When Home Retail Group announced that it was in advanced discussions with Wesfarmers to acquire its Homebase business, commentary was mostly on Sainsburys interest in acquiring Argos. Little focus was on Wesfarmers, a company few of us had heard of. Yet Wesfarmers is one of Australias largest public companies, with diverse business operations covering supermarkets, department stores, home improvement, coal, chemicals, energy, fertilisers, and industrial and safety products.
Why Homebase Wesfarmers view the UK home improvement and gardening market as attractive and growing. It intends to grow its existing business, Buntings, and believes it can unlock value in the short term through operational improvement. The intention is to ultimately rebrand the business within the next three to five years and to convert Homebases premium offering to its low price model. Only time will tell whether this strategy will be successful.
Overseas companies entering the UK market do not always go the acquisition route. Some set up successful operations from scratch, including household names, Ikea, Aldi and Lidl.
Not every new venture has been as successful. Carphone Warehouses joint venture with US retailer BestBuy aimed to introduce American-style electronic megastores. Carphone Warehouse bought out its partner and eventually closed the operation after losing millions of pounds. This has not dented Dixons Carphones enthusiasm for the US market, which has kickstarted a 500-store roll-out.
Equally, UK companies have struggled to penetrate foreign markets. Marks & Spencer and Tesco had problems with US operations. There is no magic formula for successfully starting an overseas operation, whether by startup, joint venture or acquisition.
Read more about acquisitions:
- Mergers, acquisitions and restructures: Why they can fail
- Top 7 ways to keep business momentum going during M&As
- Asian buyers offer strong M&A opportunities for British businesses
Starting from scratch is probably most difficult. It takes time to establish brand reputation and can be hard to recruit quality people. Frequently the controlling shareholder is reluctant to let go and there is nobody capable of making the right decisions to allow the business to establish and flourish.
A joint venture with a local third party is another possibility but there is much potential for disagreement, including over roles and funding obligations. Negotiating joint venture agreements can be lengthy and expensive. It can also be difficult to extract yourself from, no matter how well drafted the joint venture documentation is. The only way for overseas companies wanting an immediate presence in the UK market is acquisition of an existing business.
Small to medium companies successful at home, often fail abroad. What works in one country does not necessarily work in another. Local market knowledge is necessary to see whether your product/service is viable in the UK, and market research agencies can assist here. Wesfarmers comprehensively researched the market, visiting hundreds of stores during due diligence.
Avoid the embarrassment of receiving an injunction at launch by carrying out searches to ensure that your brand name or logo is not already registered as a corporate name or trademark, and that no other similar business has the same or a similar name. Does your product/service name translate well in your new market International names can have local translations that are at best inappropriate and, at worst, offensive.
Corporate finance or accountancy firms can help identify target businesses. Once you know a business is for sale, the hard work begins. You will sign a non-disclosure agreement and perhaps even make an indicative offer. By this stage you should instruct professional advisers, including accounting, legal and tax, to create the most tax-efficient structure. Think about how you will fund the acquisition.
Then comes detailed due diligence. Assuming you are happy with what you find and you can agree a satisfactory price, your lawyers will help you negotiate the acquisition documentation, covering property, employees, contracts, pensions, tax, etc. Ensure that the change of control will not lead to major contracts being lost, or withdrawal of existing funding lines.
Be aware that the UK legal system may be different to your own, particularly regarding employment rights, pension scheme obligations, consumer rights and other regulatory matters. And do not overlook the culture of the business you are purchasing. How will you retain and motivate existing management Change management can help with the transition.
As you can see there are many issues to consider, no easy answers and no guarantee of success.
This interest from foreign buyers is but one of the reasons why the government should help businesses improve employees’ foreign language skills through tax breaks or grants, according to a leading entrepreneur in the space.
David Clark is a partner at IBB Solicitors.