Cross Border M&A Risks

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  • #35889
    Korath Wright

    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
    ❏ Governance
    ❏ 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.

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