This article, co-authored by Simon Pearson, Anna Faelten and Ryan Gong from EY’s TMT Corporate Finance team, looks at how tech entrepreneurs can take their exit global.
The world is your oyster
Cross-border transactions present a huge opportunity to business owners. The benefits of an international sale process are twofold: it exponentially expands the buyer pool, meaning greater competition. And, it can ultimately provide an established platform and customer base to leverage in other geographies.
Over the past few years transactions have become increasingly international, with investors and corporates searching the globe for the most strategic assets. In 2017 cross-border M&A accounted for 41.9% of the value of global M&A activity, the highest proportion since 2014 according to Mergermarket.
The international opportunity applies to both large corporates and SMEs, particularly in the technology sector where cross-border M&A and fundraising are highly active. And despite the uncertainties around Brexit, the UK remains one of the most attractive European investment destinations for international investors. In 2017, foreign acquisitions in the UK dropped 10.1% in value to £98.8bn, but increased in number to 679 compared to 651 deals in 2016 – the highest deal count on Mergermarket record.
Given this cross-border activity, it is unsurprising that many business owners have international buyers front of mind – in EY’s 2017 Fast Growth Tracker survey 59% of entrepreneurs said they expected to sell to an international corporate, compared to 29% envisaging a domestic corporate sale or IPO. However, whereas a business may invest a significant amount of time planning an international product expansion, not all owners give the same thought to planning for cross-border M&A. In our previous articles we discussed the importance of strategic positioning for an exit and differences between trade and financial buyers – the ‘where’ of a business’ future owner is an important element of how a business is marketed and prepared for an exit process.
Think global, act global
Much like an oyster, international companies can be difficult to crack – businesses need to know who to talk to and understand the market dynamics impacting their business. A financial advisor should be a valuable facilitator in cross-border marketing, providing a targeted landscape of credible, best-fit buyers and an international network of contacts.
The additional complexities involved in cross-border M&A can make an exit process more costly, time-consuming and unproductive if not managed well, so it’s important to plan ahead to tailor marketing:
- Do the homework: Before approaching and talking to potential investors or buyers, make sure the research has been done. What is their business strategy, and what trends or changes are impacting them in their local markets? Who are their key competitors, and how have they performed against them? Consider what data or information they might need to assess the business.
- Be smart in buyer outreach: Be targeted in who is approached and where the attention is focused, as more buyers not only mean more work, but more scheduling distractions and information requirements to accommodate. Also it is important to be aware of cultural differences, for example some Middle Eastern countries have a Sunday-Thursday working week. Having access to local connections and intelligence (through an advisor’s international network or other) can help secure the best valuation for a business and/or technology.
- ‘Face time’ or direct contact is still key. Having conversations and meetings with buyers and investors is essential for communicating product solutions, vision and strategy, particularly for explaining local market factors to international buyers. Calls, virtual meetings and video conferences will be the easiest way to communicate initially, however there are some obvious advantages to face-to-face meetings as the process progresses, including being able to observe reactions and body language, build rapport, and get instant feedback.
- Localise the buyer process and experience: In contrast to large corporates and investors in Western markets who are used to assessing their interest in a business fairly quickly, Asian buyers generally need to be contacted well in advance of commencing a sale process. For Asian buyers you should factor in that:
- They typically engage in very detailed preparatory work, but leave their decision to bid/not bid until the very last minute
- They will need a large amount of information upfront and significant education time to understand your business and market. Ongoing communication is key to ensuring they have opportunities to clarify understanding and ask questions
- If you think Asian corporates are likely to be key buyers in your exit process you should consider a dual-track timeline, with a tailor-made process for Asian parties
An exit process involving international buyers is a genuine opportunity if managed correctly, but business owners should be prepared for the additional time and effort involved. Understanding a foreign buyer’s view of the world and the way they do business is crucial in order to unlock an opportunity and facilitate a deal.
- Find out what the buyer’s decision process is early on – they may need to involve decision makers from other countries, schedule Board meetings and obtain regulatory approvals for foreign investment, all of which can add extra time to a process
- Be aware of local timezones and public holidays – having to wait for a response during business hours across timezones creates a natural lag and should be factored into timing
- Leverage technology to manage meetings and save time and money
- However don’t neglect direct contact – hearing about your business firsthand is still the best way to communicate the business story and value
- Stay up-to-date with major changes in laws and regulations, tax rules, and market or political trends that affect key buyers or investors