3 focus areas as global M&A accelerates

As the global economy continues to grow, the outlook for cross-border mergers and acquisitions appears especially bright.

Citing an investment recovery in advanced economies along with strong growth in Asia and a notable upswing in certain emerging economies, the International Monetary Fund last month predicted that the global economy would grow by 3.9% in 2018, up from 3.8% last year.

Tax law changes in the US are improving conditions for certain deals, such as asset sales. With a rate of 21% on corporate capital gains, companies can focus more on the business merits of asset deals and less on the tax consequences, according to the Boston Consulting Group. Previously, such deals were taxed at a 35% rate.

While M&A activity is already looking good, there are other signs deal levels could pick up further.

“Cross-border transactions are active and maybe even more [popular] as confidence builds in the global economy,” said George Skidmore, CPA, CGMA, an independent international business consultant in the US.

More deals

A survey from EY published last month found that 86% of global executives were expecting the world’s M&A market to strengthen during the next 12 months, up from 39% when EY asked the same question last year.

For the first time in the history of the twice-a-year EY Global Capital Confidence Barometer, now in its 18th edition, 99% of executives foresaw global economic growth to be stable or improving.

Notably, 52% of survey respondents said their firm was planning to make an acquisition within the next 12 months. The responses were gathered in March and April.

Synchronised growth

In addition, the number of executives saying they expected to complete a greater number of deals in the next year had more than doubled (67% in April 2018 versus 33% in April 2017).

This is despite deal levels having already exceeded their pre-financial crisis highs of 2007.

EY put this down to several quarters of synchronised global growth along with optimism around the impact of changes to US tax laws.

Executives named the US, Brazil, Canada, China, and the UK as the top investment destinations of choice, respectively, for cross-border M&A.

Cross-border transactions

Skidmore said he was currently working on several transactions, including a US company acquiring a Canadian company in the oil and gas sector and another in the software industry where a UK company was divesting to a US firm.

Mike Vaccarella, CPA, CGMA, managing director of transaction services at Wipfli LLP, said many US companies are contemplating mergers with competitors in Canada and Latin America as they look to head off intensifying competition.

Vaccarella, who is based near Chicago, said his firm was currently performing buy-side due diligence on a Canadian company being purchased by a US group.

Another recent deal involved performing sell-side diligence for a middle-market US manufacturer that was being acquired by a large Japanese firm.

Technological change

Rapid technological change is also seen as feeding the appetite for M&A.

Robert Brant, FCMA, CGMA, an independent consultant in Milton Keynes, England, points to a huge rush towards artificial intelligence, robotics, and process automation. Some organisations, he said, are shedding less profitable businesses, which are being acquired by rivals to improve competitiveness.

“It is a time of change that could be summed up as ‘eat, eat together, or be eaten’,” Brant said. “The speed of change in technology will supply the M&A market for many years yet.”

Skidmore said finance executives should focus on three key points to better navigate the opportunities and challenges of fast-expanding, cross-border M&A:

• Prepare for differing regulations. Ensure you’re able to handle the complexity of different sets of regulations. “Cross-border transactions are very complex by their nature,” Skidmore said. “A minimum of two countries are involved, and usually, there are many more countries, whose rules must be analysed and understood.”
• Know your tax. The tax rules of individual countries and bilateral treaties between nations can vary considerably. “Simply consider a US acquisition of a UK company; both countries have their individual accounting, tax, and regulatory laws,” Skidmore said. “In this simple example, there are two sets of tax rules that can apply to a transaction, plus alterations caused by the treaty between the countries. The differences between these rules are quite detailed and expansive. Adding to the complexity, the various rules are not static and [are] always changing — the new US tax laws come to mind.”
• Get integration right. Integration is likely to be the key ingredient for success, while allowing for the individual cultures, practices, and expectations of companies that are operating in different time zones. “Despite all the due-diligence work and acquisition planning prepared in advance, nothing is more important than properly integrating the acquired company,” Skidmore said. “This is key to meeting deal metrics and, ultimately, whether the transaction adds value to the new combined organisation.”

— James Hester is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.