Cross-Border M&A: Risks and Opportunities

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Vlad Zghurskyi

11.11.2024

3 Min Read

Cross-border M&A has become a key strategic tool for companies looking to grow, diversify, and gain a competitive edge in the global marketplace.

These deals are often motivated by pursuing commercial objectives ranging from acquiring strategic assets to entering new markets with advantageous regulatory frameworks. However, what is the situation these days with cross-border M&A offerings? Should you expect significant opportunities in this area?

In this article, we’ll explore both the potential rewards and challenges of cross-border M&A transactions.

Why Cross-Border M&A?

Access to Strategic Assets

One of the main drivers of cross-border M&A is the ability to acquire valuable strategic assets that may not be available domestically. These assets include intellectual property, cutting-edge technology, or a highly skilled workforce, which can provide a competitive advantage in global markets. For example, a company seeking to improve its technological infrastructure might target an international firm with innovative capabilities that complement its offerings.

Acquiring such assets can lead to synergies, where the combined strengths of both companies result in greater efficiency, innovation, and competitiveness. For instance, a merger between a tech company and a manufacturing firm across borders could foster new product development while improving operational processes. Below are the largest cross-border mergers and acquisition transactions worldwide as of 2024:

Source: statista.com

Economies of Scale and Cost Savings

Cross-border M&A deals often aim to create economies of scale. When companies consolidate operations, they can achieve cost savings in areas such as production, distribution, and administrative functions. By pooling resources, companies can reduce per-unit costs and improve profit margins. This is especially attractive in industries where large-scale production is crucial for maintaining competitiveness.

Additionally, administrative functions such as human resources, finance, and procurement can be streamlined through mergers, reducing redundancies and further lowering operating costs.

Market Expansion

Entering new markets is another compelling reason for cross-border M&A. By acquiring a company in a foreign jurisdiction, the buyer gains access to the target’s established customer base, distribution networks, and local expertise. This allows the acquiring company to expand its footprint and capitalize on emerging growth opportunities in that region.

For example, an American company might acquire a European firm to gain access to the European market, benefiting from local relationships and a deep understanding of regional customer preferences. Such expansion can strengthen the company’s global presence and open new revenue streams.

Regulatory and Tax Advantages

Cross-border M&A can also provide regulatory and tax benefits. Some jurisdictions offer more favourable business environments, including lower corporate tax rates, reduced regulatory burdens, or incentives for foreign investment. By shifting or expanding operations into these regions, companies can reduce their tax liabilities and operate with greater financial flexibility.

For instance, acquiring a company in a country with favourable tax regulations can result in significant savings and enhance the overall profitability of the transaction.

Cross Border M&A in Europe and Asia

Asia M&A activity totalled $622 billion in the first nine months of the year, a slight 0.2% decrease compared to the same period in 2023, according to LSEG data. The cross-border M&A landscape saw a boost from several large-scale deals, including a notable $38.5 billion all-cash takeover bid by Canadian company Alimentation Couche-Tard for Japan’s Seven & I Holdings, the largest announced M&A deal globally this year.

Source: Reuters

Before we get to Europe, let’s take a look at what countries have been the most active on the market in the decade:

Source: aventis-advisors.com

While most cross-border deals involve European buyers, the US is the largest foreign buyer by aggregate deal count, accounting for approximately 24% of all cross-border transactions in Europe between 2003 and 2023.

Overall, cross-border M&A activity in Europe is lower than domestic:

Source: aventis-advisors.com

Legal Due Diligence in Cross-Border Mergers

Legal due diligence is one of the cornerstones of cross-border M&A. How should you perform it before diving into the deals?

If the target company has subsidiaries in different countries, it’s essential to conduct LDD on each one. This helps identify legal risks and pitfalls related to the entire target group. Lawyers in various jurisdictions may need to work together to conduct LDD on these companies simultaneously. The scope of LDD for each subsidiary can vary depending on factors like the buyer’s risk appetite and the subsidiary’s business activities. For instance, a dormant subsidiary may require less extensive LDD compared to a subsidiary that is actively engaged in trading.

Key contracts related to the target company’s business, such as customer contracts, service contracts, supplier contracts, financing agreements, and intercompany agreements, are typically scrutinized. These contracts may contain onerous terms like indemnities, liquidated damages clauses, or termination provisions that could significantly impact the business or create legal risks for the target company. In such cases, the buyer may consider renegotiating these contracts or including appropriate warranties and indemnities in the definitive share purchase agreement. Additionally, if the target company operates in multiple jurisdictions, the contracts may be governed by different laws, necessitating a careful analysis of the legal implications arising from the laws of each relevant jurisdiction.

Change of control provisions are clauses in agreements that specify certain rights or obligations in the event of a change in ownership of one of the parties. For example, a change of ownership might require the target company to seek prior written consent from the counterparty, or the counterparty may have the right to terminate the agreement entirely. These provisions are commonly found in lease agreements, where the landlord’s prior written consent is typically required before a company can change its shareholders.

Depending on the target company’s business, relevant licenses may be required to operate in certain countries. LDD involves verifying whether the necessary licenses have been obtained and are still valid. The license conditions might also require approval from relevant authorities.

Conclusion

Cross-border M&A allows companies to mitigate risks tied to their domestic economy, such as inflation, recession, or currency devaluation, by diversifying their revenue base. Besides, companies engaged in cross-border M&A may sidestep tariff restrictions and other trade barriers, making international operations more efficient.

However, to close these deals successfully, you need more than prospective partners: you need an advisor, experienced in both M&A and legal activities. If you are looking for one, contact us to ensure smooth and efficient deal-making.

Cross-Border Deals

Global M&A

M&A in Europe

M&A in Asia

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