According to a recently published article by Financer Worldwide, the number of cross-border M&A is expected to drop globally in 2019. A decline is expected to hit the mega-deals the hardest (i.e. transactions with deal values exceeding $10 billion) amid uncertainty over Brexit and the threat of global trade wars. Accordingly, acquirers are increasingly focusing on domestic deals rather than cross-border opportunities, and as corporate leadership remains bullish towards cross-border M&A, industry experts have suggested placing a greater emphasis on managing post-transaction integration issues.
Why? Because poor post-merger integration can hamper value creation. A mismatch of cultural fit, particularly magnified in a cross-border deal, is often cited as the primary reason for failure to achieve synergy. The difficulties at the outset begin with an inaccurate understanding of the foreign target's operations and any political and regulatory issues connected to the transaction. Companies that underestimate the time and expense that go into deal-making, due to a failure to account for challenges caused by language barriers, cultural and time zone differences, or delays in obtaining third-party and regulatory approvals, often find themselves setting unrealistic timelines for closing. Unfeasible expectations can dampen or even derail the transaction.
Secondly, acquirers should learn about and appreciate the differences between the way the merging companies operate. Understanding the nuances such as risk tolerance and decision-making processes of the staff and senior management can play a key role not only during the deal negotiation stage but specifically during post-merger integration. Acquirers would be remiss to leave developing an integration plan to post-closing stage. Challenges such as IT integration, IP assignments, cultural fit, cooperation and teamwork should be addressed from a holistic and strategic consideration well before closing.
Practically speaking, senior management ought to conduct cultural assessments to understand the different standards and expectations between the target and the acquirer with respect to people, practices and management. These are also opportunities for each organization to determine the benefits and drawbacks of their current structures and management styles, as well as opportunities and threats posed by merging cultures.
Lastly, probability of a successful integration for an acquirer can increase through the development of strong working relationships with target company employees at an early stage. The employees at the target company should be properly incentivised both financially and culturally so that they become invested in the merger, with a view to integrate into the larger post-merger company.
The author would like to thank Coco Chen, articling student, for her assistance in preparing this legal update.
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