Uncovering Hidden Value in Cross-border M&A

February 21, 2024
Mergers & Acquisitions
Due diligence
Cross-border M&A

Lately, our clients are asking us different variants of the same question - since I have surplus funds in my books, why don’t we acquire a company in the US/EU/etc.? It is a complex question, with no right answers. So, we thought of talking about some dimensions of cross-border M&A (CBMA) and suggesting a few best practices. Caveat - we have looked through the lenses of our clientele in the US and India; and have not considered more culturally nuanced markets like Japan, China, or Russia.


Firstly, the data - how big is the global CBMA pie? Taking the data of the last 10 years (to get around C-19 induced fluctuations), the global annual average of M&A deal value is around USD4.3T - of which ~35% (or USD 1.4T)has been the deal value of CBMA. A big chunk of these (~20%) deals are CBMA with an US company getting acquired by a non-US one. In value terms, annually such deals total around USD 230 Bn.[1]


Of these deals (of non-US companies acquiring US ones), 50% of deals involve Buy-Side companies from AU/CA/JP/SQ/UK/US. A much smaller number (about 8%) involves companies from China, India, and other EMs - though the proportion is growing. Decidedly, CBMA with the acquisition of an US company is an exciting option for growth and access. While the compliance norms are quite stringent, the availability of specialized Advisors makes such transactions eminently executable from faraway countries.


Secondly the rationale - how does CBMA unlock value? Other than providing access to market, talent pool and proprietary knowledge (IP, patents, etc.), studies in EMs show short-term abnormal positive returns from acquiring assets in US and other developed economies[2]. HBR studies have also found high rates of success (~51%) factoring for primary purpose being fulfilled over a long-time horizon - expansion of core business in existing markets for both partners[3].An interesting note was that for new markets or adjacent spaces, a prior relationship of strategic alliance has much better results.


Contrasting CBMA with cross-border strategic alliances


Cross-border strategic  alliances (drawn up as a special purpose JV between the parties) have proven  to be a better entry strategy in a new market (30% success rate against 8%),  where CBMA works better once the parties are established players in the  market (94% success rate against 37%).


An established best  practice for the new market entrant is to work out a strategic business  alliance with an existing partner - to buy it out later. It checks all the  boxes, and executed transparently and with fairness, can succeed in ~75%  cases in delivering revenue objectives.


Finally, the best practices - how should an Indian firm approach CBMA in the US? Assuming the firm has advisory access to US compliances (ibid #1), it needs to complement the same with compliance groundwork on the Indian side[4]. But the most important work would be to obtain complete (financial, team, off-market analyses, analyst feedback et al) information of the target companies - before engaging them with the costly processes of due diligence and contractual documentation.  Also, transactional parties will do better if they are well-prepared for the cultural, political, regulatory, and technical complexity inherent in cross-border deals.


While standard databases provide granular information (and Investment Banks are too expensive for building a portfolio of small to midsize acquisition targets), a global Investment service like GrowthPal an be of import, GrowthPal can table an actionable shortlist (of 10-12pre-screened companies) based on accurate data and AI/analyst curation. Along with off-the-market data on Founders, team, clientele trends and sectoral SWOT, it helps the Buyer see all (well, most of) the available options on one page and start the necessary processes. This approach does not absolve the inherent risks of a complex CBMA transaction - but makes it more structured and data-driven.

The obvious and failure-prone values from a complex CBMA are predictably unlocked by GrowthPal through detailed information and pre-verified intent.


[2] ASEAN study of CBMA effectiveness, ICEBR,2013

[3] The Way to Win in Cross-Border Alliances, J Bleeke & D Ernst, HBR Magazine (Nov-Dec 1991)


Wrapping Up

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