Entering overseas markets can be costly and fraught with difficulty and risk. Acquiring established businesses in a new territory can be an attractive market entry strategy, but there are pitfalls to be avoided.
“M&A is a well-established strategy for quick market entry and is particularly attractive in fast-moving industries where first-mover advantage can be critical,” says Paddy Quinlan, corporate M&A partner at Taylor Wessing.
Acquisition can accelerate market entry dramatically, he adds. “Buying an established overseas business can provide immediate market presence, existing customer relationships, local expertise and credible scale. This may also provide access to new product or service offerings. However, acquisitions usually involve the need for significant up-front investment and, although multiples are coming down in certain sectors, remain an expensive strategy.”
Enda Cullivan, partner, corporate with Eversheds Sutherland (Ireland) points to other benefits including bypassing tricky regulatory hurdles that can exist on the commencement of a business abroad. “In general, there are more barriers to entry abroad compared with in Ireland,” he explains. “Given its history and the role of bodies like the IDA, Ireland has become extremely efficient in its approach to new business commencement. The same cannot be said for many other jurisdictions around the world which can lead to frustrations.”
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There is also the issue of local familiarity. “In some markets it can be an advantage to appear as a local entity rathe
r than a foreign entrant,” Cullivan points out.
“Entering new markets via acquisitions can significantly reduce the time and risk associated with establishing new operations and supply chains by providing immediate access to an established brand, reputation and customer base,” adds Key Capital CEO Colin Morgan.
There are downsides, of course. “While comprehensive due diligence is required for any transaction, it becomes even more critical when entering a new market, where differences in regulatory and economic environments, and even cultural factors can impact transaction outcomes and longer-term success of the business,” Morgan notes.
“Engaging with an experienced, local advisor with an understanding of the target market is critical to increase the likelihood of a successful transaction for all parties,” he adds. “Other items that are critical to obtain advice on when dealing with cross-border M&A include tax and structuring considerations, in addition to any regulatory or foreign investment approvals required in the jurisdiction.”
Cultural integration can also present problems, according to Cullivan. “It is important to get to know and understand how business is done in the new jurisdiction,” he advises. “Be sensitive to staff and try to ensure you work collaboratively with them as opposed to dictating to them from ‘head office’.”
Quinlan also stresses the importance of cultural alignment: “Businesses should always conduct thorough cultural assessments and employee interviews along with the more routine due diligence investigations of the financial, legal, commercial, operational, tax, environmental and IT aspects of a target business.”
Unfamiliar regulatory environments are another issue. “It is important to take local legal advice to ensure that all foreign direct investment and merger control rules are adhered to,” Cullivan advises. “This is an ever-expanding area and one that needs to be considered in every transaction.”
Competition and FDI law regimes are more complex than ever and should be addressed early in any process, Quinlan cautions. “Other regulatory requirements may also be applicable, particularly in the financial and professional services sectors where there can, for example, be strict ownership rules. Sanctions and anti-bribery compliance are also increasingly in focus. In each case, sophisticated local advisers should be engaged early.”
Cullivan agrees: “Using local legal, tax and accounting plus any other sector specialists that may be relevant is not something to be feared and should be embraced. There can be a tendency to be concerned about costs but used properly they significantly derisk transactions, discover issues that a foreign buyer would not spot and help to ensure a smooth completion process.”
Finding the right company to acquire is critically important, of course. “The key consideration is strategic fit,” says Quinlan. “Expansion must align with core capabilities and market opportunities. Companies should never expand for expansion’s sake. The cost of failure can be enormous, and companies should only enter new markets where there is a compelling strategic reason, backed by a sensible plan for execution, to do so. Again, due diligence and strong advisers, with knowledge of the local markets, are key to any process.”
There are many ways of identifying suitable targets once a business has decided on a market that it wants to enter, according to Cullivan. “Firstly, most businesses will recognise similar businesses based on their own knowledge or market research. Some desktop analysis and detective work such as discussing it with your suppliers and distributors could yield results.”
Corporate finance advisors in those local markets would be very happy to assist, he adds. “Many corporate finance houses in Ireland have foreign offices so engaging with them may be of assistance.
“Once a target is identified, it is important to analyse it methodically,” Cullivan continues. “For example, is it a good fit based on personalities, approach to business etc. What are the management like? You will be relying on these people moving forward more than you would at home, so it is important to have a relationship built on trust.”
Market familiarity helps. “In our experience, local knowledge and relationships are critical to identifying and successfully completing acquisitions overseas,” says Morgan. “Key Capital is a member of the International Mergers & Acquisitions Partnership (IMAP), a leading mid-market M&A partnership of corporate finance advisors across 51 countries. Through this network, we regularly help clients identify suitable targets outside of the Irish market or identify international buyers who are looking to enter the Irish market.”
