The financial crisis put a lid on M&A across the board, but the drivers of global industry restructuring continued to bubble underneath and now, once again, are resulting in the growth of international M&A.
North American companies will be increasingly active in one way or another. On the buy side, while the markets remain somewhere between weak and uncertain, many U.S. and Canadian companies are in better shape than their EU counterparts (who did most of the buying in the last round). On the sell side, Canada and the U.S. continue to be seen as safe places to invest (Mexico less so), and the assets continue to be attractive to foreign companies – especially for the resources in Canada, and in the U.S. as a way into the largest market in the world (and at bargain prices at the moment).
So, to buy or to sell?
In the past decade, North American companies were overwhelmingly sellers. Sales of billion-dollar companies to international interests in the U.S. outpaced purchases by over $300 billion, making the U.S. the largest net seller of corporate assets in the world. If measured relative to GDP, Canada was the largest net seller, albeit relative to a much smaller economy. Mexico, while not a major player in large international deals, was more or less in balance.
Is this a problem? Economists generally encourage inbound foreign investment as it can lead to resource development, efficiency improvements, growth and employment. But the sale of the controlling interest of a large, healthy company achieves none of this in and of itself. Instead, it usually diminishes the senior responsibilities left in the acquired headquarters and reduces the need for local professional services and financing. Unabated, this trend would turn the lights out in the headquarters on which many North American city economies depend.
Not only is this acquisition deficit potentially harmful to U.S. and Canadian corporate centers, it also represents a missed opportunity. Many of the companies that have acquired the most internationally, most hailing from the EU in the past decade, have created substantial shareholder value and positioned themselves well in globalizing industries, such as telecommunications, resources, energy, pharmaceuticals and consumer goods.
However, is it realistic for North American companies to be more aggressive in global consolidation in present circumstances? And would it be wise, given some of the famous failures of overseas deals in the past?
In fact, for those companies able to acquire, the timing may not get much better. In developing economies, growth continues but at a slower pace, and the EU is flat, resulting in more modest valuations. In addition to slower growth, there is less competition to push up acquisition premiums. Europe did most of the buying before the crisis and is less active now.
Overseas acquisitions have in the past had high failure rates, generally falling short of the needed cost synergies to justify the prices paid, and sometimes suffering from failed post-merger integration across cultures. These failure rates can be overcome if the focus is put on growth in the global economy. The cost synergies will generally be weak in any case in cross-border acquisitions because there is minimal operational redundancy. By focusing instead on deals that can provide entry into new markets and/or end-to-end product market synergies, companies can minimize the need for integration, reduce the clash of cultures and instead benefit from the distinct capabilities and market insights of overseas merger partners. Deals based on real revenue synergies generally have greater potential for success.
However, corporate leaders and directors need to shift their frame of reference to be successful in the global context.
Corporate leaders need to raise their international ambitions. On one hand, the great size of the U.S. market continues to offer growth potential and interesting acquisition opportunities at home. On the other hand, however, remaining content with the growth offered here is underserving shareholders and, as industries become more global, will ultimately result in loss of competitive scale and scope. In many industries, those companies that don’t grow internationally will likely have to sell to global enterprises in due course.
Directors need to resist the easy money of a takeover offer if there is real potential for growth abroad. In many overseas markets, public policy makes foreign takeovers difficult or impossible with a range of ownership restrictions and explicit or implicit barriers to foreign takeovers. While some U.S. states also have such restrictions, it has in general been open season on U.S. and Canadian companies. The last and sometimes only line of defense is the board. If the board sees greater potential in a growth strategy than a sale strategy it can and should say “no” to the sale and encourage management to define and execute an international growth strategy.
Notwithstanding ongoing economic challenges, it’s time to reverse the sell-off in the next wave of M&A and for North American companies to live up to their full potential on the world stage.
Published October 7, 2011.
