Finding a cultural fit
in global M&A
  Business owners seeking a foreign partner or buyer
must go beyond the standard due diligence.
 

HE MERGERS and acquisitions market has been booming since early 2005 and family companies have been among those making headlines. Judging from the number of financings and mergers our office is involved in, this activity level may continue for quite a while. Each week we field requests from family business owners interested in putting their company on the block as well as those seeking investors.

This is not the first time that M&A activity has exceeded expectations at the top of a business cycle. What is new in this cycle is the influx of capital from foreign investors and global private equity groups.

Globalization continues to lure U.S. businesses to

Family firms' long-term orientation, close employee relationships and conservative financial structure alleviate some of the risk for foreign investors.

seek new markets overseas. The abundance of private equity and debt capital has bid up multiples, which are currently at historically (some would say excessively) high levels. But at today’s exchange rates, foreign buyers and backers can compensate for those high multiples with lower-valued dollars.

As a result, foreign firms’ acquisitions of U.S. companies rose 27% in value in 2005 compared with the previous year, according to financial publisher FactSet Mergerstat LLC.

Between June 30, 2005 and June 30, 2006, Canadian firms gobbled up 347 U.S. companies, worth almost $16 billion, and U.K. investors spent more than $35 billion to purchase 324 companies. Japan, France and Germany were also big spenders in the U.S.

Family companies are particularly attractive acquisition targets for foreign investors or global private equity groups. Family firms’ long-term strategic orientation, close employee relationships and conservative financial structure alleviate some of the risk for foreign investors entering the U.S. market. A group of Japanese merchant bankers who recently approached our firm said they were particularly intrigued with our family business focus.

This is great news for family companies seeking a foreign partner or buyer. But merger deals with foreign companies are much more complicated than transactions with American partners. The cultural fit between buyer and seller is as key to the long-term success of a merger as the financial considerations.

In addition to routine due diligence, family businesses seeking foreign capital would be wise to assess the cultural compatibility of a potential foreign partner—especially if the transaction involves stock or an earn-out, enmeshing the seller to the buyer for some time after the ink has dried.

A world of difference

It is dangerous to draw sweeping stereotypes of ethnic cultures, but here are some factors to look out for before entering negotiations with a foreign party:

• Communication and negotiation styles. Differences in negotiation styles can jeopardize a perfectly fair transaction. One recent deal almost fell through between a German buyer, who took a “my way or the highway” approach to negotiations, and an American seller offended by this approach. Obviously, not all German-descended businesspeople have this trait, but it took an outside adviser to help this transaction along. The adviser apprised each party of the other’s sensitivities and urged them not to take their counterpart’s style personally.

     
     
 
 

 

 

 

de Visscher & Co.

 

 

(Continued on page 2)

(Continued from page 1)

Finding a cultural fit in global M&A

In many cultures, especially Asian traditions, people are uncomfortable responding to any request in the negative; they consider it rude. So if you ask a colleague from China or Japan if she can get a task done by the end of the month, she is likely to say “yes,” even if she knows she will be unable to do so. Eugene Nesbeda, managing director of New York City-based CITIC Capital Partners, explains that it is better to avoid yes-no questions; ask, “When you do think you can deliver that to me?” “It takes extra effort to make sure communications are clear” when people from different cultures try to do business, according to Nesbeda.

Handshake agreements and letters of intent may be interpreted differently. In certain Latin cultures, for instance, letters of intent are a mere statement of understanding, which may be deviated from unilaterally if the circumstances change. A U.S. party, accustomed to the rigidity of the terms of an executed letter of intent, may be offended if the other party “changes its mind” in the middle of negotiations. Continually checking on the parties’ plans in the process of negotiations is a key to the transaction’s success.

Respect your partner’s values

Given such cultural differences, it’s clear that negotiations with non-U.S. parties must be handled delicately. The respect given to each party’s values—especially important in family companies—will be a factor in how the transaction’s long-term success is judged. Those values may include the following:

Check the references

There are many variations within cultures throughout the world, so don’t just rely on broad generalizations about a particular country. Ask potential foreign partners if you may contact their customers and suppliers. Talk to these references about each of the factors mentioned above.

In a very hot M&A market, sellers tend to focus on getting the best price for their company. But it’s just as important to seek out a comfortable cultural fit. As the owner of a family company, you likely take pride in what you’ve built, and care about what happens after you sell— to your employees, customers, suppliers, community and overall legacy.

By François de Visscher

- 2

- 3

Advisor of the Quarter

n continuing de Visscher & Co.’s recognition of outstanding collaboration partners, we are pleased to introduce Dick Albu, of Albu Consulting, a friend and colleague with whom we have had a long and mutually beneficial working relationship. Dick founded Albu Consulting (www.albuconsulting.com) in 1994 as a strategy consulting firm specializing in strategic planning, leadership and organizational excellence. His proven planning systems help management teams:

  • Make better decisions with more confidence over the long term
  • Focus resources and eliminate wasted time and money on low priority activities
  • Create an accountability-based culture focused on results
  • Increase collaboration and communication among functions
  • Create a culture of continuous improvement with a willingness to change.

Dick has been a “trusted advisor” to many family owned companies at a time when they are most in need of straightforward and insightful advice. Through a collaborative approach, his clients have had success in securing management buy-in to the challenges ahead and absorbing the knowledge and skills needed to deliver the desired return on investment from their new strategic plans. Albu Consulting’s success in facilitating business planning projects comes from practical operating experience that can be applied across all industries. Dick has worked with privately held, family owned companies and private equity firms in a range of industries.

We at de Visscher & Co. work hard to locate trusted family business advisors like Dick Albu who can assist closely held business with their most important issues and there are none more important than having a well thought out and realistic strategic plan. Please do not hesitate to contact Dick directly at 203-321-2147 or RAlbu@albuconsulting.com regarding his strategic planning services or general business advice.

de Visscher & Co.

is an independent financial advisor to business owning families and closely held businesses worldwide. Through a unique combination of financial advisory, capital raising and investment banking services the team at de Visscher & Co. creates high value-added solutions to the liquidity needs of shareholders and the capital needs of their businesses. Family Capital Growth Partners (www.fcgplp.com), a private equity fund affiliated with de Visscher & Co., also provides equity and subordinated debt capital to growth-oriented closely held and family-owned businesses.

Two Greenwich Office Park Greenwich, CT 06831 Tel: 203-629-6500 Fax: 203-629-6547 Website: www.devisscher.com e-mail: worldhq@devisscher.com

- 4