Managing Cross–Border Deals
More and more companies are pushing into new territories, counting on their ability to buy in talent and new business to expand. This has always been the case but now we are seeing increasing investment and risk taking on less developed countries, on a more frequent basis. In these transactions, you have the same issues as in traditional local markets, but more need for true local understanding, the best local and regional advisers and the ability to have strong legal, accounting, and finance teams in place to support and guide the businesses forward and also to assist them crucially in growing out of their home markets with their products and services.
This month, Erik Lazar, Director and founder of Transatlantic Law International (TALI), a global business law provider in more than 95 countries, explains how he and his firm are able to do this. TALI’s global presence and footprint in more countries than most with experienced teams in most major countries. he and his firm have considerable experience in making cross-border deals work and also always identify sound local accounting and tax partners that their clients can work with to support the acquired businesses going forward.
What are the most important factors to success in a cross-border transaction?
For a company, knowing the target inside and out to the greatest extent possible before the lawyers are brought in, if possible, is the single most important factor in my view.
Many deals have negative effects because they are driven by the desire to gain revenue streams quickly without looking at the target or the personnel or substance. AOL – Time Warner is a classic example on the macro side, but there are multiple smaller deals including single country deals which fall victim to what I call deal fever vs. sound analysis and motivation.
The other key factors are organising the deal team and all disciplines in advance, deal team coordination and getting the tax and finance due diligence done first, if possible – at least on a high level – before pouring on and in the other team resources. If the numbers don’t work, there may be little sense proceeding. In a cross border-deal cultural understanding and local knowledge are also critical.
How do you achieve effective communication and ensure a deal runs smoothly?
In the best of worlds, a company would structure a deal team in advance with key team leaders for each discipline (tax and finance, legal, environmental, IP, risk and Insurance, technology, HR assessment etc.) and integrate those teams in advance with the legal team head in these areas. Priorities should be set so that overall deal spend is minimized by concentrating on what is most important and rolling out due diligence in a stages as the most important issues become clear.
The reality is that most companies continue to move a deal as quickly as possible so that there is an ‘all in – all at once’ approach with teams working in parallel feeding into the central business team and not necessarily a great deal of communication – what is called the silo structure which means teams work alongside each other and only communicate at certain stages.
How you bridge the gap is relatively simple on the legal side – you have to make sure you have an effective overall team head and the best communicators as your specialist legal team and then make sure you have clear communications loops with the company and have regular updates so that all key issues and positions are filtered into a funnel leading to the SPA or APA which after all reflects what the deal is.
This creates in real time a running and constantly updated list of key deal issues and solutions. Indeed this is what we do and most experienced M&A counsels should do. It’s intuitive and simple if you have the right people on board which is a prerequisite of course for any such exercise.
We are also a big fan of getting to the key management sites and speaking to managers and employees early on, as the best due diligence is face to face without the investment bankers present – you get much more true information that way (the old fashioned way) than through a data room virtual or physical.
What are the common reasons transactions are cancelled after due diligence?
The core factors for failure at the d/d stage remain fundamentally the same with some shifts due to technology and changes in laws. The biggest reasons involve the numbers – i.e., the accounts, sales and contingent liabilities including hidden tax and social security charge exposure or sales tax non-compliance for example.
After that, there may be particular issues about the products or services or the supply chain, including over-reliance on certain products or supplies in the revenue stream. There may also be an over-reliance on a core set of customers.
After that you have typical issues with the inability to unwind certain assets or commitments or too complex a corporate structure so that the target should be restructured before the deal.
The usual hidden liabilities such as ethical issues and environmental problems could also be deal killers, of course. Most of these can be rooted out by a sharply focused upfront approach to deal making if one has time and the buyer is open to it.
Finally, new technologies and the ability of companies to operate globally and expand quickly, but not necessarily in accord with local law, can create issues including reliance on sales where not operating legally, lack of attention to consumer or other laws even where properly registered, lack of local licensing, poor attention to data protection; and again, security and cyber security issues or lack of the right personnel in the buyer and / or seller to deal with these issues if the company is moving internationally but too quickly.
What continuing legal support do you recommend after investment and why is this important?
The single most important challenge which seasoned acquiring companies often do very well is restructuring – or indeed they can allow companies to continue on a standalone basis if a portfolio approach is taken, but in a reorganised structure. In both cases, continuing outside legal support is vital as well as putting into place a cost effective legal team which is dedicated to and tuned into, the objectives of the buyer.
This is important because prior counsel would have been aligned with prior management (usually) and owners (more particularly) which creates a de facto and ongoing conflict in interest, both in terms of defending the status quo and management carried over, and also in managing any ongoing warranty and related issues, where the sellers are carried over management, or are significant personal shareholders in the new operation.
What we do is to provide a day to day service team immediately after the deal to support the acquired business on all corporate, commercial, labour, employment and related matters, through the transition and structuring. The team is led usually by the specialist counsel who engaged in the due diligence in those particular areas, as they will already have had familiarity with the company and hopefully have built relationships with the acquired management. The service team has to be lean and suited also to local management with costs brought down so legal support is in fact a benefit and not a burden, which we are also careful to do.
For the buyer it’s critical to take such an approach to make sure that issues are spotted early, buyer norms are being implemented across the board in everything from commercial terms to approaches to labour and employment issues and also above all in policies and company values as set out in rolling out compliance and ethics guidelines. In this way one also has an immediate team in place for the next deal in that country, our advantage being that we cover over 95 countries and more world-wide.
Will Brexit have any effect on cross border M&A in Europe?
If the United Kingdom remains in the EU trading zone or gets an equivalent offer (most likely by having to accept the primacy of EU law or certain EU laws), then there will be very little effect. On the other hand if not, then the UK will be likely seen by European business as another ‘third country’, albeit an important one for trade and there should be an impetus of buyers to focus on the UK as a separate single country market. That would increase M&A which is European law based and decrease M&A which is UK based. However, while predictions now cannot be relied on, contingent thinking and planning is a requisite. As the UK will continue with all EU laws and regulations being adapted as ‘local’ laws and eliminate them only over time, there should not be any short term effect in how M&A works in the UK for the relative short and medium term going forward in a legal sense. However, cross border filings in Brussels for multi-country acquisitions may either be eliminated (if the UK is seen as a separate country) or compounded (if a UK separate filing is needed, and also multiple European filings or a single Brussels filing). As noted, one can only surmise at this point and plan accordingly.