Cross-border merger and acquisition (M&A) transactions can help companies unlock access to new markets, diversified customer bases, and valuable growth opportunities. But these deals can be exceedingly complex – even more so than traditional M&A deals – and often come with a unique set of challenges, including currency risk, regulatory uncertainty, and cultural differences.
This article will explore the opportunities and pitfalls of cross-border M&A transactions in high-growth regions. If you’re planning on pursuing a cross-border deal in the near future, then it’s best to speak directly with a team of experienced M&A advisors for personalized advice.
What is Cross-Border M&A?
Cross-border M&A is when two companies from separate countries combine assets. This is typically accomplished by either forming a new company (a merger) or by one company absorbing the other (an acquisition).
These deals typically still follow a standard M&A process, but with added complexities as each company must account for differences in legal systems, tax rules, business cultures, and financial regulations. There are five common types of cross-border M&A transactions:
- Strategic Acquisitions: When one company buys another outright to support its long-term business goals.
- Joint Ventures: When two companies from different countries create a new business, with both companies sharing resources, control, risks, and profits.
- Vertical and Horizontal Integration: When one company buys another, that’s at the same or different level of the supply chain.
- Inbound M&A: When a foreign company acquires or merges with a domestic company, it brings investment and ownership from outside the country into the local market.
- Outbound M&A: When a domestic company acquires or merges with a foreign company, expanding its operations and influence into international markets.
The Unique Opportunities of Cross-Border M&A Deals
Access to New Markets
One of the most common goals in cross-border M&A is to gain immediate access to a new, established market to help grow revenue. Rather than building a presence from the ground up, which can be costly and time-consuming, companies can acquire a well-positioned local business and instantly tap into its existing brand recognition, customer relationships, and operational infrastructure.
Access to New Technology or Products
Acquiring an innovative foreign entity can be an effective way for a company to enhance its products, services, or technological capabilities. This goal is especially common in fast-paced sectors like technology, healthcare, and automotive, where staying ahead of the curve is critical to long-term success.
Diversification of Customer Base
Acquiring a company abroad can help large businesses reduce their reliance on a single market. If one region faces economic downturns, political instability, or regulatory shifts, the company can continue to rely on performance in more stable markets.
Potential Risk Factors in Cross-Border M&A
While the upside potential is hard to argue against, there are several risk factors that can make companies hesitate before pursuing a cross-border deal. Let’s explore the most common potential risk factors in cross-border M&A.
Societal or Regulatory Resistance
Societal resistance occurs when local populations oppose a deal due to cultural, ethical, or environmental concerns. This type of pushback is especially common when larger corporations are trying to enter a smaller, close-knit community, where the company is poised to have a major impact on the local economy.
This pushback typically begins informally through public sentiment or grassroots activism, but it can escalate and eventually influence formal regulatory responses, such as antitrust reviews or foreign investment restrictions.
Successfully overcoming societal resistance can be challenging and often requires proactive trust building. Acquirers should engage in transparent communication, targeted outreach to community stakeholders, and demonstrate a genuine commitment to social responsibility throughout the deal process.
Currency Fluctuations
Fluctuations in currency values are another potential risk in most cross-border transactions, introducing an added layer of complexity to deal structuring and valuation. Exchange rates are inherently volatile and can fluctuate significantly over time, potentially impacting both the purchase price and projected return on investment (ROI) of a deal.
To mitigate these risks, businesses should actively monitor currency trends and consider using hedging strategies, such as forward contracts or currency swaps, to protect against unfavorable currency movements and preserve deal value.
Different Tax Regime or Legal Implications
Another often overlooked challenge is the process of navigating the target country’s tax regime and legal code. Emerging markets tend to have especially inconsistent systems, making it difficult to navigate the deal and forecast issues like the post-deal tax burden. Acquiring companies will likely need to adjust their deal to accommodate differences in:
- Antitrust laws
- Foreign investment restrictions
- Tax laws
- Corporate governance requirements
- Capital gains treatment
Even just getting up to speed on foreign tax and legal laws can be a massive challenge in and of itself that can slow down a deal. Buyers must typically work closely with international legal and tax experts to abide by all regulations, uncover hidden liabilities, and optimize the deal from a legal standpoint.
Due Diligence Challenges
Conducting due diligence in emerging markets is another aspect that’s more challenging in emerging markets, due to limited transparency, inconsistent record-keeping, and unfamiliar legal frameworks.
Buyers may encounter incomplete financial documentation, weak corporate governance, or unregistered assets and liabilities, all factors that can make it harder to assess the true value and risk of a target company.
To reduce exposure, acquirers should leverage local expertise or consider working with a team of experienced M&A advisors who are familiar with cross-border deals.
Difficult Integration Due to Cultural Differences
Post-merger integration – a phase that’s already difficult – can be especially challenging when companies operate across vastly different cultures. Misalignments in communication styles, management expectations, and decision-making processes can erode trust and reduce employee morale. If not proactively addressed, cultural clashes during post-merger integration can lead to talent attrition, slow execution, and failed synergies.
Successful cross-border deals often involve investing in cultural training, appointing integration leaders with global experience, and fostering a shared vision that bridges cultural divides.
3 Strategies to Structure Deals for Success
Pursuing a cross-border M&A strategy can be highly rewarding, but it does come with elevated risks. To protect deal value and mitigate exposure, companies often incorporate protective structures into the transaction.
Common risk-mitigation mechanisms often include withholding part of the purchase price until certain stipulations are met. The three most common ways to do this include:
- Escrow: When a neutral third party holds funds or assets during the transaction, only releasing the funds when predefined conditions (i.e., regulatory approvals or post-close obligations) are satisfied. This ensures compliance and protects both parties.
- Earnouts: When a portion of the purchase price is contingent on future performance milestones. For instance, a buyer may pay 70% of the purchase price upfront, with the remaining 30% disbursed in annual installments over three years, but only if the acquired company meets agreed-upon financial targets.
- Holdbacks: When a percentage of the purchase price is withheld until certain post-close conditions are fulfilled. Common conditions might include clearing local tax obligations, complying with jurisdictional regulations, or resolving known liabilities uncovered during due diligence.
Navigate Cross-Border M&A Transactions With Confidence
Cross-border M&A presents an exciting opportunity for companies to accelerate growth, access new technologies, and diversify their market exposure, particularly in high-growth, emerging markets. These transactions can unlock significant value, whether it’s tapping into established customer bases, acquiring innovative capabilities, or strengthening their global positioning.
However, the potential upside comes with heightened complexity. Potential obstacles like regulatory hurdles, cultural resistance, and currency volatility can all introduce risk that may outweigh the deal’s value if not properly managed.
That’s why it’s critical for companies pursuing this strategy to implement protective structures like escrows, earnouts, and holdbacks that can help safeguard against uncertainty.
Thinking about expanding into a new market? Let the experts at Acquinox Advisors help you evaluate your options, structure your deal for success, and navigate the complexities of international transactions with confidence.
