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 2 of 2
Navidar | January 19, 2023
In part one of our blog post on the cross-border M&A market, we discussed the growth of this market, several key factors driving its expansion, and the various benefits of including international companies on any list of prospective buyers in an M&A sale process. (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) In this article, we discuss how including foreign buyers may involve some modifications and customizations of the typical M&A process and we also examine several additional considerations that arise in cross-border processes.
How Cross-Border M&A Differs From Domestic Acquisitions And Key Implications
As we noted in Part One of this blog, it is often a good idea to include international buyers in your sale process if you are a domestic company looking to maximize the value of your business in an exit. Below we highlight a range of additional considerations that your banker should take into account and prepare for in order to achieve the best results from the cross-border M&A process. As you will see, conducting cross-border deals involves a range of considerations that may be less important or may not arise at all in domestic-only M&A transactions.
- Tailoring The Cross-Border Sale Process By Doing Early Outreach To Foreign Buyers
We believe that a customized sale process suited to the particular needs of an individual client is the best way to achieve outstanding results. (Unlocking the Secrets to a Successful M&A Process: Outlier Valuations, Re-trades, and Other Key Considerations) Customization of the sale process—that is, incorporating additional considerations and steps—is particularly important when doing cross-border M&A transactions.
Timing of the buyer outreach is one very important example of how to customize the sale process in a cross-border M&A transaction. We at Navidar have seen that it is often advantageous to contact international buyers earlier than domestic buyers. In other words, we do not reach out to potential international buyers and domestic buyers at the same time because doing so can result in a very poorly synchronized process in which the domestic buyers will be ready to bid on the selling company while the potential international buyers are not yet ready to submit their bids. By affording international buyers more time to socialize the acquisition opportunity within their respective companies and conduct their due diligence, we have been better able ensure that both foreign and domestic buyers who want to bid on the company can do so at the same time, thus enabling our client to evaluate all of the various offers simultaneously before choosing the most attractive offer.
- Customizing the Sale Process By Modifying The Way The Company Tells Its Story
In past blogs we have noted the critical importance of positioning—how a company communicates its story to prospective acquirers—and how that story often needs to be modified—sometimes significantly—in order to place the company in the most appealing light with prospective acquirers. (How Your Banker Can Help Maximize Your Earnout in a Sale Transaction) Companies considering selling their business are certainly quite skilled at telling their story and communicating their value proposition to their target customers but they necessarily have significantly less expertise in positioning their companies with potential buyers in ways that will drive buyer interest and maximum valuation in a sale. Proper company positioning is very important in any M&A transaction, but it takes on particular significance in a cross-border deal because foreign buyers often have different motivations than purely domestic acquirers.
For example, we were hired to sell a US-based company that possessed a number of interesting attributes, one of which was its extensive distribution channels in the US. But, because the likely US-based acquirers already had their own well-developed distribution channels, we did not emphasize this attribute when positioning the company with domestic buyers. However, with foreign buyers, we modified the company’s positioning considerably and created additional marketing materials that went into considerable detail on the nature, extent, and power of their US-based distribution network.
- Diligence Considerations May Vary Somewhat
In cross-border transactions, the diligence requirements will include many of the same topics and issues as found in domestic deals, but they may also involve items different from those of a typical domestic-only deal. As a simple example, because foreign companies must comply with US laws, diligence must occur to ensure that any non-US entities have complied with the US Foreign Corrupt Practices Act and complied with US Export and Sanctions laws to avoid any future legal issues. Your banking and legal team should be well-versed in handling these issues since they arise often in cross-border deals and are important to address thoughtfully.
- Tax Issues and Deal Structure Are Important and Often Go Hand-In-Hand
Tax considerations are typically critical to how a cross-border transaction is structured. For example, the proportion of debt and equity used in a transaction can have important tax implications (if obtaining US interest deductions on indebtedness is important as it often is) and thus will affect the ultimate structure of the deal. Additionally, non-US acquirers contemplating a post-acquisition dividend stream flowing from the US target to the foreign buyer need to structure the transaction to account for withholding tax requirements (which is often done by utilizing a subsidiary located in a country where taxes on dividends will be minimized when the money crosses borders after the deal is complete).
In one of our cross-border transactions, the international acquirer used separate subsidiaries to acquire different parts of our client’s operations because doing so enabled it to repatriate “trapped” cash that had long been held in one of its subsidiaries. By using the cash in the foreign subsidiary to finance part of the acquisition, the acquirer not only efficiently utilized that trapped cash but was also able to create a deal structure that obviated the need for Hart Scott Rodino review and accelerated the deal timeline.
- CIFIUS, FIRRMA And National Security Issues
The Committee on Foreign Investment in the United States (CIFIUS) is an interagency committee charged with screening proposed foreign investments in US companies for potential national security risks. In a CIFIUS review of a proposed cross-border M&A transaction involving a US-based target, there are three possible outcomes: the deal may be allowed outright, the deal may be allowed if certain mitigation measures are taken (which might involve a range of steps including, for example, restructuring the transaction, divesting of certain assets, or increased monitoring of the acquiring company post-acquisition), and, finally, the deal may be blocked and not permitted to go forward.
The review authority of CIFIUS was expanded in 2018 when The Foreign Investment Risk Review Modernization Act (FIRRMA) was passed. In essence, FIRRMA enabled CIFIUS to review any investment—not just a controlling investment as had previously been the case—in what are referred to as “TID businesses”, those domestic businesses that involve critical Technology, critical Infrastructure, and sensitive personal Data. So, if the US company is working or worked under US defense contracts or classified government contracts, regularly interacts with US government agencies that possess trade or national security secrets, or has facilities located near government facilities, miliary bases, or other sensitive infrastructure, then the company and its legal team should prepare to send notice of the transaction to CIFIUS.
How To Navigate The Cross-Border Landscape & What To Look For In Your M&A Banker
The foregoing discussion begs the question of what a company should look for in an investment banking advisor. We recommend seeking an individual banker who has significant cross-border experience and expertise. The banker should also have a large and extensive network of relationships with international buyers. It is very important to remember that this does not mean that the bank where the banker works has to be a large, global bank. In fact, we believe that it is a myth—and mistaken thinking—to believe that only a large, international investment bank can provide access to a large pool of international buyers.
We recall one situation where the CEO, who had hired us as his investment banker to sell his company, mentioned that he was also thinking of hiring a large bank as a secondary advisor in order to help his company get access to international buyers. In response, we explained that our team’s years spent working at the technology investment banking groups at firms like Goldman Sachs and Morgan Stanley had enabled us to develop very significant relationships with many foreign buyers. The CEO was persuaded and we ultimately sold his company in a very successful exit to an international acquirer who in fact had competed against several other international acquirers to buy his company. The obvious moral of this story is that companies should look to the international experience of the senior bankers that they will be working with directly to sell their company rather than at the size of the bank that employs that banker.
Cross-border transactions are an important component of the sale process for many middle-market technology and technology-enabled businesses that are seeking to sell their company. It is important to remember that your sale process may need to be customized both in terms of how you tell your story to prospective international acquirers and in terms of the timing of when you contact those buyers. Foreign buyers may well have different needs, procedures, and approaches, but these differences can be appropriately and professionally accommodated by an experienced banker. Including international buyers in a well-run and thoughtful sale process can result in your company receiving an outlier valuation and excellent terms in its sale.
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.