Summary

Due to globalisation, cross-border businesses are increasingly the norm rather than the exception. As companies grow, it is natural for local companies to be a part of global M&A. Whether they are the target or acquirer, the right legal and regulatory advice can make a huge difference in a deal. An understanding of local laws, M&A structures, future synergies and cultural considerations are all important factors.

• Vodafone Air Touch in the UK and Mannesmann AG in Germany.
• Anheuser-Busch InBev in Belgium and SABMiller in South Africa.
• Daimler-Benz AG in Germany and Chrysler Corporation in the USA.
• Tata Motors in India and Jaguar Land Rover in the UK.

What connects these deals? They are all examples of cross-border mergers and acquisitions (“M&A”). 

While traditionally dominated by large corporations, the M&A landscape around the globe is evolving. With the economic rise of India and Southeast Asia, companies in these regions are increasingly targeting global markets. This has spurred the participation of startups in M&A activity, both as targets and acquirers.

Acquisition deals are inherently complex. Navigating different legal and regulatory environments in cross-border transactions adds another layer. Yet, the pre-pandemic years 2018-2019 saw cross-border M&A deal values exceeding $4 trillion.

However, 2023 presented a different picture. Global economic concerns — geopolitical conflicts, a slowdown in China, high inflation, and rising interest rates — led businesses to prioritise alternative means of value creation and funding. This resulted in a drop in global M&A deal value to a 10-year low of $3.2 trillion.

Despite the decline in overall deal value, the M&A scene wasn't completely stagnant. Smaller M&A deals, often more cost-effective, less scrutinised, and quicker to execute, continued to close in significant numbers. This explains why the total number of deals in global M&A league tables remained relatively stable.

As market sentiment improves and companies mature, we can expect a natural progression towards more M&A activity. Industry forecasts suggest a potential "explosion" in M&A in 2024. This is likely going to be driven by both - companies facing funding challenges, and a backlog of assets ripe for acquisition due to anticipated economic recovery and stabilising interest rates.

While commercial motivations drive M&A, navigating legal aspects is crucial. Overlooked legalities and regulations have contributed to the failure of past major M&A deals. This is even more critical for startups, where M&A isn't a core competency. Addressing the complex legalities of cross-border transactions early on is vital for stakeholders' success.

Entrepreneurs often find themselves at sea when trying to navigate the legal intricacies of a cross-border M&A. Vinayak Mishra, General Counsel at Lightspeed India, is in the thick of all things cross-border M&A. Here, he takes us through some things that are important in these transactions and why good legal advice can be the key differentiator between a good and a great deal.

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Why does cross-border M&A take place?

At a very basic level, cross-border M&A either adds or aids the acquiring entity in its future goals. The most common reasons they occur include:

• Vertical integration;
• Horizontal integration;
• Geographical expansion into a new market;
• Adding new product lines and diversifying offerings;
• New customer base acquisition;
• Adding to the acquirer’s distribution networks;
• Technology roll-ups;
• Consolidating cash by acquiring a startup that may have cash on its balance sheet, and may not have/may have lost product market fit;
• Plug gaps in the acquirer’s production or service capabilities without having to build them, among others.

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The different structures of M&A deals

It is not uncommon for acquirers and targets to agree to the terms of a deal in informal settings, such as over coffee. In-principle, this agreement may sound good at the time, but many details require refinement before formalising the conversation. Understanding which deal structure is best suited for your long-term strategy mandates careful consideration of the pros and cons, and the support of an expert for guidance.    

“A smooth M&A journey hinges on the quality of your advisors.” - Vinayak

It may be useful for founders to understand the broad strokes of deal structures in M&A:

1. Simple share or equity allocation, which is approved by shareholders of the target company, by virtue of which a strategic player acquires a majority in the target company. 
2. Slump sale is where the entire business is sold lock, stock, and barrel to the acquirer.
3. Asset sale is one where selected assets of the target business are sold to the acquirer.
4. Acquiring a part of the target’s business when the acquirer is interested in only part of the business, by way of a hive-off.
5. Court-approved merger/demerger, wherein a relevant judicial body blesses a combination between companies.
6. Acquihire, where the acquirer cherry-picks the target company's management or key team members to bolster their own workforce, bringing them on as employees or consultants. This can be accompanied by an asset sale or a slump sale.

“Engaging legal and tax experts before the transactions materialise ensures they can extract maximum value for all stakeholders,” Vinayak adds. 

Understanding which deal structure is best suited for your long-term strategy mandates careful consideration of the pros and cons, and the support of an expert for guidance. - Vinayak

Involving legal and tax experts from the beginning ensures they can maximise value for everyone involved. Here's Vinayak’s golden rule: “A smooth M&A journey hinges on the quality of your advisors.” Both sides need sharp minds who understand the deal's complexities. This way, they can navigate requests, propose creative solutions, and steer you all towards a win-win.

Cross-border M&A considerations

When dealing with businesses based outside of your geography, several areas need attention. Some may be more obvious, such as regulatory issues, but there are also some that founders may be less prepared for:

• FDI laws 

The rules and regulations for startups are still an evolving area globally. Keeping that in mind, the first aspect of cross-border deals that needs legal and tax intervention is foreign direct investment laws which may be a determining factor in the viability of a deal. 

Sectoral caps and conditionalities are important aspects to consider. Different countries have different laws around how much capital can be invested in a particular sector by a foreign investor. Some countries like the US, have CFIUS-like regimes, which mandate that certain transactions in strategic areas be disclosed to/blessed by regulators.

• Anti-trust laws 

Anti-trust laws applicable to the relevant transaction are something that needs to be navigated very carefully. While regulators in different geographies seek to ensure that healthy competition is promoted, their reactions to nuanced situations may need to be preempted.

Legal experts will help entrepreneurs navigate regulations. For the more regulated sectors, such as fintech and insurance, they also prove pivotal in getting approval from the sectoral regulators. 

• Tax implications

If you are looking to acquire a business, it is very important to understand their tax liabilities. Getting timely clearance from the tax authorities may become a challenge if the same has not been factored in suitably in the deal timelines.

• Lender / third party consents

Whether you are an acquisition target or want to buy an entity outside your geography, it is important to consider the running loans and outstanding contractual commitments. You may need consent from your own lenders or counterparties before going ahead with the M&A. This can become a roadblock to a successful deal if not planned for. 

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Finding the right local consultant

Every market has nuances that require experience and expertise in a cross-border context.

Hiring a local consultant is critical. Legal and regulatory considerations may vary significantly between the acquirer's market and the target’s markets. It may not always be possible for your own domestic legal counsel to know or understand these nuances. 

Legal and regulatory considerations may vary significantly between the acquirer's market and the target’s markets - Vinayak

Here are a few examples that necessitate a local expert:

• The Committee on Foreign Investment in the United States (CFIUS) monitors mergers and acquisitions (M&A) transactions that could threaten national security. They require mandatory filings for certain controlling or non-controlling investments by foreign investors in industries producing, designing, or manufacturing critical technology.
• In Indonesia, all documents presented as part of the due diligence process must be written in both English and Bahasa. Translating accurately from Bahasa can be a big challenge for external entities.
• In Japan, the law dictates that documents must be executed in a specific format to be admissible in court.
• India has a limit of 200 shareholders for a privately held company. Singapore‌ requires companies with over 50 shareholders to be treated as public. This can lead to significant legal changes during transactions between these countries.
• In India, both central and state legislatures govern labour laws. For instance, the laws in New Delhi may differ from Mumbai. If a US-based business acquires a company with operations in both cities, a local partner would be necessary to perform the required due diligence and ensure compliance with local laws.
  

So how do you find the right consultant for your M&A? There are no rules set in stone here, but based on experience, some ways to find an effective local consultant could be:

• Search for the best consultant in the target or acquirer geography, who is experienced in M&A in your industry. 
• Do thorough reference checks on the advisers before hiring and pressure test if they are deal enablers, apart from being experts.
• Find someone who has a demonstrated record of optimising the deal value for both sides and not just her client. 

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Maximising value: beyond the numbers

A business is not just numbers. It is also dreams, hopes and hard work. When an entrepreneur agrees to sell the whole or a part of their company, it is natural for them to want to maximise value for their team and shareholders. Similarly, an acquiring entity wants to further improve its business prospects. But it also has to look at integrating culturally with the target company. ‍

“it is very important to learn and unlearn, and not get fixated on a certain way of thinking,” - Vinayak

Within that context, some very important factors for founders to keep in mind in a cross-border M&A scenario:

• Try to get clarity on the closing timelines of the transaction.
• If a deal takes too long to close, it can destroy value.
• The transaction’s timeline should not be arbitrarily extendable by one party. 
• Ask if you’re getting real value for what you’re parting with. In an all-stock deal, for example, if the acquirer’s company has issues that reduce the value of the target’s stocks, it may be less than desirable. 
• In the case of a share swap deal, founders should ensure that tax liability payments are paid in cash. 

Any M&A deal by its nature takes longer than a lot of investment deals. People negotiating a deal should be cognisant of the leverage they have in a transaction.

Deals have fallen through because of a mismatch in expectations regarding the legal terms being sought. Often, parties don’t budge on a particular term which may not be as material in the overall scheme of things and protract the negotiations. 

Ultimately, “it is very important to learn and unlearn, and not get fixated on a certain way of thinking,” concludes Vinayak.

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#M&A, #acquisitions, #duediligence, #FDI