M&A In The Pandemic Age: The New Face Of Global Expansion

A few months into the pandemic, it seemed as though blockbuster dealmaking hit a brick wall. Major deals were falling apart or getting stuck in limbo. Mergers and acquisitions (M&A) activity was dead in the water — or so it seemed.

As it turns out, finance executives were taking a long-term view on the crisis, often opting to delay deals instead of abandoning them outright. Today, we are beginning to see the results of that patience, and major deals are bouncing back.

The rising transaction volume represents more than a rebound, however. In a world still gripped by the restraints of the global pandemic, many executives are turning to M&A as a faster path to international expansion than organic growth.

M&A As A Path To Expansion

International growth traditionally takes a few different paths. An organization can expand through organic growth — setting up a new entity from scratch in a target region — or through M&A deals with entities already existing in their target region.

Organic growth has become more challenging and complex under the constraints of the pandemic. Travel restrictions have made processes such as conducting due diligence, establishing bank accounts, finding real estate, recruiting talent and navigating expat arrangements more difficult. Furthermore, the pandemic has destabilized international markets, upended supply chains and introduced new regulations that expanding organizations must comply with.

As a result of the constraints on organic growth, some organizations with global expansion as a strategic initiative are looking to M&A as an alternative. There are several reasons why organizations may find M&A compelling as they grow their companies in 2020, including:

• Financial: Given the economic downturn, companies can often be acquired at lower prices. Many companies are more open to acquisition than they would have been before the pandemic.

• Known Entity: Organizations are acquiring a company that’s pre-established, meaning they won’t have the same worries about entity formation, hiring, infrastructure, etc.

• Proven Market: A company with an established presence brings with it the institutional knowledge of their market.

But while it may be appealing, M&A comes with challenges of its own.

Key Challenges Associated With M&A Growth

M&A is often a great option for organizations looking to expand internationally, especially in these uncertain times. However, there are several challenges that organizations should be prepared to address to be successful.

• Due Diligence: Insufficient due diligence is a common mistake organizations make when taking on a cross-border merger or acquisition, particularly when it comes to translating finances in one regional economy to that of another. For example, while a company’s financial history may appear strong from the perspective of the acquiring organization, it could actually be weak relative to that company’s local economy.

• Evolving Regulations: The regulatory steps associated with M&A vary from jurisdiction to jurisdiction, and these regulations are tightening quickly. Today, there is rapid movement around privacy, security and permanent establishment regulations, mainly to account for cross-border digital services that aren’t captured by previous regulations. Recent examples include GDPR and DAC 6. Organizations need to keep an eye on the regulatory environment, particularly as governments look for new revenue streams to counterbalance losses from the pandemic.

• Cultural Differences: Aside from regulations, cultural barriers can pose a challenge to international M&A, including differences in cultural norms and local salary expectations. A bad cultural fit can doom a deal in the long run, so it pays to get it right from the outset.

It’s clear that organizations set on global expansion are moving forward with those plans. And while expansion plans may have been moved to the back burner at the beginning of the pandemic, we’re seeing a new burst of activity that paints a picture of what’s to come in the latter part of this year and the first half of the next.

What’s also clear, however, is that the M&A path to global expansion is still fraught with challenges posed by increasing regulations, travel restrictions and the lasting effects of the pandemic. Navigating the challenges of M&A can be a long journey even without a pandemic, and organizations should come prepared with the expertise to see it through. Success will depend on having a team dedicated to developing a comprehensive understanding of the complexities of M&A across borders.

Source: Forbes

Can’t stop reading? Read more