How much? Price negotiations in cross-border M&A (Part 1)

2018-02-26

Category: All Capital International growth

Keywords: Capital, international expansion, International Growth, Internationalization, M&A

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How much?

– Price negotiations in cross-border M&A (Part 1)

Mergers and acquisitions are a powerful way to scale a business. It provides, probably, the fastest growth track opportunities compared to all other traditional methods. It is even more powerful when we talk about cross-border deals. Companies, which have developed in different environments have different strengths and weaknesses and, thus, more opportunities for synergies when they join the forces.

Understand the culture

Companies can offer each other access to new markets, cost-efficient production, technological know-how, operational efficiencies, and more.

However, having inherently more differences also creates additional challenges in reaching the synergies. The managers need to have a lot of specialized soft skills to navigate smartly through many semi-hidden cultural and communication differences. In fact, important cultural differences exist in many companies. Even if their headquarters are located across the street from one another. It pays to recognize and work through those differences. In international cases, this need is amplified by a hundred and will easily break deals, which could fly for companies from the same country. Experience is the best teacher.

The price gap

For instance, often the need for the specific cross-border M&A skills becomes first apparent when the project reaches the price discussion phase. A common scenario is that the project manager has experience from local M&A cases and feels quite confident in their understanding of the price range. The owners of the companies have already met. They made a good impression on each other and shared their visions. They shook hands on the initial interest in the transaction. The deal manager prepares and sends preliminary price offer, and soon finds out that the price expectation gap is more spectacular than the Great Canyon. Some pushing and pulling follow, but soon the gap is declared too wide to cover. The company moves on to search for other opportunities.

Even though I am with both hands for a direct and practical approach. Often the price gap could be avoided if the manager recognized the possibilities and likelihood of differences in understanding of the value. It is often plain naïve to assume that the valuation basis from your home country has direct application internationally. It can be seen outright arrogant by the other side if you state your price without considering possible environment differences. It’s always more efficient to do things properly from the beginning, compared to trying to resolve the created situation later.

So, what could be done differently? Read in Part 2.

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