Making the Leap

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

Similar regulatory red tape abounds in other high-growth emerging markets, including China, adds Mark Harris, a partner with McDermott Will & Emery. “Local counsel may understand the landscape, but may not be able to communicate it back [to you],” he says.

Finance chiefs acquiring abroad need other kinds of expertise as well. Earlier this year, InnerWorkings, a $482 million public company that helps manage print procurement for large global companies, bought a company in Chile in order to better meet the needs of its global clients. The company had made many acquisitions — five or six per year — in the past, but this was only its second international deal and its first in South America.

As such, CFO Joseph Busky did something he says he would never do for a U.S. acquisition: he hired a Big Four accounting firm’s Chilean office to help investigate the target firm, CPRO.

“The risk for fraud in South America is much greater than in the United States, so make sure you have the right controls and…have someone on your side who knows the pitfalls,” Busky says. “Having someone on your side who speaks the same language and who knows what the pitfalls are is invaluable.”

That doesn’t mean that a company should simply outsource all due diligence, of course. “There’s no replacement for having someone in your organization do the technical due diligence [on intellectual property], if the acquisition is within your industry,” says Duncan Perry, CFO of PeopleCube, a maker of facilities scheduling and management software. Perry has been involved in several international acquisitions in his career, including one in the United Kingdom for PeopleCube in the past year. “If you don’t know what you’re getting in terms of intellectual property, you’re missing half the value,” he says.

3. Don’t Ignore Workforce Issues

Many parts of Europe are famous for their labor-protection laws, which generally make it very difficult to fire people. “Reductions in the workforce usually take longer and cost more than you would ever imagine,” says High Street Partners’s Harding, in part because “the concept of ‘at-will’ employment doesn’t exist outside the United States,” he says.

For that reason, PeopleCube’s Perry recommends getting a good handle on a workforce strategy preacquisition. “If you’re going to be losing people, you should handle it prior to the acquisition, since the seller may have more flexibility on terminations than the buyer,” he says. If not, a company may be locked into a higher head count than it needs for longer than it expected.

Case in point: after a recent acquisition, one company chose to close an operation in the UK that was performing well, rather than a somewhat poorer-performing location in the Netherlands, simply because Dutch labor laws made it so “difficult and expensive to terminate employees” that closing the UK operation “was the far cheaper alternative,” says Michael Martell, an attorney with Morrison Cohen in New York. Hiring contractors overseas can also be tricky, since short-term contracts can quickly trigger long-term obligations on the company’s part.

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