Masuda Funai Attorneys Discuss Cross-Border Transactions With Mid-Market Dealmakers

On May 1, 2012, Thomas McMenamin, Chairman of Masuda, Funai and Jennifer Watson, Vice-Chair of Masuda, Funai's Business Group, reprised their well-received presentation on International Mergers and Acquisitions. Originally presented to the Chicago Bar Association, Mr. McMenamin and Ms. Watson were asked to present a modified version, this time to the Midwest Business Brokers and Intermediaries (MBBI), an organization of dealmakers serving small and medium size companies (www.mbbi.org).

Mr. McMenamin and Ms. Watson conceived the presentation when they noticed the critical cultural differences in cross-border M&A transactions. Having experience with both Asian and European M&A cross-border transactions, Mr. McMenamin and Ms. Watson saw deals fail or succeed based on perceptions and mis-perceptions that one side held about the other. Obviously, preferring that deals succeed, they felt it important to educate potential buyers, sellers, and deal makers of the importance of cultural differences in putting deals together and, even more importantly, having a successful post-closing outcome.

Mr. McMenamin and Ms. Watson noted the following key points, based on their experiences in cross-border transactions:

  • In the U.S., rights and responsibilities arise from agreements. In contrast, in many foreign cultures, rights and responsibilities arise from relationships. This means that a U.S. party in an M&A transaction should seek to create and build a relationship, even before negotiating a memorandum of understanding, letter of intent, or formal agreement. Building a relationship requires more time and patience, but can pay off in the long-run.
  • Although a U.S. party will want a written agreement first, in many cultures, the written agreement evidences a relationship already formed. So, while a U.S. party will analyze a situation using the written agreement, a foreign party will analyze a situation based on the effect it will have on the relationship.
  • Americans use lawyers heavily because of the importance of careful drafting of the agreement and its importance on the rights and remedies of the parties. Other cultures do not use lawyers as much and do not view their role as so critical.
  • U.S. parties view speed as a virtue. They want to close on the transaction as soon as possible. For Americans, the relationship begins after the closing. For parties from other cultures, speed is less important than creating and maintaining a strong relationship. The closing is only evidence of a relationship that has already been created and, presumably, strengthened through the parties' interactions in the M&A process.
  • In due diligence, Americans, as buyers and sellers, believe a buyer should be told generally about how the target operates. In contrast, foreign buyers will learn through due diligence how to operate the target. So foreign buyers' due diligence takes longer and is based on building a trusting relationship to assure post-closing success. As a result, U.S. sellers may view foreign buyers' due diligence as too detailed and inappropriate. The foreign buyer, on the other hand, views the U.S. seller as being evasive and untrustworthy.
  • The leader of a U.S. transaction team is frequently the decision maker. However, the leader of a foreign transaction team may not be the decision maker. Rather, the foreign leader must work with groups to build a consensus to reach decisions. So the U.S. leader views the foreign leader as weak or slow. The foreign leader feels bullied and disrespected.
  • Another area of contrast is the treatment of employees. U.S. managers of the target are very concerned about job security in an M&A transaction. They wonder if they should be looking for new jobs after the closing. But foreign managers are often from cultures where there is less job mobility and where employees feel a much stronger obligation to their employers. They assume the U.S. managers will remain. So U.S. managers expect the foreign acquirer to raise the issue of post-closing employment. When the foreign acquirer does not, U.S. managers become very concerned about their status and may explicitly raise it, almost as an ultimatum. This creates distrust on the part of the foreign acquirer, whose assumptions about the managers continuing were not shared by the managers themselves.

Based on their experiences, Mr. McMenamin and Ms. Watson had recommendations for both U.S. and foreign parties involved in cross-border M&A transactions. Foreign buyers should know that delayed decision making could cost it M&A opportunities, especially when dealing with competing buyers. A U.S. seller should realize that decisions may take longer than they are accustomed to. U.S. sellers should allow and encourage the relationship with a foreign acquirer to develop and grow. Foreign buyers should be sensitive to the insecurities of U.S. management and employees and how delays could be perceived by U.S. targets.

The presentation by Mr. McMenamin and Ms. Watson was very well-received by MBBI, some of whose members approached them about giving it to other M&A related organizations. If you or your organization has an interest in this topic, please contact Fumiko Tokuyoshi at ftokuyoshi@masudafunai.com .