If your company is seeing domestic growth slowing, and organic growth can’t happen quickly or easily enough to satisfy investors’ expectations, strategic acquisitions outside the United States may be the best use of the capital you have on hand. As companies feel the pressure from investors to fund more growth, and fast, many are looking to Europe. Opportunities in European nations often offer attractive valuations and high ROI, and the deals may come with the additional benefit of securing overseas manufacturing facilities closer to Asian markets.
According to Dealogic, cross-border M&A totaled more than $1 trillion last year, a 40% increase over the prior year. A recent article in The Guardian compounds this point, showing that US companies have been taking advantage of the cheap pound to buy up UK businesses; the value of these deals has escalated to £79b in 2017-18 from £36.8b the year before.
The good news is that financing for overseas acquisitions has become much easier in recent years. What’s more, as these types of acquisitions become more commonplace, investors are becoming more comfortable with them and beginning to understand that the risk aren’t as high as they may have initially perceived.
That said, companies exploring this route to growth are wise to keep several caveats in mind.
First, the onus is on the company to educate the investment community and other stakeholders on the value of the deal. In general, US investors have limited knowledge of the importance and potential of the European market, the underlying trends supporting this growth, the way work councils operate within a company, and even the shareholder voting requirements. Sell-side analysts in the States aren’t as likely to cover the industry in Europe, and, as a result, buy-siders will have a tough time getting access to good industry reports. And remember, buy-siders have regulatory walls within their own firms, no matter how global the companies may be. The reality is, there is very little information flow on a cross-border basis outside of the investment banking function. Your company will need to do the legwork to lead investors to the right resources to better understand the deal’s potential.
To help tell the story, start by identifying some sell-siders who cover the industry in Europe, even if they don’t cover your specific target company. This will give you a point of reference you can use to lend credibility to your story. Make the industry discussion part of your deal discussion and include as many details as possible in your investor presentation. If it’s a good deal, don’t shy away from it just because your investors don’t immediately get it. But do keep in mind that you’ll have to work harder to help the Street understand why the deal makes sense.
Second, you’ll need more time to get the planning and logistics right. Different time zones, different cultures and workforce practices, and different languages can complicate things. All of these issues can be addressed effectively; you’ll just need to invest additional time and resources in the planning process as you consider the state of play and the days moving up the deal.
Start by deciding where your CEO will be physically located on the day of the announcement. If your acquisition has a large employee force in Europe, it might be best for the CEO to be onsite at their headquarters for the announcement. You’ll also need to fine tune the timing so it happens after the market closes in Europe but before it closes in the US in order to maximize exposure. Be ready with translation services and make sure you have all European conference call numbers set in advance so things go as smoothly as possible.
You’ll need to manage media and exclusives in both counties. The goal is to have at least one solid story in the US press and one in the European press. You may need to do some legwork in advance to establish the right relationships with the European media.
You also need to consider labor practices and the role of work councils in the country where you are making the acquisition. Work councils often need time to review the deal and weigh in. Again, advanced planning and making sure you factor this into the overall timeline will help set you up for success and avoid unnecessary delays as it gets closer to announcement day.
Finally, make sure you’re prepared to capitalize on the opportunity to sell to European investors in the aftermarket. One of the advantages of cross-border M&A is that it opens up access to a new pool of institutional investors. They will likely already have knowledge of the company you’re acquiring, which means less educational legwork on your part. These investors are also typically much more patient than US investors; they understand how long it takes to integrate companies and often have limited near-term expectations.
To maximize this opportunity, you’ll want to work on sell-side coverage. Finding and working with a European sell-sider who can provide thoughtful analysis on the European target company will help position you to effectively reach these investors once the deal is done.
Making the most of a golden opportunity.
The bottom line is that cross-border M&A can be a really lucrative opportunity for US companies looking to deliver on growth promises. But it can’t, and should not be, treated just like a US acquisition. You need to be willing to invest the time and resources to plan and communicate the deal effectively.
With the right mindset—and the help of strategic partners who understand the nuances of cross-border M&A and who can facilitate the necessary connections with European analysts and media—a European acquisition can be the key to satisfying your US investors while opening the door to a new group of shareholders. Contact us if you’d like to discuss the opportunity more.