Language and cultural skills: Learn about the business culture and etiquette, make sure you avoid getting lost in translation, and stay away from actions that could be culturally misinterpreted.
Legal and regulatory concerns: Build a team, of both internal and external experts, that can help and guide the company through the nuances in the specific regulatory environment and industry.
Understanding the purchase price mechanism: Understand the purchase price mechanisms being utilized, perform necessary due diligence, and define all potentially ambiguous terms accordingly.
Mergers & acquisition Transaction advisoryAn essential step when considering acquisition opportunities in foreign countries is the development of an international expansion plan, including consideration of certain elevated financial and regulatory risks. Prior to executing an international merger, acquisition or significant investment, companies must devote adequate time and attention while utilizing the right complement of internal and external resources to establish plans and strategies to adequately assess international business and transactional risks. Unidentified risks and issues will inevitably arise, and use of such a proactive planned approach provides companies with the information necessary to make calculated and efficient business decisions.
The following are five items to consider when closing a cross-border acquisition:
Language and cultural skills: Learn about the business culture and etiquette, make sure you avoid getting lost in translation, and stay away from actions that could be culturally misinterpreted. Speaking the same language does not always mean understanding the culture. Potential buyers should use internal and external resources that are bi-culturally educated in the way to conduct business at a specific foreign location. Consider that the target’s key management personnel, involved in the day-to-day operation of the company, will likely feel more comfortable discussing sensitive issues in their own language with someone who understands their culture. This strategy will enhance your ability to understand current business misbehaviors or malpractices common of the specific cultural environment.
Adequate background research: Work closely with experts at the foreign location who can efficiently guide and provide thoughtful industry insight. While abundant business information exists for larger public acquisition targets, it can be challenging to obtain valuable information for smaller and mid-sized businesses in some countries outside of the United States. Consider reaching out to chambers of commerce in the foreign country, business intelligence sources, and additional industry experts or competitors. Use your professional skepticism when reviewing information obtained by third parties. Consider utilizing a firm to run background checks on key employees and investigate potential opportunities for corruption. Perform pointed interviews geared toward identifying potential risks of fraud and corruption (which includes gaining a thorough understanding of connections to government officials).
Legal and regulatory concerns: Build a team, of both internal and external experts, that can help and guide the company through the nuances in the specific regulatory environment and industry. As stipulated by the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC), pre-acquisition anti-corruption due diligence and post-acquisition anti-corruption integration are one of the hallmarks of an effective corporate compliance program. Those that do not perform adequate Foreign Corrupt Practices Act (FCPA) due diligence prior to a merger or acquisition may face both legal and business risks. Inadequate due diligence can allow a course of bribery to continue. In contrast, companies that conduct effective FCPA due diligence on their acquisition targets are able to evaluate more accurately each target’s value and negotiate for the costs of the bribery to be borne by the target. Such actions demonstrate to the DOJ and SEC a company’s commitment to compliance and are taken into account when evaluating any potential enforcement action. Foreign firms, that have no prior U.S. ownership, may not be familiar with the necessary requirements of the FCPA. Additionally, companies should understand the terms and cost of expatriation and repatriation of money to and from the foreign jurisdiction.
Understanding the purchase price mechanism: Understand the purchase price mechanisms being utilized, perform necessary due diligence, and define all potentially ambiguous terms accordingly. The “locked box” closing mechanism (a fixed price deal with no post-closing adjustment) is commonplace in European transactions, especially among private equity sellers, while the chosen purchase price mechanism for North American transactions is “completion accounts” (sales price is determined based off an estimated balance sheet and a potential purchase price adjustment can occur post-closing). It is important buyers modify diligence according to price mechanism to ensure the sale and purchase agreement include appropriate protections. Additional contractual language and disclosures may be necessary to reduce the potential for post-acquisition accounting disputes which may significantly affect the ultimate transaction price.
Fluctuations in foreign currency and differences in accounting: It is important to understand how foreign currency has affected the historical performance and how fluctuations in the foreign exchange market can affect the target company on a go-forward basis. A buyer should consider the proper mechanism to hedge important foreign currency investments and liabilities within the purchase model and consider the effects of foreign exchange on the purchase price mechanism. Consider inserting into the transaction agreement the specific rules regarding currency conversion and any applicable adjustments when translating financial information from local financial reporting standards—such as International Financial Reporting Standards (IFRS)—into the U.S. generally accepted accounting principles (GAAP). Furthermore, if the potential transaction is going to be prepared under a different set of accounting principles post transaction (US GAAP vs. IFRS) the investor should consider how differences in accounting guidance will affect the reported financials on a go-forward basis.