Cross-border M&A Springboard To Global Growth
Cross-border M&ASpringboard to global growth
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Cross-border M&A Springboard to global growthExecutive summaryAs companies seek increased competitiveness and growth in newgeographies, cross-border Mergers and Acquisitions (M&A) has emergedas one way to quickly gain new market and customer access. Historicalglobal M&A trends, along with macroeconomic, regulatory, and marketdynamics, point to increasing cross-border deal volume. In fact, 2015saw the most cross-border deals to date in any given year, and theBaker McKenzie Cross-border M&A Index remained at a sustained highof 222 in 2016 after peaking at an average of 272 in 2015. However,many companies are weighing the value of cross-border deals against”greenfield” investing or pursuing a joint venture to expand presence ina new market—a situation we call the “cross-border M&A conundrum.”Advantages of cross-border M&Ainclude expediting time to market,gaining access, scale, and brandrecognition, and mitigating competitivemoves. At the same time, companiesare acknowledging the challengesposed by cross-border deals in termsof market assessment, regulatoryevaluation, cultural fit, and dealstructure evaluation.To better understand the successesand pitfalls associated with crossborder deals, Deloitte conducteda survey of more than 500 clientexecutives with cross-border M&Aexperience across regions, industries,and functions. The survey resultsprovided insight and perspective ontrends, which were then supplementedwith Deloitte experience.Through our research, we haveidentified three key themes incross-border M&A:01. Stronger appetite for cross-border M&Ain key deal corridors is primarily drivenby revenue growth and access to newproducts and channels.02. Commercial and operational diligence,along with a thorough understandingof tax, regulatory, and political risks, areimperative to cross-border deal success.03. Early and focused integration planninghas an outsize impact on overalldeal success.Based on our survey and lessonslearned from Deloitte’s cross-borderM&A experience, it is critical thatdeal thesis and objectives drive allphases of the M&A lifecycle fromtarget screening to due diligence andintegration, especially for cross-borderdeals. Organizations need to integratepre-deal due diligence with pre-closeplanning activities to prevent handoffmisses, define the overall integrationapproach, and plan for achieving bothlegal close and end-state goals.This article reviews cross-border M&Atrends; identifies potential challengesto cross-border deals; offers insightsinto how companies can manage thesecomplexities; and shows that crossborder M&A may provide a betteropportunity for growth thana greenfield investment.03
Cross-border M&A Springboard to global growthIntroductionThe globalization imperative comeswith a host of opportunities and risks.Cross-border M&A has emerged asa key tool in pursuit of new markets,technologies, capabilities, and productsin order to drive growth, innovation,and transformation. As cross-borderdeal activity continues, companies willneed to weigh the risks and rewardsof engaging in these ventures againstmaking greenfield investments.Further, companies will need to displayagility and preparedness to cash inon opportunistic deals arising fromemerging economic and politicalevents like “Brexit”, the recent USelection, and the referendum in Italy.While it is too soon to estimateand/or quantify the impact on M&Afrom such events, there is no questionthat the status quo will be challengedto a significant degree.What are the issues companies mustprepare for when engaging in crossborder deals? The following analysisdelves into the success rate of crossborder deals across geographies andindustries, and offers our observationson the future of cross-border M&A.Survey approachDeloitte conducted a survey of executives with previous experience undertaking cross-border deals.We gathered insights from nearly 500 executives across regions and industries, and supplemented itwith our experiences and additional research. All of the respondents reported personal experiencewith their companies’ mergers or acquisitions, with the majority (69 percent) indicating extensiveexperience (i.e., participation in three or more deals in the past five years).Figure 1: Respondents’ primary industry and region by Energy ��cEurope and UK/Middle-East/AfricaFinancialServicesLife Sciencesand Health CareLatin , and TechnologySource: Deloitte analysis through primary survey.Value might not add up to 100 percent because respondents could select more than one answer.0450%Canada/United States
Cross-border M&A Springboard to global growthStrong appetite forcross-border M&AStronger appetite for cross-border M&A in key deal corridors is primarilydriven by revenue growth, access to new products, and channelsCross-border M&A in 2015 set records,with announced deal value exceeding 1.38 trillion1 and comprising morethan 31 percent of the year’s total M&Adeal value.2 The period between 2010and 2015 witnessed cross-border M&Adeals worth 5.8 trillion, growing at acombined annual growth rate (CAGR) of15 percent (Figure 2).3 While this growthhas plateaued to some extent in 2016—Baker McKenzie’s cross-border M&Aindex was at 238 in Q3 2016, down 10percent compared to Q3 2015—interestin cross-border M&A remains strong.As further evidence of this trend, thenumber of cross-border M&A deals as apercentage of total deals increased fromapproximately 27 percent to 31 percentover the past two years.4Figure 2: Cross-border M&A deal activity 2010-2015 1800 1500 1200 900 600 300 2.4 1.8 2.0 1.7866775685377445 1.9 2.61,3801,300 2.1 1.4814437 2.8426550533 0.7 - 0201020112012Total Deal Value (in #B)The trend toward larger deals continuedfrom 2015 into 2016, as evidencedby recent big-ticket transactions. Thetop three investors in the first quarter2013Number of deals20142015Avg. Deal Value (in B)of 2016 were China, Canada, and theUS, and the top three investmentdestinations were the US, Switzerland,and the United Kingdom (UK).505
Cross-border M&A Springboard to global growthA sense of uncertainty was introducedinto international M&A markets by theresult of the Brexit referendum in June2016. Deloitte’s analysis6 suggests thatmany dealmakers are in a “wait andsee” mode, approaching the post-Brexitworld in a rational and considered way.However, M&A appetite has traditionallybeen driven by intrinsic factors (such asvaluation and growth prospects of theasset) in addition to external factors likeoverall business confidence and stablemacro environment. Following Britain’sdecision to exit the EU, overseasacquirers may likely be attracted toBritish assets, which are now availableat cheaper valuations driven by thedepreciation of the pound. A snappoll conducted by Deloitte indicatesfar greater numbers are consideringincremental M&A opportunities fromBrexit than those looking away fromthe UK as a target destination.Figure 3: Cross-border M&A by target regions, 2010 to 20157Japan to North America 158.9B; CAGR 25.7%Europe to US 680.6B; CAGR 22.7%China to Europe 66.7B; CAGR 52.3%US to Europe 593.0B; CAGR 27.6%US to Asia-Pacific 112.3B; CAGR 3.4%Asia-Pacific to US 312.9B; CAGR 37.7%06RegionOutbound deals (% of total deal value)Inbound deals (% of total deal value)North AmericaC&IP and TMT (35%, 21%)C&IP and TMT (29%, 21%)EuropeC&IP and E&R (39%, 20%)C&IP and TMT (41%, 19%)Asia-PacificE&R and C&IP (32%, 28%)C&IP and E&R (34%, 30%)South AmericaC&IP and FSI (35%, 28%)E&R and C&IP (38%, 24%)Africa/Middle-EastLSHC and C&IP (35%, 27%)C&IP and TMT (38%, 27%)
Cross-border M&A Springboard to global growthRegarding rationale for the deal, surveyrespondents identified a numberof drivers that create a compellingbusiness case for cross-border M&A(Figure 4). These include saturation orslowdown in core markets and need fordiversification; regulatory uncertainty inhome markets (e.g., Latin American—LATAM—outbound) and highrepatriation costs of overseas earnings(e.g., US tax inversion outbounddeals); technology and productivityenhancement synergies (e.g., APACinbound deals, North America inbounddeals). Note, however, that recentUS Treasury rules would restrict thepractice of earnings stripping oftenundertaken following an inversion andother related party debt structures.Figure 4: Top strategic deal objectives50%Portfolio diversificationFavorable regulatory environment,including tax structuring40%35%Cost synergies29%Scale efficienciesAcquiring intellectual property27%Access to new talent25%Adding distribution networks25%Adding production capacity25%Securing new product technologyGrowth in new geographic markets22%12%Source: Deloitte analysis through primary survey.Value might not add up to 100 percent because respondents could select more than one answer.Not surprisingly, our survey showsthat deals driven by technologyand productivity enhancement aremore common in industries thatplace a premium on innovation,such as technology, media andtelecom (TMT), and life sciences& health care (LSHC). Specificdrivers include high US technologycompany valuations and anincreased focus on acquiring drugpipelines versus organic researchand development.07
Cross-border M&A Springboard to global growthUnique due diligenceconsiderationsCommercial and operational diligence—along with a thoroughunderstanding of tax, regulatory, and political risks—areimperative to cross-border deal successAcquiring companies may have torecalibrate their perceptions of risk andtheir traditional due diligence process toaddress both common and unique riskfactors that accompany cross-borderM&A transactions. The deal team willneed to focus on common risk factorssuch as national and regional tax laws;the availability, accuracy, andreliability of the target company’sfinancial information; the country’spolitical stability; and the target’scompliance with the US Foreign CorruptPractices Act (FCPA) and similar antibribery and anti-money laundering(AML) regulations (Figure 5).Figure 5: Top risk factors for cross-border M&A deals47%36%32%28%Tax lawRegulatoryPolitical stabilityCulture and talent25%Business riskSource: Deloitte analysis through primary survey.Value might not add up to 100 percent because respondents could select more than one answer.A company can also adjust its duediligence approach to identify andaddress a target’s unique mix ofgeographic and industry risk factors.To illustrate, regulatory complexitiesin Asia-Pacific (ACPA) countries maydiscourage EMEA and Americasinvestors that are accustomed to a morebusiness-friendly environment. Thecautious approach of certain acquirersin the immediate aftermath of Brexit,the Italian referendum, and the USelections is another case in point asoverseas acquirers are expected to laygreater emphasis on pre-deal diligence,especially in areas such as forex risk andtrade agreements. Similarly, politicalstability is a top risk concern from LATAMcompanies (Brazil, Venezuela).09
Cross-border M&A Springboard to global growthFrom Deloitte’s experience, challengesthat add complexity during the targetidentification and transaction executionphase may include sectoral caps forforeign investment, lack of reliableinformation on the target, differentofficial languages, disclosure andreporting requirements, coverage ofdata aggregators, complicated taxstructures, cultural and languagebarriers, multiple levels of complexlegal processes, and divergentexpectations on acquisition price.Similarly, navigating stringent laborlaws and gaining approval from workcouncils may significantly lengthen dealtimelines for European transactions.Survey respondents judged researchfrom a consultancy and third-partyadvisory support to be the most helpfulinformation for evaluation of potentialtargets, especially acquirers withheadquarters in APAC.Survey respondents assigned significantimportance to reliable accounting,tax, operational, commercial, andlegal/regulatory due diligence whentransacting cross-border (Figure 6).Figure 6: Critical aspects of due diligence59%57%54%53%40%0Accountingdue diligenceTax duediligenceOperationaldue diligenceCommercialdue diligenceOtherNorth AmericaEMEAAPACLATAM1. Accounting (63%)2. Tax (56%)1. Tax (56%)2. Accounting (53%)1. Operational (66%)2. Accounting (61%)1. Commercial (62%)2. Tax (60%)Source: Deloitte Analysis through primary surveyValue might not add up to 100% because respondents could select more than one answerOur experience with multiple crossborder deals suggests that companiesshould conduct due diligence earlyin the deal cycle to identify commonpitfalls and integrate pre-deal duediligence with pre-close planningactivities to prevent handoff misses. Inaddition to identifying potential dealbreakers, the due diligence process is10Legal/Regulatorydue diligenceextremely important when assessingthe buyer’s deal rationale and riskmitigation plan. From an industryperspective, LSHC and TMT surveyrespondents said they place greateremphasis on commercial rather thanoperational due diligence (Figure 7),presumably in order to acceleratetopline growth.
Cross-border M&A Springboard to global growthInterestingly, the survey shows thatacquirers from the North America andAPAC regions rated commercial duediligence as a key determinant whenmaking a purchase decision (morethan 50 percent of respondents);however, these respondents placedmore emphasis on extracting costsynergies from the deal, as evidencedby the higher importance attachedto operational findings. Additionally,executives in financial services andinsurance (FSI) and manufacturingoverwhelmingly selected accountingand tax due diligence as mostimportant, while those in the heavilyregulated energy and resources (E&R)industry leaned toward legal/regulatorydue diligence.Figure 7: Due diligence priorities by industry and %0%10%20%Commercial diligence30%40%50%60%70%Operational diligenceSource: Deloitte Analysis through primary surveyWhen further questioned about whichdeal structure, in their experience,proved most effective in pastdeals, the majority of respondentsidentified either full acquisitions (63percent) or majority stake ownership(51 percent). Sixty-nine percent ofsurvey respondents did not view jointventures (JVs) favorably; those workingin TMT and manufacturing indicatedthe highest level of dissatisfactionwith this structure, likely due tothese industries’ unique intellectualproperty considerations. Respondentsattributed their dissatisfaction with JVsprimarily due to a lack of strategic goalalignment among the JV partners. In ourexperience, misalignment can occur dueto the absence of a detailed businessplan, an ambiguous operating andgovernance model, mismatch in capitalinjection expectation versus growth,and unclear boundaries between JVsand the core business. In addition,local partners often lack the operatingcapital of their larger multinationalcounterparts, which can cause JVs tomiss growth expectations.11
Cross-border M&A Springboard to global growthThe critical importanceof integration planningEarly and focused integration planning has an outsize impacton overall deal successWhen reflecting on their regretsfrom prior cross-border M&A dealsand opportunities for improvement,33 percent of executives said theywant to place more emphasis oncomprehensive pre-and post-dealplanning; 32 percent want to bemore aggressive in negotiations; and31 percent want to conduct moreresearch on a target’s market potentialand company culture (Figure 8).Based on Deloitte’s experience witha 5B cross-border transaction in theconsumer products space, pre-dealplanning through constant interactionbetween the buyer and target, anda thorough analysis of competitivelysensitive information undertaken inclean rooms were all key in expeditingpost-close integration.Figure 8: Opportunities for improvement in future cross-border M&A deals33%Increase planning timelines32%Be more aggressive in negotiationsMore research on prospects marketpotential and company cluture31%29%Financial deal differentlyHire outside consultants to completemore due diligence and planning26%22%Keep more of target staffHave different M&A team work on dealSource: Deloitte Analysis through primary survey1219%
Cross-border M&A Springboard to global growthFrom a regional perspective,respondents in LATAM and APACshared similar regrets aroundintegration and initial target research.52 percent of LATAM respondentsand 43 percent of APAC respondentsdesired a more complete integrationplan for future deals. According tosurvey respondents, 91 percent of thedeals they executed in the previousfive years were all or mostly successful,and respondents indicated that theirprior experiences make them morelikely to pursue future cross-borderdeals. Note that executives in LSHC(29 percent) were the only ones tosignificantly indicate past experienceas a negative influence. When askedabout the likelihood of pursuing dealsin the next two years, 92 percentof executives responded positively.However, those in some industries,such as Professional Services andLife Sciences & Health Care, havereservations about pursuing futurecross-border deals, likely due to thecountry-specific nature of drug- andhospital-related regulations andoperations. Irrespective of region orindustry, respondents indicated thattheir successful experiences with priorcross-border deals will embolden themto pursue additional deals in the future.Overall, the future of cross-borderM&A remains bright, and the numberof deals will likely continue to grow asthe global marketplace becomesmore and more borderless.Our perspectives for executivesconsidering cross-border M&ACompanies can achieve substantialfinancial, market, and competitivevalue through cross-border M&A, andexecutives should plan ahead, conductthorough due diligence, and closelymanage pre- and post-deal execution.Based on our M&A experience, wehave identified a handful of leadingpractices that executives and dealmembers should consider: Ensure that the deal thesis anddeal objectives drive all phases of theM&A lifecycle, from target selectionto due diligence to execution andto integration Adapt the deal methodologyand playbook to specific dealcircumstances to pre-empt globalM&A challenges Integrate pre-deal due diligence withpre-close planning activities to preventhandoff misses Structure the deal so it has the bestchance of meeting its objectives—knowing that full integration may notalways be the right choice Define the overall integration scope,approach, and plan for achieving bothDay 1 and end-state goals Organize a global integration programthat has representation from bothacquirer and target around key workstreams and regions/countries Focus efforts on effectively planningpre- and post-close integration indetail, with dependencies and criticalpath clearly outlined13
Cross-border M&A Springboard to global growthConclusionCompanies are becoming bolder in their use of cross-borderM&A to ignite growth and/or acquire critical capabilities in anincreasingly competitive, global marketplace. Cross-borderdeals can be a springboard to help companies bolster theirtechnological relevance, operational competency,and geographical diversity.Our survey indicates that firms are becoming more competentand experienced in cross-border acquisitions—acknowledgingthe importance of comprehensive planning, tapping theexpertise of external advisors, using thorough due diligence—and are thus able to deliver on their deal objectives. However,executives remain cautious as they navigate the murkywaters of global economic and political instability.14
Cross-border M&A Springboard to global growthDeloitte global contactsLarry HitchcockPrincipal, Mergers & AcquisitionsDeloitte Consulting LLPTel: 1 847 309 3207E-mail: lhitchcock@deloitte.comMirko DierPartnerDeloitte Consulting GmbHTel: 49 175 576 8315E-mail: mdier@deloitte.deHideo MatsuePartnerDeloitte Tohmatsu Consulting JapanTel: 81 80 3367 2826E-mail: hmatsue@tohmatsu.co.jpIain MacmillanPartner, Transaction ServicesDeloitte UKTel: 44 7961 116121E-mail: imacmillan@deloitte.co.ukNik ChickermanePrincipal, Mergers & AcquisitionsDeloitte Consulting LLPTel: 1 650 784 4071E-mail: nchickermane@deloitte.comGaurav DharmadhikariSenior Manager, Mergers & AcquisitionsDeloitte Consulting LLPTel: 1 832 584 1238Email: gaurav@deloitte.comRenata Mitiko MuramotoPartnerDeloitte Consulting BrazilTel: 55 11 97100 1248E-mail: renatamuramoto@deloitte.comKeat LeePartner, Mergers & AcquisitionsDeloitte Consulting (Shanghai)Company LimitedTel: 86 18721975787E-mail: klee@deloitte.com.cnAcknowledgementsRohan Balakrishnan, Manager, M&A; Manish Shekhawat, Manager, M&A;Jayantwin Katia, Consultant; Abhishek Gupta, Consultant; Jyra Bickham, BusinessAnalyst; and Lauren Clark, Business Analyst, all from Deloitte Consulting LLP,have made significant contributions to this article.End Notes1.Deloitte Research & Analysis, Based on 2010-2015 data from MergerMarket (Cross-Border M&A deals withvalue 500 million are captured; deals which have lapsed/withdrawn have not been considered)2.J.P. Morgan, “2016 M&A Global Outlook,” tlook3.Deloitte Research & Analysis, Based on 2010-2015 data from MergerMarket4.J.P. Morgan, “2016 M&A Global Outlook”, tlook5.Deloitte Research & Analysis, Based on data from Thomson Reuters6.Deloitte Research & Analysis, Detailed in “Plotting a new course: The impact of Brexit on M&A activity”7.Deloitte Research & Analysis, Based on 2010-2015 data from MergerMarket15
About the Deloitte M&A InstituteThe Deloitte M&A Institute is a community of clients and practitionersfocused on increasing the value derived from M&A activities, powered byDeloitte’s M&A Services capabilities. The Institute serves as a platform tobuild connections, showcase thought leadership, and accelerate experienceand learning for those involved.Guarantee (“DTTL”), its network of member firms, and their related entities. DTTLand each of its member firms are legally separate and independent entities. DTTL(also referred to as “Deloitte Global”) does not provide services to clients. Pleasesee http://www.deloitte.com/about www.deloitte.com/about for a more detaileddescription of DTTL and its member firms.Deloitte provides audit, consulting, financial advisory, risk management, tax, andrelated services to public and private clients spanning multiple industries. Witha globally connected network of member firms in more than 150 countries andterritories, Deloitte brings world-class capabilities and high-quality service toclients, delivering the insights they need to address their most complex businesschallenges. Deloitte’s more than 225,000 professionals are committed to making animpact that matters. Deloitte serves 4 out 5 Fortune Global 500 companies.This document contains general information only, and none of Deloitte ToucheTohmatsu Limited, its member firms, or their related entities (collectively, the“Deloitte network”) is, by means of this communication, rendering professionaladvice or services. Before making any decision or taking any action that may affectyour finances or your business, you should consult a qualified professional adviser.No entity in the Deloitte network shall be responsible for any loss whatsoeversustained by any person who relies on this communication. 2017. For information, contact Deloitte Touche Tohmatsu Limited.
Cross-border M&A Springboard to global growth 05 Strong appetite for cross-border M&A Cross-border M&A in 2015 set records, with announced deal value exceeding 1.38 trillion1 and comprising more than 31 percent of the year’s total M&A deal value.2 The period between 2010 and 2015 witnessed cross-border
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Mars-Venus Marriages: Culture and Cross-Border M&A Abstract Using a sample of over 800 cross-border acquisitions during 1991-2004, we find that contrary to general perception, cross-border acquisitions perform better in the long-run if the acquirer and the target come from countr
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