What is Cross-border M&A integration and Why Does it Matter

Cross-border M&A is rewarding

Cross-border M&A is a crucial means for generating shareholder value and entering new markets. It enables companies to pursue new technologies, capabilities, and products while driving growth, innovation, and transformation. For instance, cross-border acquisitions allow buyers from China to make products and services to sustain their offerings in a large and sophisticated domestic market. Countries like Japan and European markets such as Italy, Portugal, and Germany, where populations are aging, are drawn to cross-border deals to bolster their international presence and increase routes to market.

Cross-border M&A transactions declined in 2019

The number of cross-border deals declined globally this year, due to regulatory impediments driven by growing protectionism. Purchases valued at more than $10bn – were mainly affected by global uncertainty caused by Brexit and the threat of global trade wars. US acquirers, for example, pursued domestic deals in 2019. Due to the high focus on employment, measures were taken to ensure that cross-border transactions do not end in an outflow of jobs from the US.

New bearings and developments, including Brexit, nationalistic policies in North America, South America, and Europe, and sudden shifts in regulatory policies, can hinder, dissuade or prevent cross-border deals. For instance, India’s recent amendment in policy toward non-domestic retailers had a significant impact on Amazon and Wal-Mart. Hence most businesses still encounter significant challenges in getting cross-border transactions completed efficiently and cost-effectively.

Cross-border M&A deals are challenging to execute

Cross-border M&A is difficult to achieve, and the failure rate may be up to 70 %. Few cross border deals enhance shareholder value. Post-merger integration challenges can expose value creation. To prevent this, acquirers should have a right understanding of the target’s business. They should be ready to sail any political and regulatory issues and pick the correct speed for the integration. It is essential to bridge the cultural gap between the two organizations and control the foreign ‘fear factor’ that can stay when companies seek international targets. Corporate culture and talent retention are essential.

The challenges in the dealmaking include legal and strategic due diligence, cultural patterns, regulatory concerns, human resource management, and time delays in obtaining third-party and regulatory conditions before closing.

Successful integration of the target in the acquirer is essential, but this can be difficult to achieve and, when done poorly, can cause transactions to fail. Poor cultural integration is a core reason for failure, and become amplified in cross-border dealmaking. Poorly aligned expectations, behaviors, practices, processes, and structures can render a merger ineffective.

Merging parties must overcome both national and organizational culture differences by creating a new culture that recognizes, reconciles, and embraces such differences to create positive outcomes for the new organization. Integration planning is a crucial part of all M&A deals, but especially so in cross-border transactions because of the additional difficulties presented through language barriers, time zone differences, and cultural differences. The key to successful integration is building a strong working relationship with employees at the target company, and making that relationship early – well before closing. It is essential to incentivize the target company employees to get invested in the integration and to concentrate on becoming a member of the combined entity. This investment needs to be financial, including paying bonuses to target employees for achieving their targets, and cultural, like influencing, the target company’s employees feel like a part of the larger entity.

National cultural identities can produce a significant impact because they arise from shared experiences and beliefs, and an acquirer must recognize these differences. This understanding will help the acquirer in the deal negotiations and the post-merger integration step when the acquirer must develop the new corporate culture. Companies must develop a post-acquisition integration plan to address both physical issues such as IT integration and IP assignments, as well as reviewing some of the intangible difficulties, like post-closing cultural fit, leadership, engagement, and overall synergies between the companies.

Success factors for Cross-border M&A deals

If a deal should generate value, the acquirer must understand what it is buying, both in terms of physical assets and cultural adaptability. Cultural due diligence should play a critical part in the due diligence process with the human resources (HR) department assuming a vital role. The deal team also needs to identify synergy opportunities, evaluates potential financial and operational risks, and prepare for the post-integration phase. Acquirers should develop a robust checklist and assign resources with the right skillsets to address integration challenges. Communication is also vital. Senior management must prioritize effective communication so that it forms a core part of integration planning. Acquirers should employ multiple communication channels to ensure that they connect meaningfully with all employees. When designing an integration strategy, the acquirer must ensure that it applies the best approaches to ensure the combined business fits can deliver synergies targets.

M&A is a complicated, risky venture that needs companies to recognize strategic and financial issues before completion and plan the best course of action to align two entities correctly. For cross-border transactions, the risks increase exponentially. Cultural components must be recognized if companies are to integrate distinct organizations successfully, and this requires preparation.

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