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
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.
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.