In a Deloitte survey conducted to weigh the risks and rewards of cross-border mergers and acquisitions, the firm found portfolio diversification to be the top strategic objective. Other objectives included favorable regulatory requirements, cost synergies, scale efficiencies, and acquisition of intellectual property.

The survey also focused on unique due diligence considerations in cross-border mergers. When acquiring a company overseas, you must account for risk factors like regional tax laws, political stability, and the accuracy of the acquired company’s financial information. Let’s examine the importance of due diligence in cross-border investments and the approach to ensure a successful transaction.

Top Risks in Cross-Border Mergers and Acquisitions

According to the Deloitte survey referenced above, the top risks factors in international M&As are as follows:

• Tax law
• Regulatory compliance
• Political stability
• Culture and talent
• Business risk

Integration planning is a must-do to prevent running into these risks. 26% of the survey respondents wanted to hire outside consultants for due diligence, while 31% believed they should research the target company’s culture and market potential thoroughly.

While due diligence in other aspects comes from internal experts or third-party services, ascertaining political stability requires governmental input. An example is the World Bank Group’s MIGA (Multilateral Investment Guarantee Agency), which promotes foreign investments in the EAC (East African Community) through the provision of political risk insurance to foreign lenders and investors.

Why Is Due Diligence Important?

Before an investment takes place, the investor should use due diligence to ascertain that costs, margins, revenues, and performance resulting from this investment are feasible. For instance, an investor planning to acquire an overseas company should look at the organization’s past performance to project its future sales and ROI (return on investment).

Similarly, it’s imperative to consider the target company’s tax profile, focusing on both non-income and income tax areas. They include transfer tax items, payroll, property taxes, and sales taxes.

Since the investor will inherit the acquired company’s tax issues, due diligence is mandatory. It can inform the investor about underreported or unreported tax liabilities and non-filing exposures well before time.

Legal due diligence is just as important as it allows the investor to review legal matters around the contract. Issues such as noncompete clauses, pending litigations, branched contracts, or restrictive covenants can have a significant financial impact on the investor.

Once the deal has been closed, investors should use due diligence to put obligations on the acquired or merged target company. It helps prevent or minimize the opportunity for corruption in the organization. The acquiring company can also work with or appoint a third party to keep a check on the acquired business to prevent future risks.

Due Diligence Over the Course of Transaction
Due diligence is important not only before an international investment but also throughout the transaction process. For instance, there are differences in accounting, taxation, and government regulations of the investor’s and target company’s countries. Both parties must come to a mutual consensus on all these aspects.

The investor must also employ due diligence to understand the foreign law and regulations, along with possible risks and complications that the company could encounter in the future. Some of these legal considerations include:

• Foreign investment laws
• Exchange control
• Antitrust procedures and laws
• Requisite documentations
• Mandatory filing with local authorities
• Taxation and labor laws

Due diligence protects international investors from bad press, monetary losses, unpleasant surprises, and legal conflicts.

When Does Due Diligence Start?

Many people are mistaken about the actual starting point of the due diligence process. Due diligence does not begin with an investor signing the binding agreements. Instead, it starts with the Letter of Intent, which states the initial terms of the deal being negotiated.

Due diligence can take anywhere from 30 to 60 days, depending on the complexity and scale of the business investment. In some instances, it may take about 90 days.

Should You Partner With a Third Party for Due Diligence?

The main reason for bringing a third party for cross-border due diligence is to eliminate bias. Secondly, a third party will have experienced investment counselors and advisors who have conducted tens of due diligence processes in the past and can help you make well-informed decisions.

Besides legal, financial, and operational due diligence, these consultants can help determine if the target company’s market entry strategy aligns with your objectives.

Partnering with a consultancy established in your preferred region of investment is the right move, especially if you have limited knowledge of the target region or are planning your first cross-border investment.

Conclusion

Due diligence is integral to any merger, acquisition, or investment. It becomes even more paramount in cross-border ventures due to the stark differences in regulatory compliance, culture, language, and negotiation strategies.

Partnering with a regulated third-party consultant, like Trans African Investments, can save you the time, hassle, and money you’d have to spend otherwise. We work with licensed professionals throughout Africa to provide regulated professional services to our clients.

Our licensed investment advisors take a systematic approach to cross-border due diligence to maximize your chances of success in a new market. Get in touch with us to learn more about our process.