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.