The anatomy of a successful deal
Our research points to a consistent theme: successful cross-border M&A requires structure, strategic clarity and post-deal discipline.
01
Defining the rationale
The most successful cross-border deals are built around a clear strategic rationale – for example acquiring intellectual property (IP), scaling into new markets or securing specialist talent. Aligned expectations are also critical as there may be jurisdictional differences to valuation, earn-out structures or working capital conventions, for example. Deals may falter if assumptions around the mechanics of a transaction are lost in translation.
There is a lot of assumed knowledge in cross-border deals, from local legal shorthand to how pricing adjustments are handled. Jurisdictional differences can create friction and erode value if they are not surfaced early.
Emma Danks, Co-Head of International Corporate, Taylor Wessing
Cultural aspects of dealmaking can play a big role. Deals can be delayed if advisers are unable to accurately communicate what their clients and their counterparts really mean.
Dr Christian Traichel, Co-Head of International Corporate, Taylor Wessing
Equally, successful acquisitions will be predicated on realistic post-deal expectations. According to our survey, growth potential, cost synergies and cultural fit are the three factors most often overestimated on the way into a deal.
Senior dealmakers, especially those in the C-suite, are particularly concerned about the focus on growth potential and cultural fit – 87% say growth is overestimated, compared to 79% overall.
A particular challenge from the survey is the finding that acquirers do not always appreciate the level of management time required to unlock potential and achieve cost savings.
02
Planning and execution
A strong rationale needs to be paired with thoughtful deal structuring. In volatile environments, this includes managing valuation mismatches between bullish sellers and cautious buyers. The valuation gap has been particularly apparent in recent years, with assets brought to market typically having been acquired several years ago at higher multiples.
Sellers have a natural instinct to hold out for a higher multiple than they originally paid. They may also be basing valuations on pro forma forward-looking earnings before interest, taxes, depreciation and amortisation (EBITDA), while buyers will be focused on historical numbers including comparables.
Meanwhile, although post-deal integration is paramount, buyers should be wary of moving too fast to consolidate control. Transactions can come unstuck post-completion if the acquirer assumes they can run the target without any significant input from or co-ordination with the incumbent team.
In situations where buyers seek to lock in efficiency gains by replacing the target company’s C-suite, institutional knowledge can be lost to the detriment of the success of the deal.
Dealmakers in our survey recognise the value that talent brings, though. Talent retention was cited as one of the three most underestimated factors in dealmaking.
Integrating human capital at all levels of seniority can be challenging. Management teams at target companies will often be used to operating independently, without the need to report to a CEO in a different jurisdiction, but this can be a difficult transition.
The inverse is also true. Talent retention can be complex in carve-out situations where the team is moving from a large corporate environment to a business unit where they will have greater autonomy.
The negotiation of incentive packages is critical. Important considerations include whether individuals are rewarded for the performance of their own business unit or the buyer organisation as a whole. Meanwhile, integrating more junior staff has its own complexities and may not always receive the attention it deserves.
When leadership transitions are poorly managed, customer relationships can be disrupted too, eroding trust and continuity. Our survey found that customer continuity features as one of the top three most underestimated risks in deals.
The top tiers of management get a lot of focus in terms of incentivisation and retention strategies. The deeper you go into an organisation, the more likely it is that attention on talent tails off.
Daniel Domberger, Managing Director, Arrowpoint Advisory
Cyber security and data privacy risks are particularly acute in:
Life sciences & healthcare
Energy & infrastructure
Automotive
It isn’t always possible to conduct customer due diligence before completion, but where there are mutual customers between the target and the acquirer, early conversations can be helpful.
The deals that do succeed post-close, meanwhile, are those where integration is factored in from the outset. Acquirers who engage early with target leadership and revisit key integration assumptions in the months after completion are best positioned to create long-term value.
Buyers are often overly optimistic regarding how quickly cost savings can be achieved. This includes an underestimation of the management time required to achieve the necessary synergies.
Mark Barron, Partner, Taylor Wessing
of dealmakers think artificial intelligence (AI) can improve due diligence
Just 13% of dealmakers think AI can help with integration
03
A longer runway for lasting results?
With integration, talent and customer retention all emerging as critical risks in dealmaking, having more time to consider these factors could give buyers an advantage.
Our analysis of almost 900 cross-border deals conducted in partnership with Bayes Business School suggests that speed influences deal outcomes. Deals undertaken within compressed timetables tend to deliver a smaller increase in the share price than slower transactions. This pattern was particularly pronounced in France, Germany and Spain, where the change to the share price for acquirers on 'quick' deals one month post-completion was lower than that of 'slow' deals by as much as 10%-13%.
Although this data may appear intuitive, there is more nuance beneath the surface. Fast-moving deals may front-load commitment while deferring the more challenging issues to a later stage, but that only serves to make those issues even more difficult to address at that point when decisions must be made.
If you take the time to really understand the asset you are targeting you can take precautions to ensure you are not buying a falling knife.
Christopher Jobst, Partner, Alantra
An interesting development we are seeing is some sellers giving a selected buyer an early look before launching a formal auction – a sort of sneak preview. The idea is to build competitive tension and time pressure, letting buyers know the process is coming, it’ll be fast, and they won’t be the only ones at the table. But it doesn’t always work, valuation gaps often remain.
Dr Christian Traichel, Co-Head of International Corporate, Taylor Wessing
04
Navigating regulation
Deals don’t take place in isolation though. Even with the right strategy, structure and integration plan, cross-border M&A can still be derailed if regulatory complexity isn’t appropriately managed.
A lack of preparation can impact deal execution risk as well as operational continuity, should buyers not fully understand the new regulatory environment that they find themselves operating in.
National security and competition rules are becoming increasingly politicised, as is evident especially in the US with recent activities scrutinised by their cross-border regulatory body, the Committee on Foreign Investment in the United States (CFIUS). EU Member States have also tightened up their equivalent regimes at both the regional (EU) and national levels, making cross-border M&A more complex and unpredictable, particularly for buyers from certain jurisdictions.
While these regulations have historically focused on defence and critical infrastructure (such as energy, transport, water and healthcare), application of these regulations is expanding to include sectors such as communications and advanced technologies (notably AI and chip-making), as well as food security. Both the US and Europe are also increasing enforcement activities and penalties for violations.
Given the scope of these national security and competition rules, it is not surprising that our survey shows that dealmakers specialising in aerospace & defence, energy & infrastructure and life sciences & healthcare were the most likely to state that regulation hinders cross-border M&A.
of dealmakers see regulation as a deal blocker in aerospace & defence, compared to 44% overall.
GDPR is certainly a factor. It faces very little acceptance amongst large US or Asian tech players. That gives them a competitive advantage over European companies which follow these rules, rolling out compliance processes and bringing in data protection officers, leaving them at a competitive disadvantage. The EU Digital Markets Act may help to create a more level playing field by putting pressure on the so-called very large operating platforms, helping shift the market toward more balanced competition.
Dr Peter Hellich, Partner, Taylor Wessing
When comparing the views of dealmakers involved in different areas of cross-border M&A, sell-side dealmakers were the most likely to view regulation as the biggest barrier to cross-border deals. Almost half (48%) saw it as the top challenge, compared to 44% overall and just 29% of those involved in management buyouts (MBOs). Those involved in distressed M&A were also more likely to see regulation in the UK and US as hindering M&A – for example, 37% of these respondents saw M&A as a barrier compared to an overall figure of 30%.
There are also sector-specific regulatory requirements that need to be evaluated, for example in financial services or data-heavy sectors such as social media, where privacy laws have become a key hurdle. Another example would be the online pharmaceutical sector. These businesses are heavily regulated in many European markets, but not in the US.
Sector-based regulation can be complex and far-reaching. It is therefore vital to map out any regulatory issues at the start of the deal process.
Almost half of sell-side dealmakers saw it as the top challenge, compared to 44% overall and just 29% of those involved in management buyouts (MBOs).
Take something like acquiring an online pharmaceutical business in Europe. These businesses are heavily protected in many European markets, unlike in the US, and that creates significant regulatory friction. By contrast, in manufacturing, those concerns often don’t apply. Regulatory complexity is highly sector-dependent.
Mark Barron, Partner, Taylor Wessing
Indeed, for many survey respondents, regulation is now the single biggest perceived barrier to successful cross-border M&A. This includes most Western European countries, with respondents to our survey suggesting that regulation is more likely to hinder than help M&A activity.
Meanwhile, our analysis of cross-border M&A, together with Bayes Business School, suggests a possible link between the least supportive regulatory regimes and the lowest volumes of deals taking place in those jurisdictions.
In some jurisdictions, the regulatory path is well trodden, and everyone knows where they stand. There are other jurisdictions where approvals can take a long time and communication can be poor. That adds a layer of complexity and uncertainty to dealmaking.
Emma Danks, Co-Head of International Corporate, Taylor Wessing