Accomplishing cross-border deals

The debate about the efficacy of an inorganic growth strategy is a long standing one. Most of the surveys indicate less than half acquisitions to be successful. Add to it the complexity of undertaking acquisitions in a distant land! Critical, dispassionate analysis, due diligence and carefully planned execution will go a long way in undertaking a successful cross-border acquisition.

The usual pitfalls of a domestic M&A transaction are inadequate strategic analysis, over-estimation of synergistic benefits or under assessment of redundancies and integration issues. Compounding this situation in a cross border deal is a multitude of challenges including rapidly changing business dynamics, legal, regulatory and taxation aspects and finally culture and integration issues.

It is indeed a gratifying situation to note that our country presents a high growth opportunity for corporates. Economies in the west are facing enormous pressure on growth, if not recessionary conditions. In the past, acquisitions were meant to offer Indian corporates a larger marketplace to operate. Therefore, presence closer to the consuming market was a big benefit. This thesis has become a little less tenable as growth potential in India is relatively at a much higher level.

Business Dynamics

Therefore, acquisitions that focus on specifics, like acquiring a technology or a contracted customer base are more likely to succeed than transactions that merely look for manufacturing facilities in international locations.

A target that suits an acquirer's requirements perfectly is usually rare to find. In many an instance, the target comes with excess baggage that needs to be restructured/disposed off. Management teams under-assess the redundancies in a target. This results in paying for a business that you need as well as paying for a business that you don't need!

Disposing of the unwanted part is easier said than done due to the close linkages with the other businesses. However, in a bid to be in tune with the market, of having done a cross border deal, or to meet the exacting demands of the capital market to announce higher growth rates in revenues, management teams embark on these adventurous expeditions.

A full appreciation of the way business is undertaken in international markets is critical before finalising a deal. For example, the sales process of pharmaceutical products in the US under the managed healthcare system is significantly different from that in the Indian market. Similarly, the employee-related regulations in certain markets in Europe are legendary for their complexity. Without a proper understanding of these peculiar features, it is a minefield for teams to explore.

Another challenge is the currency of the transaction consideration. In a cross-border transaction, the selling shareholders usually prefer to receive consideration in cash, not stock. This makes it essential to fork out cash in cross border deals. In a domestic deal, there is a possibility to offer stock of a listed entity as most of the shareholders are usually from the same country and can avail of the liquidity offered through listing. A stock payment in some sense aligns the payout to the future growth potential of the combined business.

Legal and Regulatory Framework

In most of the M&A transactions in India, it is customary to seek a representation from the selling shareholders that they are in full compliance with all applicable laws. Rare is the situation where the management or shareholders are completely aware and in full compliance with the plethora of the municipal, state, central, corporate and a host of other applicable rules and laws of statutory bodies. Obviously there is professional advice available when a corporate is making an entry into a new geography.

However, grasping the intricacies of the laws and the implications is rarely, if ever, fully achieved. In some instances, Governments also take a not-so-friendly approach to foreigners owning shares of entities in their countries. This is true even in these days of globalised economies. Sectoral caps on foreign shareholding is one such example.

In some countries, while there may not be a straightforward restriction on ownership, the compliances required and the legal and tax regime could have significantly onerous clauses for entities significantly owned by foreign shareholders. Another important factor is the stability in Government policies- ranging from taxes to price controls to operating conditions. Volatility in these core issues could make a seemingly good target entity bring down the acquiring entity as well.

(The author is Partner, KPMG)

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