Negotiating Cross Border M&A

Biggest challenge in cross border M&A

Unlike the West where much of the dealmaking is very institutionalized and counterparties are generally pretty savvy, Southeast Asia is still a bit rough around the edges. Terminologies like earn-outs or reps and warranties are generally more uncommon.

Particularly if you're dealing with smaller size businesses or companies where the person leading the company we're trying to acquire has not had much deal exposure. To add more context, in the U.S. middle market M&A, it's generally companies between 50 million to 200 million, which is considered the lower end of the middle market, whereas in Asia, anything above a hundred million is considered quite big.

The scale of the businesses, the complexity, and maybe the volume of the types of deals people have been exposed to here are just not the same as in the States. A lot of it is more about breaking things down to layman terms and helping them understand why things need to be put into writing.

It's a little about lack of standardization. Plus some of these different countries vary. If you're talking to a mega multinational company like the Grabs and Tokos of the world, that's a very different story. They've done a ton of M&A and are exposed to international bankers.

But many of the situations I've worked with are companies that have never hired an investment banker before. Or they've never really gone through a process. To them, if you think about it, even in the States, meeting someone who hasn't been exposed to the finance industry, and you talk about earnouts or reps and warranties, they're going to be quite clueless.

So, that's what we're dealing with, but with companies of a bigger quantum.

When it comes to private equity, a lot of the deals I've worked with involve parties that weren't sponsor-backed or maybe they hired a local investment banker or advisor, with locals being domestically incorporated in that country. They may not have been exposed to the institutional training that someone would get at a bulge bracket firm.

From those experiences, there are certain nuances that occur. It's a combination of education and negotiating, just ensuring that they understand what you're trying to ask for.

Cross Border M&A without bankers

If they don't have a banker, a lot of it is about trying to buy a business from someone who says, 'Hey, I think my business is worth this much because this up-and-coming company that just made a news article sold it for this much.' But there's no rationale behind it, like what are the fundamentals of your business? Your financials might be way off, and there are many considerations and assumptions. 

It becomes a sort of 'I just want the same exit' mentality. When talking about valuation, or hiring lawyers to get a purchase agreement done, putting money in an escrow, or instilling certain clauses for protection on both sides, they might not see the need for such complexity. It's just a matter of trying to explain that to them.

Working with local bankers

One example is in the U.S., where a lot of M&A transactions involve buying reps and warranties insurance to protect against misstatements. That's actually quite rare in this part of the world. 

I remember one situation where we explored that and even the third-party consultants we spoke to found it uncommon. They had to bring someone from the States to help look into that situation. 

That's just one example of how things we do stateside are not as common elsewhere. But over time, you're probably going to see more consolidation of mindset and views as the world becomes more interconnected.

Language barrier during cross border M&A

Yeah, the challenge can come in two ways when communicating in English with non-native speakers. Firstly, they may speak but with broken grammar or a heavy accent. In such cases, it’s best to get someone local to help navigate, translate, and ensure nothing gets lost in the deal. A good example is trying  to communicate with a cab driver in a foreign country; the challenge of conveying what you're trying to do can also arise in deal negotiations.

Additionally, even local or regional lawyers representing them can present issues. For instance, we might find a purchase agreement written in direct opposition to what we just verbally discussed. It takes extra work and scrutiny to ensure that what is conveyed is translated appropriately in writing.

In cases of ambiguity, it’s crucial to double or triple check what was agreed upon and record it in writing to ensure both parties understand the agreed concepts.

When you ask about getting a local person to sit in, I usually choose an employee within Zended, for example. So, if it's Indonesia, I'll have someone from my team who's Indonesian and can speak Bahasa to help translate. Or, if it's in Vietnam, I'll have someone representing our Vietnamese business team to assist with translation or moderate conversations.

When dealing with lawyers it is a bit different. Once you bring lawyers into any conversation, it becomes very rigid and formal. Even if their role is to help moderate, the other side might not be comfortable with a lawyer in the room. Whereas, if you bring someone from your deal team or someone representing the post-merger side, it's a lot more comfortable for the other party as well.

But there will be a point where you do have to bring lawyers and they tend to have a similar approach anywhere you go. You might have the commercial side sorted out, but then there's the legal side that could become a potential deal breaker. Instead of trying to convey that to the other side yourself, it makes more sense to bring a lawyer on board. Then they may bring their lawyer, and they can hash it out.

Managing cultural differences during negotiations

Cultural differences play a significant role. One of the starkest contrasts I've noticed since coming over to Asia is the importance of honorifics. For instance, in the States, you can call your father-in-law by his first name, and it's totally acceptable. 

In contrast, in many Asian countries, it's customary to use honorifics like 'Mr.' or 'Miss' before someone's name, especially if they're older. In Indonesia, for example, 'Pak' is used for men and 'Bu' for older women. In Thailand, they have their own honorifics, and in the Philippines, professionals like lawyers are addressed more formally.

Another aspect is the level of deference given to seniority. Junior individuals often speak with great humility or deference to those older or more senior, both across the negotiating table and within organizations. This can feel exaggerated, especially coming from the States where interactions are more colloquial.

In negotiations, individuals from the States might be more direct and assertive, which is not always well-received in Asia. Even if you're correct, the way you present your argument can affect how it's received. It's important to navigate conversations with a certain level of politeness, even if it feels somewhat superficial. 

This ensures that respect is maintained between parties. However, there are times when the other side may become overtly emotional or confrontational, but that's a different situation.

The good news is that we have our stereotypes of them, and they have the same of us. Playing to your stereotype can actually help a lot in negotiations. There are times where I might look Asian, but culturally, I prefer to be direct and efficient. I'm straight to the point, and I make that clear from the start. This approach forces them to express their preference, whether they like directness or not, which can be revealing in a negotiation.

It's also been helpful to meet people in person whenever possible, especially since I joined during COVID when much of our work was remote. Meeting in person can soften the edges. If they drink, that works even better. The goal is to build trust and a relationship outside the formality of business.

Managing the speed of cross border M&A

Generally, in my experience, which has mostly been on the buy side, we tend to move quite quickly. Our teams are lean, allowing for rapid decision-making.

However, during due diligence, the other party may need more time to put their materials together. This is common in the U.S. as well, especially with middle market companies that might not have everything in order.

Time hasn't been a significant issue in my experience. In most deals I've worked on, the parties have been prompt in providing materials. Sometimes, it's actually their side chasing us on certain topics. We often deal directly with the founder or key decision maker of smaller companies. In contrast, at a company like ours, we have to navigate internal processes for approvals.

The challenge has been more about ensuring they understand that our decision-making process is different from theirs. We have to adhere to certain internal protocols and compliances, making sure everything is thoroughly reviewed before we can proceed.

Cultural differences almost killing the deal

Yeah, I don't have a specific example where a deal was derailed due to cultural differences. However, there have been colorful conversations between parties, especially with the other side having certain expectations.

For example, they might have expected that we agreed to a particular commercial term when, in fact, what we stated was that we would look into it. This was misinterpreted as an agreement, which is not the same thing.

Another instance could be when we said something seems to make sense but needed to discuss it internally. From their point of view, they might have thought we agreed with them, overlooking the fact that we mentioned it needed further discussion. This led to time wasted in clarifying to the other side that hearing them out did not equate to agreement. 

So don’t use sarcasm ever, because they don't understand sarcasm over here. Jokes are probably the most easily lost in translation. 

Countries easiest to work with

I've worked with the Philippines, Thailand, Vietnam, Malaysia, and Greater China. It's a combination of countries as well as people from those countries. The Philippines is probably the easiest to work with in terms of language, as many Filipinos speak English quite well. 

Indonesia is okay too, but they generally prefer to speak Bahasa. In Thailand or Vietnam, the accent can be heavier, and having an intermediary to facilitate conversations helps a lot.

As for the most challenging, based on my experience, Thailand might be one. They're very loyal to the original relationship person. For instance, if someone introduces you to a potential target and then you take over the dialogues and negotiations, they might still prefer to communicate through the original contact. 

This was a challenge because you couldn't transition the relationship over, whereas in other situations, it was okay. It's difficult when the window of opportunity closes, and you have to continue using a mediator, which adds an extra step and affects efficiency.

Cross border M&A best practices

To navigate cross border M&A successfully, it is crucial to build trust early on. When you're just another face on the other side of the wall, especially if you sound more eloquent and polished due to an English-speaking background, people can become defensive, particularly when dealing with local businesses. 

Meeting them in person and showing them who you are creates affinity and helps a lot. Also, communicating your style upfront is beneficial. Telling them that I'm direct, and apologizing in advance in a joking way, generally makes people more open or accepting of your approach.

On the other hand, I've been told by someone from the Middle East, representing a company we dealt with, that he actually prefers working with us because of our directness. He found it painful dealing with other parties in regions where the conversation needed to be more nuanced and passive.

Strategic tips when dealing with cross border M&A

I do slow down and enunciate my words more clearly. I definitely don't try to fake an accent like Russell Peters, except maybe for fun at a bar with friends. Generally, if they don't speak Chinese, I'll speak a bit more slowly and clearly. 

However, if they do speak Mandarin, I'll speak Mandarin back, even though English is my strong suit, just to make them feel more comfortable. They might realize I speak like a fifth grader, but at least we understand each other, and that works.

Integration approach to cross border M&A

We only have one approach to integration. What we generally do when we look at an asset, especially if we're trying to buy the entire operations of a company, including retaining the staff and more than just the license, is that we have an underground local team from my firm that connects with them.

For instance, if we're talking about Vietnam, we have a local Vietnamese team that will connect with the counterpart to ensure cultural compatibility.

The cultural aspect is generally an issue, but beyond looking at it from a country-to-country perspective, we also consider whether it aligns with the company values.

For me personally, I've realized that the harder part is not necessarily cultural from a regional perspective. It's more about whether they have a startup mindset, like whether they can move nimbly or if they're like a traditional mom-and-pop, brick-and-mortar shop with employees who have the same mentality. 

This is important and transcends borders. For example, even in the States, if a tech company is acquiring a 20-year-old industrial sewage plant, they're going to have very different mindsets in how they approach things.

Negotiating payment terms

It's very specific to the situation. Obviously, cash is king, and we prefer to give as little cash as we can. At the same time, it's important to offer something that is in line with companies of a similar scope. In the end, it might be a combination. We ask, 'What is your floor? What do you need to move forward?' We then work around that and be creative.

For example, if they're asking for a hundred bucks and we think they're worth seventy, we might offer seventy in cash and the remaining thirty as some kind of earnout, where they have to grow the business to the level they claim. 

In this case, it could be a combination of cash or share swap. We don't really use debt, given the nature of our business, so it will likely be cash or stock. 

In terms of what to use for payment, we've tried to figure out internally what our appetite is for the business on a cash basis. If there's a gap, we then consider completing the deal using stock or some other kind of deferred scheme. 

It's less about relying on a lot of relative comparison valuation analysis like DCF, LBO, public comps, and precedent transactions, which are often used by investment banks. Those are primarily used as references to get a sense of whether our valuation is in the right ballpark.

The actual decision-making is less about these Excel exercises and more about understanding the real value we see in the business.

Computation for stock payments

If you're a public company, the formula is a lot easier since everything is already listed. You just do an accretion-dilution analysis to figure out what you're comfortable with.

For a private company, your stock is private, so its value is based on a valuation that both parties agree on. For example, let's use Stripe. When they were worth 95 billion, a company recognizing Stripe's potential a few years prior might have preferred taking private stock from Stripe, anticipating strong accretion and a beneficial exit.

This perceived value could be worth a lot more than just cash. Cash is fixed, but if you take shares of a company with high potential, recognized based on their credibility, that can be more advantageous.

Advice for first-timers

Observe and respect the local nuances. Try to really interpret and understand how the other party acts and functions. The first meeting usually doesn't lead to much fruition. You typically need a second or third meeting to build that initial ground. Once they open up or once you're able to meet them in a more casual setting, it helps.

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