International companies, increasingly those from deal-hungry Europe and Asia, can offer great value enhancement opportunities for U.S. businesses seeking buyers. However, foreign buyers aren’t always familiar with U.S. tax regulations and legal obligations. Therefore, foreign buyers need more advisory & diligence support to help navigate the intricacies of the cross-border (“X-border”) deal process.
Asia as a whole has expanded its share of global M&A from 10% in the early 2000s to 20% today.
Driving such dramatic change is China’s hunger for overseas growth. Formerly, the leading impetus behind Chinese M&As was a desire for raw materials and energy resources. Now, Chinese companies are buying everything from banks (Construction Bank Corp.’s acquisition of a 72% stake in Banco Industrial e Comercial SA) to food producers (Shuanghui International’s $7.1 billion purchase of Smithfield Foods).
While these are large deals, the DGC TAS team has recently assisted Asian buyers with middle market deals with values less than $50m. the M&A strategic value proposition on these deals included branded food distribution (and the ability to bring lower priced Asian products to US market) and software integration services where the buyer had lower priced engineering support located outside the US.
We expect to continue to see an increase in X-border M&A deals for middle market companies.
Growing interest in Asia and other regions in buying U.S. companies can mean greater competition and potentially a higher sale price for your business. But advisors need to take on more responsibility during the deal process than they would with a domestic buyer. This could increase the timeline to complete the deal but the higher price may be worth the patience for sellers.
Foreign buyers are under a unique set of obligations: They must comply with legal and regulatory requirements both in their home countries and in the United States. Common X-border deal issues include the following:
Employee quality, The most frequent issue that buyers will cite for a failed X-border deal is the quality of the people. Getting the right talent and being able to retain it is critical to success in the US as the foreign buyer usually does not have its own employees that it can plug and play in the target post closing. Additional diligence on key employees is required to assess the level of talent, the strategic fit and to develop the retention plan (communication and incentives).
Tax laws & structure. Determining the right tax structure involves a technical analysis of both the buyer’s country tax laws and the US tax laws for the target as well the applicable US tax treaty, if any. Structuring analysis should focus not only on the US taxation of the US operations but also the tax cost of repatriating profits back to the foreign parent (buyer). These issues are unique to X-border transactions and add complexity to the normal buyer and seller tax analysis required for domestic M&A transactions.
Invalid obligations. Are there any obligations that could be difficult for an international buyer to assume? For example, some noncompete agreements, licenses, permits and patents may not be valid under foreign ownership. Are there customer agreements (i.e. government or defense) that will become invalid if a foreign buyer owns the company?
Ongoing litigation. Try to settle any litigation or outstanding issues involving regulatory requirements, intellectual property, employees, customers or competitors before entering serious deal negotiations. No business buyer wants to assume legal liabilities, but such issues are especially off-putting to foreign buyers unfamiliar with U.S. law.
X-border mergers make integrating operating and management cultures especially challenging. Despite the best intentions of both parties, international M&A typically generate some degree of cultural friction. The parties need to assess whether the US operations have a unique culture that results in higher revenue growth and profitability. We often see financial over performance in unique cultures that occur in entrepreneurially managed middle market companies.
For example, a government-affiliated Chinese buyer may be accustomed to integrating acquisitions at a faster speed than most U.S. companies are. Or your buyer might underestimate the cost of consolidating regional offices or the distribution channel. Differing expectations can lead to frustration and confusion. So help prospective buyers by providing reasonable timeframes and cost synergy analysis based on your homegrown experience operating in the United States. An important part of the diligence process is to flush out reasonable integration plans.
Employee relations can also be a live wire. International owners may be unfamiliar with U.S. holidays or such practices as medical, sick and disability leave. They also might, because of their own country’s accounting or regulatory requirements, need to “terminate” and then rehire your company’s employees. Unless it’s explained in advance, this could be an alarming situation for U.S. workers. To defuse possible conflicts, work proactively to acculturate both companies to each other’s work practices and/or at least make sure management understands, and respects, the differences in employment practices.
Communication on articulating the deals benefit to employees and a well planned integration strategy is key to avoid cultural drift (and/or rift) post closing.
Despite the many challenges, an international deal may be worth pursuing. Some analysts have noted that Asian & European companies are now making the kinds of acquisitions — particularly cross-border and large-volume — that U.S. buyers have shied away from in recent years. But to reduce potential headaches — and realize the best price for your business — do what you can to bridge the inevitable financial, legal and cultural divides.
We have assisted many sellers in pre-sale diligence which helps increase price, accelerates transaction closing time lines and increases closing surety. This pre-sale diligence effort is even more advantageous for X-border M&A deals.
Our advice? Consult with an M&A expert at DGC. ■