How to ensure your cross-border deal is a success
8 min read
14 October 2014
Cross-border deals are not as straightforward as deals in the UK only. Here is what you need to know to make your cross-border deal a success.
At the end of May, New York-based Rakuten Marketing acquired Brighton-based tech firm DC Storm. Around six months before that, social media specialist We Are Social (WAS) was bought by Chinese marketing group BlueFocus. And most recently, US private equity group Lake Capital announced its deal with UK marketing group Engine.
What do all these deals have in common? They were complex, international, cross-border transactions.
There is a lot of debate over just how many marketing and tech sector M&A deals are cross-border these days, not least because the big groups like WPP (and even many independents) already have multiple offices around the globe.
While there are different shades, cross-border deals involving a business that is entirely new to a market are the ones where you have to be most careful – and yet offer the greatest potential for shareholder return. Lake Capital’s lack of previous presence in the UK, for example, was probably a key factor in its choice of investment in Engine.
But whether an acquirer is just testing the cross-border waters or is an experienced campaigner, some issues regularly crop up.
Similar doesn’t mean same
Cross-border M&A faces different social, cultural, procedural and governmental backdrops and even the most similar environments can trip up the unwary: for example, most see the UK and US markets as much the same but it can be a false sense of familiarity – such a deal might not feel cross-border but it still is and should be treated as such.
Where a Chinese group is investing in the UK for example, people expect the ‘foreign’ issues and that sometimes the same words won’t mean the same thing to each party. However, as the famous quote says, the US and UK are still “two nations divided by a common language”.
Most of us would think that we understand the basic financial terminology well and that it is universal – gross profit for example. Is gross profit the same in the UK as in the US? In the US the measure is net revenue but actually, they are not quite the same measure, and this can result in a big difference.
Chemistry, culture and nuance
Chemistry is another issue that comes up time and again in international M&A. A UK business sitting opposite a French investor will feel comfortable that the thinking is much the same on both sides. But the same business with an Asian investor will find it much more difficult to test the chemistry thanks to different business models and protocols. No business discussion during dinner on the first meeting with Eastern audiences, for example.
There are also significant difficulties in chemistry testing when people are not operating in their mother tongue, as nuance means so much.
For those of us in the West who are often less sensitive to such matters, the best way to control this is do everything you possibly can face to face.
The non-verbal stuff such as intonation, body expressions etc. are so much clearer in person and my own experience has taught me under no circumstances to do anything by text no matter what!
Skype if you can’t meet in person, but don’t do email or text if you can possibly avoid it where you are discussing key deal issues with non-English speakers; the potential for misunderstanding is too great.
Of course, this all means cross-border deals take a lot more time: road trips and airplane journeys lead to a longer, more expensive and more complex process. But the value is immense; it gives people a chance to get used to a different social and business culture and see values through a different cultural lens. It’s obvious, but it’s still crucially important.
Numbers aren’t always the common language
Next is the business strategy for the deal. Assessing this means starting with the outcome – what does it aim to deliver in terms of revenue and profits? Only then should you go back and look at what sits behind the numbers – services, clients and so on.
This is another area where things differ markedly between territories. If you were a business based in Brazil five years ago and you were looking at acquiring a European business showing growth of 20 per cent per annum, you’d have seen that as about par given the rate of growth in GDP in Brazil at that time.
Whereas in the UK, growth like that would look unsustainable unless you were growing from a very small base or operating in an outperforming sector like social medial! Similarly, a good agency in the UK might spend 50-60 per cent of its turnover on staff costs – and those numbers would make an uninformed European buyer gasp and weep.
The devil is in the detail
It’s really easy in deal-making to make assumptions that can cripple a cross-border acquisition. US businesses might normally work up a one-page financial structure/offer letter with the initial payment and a multiple, but Germans might produce (and expect) an eight-page document covering the multiple, earn-outs, ratchets, board matters, voting rights and dividend rights. UK deals usually sit in the middle in terms of detail.
It’s okay for prolific acquirers to move fast and go straight for the name on the dotted line, but it’s much harder (and wrong) to hurry and make assumptions about businesses that have only acquired in their own market or not acquired before at all. You can’t always assume both buyers and sellers understand the normal parameters of deal-making.
Any kind of narrative agreement on how a company will be acquired needs to be worked into a financial model in a spreadsheet and agreed at the earliest opportunity, because sometimes, only at this stage, do people realise they have been talking at cross-purposes. Expectations can be set unrealistically because of assumptions about norms in a particular market.
It’s not just about differing cultures; it’s about contract details, numbers and analysis.
Jim Houghton is a partner at Results International.