Cross border M&A: why reconfigure abroad?

How can modern companies better serve customers, respond to technological change, and compete in such a dynamic economy and changing marketplace?
Massimo Penzo,
September 2019

How can modern companies better serve customers, respond to technological change, and compete in such a dynamic economy and changing marketplace?

One of the most effective ways of expanding shareholder value and responding to market needs is through the divestment and purchase of business units.
Mergers, acquisitions, divestitures, spin-offs, and other activities that change the scope and focus of a company’s business are all examples of business reconfigurations. These business reconfigurations are an important tool, particularly for companies in innovative, high-growth sectors, because they may need to adjust to rapidly changing markets.

Like all business reconfigurations, mergers and acquisitions can generate high economic benefits and returns. These include creating business synergies that are conducive to an increase in value of the combined companies resulting in:

  • financial gain for both the acquirer and the target
  • liquidation of capital for reinvestment
  • and a more efficient allocation of capital throughout the economy

What are the key benefits to Cross border mergers and acquisitions?

Cross-border M&As are used to acquire strategic and natural resources. They allow companies to tap into new markets and gain access to local know-how, product types, specialized suppliers, workforces and capital markets. All of this can have an important influence on a company’s competitive capabilities.

In fact, one of the main reasons, according to a study carried out by McKinsey and Company [1] of 1000 cross border acquisitions, for cross-border acquisitions was the need to “fill capability gaps caused by limited access to strategic resources such as technology, management capabilities, or other intangible assets in their home markets.”

Other key benefits to cross-border mergers and acquisitions include the following:

  • Gain access to new markets, talent, innovation, customers and fast emerging technology
  • Encourage the globalization of domestic trade and investment flows
  • Benefit from geographical diversification
  • Improve efficiency through access to lower production asset costs and larger production scales

What are the key downfalls and how to avoid them?

In many cases, especially within developing marketplaces, cross-border mergers and acquisitions are supported through government policies such as regulatory reforms and privatization, which leads to access to targets for potential acquisitions and/or divestments.

The critical point to underline about cross border mergers and acquisitions is that they are akin to “marriages between individuals” from different countries and hence, without empathy and a sense of understanding, these ventures can likely derail. Furthermore, cross border mergers and acquisitions can work only if the cultural differences are bridged between the partners.

In fact, in recent years, there have been several high-profile cross border mergers and acquisitions that have failed mainly because of cultural differences. In order to avoid this, both partners must fully engage with each other as well as carry out a complete due diligence process before they venture into the deal.

Moreover, differences in the perception about how individualistic the working environment should be compared to how communitarian it should be, are other reasons for failure. It is common, by way of example, for companies in the Far East to deal with red tape and bureaucracy in a different manner which, when compared with the same in the West, leads to totally different working cultures.

All these aspects attest to the fact that despite globalization, cultural differences are a reality that global companies and their local partners cannot ignore and avoid at any cost.

Collaborating with an experienced advisor to ensure all aspects (both technical and during the negotiation process) have been covered is of fundamental importance to help with the globalization process, overcome cultural differences and assist with advisory services in the M&A field.

KNET Project, is a Corporate Finance & Management Consulting company based in Turin and Milan. The international team specialises in Corporate Finance, Mergers and Acquisitions, Turnaround Management and Performance Management.

To find out more about how we see the future of cross-border M&A and our approach to such transactions don’t hesitate to contact us.

[1]Why emerging-market companies acquire abroad