How to ensure a successful cross-border M&A deal

24 October 2022 Consultancy.uk 6 min. read
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Even as businesses face a range of economic and geopolitical headwinds, demand for cross-border mergers and acquisitions is still high. Jonathon Parkinson, Managing Partner at Marktlink, looks at the key details to getting cross-border deals to work in turbulent times.

Even as the energy crisis, runaway inflation and a plummeting pound spell trouble for the economy, the volume of cross-border M&A deals remains high. In fact, foreign investors are likely to utilise the opportunity that arises with a weakened pound, enabling them to purchase assets at a lower rate. On the other hand, UK investors may be tempted to sell if their assets continue to depreciate in value. Together, these circumstances are likely to further fuel M&A activity in the coming months.

In August 2022, the UK was ranked the number one investment destination in Europe as companies continue to seek growth and the motivation to expand into new territories, as well as bring supply chains in-house. In sectors such as technology, healthcare and distribution, the volume of cross-border deals remains particularly high. However, for those looking to buy a business in the UK, and those seeking to sell one, there are a number of considerations to be made.

Jonathon Parkinson, Managing Partner, Marktlink

To ensure the success of a cross-border deal, businesses should consider the impact of regulatory changes post-Brexit, assess whether the target business is a suitable cultural fit and find an M&A adviser with good local and sector knowledge to help to navigate through the process.

Understand regulatory changes

Being aware of and understanding the intricacies of the regulation involved in a cross-border deal has always been an important part of the preparation process. However, Brexit has led to a number of legislative changes meaning that it’s important to stay up to date with regulation, as it’s still subject to change. For example, recently new rules have been announced in the EU around foreign takeovers to protect and control markets.

Working with an experienced M&A adviser is one way to ensure that business owners are able to understand post-Brexit changes and differing cross border regulation, as well as ensure that legislation does not prevent or delay a successful transaction.

One change following the UK’s exit from the European Union is that there are now multiple bodies to consult during an M&A transaction. For example, for mergers with an EU and a UK element, there may be a requirement for approval from the CMA as well as the European Commission. This need for double clearance may also result in delays in completion. In the UK, the National Security and Investment Act, which scrutinises international takeovers, is another regulatory obstacle to consider. Despite this, deals within European markets are unlikely to be too problematic for this legislation, which tends to be targeted at investment from countries outside Europe.

Consider cultural fit

When embarking on a merger and acquisition, cultural fit is often overlooked. However, it’s an important consideration to make as it can be a pivotal aspect of a successful deal. Business owners need to have a detailed understanding of their own company culture and the culture of the target company to ensure a good fit. This includes aspects such as management practices and ways of working, particularly post-pandemic when many employees are working from home or adopting a hybrid approach.

Failing to consider culture can lead to problems during the integration process. For example, issues can arise if trying to enforce a new way of working on an acquired company or if employees of the acquiring company see benefits being provided in the acquired company that they do not have access to.

It's important to know which cultural elements are most important to the success of the deal, for example, financial management, operations or innovation. Business owners should make comparisons between the two cultures and decide on the best cultural aspects to preserve from each, ensuring that these do not get lost in the merger or acquisition.

Whilst finances and legislation may be at the top of the agenda when it comes to preparing for a cross-border deal, cultural fit should never be an afterthought. It’s particularly crucial when it comes to an international deal as there will likely be cultural differences between working practices in different countries.

Working with a knowledgeable local advisor is another way to ensure a successful cross-border deal. An M&A specialist will have the relevant expertise on legislation, cultural differences, economics and industries in the country in which a business is being brought or sold and can help to navigate through the deal process.

When choosing an advisor, it’s beneficial to look for someone with specialist knowledge in the target sector as well as local expertise, to ensure the best possible deal. Finally, when engaging in a cross-border deal, ensure that the chosen advisor has previous experience working on international deals and is aware of all of the intricacies that are associated with them.

Look before you leap

Although current uncertainty makes it more difficult to predict the trajectory of M&A activity, it’s clear that appetite for cross-border deals remains high. Whilst there were concerns over the impact of Brexit on M&A activity, it has subsequently led to a boost in appetite for UK acquisitions as businesses seek to access UK markets. In combination with the weak pound, the UK remains an appealing destination for investment. At Marktlink, 70% of our projects currently involve an international party and we expect this trend to continue.

However, before entering into a cross-border deal, business owners need to ensure that they have completed the necessary preparation to ensures its success. There is an increasing requirement to understand the regulatory intricacies associated with a cross-border deal and working with an experienced adviser will ensure that this can be achieved.

Furthermore, it remains the case that shareholders often have multiple options when it comes to selling a business, meaning that doing the due diligence and considering which is the best cultural fit is an important and worthwhile part of the process to ensure a seamless integration process.