Cross border M&A and the difference between VCs in the US and Europe
From a United States perspective, there are a number of opportunities to grow through acquisitions overseas. Our views should not be limited only to domestic targets. In fact, one could argue that there are better financial opportunities with cross-border M&A than there are in the U.S. due in large part to the Venture Capital community and their investment strategies.
U.S. VCs tend to invest for growth. They’re not as concerned with profitability as long as the company is able to grow its way to profitability at some point. That point is likely to be AFTER the VC gets a return on its investment. While it’s very true that not all of a VC’s investments turn out that way, a VC only needs a few that do to make its desired returns for its investors.
VCs in other countries, particularly in Europe, have a different perspective. Many operate under a more austere premise, investing only as much in the company as is necessary to get to profitability. In many ways this is better for the company and its management, as dilution is limited. On the other hand, growth may be slower.
As a result, there may be better buying opportunities of European companies by U.S. companies. In the high-tech industry, valuation is most frequently determined based on some multiple of last year’s or the last twelve months’ revenues. If a company is growing rapidly, the multiple tends to be higher than if the company is growing slowly. This allows a U.S. strategic buyer to acquire a good company, soundly managed, at a price lower than it would likely pay for a comparably sized U.S. company.
Yes, there are added complexities to a cross-border transaction, but in today’s globalized marketplace, cross-border activities are common because it is necessary for competitive advantage, maintenance of customer relationships with multinational entities, and even survival.
Cross-border transactions have several key challenges, particularly around due diligence. The best way to address these challenges is to work with experts that can be your “feet on the ground” in that country.
Today we have the opportunity to interview Frank Berzau of Berzau Consulting and Training (http://berzau-consulting.com/). Frank has worked at startups and large technology firms. He has been involved with cross-border transactions from both the buyer and seller sides. He has a unique ability to grasp the core of what’s really important.
Q: Frank, can you share with us what are some very important points to consider when looking at a potential cross-border acquisition?
A: Well, what jumps to mind immediately are things like legal issues as cross-border contracts tend to be a little more complex because of the different legal systems. Tax laws, intellectual property rights, international patent law… there are differences from region to region. Cultural issues are then maybe the most important. Language issues, religious and historical background and other related aspects do play an important, often critical, role in making an acquisition successful. Significant time zone differences can also be a noticeable issue for an M&A execution. Ranging from the need to schedule calls at odd hours or sometimes completely out of business hours, up to extended travel time involved for face-to-face meetings.
Q: Do you have an example and what might be the biggest key to a successful transaction?
A: I have seen many examples of acquisitions, and the one thing that has always fascinated me is the executive focus after the closing of the acquisition. This is true for any acquisition, cross-border or not. However, the nature of a cross-border acquisition makes this problem a dominant issue, more so than with domestic acquisitions. You certainly need specialists before closing; legal, technical and all of that. But one thing has become very clear to me, and I believe it’s maybe the most undervalued in the entire M&A life cycle: the post-close integration. I’ve seen a lot of great starts – integration meetings, team building events, all of that. But sustaining efforts to successfully integrate an acquired company into the organization requires a long lasting executive focus. Many executives act like the deal is done when the contracts are signed. They give a great deal of focus to getting the deal done. The truth is that this is when the real work begins. It needs significant executive attention in order to be successful. Of course this applies to both domestic and cross-border acquisitions. It’s just, because of the diversity of culture, language and other aspects; it does require more executive attention. Overall though, the different culture, different points of view and other things the foreign organization brings to the table, will – in many cases – justify the extra effort to make it a successful transaction.
Q: Cultural issues are important in any transaction and they’re amplified in a cross-border deal. What are some issues to consider when assessing the cultural fit?
A: I think it’s not so much an issue today, because with the prevalence of global communication people are generally a lot more open-minded and willing to work together cross-border. What you should consider though, is whether there’s a potential issue with the cultural differences, or the “culture gap”, being too big. In other words, are you willing to work on those kinds of issues; is it worth doing it from a ROI perspective? Think about the perception people in the acquisition target’s country have regarding the United States. Next, what about acquiring multiple companies in countries that have a difficult relationship with each other? These are things to consider, and it’s worth it to spend some extra effort on figuring out how big those are, and whether it’s worth it to spend the effort resolving them – or even possible.
Q: A big fear with some domestic companies is that there will be a language barrier. What about language issues?
A: People around the globe speak English quite well, at least in the regions relevant to potential acquisitions. However, do not underestimate the complexity of language issues. Do not assume people notice subtle details or hints, do not assume they understand humor. Especially in the tech industry, people are very familiar with English when it comes to topics of their core business. Yet they may still be weak in other topics where English is not normally spoken. However, those may be key for the relationship building. Being aware of those limitations, or the uncomfortable situation a non-native speaker experiences in a casual environment, might be really important.
Q: Related to language is the whole issue around communication in general. What are your thoughts about communication issues?
A: Well, communication is more than just language. There are quite a number of non-verbal communication issues to consider. Body language, symbols, gestures. What may be completely harmless in North America might be totally offending in another country. It is good advice to make yourself familiar with these issues. Also, working hours are an important thing to consider. With little overlap in working hours, communication is limited to a potentially small window of opportunity. This may require you to dedicate time in the early morning or late afternoon to communicate with overseas organizations. But even more importantly, when you communicate, verbally or not, you should always honor the difficulty a non-native speaker may have expressing himself. And you are, for the most part, limited to email and phone, maybe videoconferencing when communicating. Ensuring there is enough face time is vital.
Q: Okay, when looking at integrating an overseas organization the acquirer must figure out how it fits in the company’s structure. What about structure or reporting/organizational issues in a cross-border deal?
A: I’ve found that there might be some rather fundamental cultural issues relevant here. Structure or reporting varies from country to country, depending on the history of the political system. These things are embedded very deeply in people’s minds and may even require you to adjust your management style. Things that work in one country may be completely counter-productive in another country. You know, when I start doing business with partners in a new region I usually purchase a book about the history of that country or region, to study and fully understand the historical and cultural background. Very rarely are people spending that much time and effort. However, I found it amazing to see how much impact this has in the daily life of people. To give you a simple example, if you do business with a company from a country that has had, or still has, a monarchy, you will find people tend to apply different management styles than if it was a federal system for the past few centuries. Those things don’t typically show up in the first few meetings before the close of an acquisition. However, they have an impact longer term while you’re trying to integrate an organization.
Q: One issue I’ve come across in my cross-border deals is the issue of being a satellite office to an overseas headquarters. I’ve found Senior Management appearances to be very helpful with a successful integration. How frequently should Senior Management visit the newly acquired office(s)?
A: I don’t think there is a rule of thumb. Just two things to consider: First, whenever you think about the need to go, go. Because asking yourself whether it makes sense to go is a very good indication that it already is. Second, start with more frequent visits, to show attention, to demonstrate you care, and to build the relationship that can only be built in a direct, face-to-face meeting. It’s also a great chance to learn a lot about the culture, history, and other aspects of the people in the acquired office. At the same time, while you demonstrate commitment to all of the acquired company’s employees by visiting them, you can also have key people from the acquired company come visit your facilities. This will help those guys understand your culture, and it will help build the relationships you need. Do not underestimate how attractive a US visit is for those people.
Thanks Frank. I recommend that you connect with Frank if you are looking for M&A support and due diligence work, especially if you’re looking at acquisitions in Europe.
Cross-border M&A is done all the time. They are not to be feared. In 2011, the last year for full-year data, cross border M&A activity was valued at US$908.4 billion during full year 2011, accounting for 35.5% of total volume, approximately the same level as in 2010. The United States registered the highest volume of cross-border M&A by country of purchaser in 2011, while the European Union led in the “by seller” category. Within the EU, France had the most activity in both groups, followed by the Netherlands (at the top of the ranking by purchaser) and Switzerland (first in the ranking by seller.) This data is published here: http://bit.ly/18rot6Y.
Cross-border M&A requires a special sensitivity to cultural issues, a commitment to focus on communication and integration, and a willingness to travel. International deals can easily justify the additional effort and return big ROIs.
If you’re wondering how you build a company that you can sell for a premium in a few years, contact me to discuss the Valuation Amplification Process.
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