Europe
15. October 2013

Internationalisation per cross-border

The number of company takeovers by German companies has risen continuously over the last ten years. National transactions continue to dominate cross-border transactions. In order for international acquisitions to be successful, companies should consider a few points.

ABOUT 40 PERCENT OF ALL TRANSACTIONS of German companies are cross-border. Whereas in 2004 there were only about 140 international transactions, today there are more than twice as many. Acquisitions in familiar, nearby markets are made far more frequently than in distant countries. Not surprisingly, takeover targets in Switzerland and Austria are particularly attractive due to the same language, but Italy, the Netherlands, France, Great Britain and Sweden are also of interest due to their local proximity and similar framework conditions (Fig. 2). In recent years, acquisition considerations have increasingly focused on the USA and the growth markets India and China.

The interest applies across all industries. The aim is to acquire favourable production locations or even gain access to technologies. It is remarkable that, according to Mergermarket figures, more than 50 percent of the takeovers concentrate on a transaction value of less than EUR 50 million. Here, risk-conscious additions are sought that are integrated into the company.

Motives for cross-border transactions

There are many reasons for cross-border transactions. The most important motive for German companies is the development of new sales markets with the help of a company in the local market. The limits of growth in one's home market are often the impetus to turn to other countries. However, a transaction may also be required if a global customer requires value creation through local development and production sites. In this case, suitable companies should be looked for in the customer's most important markets - in accordance with "Follow your Customer".

Number of M&A transactions between 2004 and 2014

Mergermarket

Other important reasons can be the expansion of the product and service offering through to securing important supply relationships for critical components. While in recent years the focus has certainly been on production cost advantages in addition to market access, German companies' interest in local technology and development resources can now also be observed.

Foreign territory

The acquisition of a company, especially abroad, is not easy. Many things are unknown or not as familiar as in your own market. First of all, important information can be lost in the transaction process due to the foreign language.

Geopolitical considerations also play a role. For example, hopes of investing in Eastern European countries, Russia or South America were very high - today people are much more cautious. Different laws, restrictions on capital movements, national tax regulations apply, which even the experts cannot always read clearly. In addition, national accounting standards that rarely meet international standards. Issues such as government and currency stability, the country's growth prospects or seemingly banal issues such as the reliability of electricity supply can play a role in a transaction.

In addition, corporate cultures abroad are different from those in Germany. There are different business practices and a different understanding of compliance.

Key factor due diligence

Therefore, a detailed due diligence of the various divisions is essential in order to understand and evaluate the differences. As a result, the acquisition process of a cross-border transaction generally takes considerably longer. Anyone wishing to acquire a company in Japan must be prepared for the fact that the decision-making process can generally take several months. And in China, even after signing a sales contract, the buyer needs a lot of patience until all state approvals have been granted. Some industries, such as the Internet sector, are almost completely excluded as acquisition targets.

Percentage breakdown of M&A transactions by transaction size between 2004 and 2014

Mergermarket

In order to gain further confidence in the intended transaction, the permanent secondment of own personnel to the company management is often sensible. These employees must be found for the first time in their own company for assignments abroad.

Checklist for cross-border transactions

To prevent the cross-border transaction from becoming an incalculable risk, the following points should be observed:

  1. Careful preparation and analysis of the company to be acquired
  2. Knowledge of the geopolitical situation
  3. Weighing up the entry strategies from strategic cooperation or a minority shareholding via joint venture to a 100 percent takeover
  4. Transparency of the seller's motives
  5. Provision of sufficient resources in your own company to accompany the transaction
  6. Establishment and use of local networks such as chambers of industry, business development institutes or other medium-sized companies with already gained transaction experience in the respective country
  7. Planning of post-merger integration already during the acquisition phase
  8. Active communication of the strategic goals of the transaction to the key employees of the company to be acquired
  9. Receipt of extensive warranties in the sales contract
  10. Professional transaction support by experienced local transaction advisors

The article was originally published in Unternehmeredition in December 2014 (German). Header Pic © Ravil Sayfullin via Fotolia