Today, companies are increasingly looking to emerging markets for new opportunities. Although China and Brazil have traditionally attracted the most attention, other countries feature on firms’ agendas as well.
Many factors lead companies to expand beyond their borders. These factors include the perceived growth potential of entering a new market or the opportunity to access natural resources or quality local talent to provide brainpower for innovation.
However, the challenges posed by acquisitions in emerging markets are broad and diverse and thus must be carefully measured. Failure to properly gauge the risks often results in acquisitions that simply cover costs and do not generate synergies or deliver the expected benefits.
What is the regulatory environment like in the emerging country? What are the transparency and accounting standards in the emerging country? What type of contacts does the target company have? Are these contacts informal? Is the company well-managed? Many questions must be answered before an acquisition in an emerging country can be safely undertaken.
The challenges posed by acquisitions in emerging markets are broad and diverse and thus must be carefully measured.
Strategic Rationale
To begin an acquisition process, the strategic rationale must be clearly defined. Only then will the acquirer be able to identify potential target companies and assess their suitability.
One important step in the selection process of the target company is to perform a thorough analysis of the local regulatory and market institutions to identify possible gaps in the market and determine how the acquired company can play a mediating role, providing access to networks to reduce information asymmetries and afford the acquirer a comfortable position in that environment.
In addition, the deal’s viability largely depends on the fit of the corporate cultures of the two companies, the country’s regulatory constraints, the interest the candidate arouses in local institutions or other local investors, etc.
This initial strategic overview can enable the acquirer to make a preselection of the most suitable candidates, which it can then begin to cull until it has a smaller group to work on more in depth.
To begin an acquisition process, the strategic rationale must be clearly defined.
Objective: In-Depth Knowledge to Make an Informed Decision
Due diligence processes are key both to gathering as much information as possible and to establishing a climate of trust between the two companies. They should thus be conducted thoroughly. The team responsible for doing this should be made up of professionals from the acquirer, familiar with their company’s strategic objectives and needs, and local personnel, aware of the particularities of the target market and its regulations.
Their detailed analysis needs to focus on the target company’s finances and accounts, a complicated task in emerging markets due to the accounting regulations, which are often laxer, close relationships between banks and companies, and the sometimes questionable role of auditors and analysts.
The due diligence must also address legal aspects, primarily related to determining the real owner of the target company and identifying the company’s obligations with regard to taxes and other fiscal charges, permits and licenses.
As for the commercial aspect, the due diligence must determine the level of the company’s brand recognition on the local market and what type of business relations it has. For example, if sales relations come from personal contacts, i.e., informal channels, the acquirer runs the risk that those contacts may disappear at the time of purchase or come into conflict with its ethical standards.
Of course, ethical aspects must also be considered in this process, to identify potentially corrupt or even criminal behavior by the company or its employees.
The human resources due diligence must assess the employees’ turnover rate and quality, with the aim of retaining the best talent. It should also seek to determine the acquirer’s actual ability to undertake a collective layoff, since politicians and bureaucrats in the country can have a decisive influence if they oppose the downsizing of a company with which they have important ties.
A systematic approach is essential to minimizing the risks and increasing the benefits.
Successful Integration
To ensure a successful integration, the acquirer must develop a clear and coherent strategy to achieve the previously defined strategic objectives, analyzing whether it makes more sense to absorb the target company or to allow it to remain independent, and considering whether to exercise strong control or provide more autonomy to the target’s management team.
Only through the definition of a clear strategic objective, in-depth knowledge of the ecosystem in which the target company conducts its business, and a clearly defined process to integrate the two companies may it be possible to obtain the full expected potential of a cross-border acquisition. The risks are considerable, but so are the benefits. A systematic approach is essential to minimizing the former and increasing the latter.
© IE Insights.
