The following article contains substantial excerpts from a presentation given by Mr. Charles Downer, Managing Director of Downer & Company, an investment banking firm with notable cross-border experience. Mr. Downer presented these concept guidelines at an InterGrowth Conference, which was sponsored by the Association for Corporate Growth.
What drives cross border M&A?
- Globalization, which started after World War II, and is driven by technology, travel and the ability to communicate across long distances.
- Deregulation of utilities, telecommunications, transportation, insurance, banks, etc., allows companies to expand across borders as they never have before.
- Privatization has made a great impact. Before privatization, 50% of the European GNP was produced by state owned companies. But under the leadership of Margaret Thatcher in the 1980s and early ’90s, the idea that private companies were more efficient in handling many industries, such as railroads, transporta¬tion, utilities and more, took hold. This trend toward privatization will do nothing but continue.
- Free trade, Common markets – The European Economic Community has created much larger markets in Europe. Larger markets demand larger companies to fulfill the need, and smaller companies really don’t fit, they are either acquiring or being acquired.
- ‘Middlestand’ effect – Middlestand is a German word commonly used in Europe to reference medium sized companies. After World War II a large number of companies came into being. Now these excellent, mid market companies are 50 years old and their owners are in their 70s with little choice but to sell. There is virtually no developed IPO market in Europe, and these companies must find a solution to succession.
- The Euro – The Euro is going to be good for cross border M&A. The common currency will keep the cost of capital low. Right now the reserve bank rate in Europe is at 2 percent. The Euro will allow an efficient bond market to be created. Acquirers are going to be able to go around the banks and deal directly in bonds, with no currency risk and no conversion cost, etc., etc.
Hazards to Avoid
- Call existing executives in Europe because they know everyone in the industry. Wrong! These people are running companies. They are not corporate development executives, who should be visiting new companies in other parts of Europe. Furthermore, these executives prefer to find turnaround situations that will make them look good. They are not going to find you the very best companies available even if they could!
- We’re so well known in the industry, we’ll hear about anything for sale. Wrong! You will be the last to find out about companies for sale because your competitors don’t want to tell you.
- We’ll contact the industry association, they’ll help out. Wrong! Industry associations have hundreds of members and small staffs, and can’t be seen helping one member over another.
- We know of two great companies, but we saw them at the industry meeting and they are not available. Wrong! Just because the company was not available yesterday does not mean it is not available today. Go back to those who said no, and keep going back.
- We’ll go to the trade fair in Frankfurt and see who is for sale. Wrong! Trade fares are all about marketing…buying and selling are not part of the agenda, and if you broach the subject of a sale, no one will talk to you.
- We’ll ask our investment bankers to bring us deals. Wrong! You’re looking for middle-sized deals. If the investment banker is large enough to have European offices, he or she is generally not interested in the $40 million deal in Southern Italy. He won’t bring you mid-market deals.
So what is the right approach?
First, focus focus focus! This drives the whole process. Become extremely proactive in a detailed, methodical, and systematic way. There are five key steps to follow to success:
- Define the desired characteristics of your corporate acquisition & identify your targets.
Set the strategy: Why are you going there? Are you diversifying? Do you need to expand technologically? Do you need market access or distribution in Europe?
What are you looking for? Sector? Size? Set the parameters – do you need new management? Are financial considerations most important?
Where should you look? You need to know the various markets of each country. For an instrumentation business, you might go to Germany and Italy. For fashion it might be France and Northern Italy, and so on. It is suggested that clients not go to more than two countries at a time. Two currencies, legal systems, accounting systems and languages are enough.
Identify every single company that meets your criteria. Go to:
- Typical business sources: Extel in U.K., Compass in Europe, and foreign government agencies.
- Foreign chambers of commerce.
- Foreign trade associations, which will tell you who is there and often provide lists divided into industry categories.
- Subscribe to trade publications – great sources of information that publish annual directories, which can be of immense help in a search.
- Trade fairs. Visit the European trade fairs for each industry. These are great channels to finding out what there is and what could be available.
- Gather information on your targets.
Gather information for two reasons: you’ve got to know what you are after and what you are not after. Gather enough information on a company until you can eliminate it. Public companies are easy to find information about, but with private companies you need to get brochures, catalogs, databases – Dun & Bradstreet in Europe isn’t bad – telephone interviews.
Make very specific approaches. This part is very Europe specific because you start to run into cultural and language differences. Here you might consider getting an investment banker or local accounting or law firm to help you process the laws and regulations that differ in each country so that you can tailor your approaches. Then, trim your list to 20 -30 companies that meet your criteria.
- Send profiles and arrange to visit.
Contact these companies by mail. Send a letter (that is extremely specific) to the decision maker. We may spend a couple of days writing one letter getting it just right. Make very specific points directly related to the individual’s business. You’ve got to hook him or her right there. You have to show how these companies mesh. If you don’t, your letter will go right into the trash. If you do, he or she may call you. You want to engage he or she as soon as you can. Your aim is to always have a personal meeting.
European customs and dress codes are different than ours so approach the visit in an informed way. For example, in Germany you never call an executive by his first name without being asked to do so. You probably need help at this stage to learn about not only customs but also legal matters.
- Rank your targets and begin negotiations.
Once you’ve seen all these companies, rank them and develop a negotiating strategy. You have to know what the company’s strategic value is to you – what the savings are, what the comparables are, the limits in price, etc. This is not too different from the U.S., but the closer you are to the North Pole – Germany, Scandinavia – the more you are negotiating; the closer you are to the equator – France, Spain, Italy – the more you are bargaining.
Get your execution team accountant, lawyer, banker, and environmental team in place.
You really do need to know what the integration plan is before the acquisition is complete. You have the final dinner, shake hands and celebrate, then wake up (with a slight hangover), and you have a new company in Spain. You’d better know how you’re going to integrate your new company before you go to bed!
Concurrent negotiations are not acceptable in Europe. It’s too small a world there. You have got to go after companies one by one.
In summary with many industries, cross border deals are no longer an elective choice. Many of your clients have to go to Europe because their customers are there. If your clients are not in Europe they are not seen as real players in industry.
Middle-market deals can represent better values for the acquirers. There are many bargains in Europe with multiples lower than those in the U.S. A systematic, comprehensive approach reduces risk and greatly improves the quality of your efforts.
The 1999 merger of Fox, Twerdahl, Lehmann & ; Co., Inc. into C.V. Lemmon & Co., Inc. has brought seasoned cross-border experience to the service of our clients. The acquisition objectives of overseas buyers in the United
States, as well as the overseas objectives of American clients are now handled by our International Division. More information may be obtained by calling Charles V.Lemmon at (214) 207-9694 or by e-mail at firstname.lastname@example.org.