable measures when the key to integration is ensuring that a new corporate message can be embraced by all parties.”

Bob comments: “People can get wrapped up in doing the deal and money talks, so money can often be used to get over the normal negation tactics to conclude a deal. But when you come to integrate it, if you haven’t thought about that market and put the right local resources in place, you are just destined to fail. You’ve got to have knowledgeable local resource with local connections.”

4) Poor use of advisors

Aside from having seasoned non-executive directors who know what to expect, it makes sense to invest in quality advisors as they can make an enormous difference during negotiations. Jim says that “you need local advisors as the local tax rules, regulations and laws are important, so you need people that know what they are doing”.

Bob says: “Third party advisors are the voice of reason that prevents you from going headlong into the pitfalls. They should not just be encouraging you to do a deal because they get a healthy commission on completion, but they have got to do more to protect the risks. For a longer-term benefit for their customers they need to be helping that customer ensure that the integration is successful.”

5) No plan B

Surprises in M&A are rarely of the good variety. Things will go wrong. That’s not to be cynical, but when you have volatile market conditions, different ways of operating and cultures and large sums of money involved, it’s probably wise to expect the odd hiccup along the way.

Simon Braham, Investment Director for cross-border M&A at private equity firm LDC, explains that contingency plans are crucial when a business begins to operate internationally and makes acquisitions, such as putting in place someone whose role is to specifically liaise between the domestic board and local management in order to ensure that any fires within the business are spotted and extinguished quickly.

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A lot of M&A loses momentum because management focuses solely on the deal and loses interest in implementing the rationale for increasing the size and presence of the business. Few companies can afford to be that lackadaisical in their thinking anymore. As Don Elgie, CEO of insight and communications agency Creston, puts it: “The key point is that acquisitions stand a greater chance of success if there is a strategic reason for them, rather than just financial roll up.”

That’s true regardless of where you’re buying a business, although acquiring abroad will undoubtedly present a greater test in terms of putting your ideas into practice, largely because of there being more variables to overcome.

Nevertheless, it’s not something to be shied away from. “Acquiring companies in faster-growing overseas markets gives UK companies an opportunity to more quickly build up scale and buy into the growth of these quickly expanding economies and markets,” says Simon. “Importantly, cross-border M&A offers a very strong alternative to what could be a higher risk and importantly slower ‘greenfield’ organic growth strategy.”

Just be sure your team are up to the task and the reasons for expansion have been examined. Pankaj Ghemawat, Criticaleye Thought Leader and Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Spain, warns: “It’s the oldest mistake in international business, companies going overseas when they’ve succeeded at home.

“If you’re Walmart and you’ve mowed down Sears and K-Mart at home, obviously there’s a tendency to think: ‘If we can do this in the US retail market we should be able to do it in South Korea, Brazil or elsewhere.’”

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