March 21, 2020 at 7:38 am #108852
What are relevant risks that impact cross border transactions?
In my opinion, M&A across borders brings greater risks to rival the potential for greater rewards. Accessing different territories opens up new markets for customers, capital, labour, materials, regulatory and tax regimes, etc. However cross border risks are usually higher. This can be on account of factors such as:
❏ Reliability and cost of electricity
Comparisons between regions can be made by the volume of the procedures involved, time and cost invested, quality in reliability and service restorations, methods for communication, etc.
In the Bahamas, electricity can go out up to twice a week, especially in the summer months. Many people and businesses have adjusted through using backup generators. For businesses the cost of electricity on the islands can be a significant cost of doing business, especially for manufacturing and production companies. These and other factors can make it difficult for certain industries to thrive in the region.
❏ Registering property differences
Some of the factors that can be analyzed to determine the impact from differences in property markets and regulation include the scope and implications of the procedures, time and cost factors, how to obtain tax clearances and utility documentation from the municipality, title search and registration processes, etc.
Registering property in Canada in many cases can take about 4 days, is relatively low cost and can utilize a highly available and reliable land administration system. However in the Bahamas it takes more than 4 months, incurs high transaction costs, and has access to a very low quality land administration system. While in Germany it can take about 2 months to register property, is about half the cost of the Bahamas, and is one of few countries with an even better land management system than Canada.
Working between these systems can have a material impact on the business case if they are not well accounted for. Digging deeper into the details can even provide opportunities to improve the business case.
For example, the business structure of an international industrial group may include a longer timeline for setting up some office, IP, management, etc functions in the Bahamas (or another jurisdiction that has appropriate treaties). Also they may find ways to shift activities requiring more facilities planning flexibility to Canada, while keeping activities that require a high degree of operational certainty in Canada or Germany.
Many other areas may be relevant which could include:
❏ Conflict of laws and differences in enforcement
❏ Accounting and insolvency differences
❏ Cultural mis-alignment
❏ Payment processing
❏ Tax regulation
❏ Ease of starting a business
❏ Constructing regulation
❏ Getting credit
❏ Other factors specific to the situation
The multitude of variables involved when doing transactions across borders increases the unknown risks. A thorough understanding of the differences between aspects in each region, and how they relate positions a company to mitigate surprises to the downside. As well as take advantage of opportunities which are discovered to improve the business case.April 18, 2020 at 10:23 pm #109494
Paul Gray, MBAParticipant
Cross Border M&A are indeed high risk endeavors and this is especially so in environments where the ease of doing business create several gaps relative to the ideal. That said, it would be incumbent on the acquirer to ensure a robust due diligence of the target and be extremely clear in terms of the acquisition objectives. With the foregoing, the integration planning activities will need to commence early with the expectation that an Integration Management Office will be required in the foreign land to manage and oversee the integration. That said, it would also be critical that the integration management office as far as is possible, includes senior leadership from the target to ensure buy-in but also to enable critical exchange in designing various aspects of the integration plan. At all costs, the acquirer, in environments as you have described above, must take note of the local idiosyncrasies and use those to scale down any optimism as it relates to synergy gains. Said idiosyncrasies should be factored in the integration plans, such that they are realistic, assuming the transaction is compelling.
Culture is a key component to cross border M&A from my experience and it is important to as far as possible ensure that local management play a key and vital role in all the integration endeavors to ensure a greater probability that the transition and success curves are flattened.June 24, 2020 at 10:23 am #111844
I think the points above are quite comprehensive in describing these issues and how to address them. In my experience, from a practical point of view, it may be difficult to achieve an understanding of the differences, due to reasons such as language barriers, or business culture/approach (e.g. conservative, indirect, target company executives who are not used to saying whats on their mind). Further, the legal requirements in some jurisdictions may not be as clear as what the acquiring company is used to in its own jurisdiction, so additional time must be set aside for relevant authorities to get back to you on say, licenses, permits, but in my experience, sometimes a clear answer is never given. Perhaps buyers must go in with eyes wide open, and perhaps leverage on price to take into account these risks.November 15, 2020 at 8:36 pm #114704
In addition to the above mentioned points, there are political risk (stability of the government to continue implementing its policies), change of regulations risk (for example, a change in the subsidy amount for renewable energy), and a risk on how to manage distance subsidiaries.
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