Cross-border M&A Deals In The Middle Market: Trends, Implications For Your Company, And What To Look For In Your M&A Banker / Part 1 of 2

Cross-border merger and acquisition (M&A) transactions have become increasingly important, especially for the middle-market technology and technology-enabled businesses that Navidar serves with our M&A and capital raising services.

We define a cross border deal as any M&A transaction between a non-US company and a company based in the United States. So, cross-border M&A deals essentially involve the assets and operations of firms belonging to two different countries. Under this definition, the firm based in the United States (US) can be either the acquirer of a foreign company or be the company acquired by a company headquartered overseas. We will use “international”, “foreign”, and “cross-border” more or less interchangeably throughout this article in describing these transactions.

Many Navidar completed M&A transactions have involved international buyers and sellers. In addition, virtually all of Navidar’s sale transactions have a cross-border element in the sense that we approach overseas companies as potential buyers of (or investors in) our US-based clients. Likewise, when we are representing a foreign client who wishes to sell their business, we often approach US-based prospective buyers as well as other international buyers. To provide a sense of this, note the following Navidar cross-border M&A transactions:

• sale of a Singapore-based client to an Israeli buyer;
• sale of a US-based company to a Japanese acquirer;
• advisor to a Chinese company in its acquisition by a French purchase;
• advisor to US-based company in its acquisition of a Netherlands-based company; and
• sale of two China domiciled divisions of a US-based company to a US acquirer.

Dramatic Growth Of The Cross-Border M&A Market

The growth of cross-border M&A has been remarkable. In 2021, cross-border M&A reached an all-time record of $2.1 trillion in 2021. Yes, that is trillion with a “T”!  This deal value represented a 69% increase over 2020 and surpassed the prior record of $1.8 trillion set in 2007, according to Refinitiv, an M&A data provider owned by the London Stock Exchange. In addition, the actual number (as opposed to deal value) of cross-border M&A transactions also hit an all-time record, rising to a level of 17,849 deals. This massive uptick in deal volume involving cross-border M&A went hand-in-hand with record-breaking global M&A volume, which includes both domestic as well as cross-border deals, which rose 64% to a record $5.8 trillion in 2021.

Interestingly, and importantly for Navidar’s middle-market technology clients, the technology sector was the largest M&A sector for foreign buyers in 2021. In fact, foreign buyers were most interested in companies in the technology sector, where cross-border technology deals reached a total value of $320 billion.

An important comment is in order before we go too much further. When we talk about “international buyers” or “foreign sellers”, we need to be careful and thoughtful because there is in fact a great deal of variety among international buyers and foreign sellers. In other words, the cross-border M&A market is not a single monolithic market that possesses very little variety and it should not be thought of as such. For example, there are major differences among buyers across various countries; for instance, there may well be significant differences in the behavior of a Japanese buyer and a German buyer. Further, there are significant differences even between buyers located within the same country. To pick but one example, Alcatel may well have a very different M&A philosophy and approach to acquisitions than, say, Cap Gemini, even though both companies are based in France. So, without belaboring the point, it is very important to bear in mind throughout this article that when we talk about “international buyers” or “international sellers”, we are really focusing on the general characteristics of these buyers as a group and how those characteristics need to be accounted for in order for your company to have a successful cross-border M&A transaction. It is important to remember that all international buyers are not created equal and that these differences cut across countries, industries, and companies.

Why Cross-Border M&A Deals Happen: The Major Drivers Of Cross-Border Transactions

We are often asked about the principal drivers of cross-border M&A transactions. Why has the market for these deals grown so dramatically? As you might expect, the reasons are varied and many of the same factors driving the overall global M&A market are similar to those driving cross-border M&A volume. But there are some additional factors driving the growth of cross-border transactions.

Below we mention several of the principal drivers:

1. Many foreign buyers buy companies in the United States to gain access to new intellectual property (IP), a new technology, or a new product to sell to their existing customers. This driver is often referred to as portfolio diversification.
2. Cross-border buyers often want to gain a foothold in a new market, such as the United States or Europe, in which to grow. This desire to access new markets is often referred to as market diversification.
3. Acquiring new talent and expertise in emerging technologies is an important additional driver of cross-border transactions.
4. Financial motivations such as greater revenue opportunities, cost synergies, scale efficiencies, and the desire to improve margins can figure prominently in cross-border deals.
5. Some acquirers seek access to new and different distribution channels for their goods and services through cross-border M&A.
6. Finally, there some slightly more idiosyncratic recent market growth drivers, including the proliferation of Special Purpose Acquisition Companies (commonly referred to as SPACs) in which a legal vehicle is created specifically for the purpose of acquiring a company that is often not identified or known at the time that the SPAC was created. In addition to SPACs, the relatively recent popularity of corporate inversions—which typically involve a company shifting from a US domicile to a foreign domicile in order to obtain favorable tax treatment and realize a lower overall corporate tax burden—have also contributed to cross-border deal growth.

The Value Of Approaching International Buyers When You Sell Your Company

Those who have followed or worked in the investment banking industry will likely remember a time not all that long ago when cross-border M&A deals were basically the exclusive domain of very large companies seeking to expand into international markets. This situation has changed quite dramatically in recent years and the cross-border M&A market is important now for companies of all sizes.  In fact, Navidar believes that cross-border M&A is as appropriate today for middle-market companies as it used to be in the past for only very large companies.

Today, the middle-market companies that Navidar typically works with regularly want to contact potential cross-border acquirers when they decide to sell their company. They do this for a host of compelling reasons.

First, middle-market companies are seeking to expand their buyer universe by identifying a host of potential international buyers who may value or appreciate their business in a different way from domestic acquirers. By including these international buyers along with domestic buyers in their sale process, these companies are effectively tapping an additional—and often complementary—source of demand which helps them maximize their chances of achieving both the highest sale valuations and obtaining the best deal terms. (Unlocking the Secrets to a Successful M&A Process: Outlier Valuations, Re-trades, and Other Key Considerations)

Second, because differentiated technology and unique technology-enabled businesses are in such high demand, many of our selling clients seek to conduct a world-wide auction to tap into this desire for increased access to differentiated technologies. Again, because international buyers may have a different view of the importance, usefulness, or difficulty of replicating various technologies, they bring something different to the M&A table. This approach often leads to a broader and more competitive M&A process and aids our clients significantly in their price discovery process in the often opaque M&A market. (How The M&A Market And Capital Raising Market Are Very Different And Why This Matters To You)

Finally, a number of our clients want to expand the market for their products after their sale is completed and they believe that international buyers represent a great way to accomplish this goal of seeing the company that they worked hard to build prosper after the acquisition.

Cross-border transactions are increasingly common and increasingly important for middle-market technology and technology-enabled companies. Because international acquirers can be highly additive for any company looking to sell their business, the inclusion of international buyers on your list of prospective M&A partners will make sense in many situations and may result in improved deal outcomes, higher valuations, and improved deal terms, regardless of whether the ultimate buyer is US-based or headquartered overseas. Navidar’s executive team has 25 years of experience executing cross-border deals totaling over $9 billion.

In part two of this post, we will offer additional insight into the international M&A market compared to the domestic M&A market, characteristics of international buyers, key transaction considerations, navigating the cross-border landscape and how to pick your M&A banker.

If you would like to discuss any of the advice provided above, or if you are currently seeking counsel on a potential M&A transaction, please contact Stephen Day at [email protected] or (512)765-6973.