Brazil, China and India represent three of the top ten countries for US outbound deal activity over the last three years despite the complexity and challenges faced when entering these key growth markets. According to research from leading global law firm Baker McKenzie, Brazil, China, and India are among the most complex countries for US buyers to close deals in given foreign investment restrictions, merger control regimes, and other hurdles that can challenge foreign buyers and potentially delay cross-border transactions.
Tapping into the experience of its leading global M&A practice and unique understanding of country-specific issues impacting timing and certainty for outbound US buyers in cross-border M&A transactions, the Firm ranked 49 jurisdictions based on the timing and complexity of completing M&A transactions in each market. Looking at the following six key factors, each country was placed in one of five bands, from band one, the least complex, to band five, the most complex and challenging markets.
• Overall assessment of speed and ease of closing • Fully globalized M&A culture vs. local law dominant M&A culture • Foreign investment restrictions and exchange controls • Merger controls • Employment related notifications, approval and consulting requirements, pension and benefits • Permits and licensing
"It is worth noting, however, that despite being placed in Bands 4 and 5, Brazil, China, and India still offer extensive growth opportunities for US investors," said Matthew Gemello, head of Baker McKenzie's North America Corporate & Securities practice. "It's a matter of knowing what lies ahead when considering these markets and being prepared to navigate local regulatory regimes. Taking a broad view of these key factors across jurisdictions helps companies be realistic about deal timelines and avoid or mitigate risks throughout the transaction process."
World's Most Complex Markets Face Merger Control Issues
Russia, China, Indonesia, and Ukraine are the four countries Baker McKenzie ranks as the most complex when closing a multijurisdictional deal. Each country experiences complexity across all six key factors but merger control issues top the list of challenges that US buyers face.
"The procedures for reviewing M&A under antitrust law in these four countries takes upwards of 90 days just to complete phases one and two," said Craig Roeder, M&A Partner at Baker McKenzie in North America. "To increase deal certainty it is paramount to engage antitrust experts who have local market expertise and are up to date on the latest filing requirements."
"A number of key growth markets restrict the level of foreign ownership of businesses in certain industries, requiring foreign investors to partner with local firms through joint ventures or similar collaborative arrangements, which typically take longer to negotiate and are more complicated than outright acquisitions," Roeder added. "However, deal complexity fails to sway interest in key growth markets."
Labor and Employment Issues Weigh Heaviest on Timing and Complexity
Employment, human resources, and talent issues present challenges in nearly all countries ranked. Differences in local jurisdiction requirements or customs and practices, and the depth of these challenges which are exacerbated by the geographic scope of a deal, can severely complicate cross-border transactions. Countries in the European Union consistently ranked as the most negative on these issues, compared to the other key factors, and France ranked the lowest of all 49 countries ranked.
"Employees outside the US have statutory entitlements to compensation and benefits that we do not have at the same level, if at all, in the US," said Susan Eandi, head of Baker McKenzie’s Global Employment and Labor Law practice in North America. "Depending on the country, currency exchange rates, and the level of workers involved, this can be both a manageable and unmanageable risk. As such, diligence on the profile of the workforce and focus on high-exposure areas for liability is important to get across early on."
Local Law Culture Slows M&A
Local law and deal-making culture of the target countries will also have a direct and material impact on the ability of US buyers to complete transactions in the timeframe that many buyers have grown accustomed to in the US. Outbound US buyers should expect to face challenges and delays due to local law documentation and execution mechanics, as well as the potential for diligence and other local concerns that can have a measurable impact on the pace and success of deals. Frequently, mandatory provisions of local law may supersede the parties' choice of law in specific substantive areas.
"Many markets have currency exchange controls, changing or uncertain tax regimes, increased political risks, and other challenges that foreign investors may not be experienced in addressing," said Roeder.
US Investors Have it Easy in Australia, the United Kingdom and Canada
Band one countries, Australia, the United Kingdom, and Canada, are the countries most likely to produce a deal that closes more quickly and efficiently than any of the other countries ranked. This is a result of procedures and local practice customs being most similar to US domestic transactions.
"Despite Brexit there are still plenty of buyers and sellers for the right deal at the right price in the UK. There are already some clear upsides - global organizations looking to acquire UK companies will find that a weaker pound makes UK valuations more attractive, and English law remains an attractive vehicle for corporate activity, although the uncertainty surrounding trade negotiations could deter the more risk averse," said Tim Gee, London-based M&A Partner at Baker McKenzie.