The business world continues to be a multinational place, with marketplaces and supply chains that cut across national borders. Global expansion efforts have also spawned a growing desire for cross-border deal making.
These mergers and acquisitions, however, are easily complicated by language and cultural differences, in addition to local politics and regulatory regimes.
Despite geopolitical risks aplenty (including ever-shifting sanctions regimes, the United States’ shift towards nativism, and the fractured state of the European Union post-Brexit) there remains plenty of interest, globally, for cross-border deals.
Smartphone users in the U.S., for example, may not realize that the proposed $26.5 billion merger of Sprint and T-Mobile is really the marriage of corporate parents on Japan and Germany. In retail, Walmart may have stores around the world, but it also has plans afoot to buy a controlling stake in an Indian e-commerce company, Flipkart Online Services.
MoneyGram is an example of a cross-border deal that was crossed up when a deal with a subsidiary of the Chinese company Alibaba was blocked by the U.S government.
We spoke to Ricardo Garcia-Moreno, a partner with Haynes & Boone and a member of World Services Group, an international referral network of leading law firms, accounting firms and investment banks, about the opportunities, challenges, and compliance concerns that come with cross-border deals.
CW: What’s the current state of cross-border deals?
RGM: The space is still pretty active. I’m seeing it across different industries, all over the spectrum, from energy to financial services and manufacturing.
CW: One might assume that some ongoing geopolitical risks might have a chilling effect, especially given sanctions regimes, espionage fears, and general political bickering. That may not be the case, it sounds.
RGM: Everybody is looking at all those global changes, but people still need to plow ahead and deal with future issues as they happen.
You’ve got private equity, with a lot of money, looking to deploy capital. They are looking for deals.
You also have consolidation among different Industries. Strategic players are looking for opportunities, whether it’s acquiring rivals, or looking at distressed assets. Here in the U.S., the stock market is strong, corporate earnings in different industries look strong, and there is low unemployment.
I think there are new opportunities in different countries. From a cross–border aspect, look at Mexico. It has its own uncertainties with their upcoming presidential elections, but they also have energy reforms that have been going on for two or three years now. You’re seeing a lot of activity upstream, midstream, downstream and in oilfield services.
It depends on the industry and what the specific parties are looking for, but you’re seeing opportunities all over the world.
From my own perspective on cross-border deals, in January I had a financial services deal in Guatemala, a deal in Argentina, Mexico, and in Colombia in the oil and gas sector.
CW: Are we seeing the most attractive deals in a traditional place like Europe, or is interest more spread out globally?
RGM: I think it really is a global trend. People are very focused on the Americas, for example. Here in the U.S. there are a lot of different sectors that are focused on the Hispanic market, whether it’s durable goods, consumer goods, or financial services.
ABOUT RICARDO GARCIA-MORENO
Ricardo Garcia-Moreno is a partner with Haynes & Boone and a member of World Services Group, an international referral network of leading law firms, accounting firms and investment banks. He practices corporate law with an emphasis on cross-border mergers and acquisitions, energy, securities law compliance and corporate governance.
He has more than 22 years of experience representing U.S., European and Latin American clients in domestic and international transactions involving mergers, acquisitions and divestitures; investments; joint ventures; capital markets transactions, including public, Rule 144A and private placements of equity and debt securities; and acting as "outside general counsel" to public and private companies. He has been representing companies involved in the Round One public bidding process of hydrocarbon blocks in Mexico, as well as CFE related midstream projects and is a frequent speaker at oil and gas conferences.
Garcia-Moreno also has a broad-based sports practice representing sports teams, owners of public assembly, sports, entertainment and recreational facilities, and companies that provide various goods and services to sports teams and facilities involving preparation and negotiation of various agreements relating to the development, use, marketing and operation of public assembly, sports, entertainment and recreational facilities.
What you are seeing out of the EU is a lot of private equity acquiring companies, but they are also looking for other opportunities elsewhere.
Any global geopolitical catastrophe could put the brakes on all this, but I think the markets are still optimistic that there are not going to be any more shoes dropping any time in the near future.
CW: From the perspective of a U.S. company, how can you mitigate the risks that come with having a deal that crosses borders? You are dealing with jurisdictions that may not have the same level of disclosure we are used to. There is always that threat of some political regime change. You are never going to eliminate all risk, but how can you minimize it?
RGM: In terms of compliance risk, with cross-border deals there are several things to worry about. The oldie but goodie, is making sure you do sufficient due diligence on a potential target to make sure that they’re complying with anti-corruption and money laundering statutes.
The Department of Justice is stepping up enforcement of the Foreign Corrupt Practices Act. They are aggressive and they are imposing penalties on companies. You also have the U.K. bribery statutes. Other jurisdictions are also stepping up efforts with anti-corruption laws and enforcing those laws. Mexico, for example, has a new anti-corruption law.
The key is always to make sure you have boots on the ground, whether it is through your existing operations or hiring advisors that can help you navigate those types of issues. Local counsel or other advisors can provide very specific due diligence research, whether its on companies or individuals, with respect to their reputation and any past historical compliance issues.
You also have issues with the U.S. Treasury Department’s Office of Foreign Assets Control. If you’re looking at an acquisition target that’s overseas, you need to determine if they have historically done business with prohibited countries, or if they have existing contracts or relationships with North Korean Iranian, or Libyan entities, or other prohibited countries or governmental players.
Make sure to focus on that risk and ask very specific questions. Ensure that documentation has specific protections. When you have a non-U.S. company involved, you step right into their shoes and, if you’re not careful, you can step into a bit of a quagmire.
There is also the Committee on Foreign Investment in the U.S., CFIUS, which is getting more aggressive with blocking multinational investments on national security concerns. The principal target is China, but that might expand to other countries. You are even seeing Canadians blocking Chinese investment.
CFIUS is taking a much closer look at transactions. It can even be something that comes to light after you’ve closed a deal that gets reviewed and can be problematic.
In terms of sanctions, in some instances you see the Trump administration be more aggressive. You’ve got all the current tariffs that are being imposed on aluminum and steel and other industries based on an old law that is based on National Security risks. You definitely may see a more aggressive stance on regimes or companies in the near future. We’ll see what Congress comes up with.
CW: What’s the situation in Europe? Is Brexit having an effect on potential deals?
RGM: It’s still a little unknown as to what impact Brexit is going to have. There’s still kind of a question mark there.
From a compliance perspective, a new law that recently came into effect that companies need to consider is the EU’s General Data Protection Regulation. That’s huge.
GDPR took effect on May 25. It’s designed to protect the personal data of EU citizens, but it has a very broad effect on companies whether or not they’re based in the EU, if they have access to, or possession of personal data.
From a compliance perspective, it is something that a lot of companies have still not focused very much on outside of the EU. There are some pretty big potential penalties involved, which could be the greater of 4 percent of total annual worldwide gross revenue or 20 million euros.
From a due diligence perspective, for companies that are looking at acquiring EU companies or transacting the EU, you need to know what a potential target has done to mitigate the impact of this law and comply. Make sure that you’re not stepping into an issue.
Companies need to be cognizant of how they are going to deal with the law.
You also see other countries, outside of the EU, that have some very strong personal data laws, even in Latin America. It is a global trend and I think there are going to be more and more countries that are going to try to better protect the personal data of their citizens. The U.S. is maybe a little bit behind, but it could come into play if it steps up protections for U.S. citizens as well.
CW: In terms of the FCPA and other issues that might come along, how difficult is it to do due diligence when some of a target company’s data again might not be easy to parse. For example, getting beneficial ownership information can be an issue. How difficult is it for a company entering into a deal to make sure that there aren’t politically exposed persons lurking somewhere behind the curtain?
RGM: Sometimes it’s a complex web of relationships with companies and it can be difficult to get to who, exactly, is behind or involved in a particular transaction.
That’s why it’s important to, to the extent that you can, uncover these types of traps and have boots on the ground whether it’s through your own existing relationships, or hiring advisers, that can help you do that type of research that that will hopefully uncover those type of surprises. Ultimately, in your definitive agreements, you need to make sure that they are pretty tight with respect to compliance with foreign laws compliance with corruption, money laundering, and all the litany of things that we’ve been talking about, because ultimately that will be your protection against the counterparty. If you do have a problem and need to deal with us authorities, you need to be able to demonstrate all the steps you took and all the due diligence that you did, to show you did everything to try and uncover these types of surprises. Those can be mitigating factors when talking to the authorities.
CW: What are other risks?
RGM: Cyber-security is a huge compliance risk companies need to be wary of.
A few months ago, I was moderating a panel with lawyers from different industries talking about the things that keep them up at night. One of them said, “there are three things that keep me up: cyber-security, cyber-security, cyber-security.” That is a huge issue and will continue to be one in the coming years, especially when there’s a lot of state players involved in breaches and that kind of espionage.
CW: How hard is it to protect yourself during an acquisition? You may want to go in and maybe do an audit or “look under the hood” to see what the other company does in terms of security. But there might be a proprietary aspect to that data and pushback from the target. What do you do if you really want to have this deal go through, but there are problems assessing that cyber-security platform?
RGM: That’s a tricky question. Every deal is different and with some deals companies want more than others do.
Even assuming that you can deal with those types of proprietary issues or roadblocks, it will be very hard to let a company or competitor into your IT infrastructure. If you don’t get full comfort, you can protect yourself with a tentative agreement, either through indemnities or walk-away rights, if an issue is uncovered.
Make sure you tap into the services of good forensic experts that can help you with those types of reviews. Also look at your insurance coverage to make sure that cyber-security is something that is covered in either the target’s commercial insurance policies or specific policies to make sure you will have that type of protection as well.