Cross-border due diligence: a key to success
Pieter Poortvliet, director at Moore Corporate Finance Netherlands
As a rule of thumb, ignoring due diligence in a cross-border transaction equals heading for disaster. “Never ever does a due diligence result in a blank sheet of paper, without comments, corrections or concerns”, says Pieter Poortvliet, director at Moore Corporate Finance Netherlands (in The Netherlands also known as Crossminds). “Even though due diligence rarely leads to a deal being called off, there is often a correction to the sale price. In almost all cases, due diligence ensures the expansion of the warranties and indemnities in the sales agreement – in order to mitigate the buyer’s risks.” Since acquisitions are by definition high risk investment decisions, due diligence is crucial.
Pieter Poortvliet and his team execute due diligence for both sellers and buyers. “One of the main factors of failing acquisitions is the lack of detailed knowledge about the businesses that are acquired. You have to take great care of the process leading to a transaction in order to build a relationship of trust between both parties. Trust is key to transparency. Even if you reach a certain level of ‘familiarity’ and truthfulness, most of the crucial data of target companies remain buried in books or records. This forces organizations to make their acquisition business cases dependent on assumptions about the condition and future prospects of targeted businesses. Faulty assumption can be the key between success and failure. Corporations generally want to take a closer look, before they start an acquisition process. This closer look can be gained through a due diligence.”
A revealing process
Due diligence is the process of evaluating and investigating a prospective business decision by getting information about the financial, legal, intellectual… information provided by the other party. “The process can be tedious, frustrating, time-consuming and expensive. But keep in mind that a due diligence can be quite informative and revealing in the analysis of the target company and will give crucial insights in the costs and risks of the transaction.”
There’s a kaleidoscope of choices to perform due diligence – financial, IT, tax, legal, human resources, business, operations, antitrust, insurance and risk management… – and each can vary in scope and depth. “Yet it is important that a ‘due diligence overkill’ is avoided, by keeping in mind that a due diligence is not perfect and cannot predict all future developments. What it will do, is providing answers to important questions and guaranteeing with reasonable probability that the seller’s claims about the business are fair and legitimate.”
Benefits of a vendor due diligence
Most due diligence investigations in M&A are executed on the request of the buyer. Although it can also be wise for a seller to carry out a vendor due diligence, in preparation of the sales process. “By auditing the own company on crucial fiscal, financial, juridical… matters, the vendor gets to know possible bottlenecks and is able to address these issues proactively. A vendor due diligence has lots of benefits: it has a positive effect on the selling price, it leads to a faster process and improves the seller’s negotiating position.” No wonder vendor due diligence is an increasingly common process.
Pitfalls to avoid
The number of cross border M&A is significantly on the rise. Cross border acquisitions have become an integral component of the international growth strategy of multinational companies from emerging markets. Cross border acquisitions allow emerging market firms to quickly gain access to foreign markets and achieve international diversification. Most of the time, cross border acquisitions also create cost advantages provided by foreign resources and achieve synergies.
Compared to domestic transactions, cross-border acquisitions come with a risk that increases exponentially since there are more pitfalls to dodge when going international. “An additional challenge that always demands attention are cultural differences. For example, the Dutch are quite direct in their communication, to the extent that it sometimes comes across as offensive. If you don't take this into account, it obviously doesn't help the negotiations. Second example: in Germany you have to be careful to respect the hierarchy within the company. And of course, you need to have a thorough knowledge of every country’s financial and legal framework.”
A broad international network
Hence the strength of a broad network such as Moore Global Corporate Finance to support cross border transactions. “A due diligence team with presence in all countries involved in the transaction, can be of great value. The team in the domestic country of the buyer can be the coordinating team with a good understanding of the buyer's needs and wishes. All procedures that need to be performed in the countries where the target has presence, can be executed by local teams. The local teams are well informed on local legislation, tax requirements, cultural aspects and are able to communicate as a native speaker with the teams of target in the respective countries.”