Cross-Border M&A and Top Risks

Aug 19, 2021 | Business Insights

M&A Deal

Cross-border M&As have emerged as a way to quickly gain access to new markets and customers. However, as M&A activity rises, so does the need to identify key associated risks  in order to overcome them.

Despite the fact that the worst of last year’s market upheaval has passed, the macroeconomic and political challenges are still contributing to an unsettling climate for mergers and acquisitions. Nevertheless, M&A transactions are a crucial part of many strategies and there are palpable signs that confidence is increasing within the industry.

Top Risk Factors for Cross-Border M&A Deals

M&A Risks
Managing risks in cross-border transactions starts by identifying what they are. Source: Deloitte

Tax Law

Governments around the world are applying more aggressive tax laws to collect returns from corporate taxpayers. Now more than ever, financial information is being exchanged across borders to help tax authorities boost enforcement and ensure global tax cooperation.

It stands to reason, then, that in a Deloitte survey of the risk factors for cross-border M&A deals, tax law topped the list at 47%. Tax legislation uncertainty not only impacts cross-border mergers in emerging markets but domestic transactions too. Research by Ernst & Young revealed that “78% of the world’s largest companies say they are already experiencing greater risk or uncertainty around tax legislation.”

Regulatory

According to Deloitte’s report, Cross-Border M&A: Springboard to Global Growth, 32% of the 500 executives surveyed cited the regulatory environment of a target as a top risk when approaching global M&A deals. A lack of regulatory certainty and strict regulatory barriers may discourage some from engaging in these types of deals. For example, the complexity of regulations in the Asia-Pacific region could deter American business leaders. Especially those that are used to a more relaxed environment.  

Since every country has a unique mix of anti-bribery, anti-money laundering, and other regulations to consider, due diligence needs to be refined accordingly to mitigate the regulatory risks.

Political Stability

Increasingly, investors and private equity firms are taking advantage of the higher growth potential of emerging markets. While these high growth M&A markets often promise the greatest rewards, they also involve the most integrity risks:

  • Political stability and leadership uncertainty
  • Protectionist approach and political burdens
  • Bribery and corruption
  • Over-regulation
  • Scant protection of the economic rights of foreign investors.

Integrity due diligence has been brought to the fore with the enactment of the US Foreign Corrupt Practices Act and the UK Bribery Act. Not only do these laws prohibit the payment of bribes to foreign officials in exchange for business, but they also delve deeper:

  • As part of the due diligence process, an evaluation of the anti-corruption and anti-bribery processes of target companies needs to be shown. This makes financial sense, too, as legal and reputational risk factors negatively impact the viability of a deal.
  • Additionally, links between the management of the target company and government officials must be explored.

Culture and Talent

As noted by Don Mulligan, former CFO at General Mills, “There’s a risk that, when acquiring an asset in another market, you focus on the hard assets but don’t do enough to nurture the soft assets. You can siphon off a lot of value if you don’t manage that risk appropriately”.

general-mills
General Mills World Headquarters. Source: General Mills

On completion of cross-border deals, the M&A process requires swift and positive post-merger integration. Combining the culture and talent of target and acquirer across borders is as fascinating as it is complex. As well as the self-evident language and religious differences, company culture is affected by different heritages. Some of these include analytical, data-driven processes versus gut feelings and an authoritative hierarchy versus one that supports dissent.

Business Risk

As good as they are for business, mergers are generally accompanied by business risk. Concerns specific to cross-border deals include the obtainability, accuracy, and trustworthiness of the target’s financial data. Finding trusted, reliable partners can be challenging, but if you do, the payoff can be fantastic.

Are you looking for a secure and simple network through which to acquire, sell, or merge your business? Opportunity Network is a verified network with no intermediaries that offer confidential deal sourcing, expertise, and no commission fees. Request your private demo to find out more about M&A beyond borders, and top risks to be aware of.

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