Compliance a Top Concern in Cross-Border M&A Deals
With global mergers and acquisitions on the rise, corporate compliance is the top concern for executives involved in deals, according to Trends in Cross-Border M&A [PDF] a new report from Baker & McKenzie.
The report is based on an international survey conducted by The Economist Intelligence Unit (a part of The Economist Group), which talked to 357 senior executives. More than half (53 percent) said their tally of cross-border M&A deals has increased in the last five years.
All in all, global M&A activity grew 2 percent between 2011 and 2012, while transaction activity specifically in high-growth markets grew 9 percent in that time.
But the bigger change isnt about the number of deals. In the past, cultural barriers were the number one concern of companies entering new markets, but, overall, corporate compliance issues now appear to outweigh country- and target-specific risks as the greatest legal concern when conducting cross-border M&A transactions, says the report.
Forty-six percent of respondents said corporate compliance issues are the main challenge they face in a cross-border acquisitionfollowed by protectionist measures (41 percent) and regulatory restrictions or uncertainty (36 percent).
Compliance areas that can affect an international M&A deal range from data security and privacy to financial reporting and anticorruption.
Particularly in high-growth market deals, the acquirer should consider conducting forensic due diligence to evaluate the potential for loss of value from illegal or unethical practices by the target company, the report recommends. A detailed analysis of potential risks arising from corruption, bribery, fraud, money laundering, conflicts of interest, and related-party transactions can reduce exposure to reputational damage and potential regulatory or criminal liability.
While compliance may be the top challenge for dealmakers, they said advanced planning is the main ingredient in a successful transaction. Nearly half the respondents (48 percent) agreed that pre-transaction integration planning is the best strategy for mitigating risk.
What should go into that plan? Think local, according to the authors: Acquiring companies are often separated by thousands of miles and a number of time zones, so empowering local decision-making ensures that the business is integrated into the local market.
In-country experts offered a handful of salient tips. In Brazils highly regulated market environment, for example, its important to play nice with regulatorsparticularly given what can be a long government approvals process.
We have to educate some foreign clients that they cant come here and think they can dictate to Brazilian authorities how a deal is going to work, commented Anna Mello, a Rio de Janeiro-based partner at Trench, Rossi e Watanabe, which is associated with Baker & McKenzie. They cannot be arrogant or they will not get the approvals they need.
In Indonesia, regulators arent keen on lawyers who challenge policy. Mark Innis, a legal consultant with Hadiputranto, Hadinoto & Partners in Jakarta explains in the report: Many do not like lawyers coming in and challenging them and doing so is actually a disservice to your client. As a result, we focus on showing the regulators, 'This is how it's done in 10 to 15 other countries.' Thus, some matters can become a long educational process.
But in Russia, its important to stand tough with executives on the other side of the negotiating table. Russian executives often view those who compromise as weak and may try to take advantage of them, according to Baker & McKenzie managing partner Sergei Voitishkin, who is based in Moscow.