Global mergers and acquisitions (M&A) are at a seven-year high in 2014 and show no signs of slowing. This dramatic rebound is characterized by fierce competition within a fast-paced, financially favorable environment in which buyers and sellers must react both quickly and strategically to capitalize on an explosion of opportunities. Jeff Cox and Duncan Smithson, partners in Mercer’s M&A Transaction Services business, look at the reasons for this brisk turnaround and explore key issues that companies need to consider to be successful in today’s booming market.
Q: WHAT ARE THE DRIVERS BEHIND THIS STRONG MARKET REBOUND, AND HOW ARE THEY AFFECTING THE DEAL ENVIRONMENT?
JEFF COX: Massive liquidity in the markets — both as cash on corporate balance sheets and as private equity (PE) dry powder (the amount of money raised by firms but not yet invested) — is creating tremendous urgency to offload the enormous sums of capital on hand. An example would be the almost $1.2 trillion in dry powder globally that private equity is looking to invest. To put that figure into perspective, that is an 11% increase over available capital last year. When companies can no longer grow organically or domestically, they typically start looking to make acquisitions overseas. However, where there used to be four or five bidders for a particular asset, there are now eight or 10. At the same time, today’s auctions are moving much faster. Sellers want to “dump and run,” making as much money as quickly as possible, often without the infrastructure in place to ensure a smooth, seamless transaction — potentially creating even greater frenzy, not to mention the critical need for transition services.
Adding to the competitiveness for PE is an out-ofkilter supply-and-demand chain — there are currently far fewer companies for sale than there is money to buy them. And because corporate “strategic” buyers are able and willing to pay more for a target, they frequently outbid PE firms. Still, PE firms have recently exited and monetized more assets than in recorded history, generating enormous returns and creating even more capital in the system. As a result, we’re seeing PE sponsors that previously focused on just two or three industry niches now expanding their reach to investors in completely uncharted industries and geographies — often in risky attempts to merely deploy excess capital, but which later reveal overlooked and costly liabilities.
DUNCAN SMITHSON: The intense pressure to do deals goes beyond capital-laden corporate entities that eventually must reinvest the money or use it to make acquisitions, or cash-rich PE firms that, by definition, exist to do deals and are therefore even less able to weather idle excesses of dry powder for long periods of time.
Also influencing current buying activity are interest rates that remain historically low. Although acquiring companies always put up some amount of cash to buy equity in a target business, most also take on a certain amount of debt, which is now still relatively cheap money. And on the sell side, many companies continue to struggle post-recession and are reviewing their portfolios to determine whether certain business units or divisions are truly aligned with the overall corporate strategy, or instead need to be sold off to improve the company’s financials.
Q: HOW ARE GLOBAL DEALS UNIQUE?
D.S.: The deal process — identifying potential targets; financial, strategic, confirmatory, and HR due diligence; purchase price negotiation; signing and closing; and post-integration or stand-up — is really the same for both domestic and global deals.
The real differentiators of global deals are around their high degree of complexity and nuance, which are manifested on two levels for HR: the necessary technical knowledge of the differences in the HR environment, such as how pensions work specifically in France or how health and benefits work uniquely in Japan; and the required logistical, practical capabilities, such as having team members who speak the target’s native language and understand its unique culture, or having operations that can manage the deal across multiple time zones.
J.C.: Often, businesses in North America simply take for granted their way of operating but quickly discover the different nuances and complexities of doing business elsewhere. For example, in another country there may be certain managers who are trustees of the pension plan and, as such, have a fiduciary responsibility to the pensioners and the works councils that represent them. However, those same managers may also be in the loop regarding significant transaction-related changes, such as moving from a DB plan to a DC plan or the closing of a plant, creating a sensitive conflict that must be carefully managed.
Q: WHAT ARE THE MAIN HUMAN CAPITAL CHALLENGES FACING COMPANIES IN CROSS-BORDER DEALS?
D.S.: There are five factors that create the greatest challenges and need to be understood:
1. EMPLOYMENT STATUS VARIES GREATLY IN OTHER COUNTRIES. The US is virtually unique in the world in its enforcement of “employment at will” for all but a handful of top executives. Conversely, it’s quite common in other countries for most, if not all, employees to have a contract that defines the terms and conditions of their employment and requires the employer to meet very specific criteria in order to terminate them.
2. EMPLOYEES ARE FORMALLY REPRESENTED TO A MUCH GREATER EXTENT AROUND THE GLOBE. In the US, trade unions have a very narrow meaning and are generally understood to refer to certain industries, workers, or jobs. However, in many other countries, there are unions and/or works councils that represent most every type of employee and to varying degrees must be consulted with or informed about actions that affect employees.
3. STATUTORY SEVERANCE IS MANDATORY IN MANY PARTS OF THE WORLD. Although statutory severance protection isn’t required for US employees, that is not the case elsewhere. For example, in Germany, if a company wants to terminate an employee, it might take 12 to 18 months and cost two times the employee’s annual salary. It’s very typical to not only have statutory minimum severance, but also agreements with local representative bodies that augment that severance.
4. BENEFITS ARE A FUNCTION OF PUBLIC POLICY AND VARY WIDELY. The social security system (how relatively generous it is), the tax system (what can be done the most tax effectively), and labor laws (what is mandatory versus discretionary) differ greatly from country to country and drive the benefits that companies offer employees.
5. NATIONAL AND BUSINESS CULTURE IMPACTS THE DEAL THROUGHOUT THE ENTIRE PROCESS. Understanding culture is critical — not just for successful integration of the buyer and seller, but also because of subtleties that can affect the mechanics of the deal. For example, understanding the quality, quantity, and accuracy of available data, and the speed with which an acquiring company can get those data, will have a huge impact on getting the deal done.
Q: WHAT TIPS WOULD YOU OFFER TO HELP MAXIMIZE SUCCESS?
D.S.: Understand that the complexities of global deals require technical knowledge and experience that US companies having only US deals under their belts simply don’t possess. Also realize that the number of employees in another country doesn’t necessarily give you a good idea of the deal’s complexity there. It seems counterintuitive, but the time and energy spent on due diligence or integration, for example, is not a linear function of employee head count.
J.C.: Make sure appropriate investments are made in project management and communication resources in order to operate effectively and efficiently and to keep key players properly informed during a very compressed time frame. Don’t be in such a hurry that you take unnecessary risks by making assumptions or decisions in the absence of proper data and facts. Particularly with many sellers abandoning the need to honor transition services agreements, buyers that lack infrastructure in other countries face numerous challenges establishing the necessary systems and can incur huge liabilities if corners are cut.
Learn more about Mercer’s M&A transaction services.
Read a related article in The M&A Journal co-authored by Mercer’s M&A experts.
|Jeff Cox (Chicago)
Senior Partner and North American Leader,
M&A Transaction Services
+1 312 917 0592
|Duncan Smithson (Chicago)
Partner, M&A Transaction Services
+1 312 917 9284