Cross-Border M&A: Best Practices For Navigating International Acquisitions

Understanding the best practices for navigating international acquisitions is crucial even before you list viable projects for M&A deals. Cross-border M&As are typically strategic acquisitions executed with the objectives to build a global market presence and fuel growth.

Close to 50,000 M&A transactions were conducted worldwide in 2022. This number is lower than the tally for 2021 at close to 58,000 deals. However, companies continue to look for new projects across the border to grab a market presence in a new country.

Although cross-border M&A deals are attractive propositions, dealmakers should be aware of the barriers to such transactions. Preparing with research to navigate the many complexities will raise your chances of a successful deal, execution, and integration.

Hiring the services of an expert professional M&A advisor can help you handle legal issues and local labor laws. You’ll also need assistance with compliance with laws and regulations relevant to foreign acquisitions.

Don’t forget to factor in the cultural differences and changing political landscape that can influence the deal and its outcomes. You’ll need to plan every step of the transaction in detail with strategic thinking and failsafe measures to deal with potential pitfalls.

Deals like these typically involve billions of dollars, and a merger going wrong can result in substantial losses for stakeholders. Let’s dive into the best practices for navigating international acquisitions.

Best Practices For Navigating International Acquisitions

Explore Your Objectives from the Merger

Company owners must start by clearly defining their objectives and vision from the merger. They should also be clear on the strategies and synergies they hope to acquire from the deal. This is the ideal starting point for identifying the right projects to acquire.

Next, you’ll match the targeted companies with the buyer’s company profile to check if it is a good fit. You’ll also explore how well it can integrate with your company. Having independent advisors at the negotiation table and throughout the deal can be highly beneficial.

They can provide you with expertise at every step of the transaction’s lifecycle, starting by assessing the expected value. Also, outline the benefits of entering into new markets and the potential savings in costs and expenses.

Research the Foreign Markets

An essential facet of cross-border M&A is that the host country has distinct laws, regulations, and culture. You’ll also expect to navigate their political landscape that has specific national priorities and practices. Unfamiliar operational and financial strategies are other areas of focus.

Learning more about these facets will help you build a strategic approach to executing the deal. The information you gather will also dictate the economic viability of the project. Don’t make the mistake of assuming that having experience with domestic markets will help.

Instead, you should do extensive due diligence to learn more about the market conditions and languages of the foreign location. Also, explore product approval criteria, customer purchasing power and trends, religious influences, customs and traditions, and technological standards.

The in-depth screening you conduct at this time will be a valuable asset during the deal’s execution and integration process.

Structure the Transaction Per Local Regulations

One of the best practices for navigating international acquisitions is to factor in local taxation laws and get government authorization. Make sure to inquire about the compliances you need to get and timelines for executing each step of the deal.

You’ll also need information about the government organization or local civil code that oversees mergers and get their approval. Local legal counsel can instruct you on the paperwork you need to fill out and their signing regulations.

For instance, the authorities may have laws about the appropriate personnel they authorize to sign the merger agreements. They may also need confirmation that the M&A has the approval of all corporate entities in executive designations.

For instance, in Japan, the Representative Director is the key decision-maker and authorized to enter into deals. However, the negotiator could be an entirely different person.

Retaining local M&A advisors to guide you through the process is advisable. Make sure they have the relevant expertise and competence in handling such transactions. That’s how they can direct you through the country’s acquisition structures.

Here are a Few Examples

For instance, Japanese corporate laws have a corporate split/de-merger scheme. Accordingly, acquirers can purchase only specific assets and liabilities of the targeted company. As a result, buyers don’t need to obtain consent from third parties, employees, and any other entities who are stakeholders.

Let’s try another example. French Civil Code and Commercial Code regulation requires acquirers to include employees in the decision-making processes. That is if the owners are considering selling their company or most of its equity. You’ll have to get letters of consent from the targeted company’s employees, which can be an uphill task.

Legal counselors can also guide you through the fees and charges you’ll pay to the authorities. For instance, the German FCO is an independent authority that regulates mergers.

Dealmakers must report their transaction to this organization and pay the necessary fee, which includes administrative expenses. A pro-rata charge based on the expected value of the deal is also payable.

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Retaining the Right Legal Counsel

When you’re executing deals worth billions of dollars, you’ll ensure that the local legal team has the required expertise to assist you. Here’s how to screen potential candidates:

• Discuss the payment structure, which can be hourly, dependent on the location, or transaction.
• Read the initial introductory and application letter carefully. If you have trouble understanding the language and terminology, look for alternatives.
• Cross-border M&A deals typically have legal teams from both sides assisting at the table. If the local team has certain conflicts of interest, they must clearly disclose how that impacts their services. If needed, acquire the necessary waivers and understand the relevant procedures. For instance, the legal team may represent a third party litigating against the acquirer.
• Legal teams are typically subject to laws against professional malpractice. Some locations have limitations on the liability firms can be asked to pay. These limits can depend on several factors, such as the fee paid to the firm, its insurance coverage, and local laws.
• The local legal team’s expertise and experience with best practices for navigating international acquisitions is also a critical factor here. Make sure the firm has worked with overseas buyers and facilitated cross-border M&As before.

Restrictions on Foreign Investment Per Local Laws

Many countries have restrictions on the sectors where they permit foreign direct investment. You’ll check the local statutory restrictions that may prohibit the acquisition you’ve planned. Some of the business verticals where you can’t purchase assets include:

• Real estate within or along the country’s borders or coastline
• Companies that own or manage Personally Identifiable Information (PII) of local citizens
• Businesses dealing in medical devices and therapeutic treatments
• Advanced and innovative technology-driven sectors
• Natural resources mining and processing
• Infrastructure for utilities
• Military and defense or any sectors related to them

Aside from navigating the foreign direct investment regulations, you’ll also need to handle political considerations. Ensure that the legal firm is adept at understanding the relevant laws without the risk of oversights and errors.

You’ll avoid the risk of incurring penalties and fines by instituting thorough communication guidelines all through the transaction. Transparency and communication also ensure that all stakeholder interests are dealt with.

Reviewing All Relevant Documents

Sharing sensitive documents using a virtual and secure data room is standard practice in M&A deals today. That’s how buyers and sellers can ensure complete confidentiality and protection from hacking incidents.

When receiving shared documents and accessing the room, you’ll comply with all local regulations pertaining to its security. For starters, check with the legal team for directions on the documents you can share with the other personnel on the due diligence team.

These experts may include human resources, business, finance, insurance, and taxation. Local legal firms will also direct you on the key issues to focus on. Let’s try a few examples:

• Japanese employment contracts include not just monetary salaries and wages but also other forms of compensation. As a potential acquirer, you should know exactly what the remuneration model is and how it works.
• Work councils and unions in Europe assign rights to employees by which they must receive information about the deal before signing. Councils can disagree with the proposed merger or block the transaction outright.
• French laws dictate that although councils cannot stop a cross-border M&A, they can delay it. That is if they have not received adequate information.
• German and Swiss laws require acquirers to take on the pension liabilities of the company they are buying.

These examples are only about local labor laws in different countries. However, they will give you an overview of the differences in contracts and agreements that you’ll look into.

When sharing documents through a virtual data room, ensure complete transparency. Instruct all the participating teams to indicate that they have received and examined each document as and when reviewed.

Conducting Due Diligence

Whether cross-border M&A or mergers within the country–due diligence is a crucial step that needs detailed execution. When you’re negotiating acquisitions in a foreign country, you’ll work harder to gather all the relevant information.

Have your legal teams from both countries scrutinize all the documents carefully, including sale and purchase agreements and financials. Also, examine non-compete contracts, change of control terms, and any Most Favored Nation (MFN) grants the targeted company has acquired.

On their part, buyers can facilitate the due diligence process by informing the legal counsel of their objectives behind the transaction. As a result, they are in a better position to identify the gaps in the due diligence reports and create more detailed reports.

Don’t overlook the importance of having an appropriate template and format for the report. You may also need them to create a global legal due diligence report. This is a document containing all the vital legal due diligence findings. And one of the most crucial best practices for navigating international acquisitions.

Knowing how to navigate the due diligence process will be exceptionally helpful to you in every business transaction. Check out this video where I have explained in detail how it’s done.

Drawing Up Merger Agreements

Regulations for drawing up agreements can be entirely different on both sides of a cross-border M&A deal. Discussing the key clauses, both parties must include at the start of the negotiations will ensure that the deal progresses smoothly.

In-depth details, conditions, clauses, areas covered, and formats are all reliant on the standard market practices in each country. It’s advisable to find a middle ground that includes mandatory information for compliance in both countries.

You’ll also discuss how to handle the transfer of Intellectual Property, proprietary intangible assets, copyrights, and trademarks. Also, talk about navigating anti-trust and anti-corruption laws and any other restrictions on foreign direct investment.

Disagreements in adding clauses and closing conditions often lead to a breakdown in negotiations and are best avoided. Such breakdowns often occur if you need approval from the boards of directors to execute the merger.

Eliminate this possibility by having open channels of communication across the board. Make sure to get management and executive buy-ins before you proceed with the acquisition. Talk about the benefits of the merger, the value you hope to get, and the potential impact on the company’s growth.

Conforming to Applicable Taxes

Mergers and acquisitions involve a transfer of assets and liabilities from the seller to the buyer, which incurs taxation. If the acquirer is liable to pay the taxes, dealmakers will want to factor in the payment structure. Working out these details when discussing the terms of the M&A deal is always advisable.

You’ll also want to research into the pricing and taxation structure for transferring Intangible Assets, Intellectual Property, and supply services. These aspects are particularly relevant in the case of IT or digital company

If you intend to relocate the core talent and other top personnel, you’ll work that into the agreement. Most importantly, acquirers may want to transfer profits from their targeted company and move them overseas. Looking into international tax treaties and analyzing multi-jurisdiction tax is critical here.

In a Nutshell!

When there are billions of dollars on the line with a strategic merger, deploy the best practices for navigating international acquisitions. Taking the necessary steps in the initial stages helps you mitigate these risks.

Be sure to include regulatory, legal, tax, and regulatory due diligence and pre-determine the integration structure to ensure a successful amalgamation. Do what it takes for the company to become operational quickly so it can start growing and generating profits.

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