UK: What Happens If You Get Cross-Border M&A Implementation Wrong And Four Ways To Ensure You Don't

One of the quickest ways to grow your business across borders is to acquire an organisation already in-country. Sometimes it's an intentional strategy to go overseas; sometimes the acquisition of a company in your home country results in international subsidiaries you now need to look after.

Either way, getting there is not as simple as walking in with an offer and starting to trade. There's a whole minefield of paperwork, regulation and complex agreements waiting for you, where one wrong step can throw the whole chain off course.

What happens if you get it wrong?

One misstep can lead to significant financial, reputational and regulatory impacts. Make incorrect assumptions about the timing of setting up your entity or setting up your employees to be paid, or about how long it will take to register with authorities, and you may not be ready in time. Remember, you've agreed a handover deadline with the company you're acquiring from, and it's detailed in the TSA – and these agreements can include a heavy financial burden for missing deadlines.

There's non-financial impacts, too. If you don't set up payroll or bank accounts properly, you might miss your first payroll to new employees - people who will be struggling to adapt to change and won't be too happy with their new management if they have to miss a payment on their mortgage. You might also miss payments to vendors who you rely on to be able to service your own clients.

And it's not just about understanding how a business needs to operate in the new country; you need to know how a business from your home country needs to operate in your new country. There's a major difference - double taxation treaties, FATCA and BEPS compliance, and more. These things could impact you not just as a one-off, but for years after.

All of this can cause lasting financial and reputational damage.

Getting it right can boil down to answering these four essential questions - and, of course, working with a partner who can guide you through the process.

1. Are you acquiring the whole entity, or just part of the assets?

There's really two scenarios for an acquisition: you acquire a full business with physical entities and employees, or you acquire a division - that's a stock purchase or an asset purchase. In the first scenario, you will likely also take over any pre-existing contracts with suppliers, employee contracts, and so on; the latter is an acquisition of the assets of the company, rather than all the bells and whistles.

Stock purchase brings complexity

You'll need to understand how the business is operating in the country or countries you're moving into: are they compliant? Have they done all their necessary tax filings over the whole operational life? What about the other reporting and regulatory requirements in that country? Often the answer to the compliance question is "no", and you'll need to take the necessary steps to bring the business to compliance, and keep it there.

Asset purchase brings multiple registrations

You've acquired a division of a larger company; it's likely that company had a single back office function servicing all its divisions. You'll need to set up teams for accounting, payroll and compliance. You'll also need to understand local compliance and how to operate locally. If you're acquiring employees, what needs to happen to transfer them to your company? Do you need any new licenses or to register anywhere? Which brings us to the next point...

2. How can you complete the deal compliantly?

Remember that every country's regulation is unique, even in countries just on the other side of your border. Timing is of the essence with a carve-out or acquisition, and you must remain aware of how long it takes to get things done locally. For example, you may have agreed a date for the transfer, but may not have considered that, say, in Argentina it can take six months or more just to create an entity - and that's before you start thinking about registering as a taxpayer, getting your bank accounts set up so you can pay staff, and so on. In places like Brazil, Mexico, Colombia - even parts of the United States - you need to not only register as an employer at a national level, but at a state or county level as well. These things can impact your timing, so make sure you're asking the right questions to get set up correctly.

3. Have you considered the cultural impact?

The culture question is an important thing that often gets overlooked. From an employee or an outside vendor perspective, any type of M&A is a sensitive one. Everyone's worried what their future is going to look like. You need to understand the local cultures - even simple things, like how what someone says and what they mean can differ. Make sure you're working with someone who can help you with the cultural nuances, who've been through it all before. Someone who knows that a new employee in Colombia will need a medical examination. Someone who knows if you are legally required to provide meal tickets to employees, or what a "normal" benefits package looks like. If you're acquiring a business that has a heavily unionised workforce, or a very strong Works Council (these are particularly important in Germany and Benelux), make sure you know when and how to work with them - remembering that they may need to be involved before you sign the deal.

4. Do you have the resource to get this done right, and on time?

Whether you work through internal resource or outsourced vendors, inheriting an entire company will bring an increased workload. Your great couple of HR, legal, or finance managers in the US or Canada will now need to look after hundreds or thousands of people across the globe. And in each of those countries, the culture and regulatory needs will be different. Can you get the transfer of assets done in a way that is in line with data protection regulation in both countries?

Where the purchase covers multiple countries, you may also be inheriting multiple vendors across all those countries. Let's say each country has separate providers for payroll, accounting and regulatory compliance. If you've bought a company operating in five countries, that's 15 providers you now must manage; in 10 countries, it's 30, and so on. Do you have the necessary internal resource to manage all those suppliers, or will it be better to streamline to one single provider across all countries of operation?

Cross-border M&A creates great opportunities, but also significant risks. Do your homework, make sure you're set up right and working with partners who can help you navigate ever changing local requirements so that great growth opportunity can be made a reality.

TMF Group's QuickStart: to Carve-Outs makes it quicker and easier to form global, compliant and fully operational NewCos following a carve-out. Discover more.

Register for our 16 May 2019 webinar to learn more: The secrets to shortening the M&A integration process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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16 May 2019, Webinar, Rotterdam, Netherlands

Summary:

Executing an acquisition integration plan is one of the most difficult assignments in the M&A life cycle. Every merger involves “negative synergies”, including the departure of key talent, sales losses, incompatible systems, productivity declines, turf battles and cultural friction. The key is limiting the costs and preparing for the unknown challenges that may arise.

 
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