Making the Leap

As more midsize companies explore overseas M&A options, a little caution can go a long way toward ensuring success.

Making an overseas acquisition is a true test of CFO savvy. Such transactions are rife with things that can go wrong, including due-diligence roadblocks, regulatory missteps, and cultural snafus. In fact, because cross-border acquisitions are “as hard as it gets,” says Stephen McGee, head of corporate finance for Grant Thornton, “many companies, particularly midmarket companies, just choke on that risk and bypass such deals.”

Of the 41% of privately held companies that plan to grow through acquisition in the next three years, for example, fewer than a third plan to do so through foreign acquisitions, a ratio that, McGee says, has remained fairly constant through different economic cycles. Instead, most companies without a dedicated international M&A team tend to get a toehold in a foreign market by first setting up a sales office or working with a local partner, then slowly adding more people as operations expand.

But not every CFO has the luxury of taking that slow-and-steady approach, particularly in geographies that are booming. “Brazil is growing so fast you can’t keep up just by growing organically,” says Michael Lucki, CFO of CH2M Hill, a $6.3 billion global engineering and construction firm.

CH2M Hill has had a presence in Brazil for more than 10 years, and now has about 180 employees there, but the company is currently evaluating Brazilian businesses that it could merge with its existing operation. “In a good year, we can double head count from, say, 200 to 400, but the change in Brazil is so great, we probably need 1,000 people there tomorrow,” Lucki says, noting the country’s projected 9% GDP growth rate for 2011 and equally impressive government construction budgets. (For more on CH2M Hill, see “80 Countries and Counting.”)

Exploiting fast-growth markets is certainly one reason to take the cross-border plunge. And with the domestic economy expected to limp along for the foreseeable future, those with aggressive growth goals may be forced to look overseas. CFOs also say they are buying abroad to follow existing clients, or to tap new sources of innovation.

Very rarely, however, are they buying companies with assets that could easily be found or replicated stateside. “To be willing to take on that level of risk and complexity, you’ve got to have really good reasons, like new markets, new technology, or new sourcing,” says McGee.

Midsize companies are making more overseas acquisitions, with Europe getting most of the action.

Approximately 450 U.S.-based companies acquired businesses outside the United States last quarter, up from 370 in the first quarter last year and on track to surpass the 1,666 such deals in 2010, according to Capital IQ. At companies with revenues between $100 million and $1 billion, finance chiefs completed 45 cross-border deals in the first quarter, compared with 31 in the first quarter of 2010 and 136 during all of last year.

Europe is still the hottest place for midsize companies to seek targets, but Asia is quickly gaining ground. “We haven’t seen a lot of M&A in China, because of the complexities of acquiring there,” says Larry Harding, president of High Street Partners, a firm that helps U.S. companies with back-office functions overseas, “but I would expect that to change in the next 18 to 24 months.”

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