Finding and Closing the Right Cross-Border Acquisitions
The pace of cross-border acquisitions in the U.S. will increase over the next several years. Manufacturing assets will be prized by companies already selling their products into the U.S. but without domestic manufacturing as well as by companies wanting to enter the U.S. or expand their sales in the market.
Buying U.S. manufacturing capacity can make sense for offshore buyers for many reasons, including:
- Reduce shipping costs significantly
- Respond more quickly to evolving needs of U.S. customers
- Fulfill orders faster by shortening cycle times
- Appeal to some U.S. consumers wanting products “Made in America”
- Access to the acquired U.S. manufacturer’s supply chain and distribution network
- Demonstrate long-term commitment to the U.S. market
Proposed tariffs have now added another significant reason to the list above – that is, manufacturing in the U.S. could help to mitigate the negative effects of tariffs as well as significant changes in currency differentials. In our prior blog, “Reordering International Trade with the United States,” we discussed the potential impact of tariffs and currency fluctuations on European manufacturing companies with significant profitable sales in the United States. In this instance, strategic diversification addresses the threat of losing near-term revenues and profits as well as market share over the long-term for exporters without the capabilities and resources for manufacturing in the United States. Addressing this strategic threat requires speed and efficiency of action.
Achieving diversification through a “greenfield” investment in a new plant may be impractical given the lead time required to site, license, design, build, and start up a new manufacturing facility. While acquiring manufacturing facility in the United States would take less time, searching for, closing, and integrating an acquisition has its own challenges. For example, in certain industry sectors, there may simply be few attractive acquisition targets due to prior industry consolidation. And, of course, owners of attractive targets may not be willing to explore the possibility of a sale, which may further limit the actionable acquisition transactions. At the same time, strategic buyers and financial investors may be bidding aggressively for the same companies or stand-alone manufacturing assets. These challenges favor promoting a proprietary transaction rather than waiting for the “right deal” to come in over the transom from a bank auction process.
Regarding competition from financial investors, a strategic buyer should be flexible in structuring an offer that includes the owner rolling over a portion of their equity after closing. Strategic buyers frequently want to purchase 100% of the acquired company’s equity at closing, which may not be appealing to the seller. Financial investors tend to be more flexible regarding equity rollovers. This issue may compel the seller to accept a lower offer than made by the logical strategic buyer with synergies and other hidden sources of value to consider in pricing a transaction.
There are, of course, many complications to completing a cross-border acquisition. Applicable laws and regulations, employment practices, and other key considerations may differ from those in the acquiring company’s home country. Notwithstanding such differences, establishing trust and rapport between buyer and seller is essential for a transaction to move forward. Sometimes a buyer and seller may know each other through existing industry or commercial interactions. More often, the owner of a target acquisition must be convinced to explore in good faith the possibility of a sale before being introduced to the acquiring firm. For that to happen, the buyer will need buyer an advisor with the seniority, industry experience, and a record promoting transactions with companies not currently for sale. But how can the buyer determine which are the right companies to approach?
Identifying the right acquisition targets first requires acquisition search specifications. This begins with strategy clarification. Acquisitions like other forms of business combination bridge the performance gap between what a strategically managed company can expect to achieve through investing for growth in its core business and what objectives it has for total growth as well as diversification. A company may define its growth objectives in terms of top-line revenue or cash income or both. Depending on how large the performance gap is, the defined scope of an acquisitions program might require serial acquisitions over several years.
If growth is the primary objective, the difference between expectations for total growth and growth core business provide the context for developing an acquisition strategy. The difference might translate to investing a defined amount per year over a defined period of years to achieve the total growth objective. If diversification is also a strategic priority, an acquisitions program must be clear about the specific kind of diversification needed. For example, does a company want to diversify the source of its revenues and profits? How will the company realize the diversification such as accessing new functional markets, adding new products or product categories to the current portfolio, entering geographic markets (countries) where it does not currently distribute its products?
Clarifying the nature and scope of the acquisition program positions a company to articulate the specifications for an ideal acquisition target. Based on five decades of conducting successful acquisition searches, we caution strategic buyers to recognize the ideal acquisition targets for them may not be for sale. For this reason, success with company search requires careful thought, rigorous research, industry knowledge and contacts, as well as creativity, experience, and credibility to approach the owners the attractive acquisition targets. This process begins with target specification.
Typically, target specification covers both qualitative and quantitative elements. Qualitative specifications may address factors such as technology leadership, brand strength, the depth and quality of the management team, and the like. Qualitative specifications address factors including financial performance (revenue growth and profitability), competitive position (market share), customer concentration, to state examples. The qualitative and quantitative specifications provide boundaries for initial screening and subsequent prioritizing of attractive acquisition targets. Notably, individual specifications may also be a range of values (“Target must have annual revenues between $X and $Y”).
Unlike bank auctions which use broad-based mailings to contact prospective buyers about a sale, the acquisition search process requires personal contact. Not only does this enable the advisor to set the tone for relationship building between buyer and seller, but also allows the advisor to make an informed judgment about whether priority targets are in fact a good fit for the buyer and to confirm the seller’s willingness to explore a transaction in good faith. Typically, relationship building involves electronic and face-to-face meetings, site visits, and confidential information exchanges through which a decision can be reached by each party to move forward.
Next, we help the buyer develop, present, and negotiate terms for completing the transaction. The term sheet is an outline of how all the different possible components of the transaction would work together. With the term sheet in place, we move onto due diligence, final negotiations, and then closing.
CDI local expertise helps both parties to the transaction to develop trust in each other and to move forward together in achieving a successful closing.
Why CDI?
CDI Global provides middle-market advisory with globalreaching success. Our commitment is to deliver worldclass service built on long-term client relationships. The pillars on which we have built our organization are integrity, excellence, client focus, and partnerships. These core values are at the forefront of every CDI Global engagement, driving our dedication to finding the best opportunities in virtually any industry or location. Our goal is to create a lasting and positive impact through our history of successful cross-border transactions.
We have now expanded to more than 40 offices in over 30 countries, with several hundred professionals dedicated to delivering transactional success. With CDI Global you find teams with deep industry knowledge, language capabilities, and experience with local business practices and customs so we can provide global reach without limit. We are known for the quality of our international personnel, our trademark interview process, and our in-depth knowledge of business strategy and corporate development.
CDI Global thrives on changing times and finding unexpected opportunities through cross-industry and cross-border expertise. Our firm is continually growing and expanding our international reach to provide our clients with industry-leading middle-market advisory, capital growth, project management, company search, and transactional success. We look forward to developing new relationships and facilitating the growth that drives our economy forward.
By Bill Surman and Jeff Schmidt
