Cross-border M&A – on the rise.
As companies grow, domestic M&A allows them to access new product ranges, customers, and aids market consolidation. Cross-border M&A is a tactic used to quickly enter new markets globally. Companies wanting to pursue this strategy will need to consider the upside benefit and downside risk of these ventures when compared to greenfield investments.
According to OECD data1, global cross-border M&A transactions were up +20% during 2016, the second year of double-digit growth (figure 11). US data shows slightly more growth, up +22% over 2015, increasing from US$345b to US$419b. Interestingly, the number of deals has remained reasonably flat, with deal size driving the growth. This is positive for sellers looking for an international buyer. In our opinion, this is a translation of companies looking internationally for growth, and willing to pay for it. If these trends will continue, and you have been weighing up an international transaction, procrastination may be costly or beneficial, depending on what side of the coin you sit.
The opportunities of cross-border M&A
Firms consider international deals, despite the extra effort involved, due to the substantial benefit, it can afford. Benefits come in many forms, which we have listed below, in order of importance:
1. Portfolio diversification – Like a stock portfolio, companies should seek to diversify their revenue streams. This should be in the form of both product and geographic diversification;
2. Cost synergies – reaching capacity takes time. Entering a new market through acquisition can aid cost efficiencies if it increases sales;
3. Scale efficiencies – as with above, new customers help you scale fast;
4. Intellectual property – if competitors have an advantage based on technology that is patented, you can purchase them;
5. Newmarket – this is the most obvious benefit. Newmarket = new customers
6. Access to new talent – If you are looking for a population of a certain skill set, it is often easier to acquire a company in a population with those skills than training staff;
7. Distribution – it’s common to have the strongest distribution network in your local market. Although possible to launch into new markets without a transaction, you will struggle to get a network as strong as a domestic player;
8. Production capacity – Building production capacity is costly and more importantly timely. Rapid demand increases may result in the inability to fulfill orders, you can quickly reach your desired capacity by acquiring it; and
9. Tax structuring – international revenue streams or a relocation of your company’s head office can have a substantial tax benefit.
Cross-border M&A – the verdict
We have seen an increasing volume of international capital flows. What is more relevant to this blog is that cross-border M&A is playing an increasingly important role in the world economy. The data suggest companies are balancing the scale in favor of the positive outcomes. Direct foreign investment can help you import needed technology, enter markets otherwise too difficult, scale quickly and gain desired organizational and managerial skills.
When looking into an acquisition in an international market, comprehensive planning and the use of experts and external advisors is fundamental. This is particularly important during the due diligence process, which is more comprehensive than with domestic M&A. Remember, you are exploring the murky waters of global economic and political uncertainty. There is an upside, but not all roads lead to Rome.
Sam Grice