Gathering Intelligence In Cross-Border M&AFrank Rudewicz
March 9, 2009 — 1,408 views
While the U.S. deal ﬂow has slowed for many reasons, transactions that cross borders have increased over the last several years. As the world economy struggles and the dollar has regained a fair amount of its lost value, the opportunity for strong U.S. companies to gain a foothold in emerging markets has increased. International business has been facilitated by strong international conventions to include financial reporting standards, anti-corruption, fair labor, intellectual property, antitrust, environmental and many others. The goal has been to increase predictability and drive international trade. As a result, the merging of businesses located in different countries has been on the increase.
However, acquisitions have always been risky. Over 70 percent of deals done entirely within the United States fail to achieve the anticipated internal rates of return. Those that do, according to many experts, succeed largely due to excellent and thorough data gathering. While due diligence has a varied and all-encompassing deﬁnition, many foreign deals rely on an enhanced level of fact and intelligence gathering. Analogous to competitive intelligence, this fact gathering is made up of several components:
The collection of information through legal means;
The assessment and analysis of that information; and
Drawing conclusions as to what the information means as it relates to the business transaction.
This fact gathering should begin in the strategic planning stages before a deal is even announced. In the United States, we have become accustomed to the availability of public and private databases. Acquiring intelligence is more difﬁcult when the target is located in another country, especially if the target has multiple foreign ofﬁces, afﬁliates, agents or relationships in many countries. The ever-increasing demand for worldwide information and intelligence requires an understanding of local languages, dialects, customs and laws concerning investigation processes and privacy. In many cases, public data of value is all but non-existent, and then frequently it is only accessible from within the country or by certain types of individuals. The real data gathering must take place locally, in country.
A team approach is well advised. It is important for a strong and competent due diligence team composed of counsel with international expertise, financial experts with a presence in the target countries, language and cultural advisors to insure that matters are clearly understood and customs are carefully observed, and access to international investigators to gather data in country. The intelligence members of the team must have the unique ability to:
- Gather data from all public and legally accessible private sources;
- Tap into industry, government and conﬁdential resources;
- Conduct in-depth interviews;
- Evaluate the credibility of the information gathered;
- Develop future leads and make connections; and
- Analyze, synthesize, understand and apply the signiﬁcance of the information and research results.
In order to produce the desired results, the research must be conducted professionally, exhaustively and cost-effectively, but most of all legally. In the U.S. we are accustomed to a general openness of records. The rules that govern access to information and records outside the United States are often far more restrictive and differ from country to country. The due diligence and intelligence team must rely on the ability of the legal team to advise as to privacy laws and other restrictions on access within each country of relevance. The investigative team should also have individuals in country who can assist them in determining custom and practice - the realities on the ground.
This step will help determine:
What are the local regulations concerning public access to information?
How is the information stored and how long does it take to retrieve?
Does the country have a Freedom of Information Act or similar legislation?
How do you prevent the subject of the inquiry from learning about the inquiry?
What is the access of the intelligence team to well placed, well informed local sources, and how receptive are those sources to discreet inquiries?
The questions that must be asked when planning to acquire a foreign entity are not all that dissimilar from those required when contemplating the acquisition of a domestic concern. It is important to create a thorough but ﬂuid fact-gathering work plan that will address the common elements:
Who? Who, besides the target company will be the subjects of the inquiry?
What? What types of information are necessary? What are the consequences of the target learning about the inquiry?
Where? Where does the target conduct business?
When? What time periods are critical to understand?
How? How is the information to be gathered? How sensitive is the information?
Often "How" is the most critical piece of the assignment. In these initial stages, until something of relevance is discovered, it is frequently critical to gather data in a way that prevents the target from ﬁnding out. In some countries, the implications associated with being investigated can be so devastating as to destroy the deal. Understanding these cultural issues is very important.
Supporting Financial Data
In many cases an acquirer will have a basic knowledge of potential revenues that a target company may deliver. This information is often available through business and ﬁnancial references, U.S. and local country Chambers of Commerce, industry and trading partners, and general media. Depending on the stage of negotiations, the acquiring company often has data provided by the target. The validity and vulnerability of these numbers must be determined.
Initial information gathering should include a review of all local business, employment and tax records as well as a list of the potential partner's parent, subsidiaries, and afﬁliates to determine if there is anything that may affect the revenue projections. Additionally, the importance of cultural attitudes and how they may affect future business transactions and worker relationships with a new "foreign" leader must be carefully considered.
In that regard, available intelligence should provide insight about the likely concerns of national, state and local government agencies, employees, customers, suppliers, communities and other interested parties should an acquisition be ﬁnalized. This could be enough to change the focus of the acquirer's strategic plan or allow more emphasis on those components in the negotiation stages.
Sometimes these answers, however, are much more difﬁcult to ascertain and the risks associated with failing to obtain those answers can be exponentially higher. For example, it may be the custom in a target country to pay monies to obtain certain government beneﬁts. Once the U.S. ﬁrm acquires the business, these actions may violate the Foreign Corrupt Practices Act. Under that law's successor liability provisions, the acquirer may take on the liability for all prior bribe payments. Penalties run into the millions of dollars. In addition, since the purchase price is based on revenues or proﬁts, what will change when bribery is prohibited?
Businesses and individuals seeking to be acquired can be superb self-promoters whose conduct can range from simple exaggeration to omission, deception and misrepresentation to outright fraud and criminality. Intelligence collection should identify "red ﬂag" facts and issues that can help the acquirer make timely decisions before additional monies and effort are spent. For example, is information available through industry periodicals or source interviews that identiﬁes a suspect marketing structure that allows the internal sale force, agents, distributors, resellers or combinations thereof too much autonomy?
Government and public resources may help identify hidden time bombs, such as corruption, collusion, environmental problems, or other potentially devastating liabilities. In many countries, however, government information is not made public.
Conﬁdential sources and communications within the limits of the law may be required to obtain critical information.
In-depth and discreet interviews can provide in-depth background information about individuals within and behind an entity, complete holes in the history of operations and activities, and build understanding of potential liabilities. In-country legwork can help identify and prevent risks that may be lurking in the shadows. Once revealed, these problems may be deemed serious enough to quash a deal, signal a need for further inquiry, or provide the critical leverage necessary to arrive at more favorable terms. Knowledge is power.
Both public and trusted conﬁdential sources can also lead to important information about the key individuals within the target company such as managerial expertise, rising stars, business reputation and personal style. This knowledge can be invaluable when assessing the effectiveness and retention of management, cultural differences and internal issues that may be interfering with the target's potential. These sources may help identify critical personnel, such as who holds the important operational know-how, untapped leadership, critical staff and middle managers or even negative information such as criminal history, bankruptcy ﬁling, unpaid business taxes, or undesirable reputation or conduct.
Intelligence should be able to assist in understanding the target's business in order to:
Identify, understand, and to the extent possible, quantify "deal breakers" and other risks and liabilities associated with the target's business.
Place the acquirer in a position to negotiate a better purchase price
Identify impediments to the completion of the proposed acquisition, including required governmental and other third party authorizations, consents, and approvals that may have a dramatic impact on purchase price.
Intelligence can also evaluate the competition and use it to better gage the deal itself. Business competitors, customers and suppliers can be excellent sources of information regarding a target company's practices and reputation. Finally, using lists of intellectual property assets (such as
U.S. and foreign patents and licenses, copyrights, and service or trademarks), copies of registrations and related ﬁlings can identify a wealth of strategic information that points to potential revenues or misguided plans.
The bottom line is simple; deciding to make an acquisition or do business in a foreign country is risky. The company risks losing time, money or reputation. It is imperative to have all the information available before the decision is rendered. Strategic intelligence gathering provides you with the necessary tools to gather critical information, conduct an in-depth analysis of that information as it relates to your particular company and, based upon that analysis, create the conclusions necessary to make fully informed decisions. If done correctly, time, effort and money are not wasted and the likely proﬁtability of the acquisition is enhanced.
Frank E. Rudewicz serves as Principal and Counsel of Marcum LLP and heads the Forensic, Investigative and Valuation Advisory practice for the New England area. He has more than 26 years experience conducting domestic and international investigations for anti-trust/anti-competitive issues, harassment, fraud, ethics and other employment related conduct.