Getting Off to a Good Start in Cross-Border Deals: Understanding cultural nuances is key to successful negotiations

In our globalizing world, the best buyer for a U.S. business – perhaps your business – may be a foreign company. In fact, a seller with international options faces a potentially better deal, with a higher price and better terms than may be available domestically as well as a stronger presence for the business in the global marketplace. Yet the prospect of selling to a foreign buyer raises special concerns and issues, not the least of which is that cultural obstacles may impact the deal and the way the sale process unfolds. Knowledgeable advisers of course can help in navigating these people issues. But there may be no substitute for the principals of the selling company to be well versed in the potential for clashing cultures. To that end, this article examines at least some of the often-surprising cultural issues that can emerge in a cross-border deal. Certainly, companies based overseas have strong strategic motivations for acquiring in the United States, including a presence in the huge North American market, international diversification, and research benefits. Additionally, the level of interest in investing in the U.S. can be cued by the direction of a market or industry segment. If executed with the best precision, the deal can achieve multiple benefits for both sides. A primary example was the 1998 acquisition by Germany-based adhesives maker Henkel Group of Manco Inc., an Avon, Ohio, producer of the well-known Duck brand tape, which is featured at many large retailers. Henkel, which enjoys worldwide scope, was able to buy major market share in the U.S. with the acquisition of a domestic brand. In turn, Manco, now known as Henkel Consumer Adhesives, gained access to adhesives technology and global marketing resources to serve its largest customers. Current interest in investing in the U.S. varies significantly by region, with the greatest interest coming from Japan, the United Kingdom, and Western Europe. We looked into some of the business and cultural differences by talking to seven experienced advisers in Germany, the U.K., Japan, China, Russia, Poland, and South America who are members of M&A International. They identified an interesting directional dichotomy, suggesting that while companies in slower-growth economies have a broad investment horizon that prompts them to look abroad, those in high-growth regions look inward for investing. Thus, countries with mature economies have the U.S. high on their radar screens. Hans Bethge, head of Angermann M&A International GmbH in Hamburg, says, “In Germany, we still see the U.S. as the most important market globally.” Moreover, he adds, issues that have received tremendous coverage, such as the controversy over Dubai Ports World’s acquisition of Peninsula & Oriental Steam Navigation Co., have “had no effect on the tendency of investors to go into the U.S.” Brian Livingston, head of M&A for Smith & Williamson Corporate Finance in London, comments that “the repercussions (from the Dubai/P&O deal) may be more positive than negative, as a U.K. buyer may be preferred over buyers from other parts of the world since it is perceived as an ally.” Interest in Japan in investing in U.S. companies remains “medium to high, depending on the sector,” says Thomas Eastling, Managing Director of Morgen, Evan in Tokyo. He reports that the Dubai Ports deal has not had any impact on prospective transactions but says that a big concern is a growing need to be aware of U.S. regulatory issues. Michael Chan of Strategic European Investment Management (SEIM) in Beijing describes a lower level of interest in China, because of recent flaps over inbound investments, including the furor over CNOOC’s bid for Unocal Corp. “Interest is currently not high,” he notes. “The Unocal incident, the heat from Washington on the (valuation of the) renminbi, cultural differences, and the restriction of high-technology exports to China all appear to be formidable obstacles. Also, most Chinese companies, state-owned or private, see the Chinese market as the most attractive given its familiarity, rising incomes, and liberalization. Further, state companies require government approval before going overseas.” Nevertheless, well-established brands may be compelling enough to overcome such misgivings in entering North America. Hong Kong-based Techtronic Industries Co., maker of tools and floor care equipment, made the leap by acquiring Royal Appliance Manufacturing Co., producer of Dirt Devil vacuums and Regina floor care equipment. Its strategy is to make the product in China while gaining access to the North American big-box retailers. In Russia and Eastern Europe, companies tend to be smaller and not ready to expand into the U.S. It’s far more likely that a company in those countries would be the target of a U.S. buyer. Similarly, Gianni Casanova of IB Partners in Sao Paulo notes there have been a few small transactions in which a Brazilian firm purchased U.S. assets. But most cross-border deals involving the U.S. and South America involve outbound investment by American companies. For a U.S. seller, the nationality of the buyer also may affect expectations as the deal moves forward. The differences are less apparent in negotiations between U.S. and European firms, but cultural factors that can influence deal discussions are important to an Asian buyer. Awareness of these differences before sitting down to talk can be quite valuable. From the very first meeting of principals, expectations differ between a U.S. company and its Asian counterpart. While cultural issues may not be a great priority in the U.S., Eastling notes that “Japanese principals will be very concerned about cultural differences from the start.” A Chinese buyer also is likely to “try to gauge the other side’s pulse” says Chan. He adds that an early meeting may be unsatisfying to a U.S. seller, but to the Chinese buyer it’s a critical gateway to sourcing more firsthand information. And while U.S. sellers are likely to be more direct, upfront, and sometimes impatient, the Japanese buyer likes to focus on assessing cultural compatibility and “soft issues.” Entering the first meeting with sensitivity to these considerations is crucial to an American, especially on the sell side. After the first meeting, the negotiation process still presents challenges from the U.S. perspective. For a deal done in Europe, Bethge says, the issues are mainly logistical. It simply takes more time because of translation and traveling. For an Asian buyer, the priorities are likely to be different, notes Eastling. It typically takes the Japanese buyer longer “to get to know you,” he says. With a Chinese company, Chan says, most of the details are negotiated directly by the two companies’ principals. Advisers are brought in after the deal is structured. Further, Chan says, negotiations over dinner or in casual social settings may not be possible in a cross-border deal because of language differences. Issues in the negotiation process for a cross-border deal with an Asian buyer stem from the cultural differences previously described. Because decision-making is so different, U.S. impatience is as irritating to the Japanese as Japanese unresponsiveness is to Americans. When Westerners try to push too hard, they “end up blocking the whole decision-making process,” says Eastling. This is compounded by the fact that Japanese companies rarely are completely separate entities, an issue that must be taken into account in the deal schedule and terms. Japanese buyers expect a high level of disclosure, yet often are not forthcoming themselves with information. The bottom line is that it’s better to keep the negotiation process open and ask questions rather than risk making false assumptions advises Eastling. Foreign buyers typically do not view the auction process as desirable but most accept it as a reality in today’s market. Bethge says that in Europe, the extent of strategic interest largely determines whether the auction process will be accepted, while Eastling says that Japanese buyers prefer a one-on-one collaborative relationship but will accept an auction. There are examples of Chinese buyers paying seemingly “over the top” prices in auctions. Hong Kong-based Lenovo Group Ltd.’s acquisition of International Business Machines Corp.’s PC business for $1.75 billion, including the assumption of debt, is a frequently cited case. But in general Chinese buyers establish a price threshold in advance of the bidding and usually don’t deviate. How important are these cultural issues to a U.S. seller? Very important, at least as far as an Asian buyer is concerned. Chan says he has seen negotiations in which cultural differences were just too wide to close. In Eastling’s experience, if the U.S. side got a poor impression at the first meeting, it took “significant time and effort to get past the first impression.” Patience also is important in setting a timetable on a cross-border deal. In Chan’s view, patience is critical in reaching what he describes as a Chinese need for a “transaction that brings mutual benefit.” Eastling recalls a Japanese buyer that walked away because of an unrealistic timetable imposed by the seller. Geert Hofstede, Emeritus Professor at Maastricht University in The Netherlands, notes that “culture is more often a source of conflict than synergy. Cultural differences are a nuisance at best, and often a disaster.” However, indicators are available that can help an American seller assess cultural differences as talks draw near. Hofstede categorizes cultural differences by five “cultural dimensions.” Ranked in order of importance, they are: Power Distance Index – The degree of equality or inequality between people in a country’s society. Individualism Index – The value a country places on individual achievement versus collective work. Masculinity Index – The degree by which the country favors the masculine work role. Uncertainty Avoidance Index – A country’s level of tolerance for uncertainty. Long-Term Orientation Index – Quantification of the society’s focus on long-term outcomes. How do the results predicted by Hofstede’s measures of cultural difference correlate with the differences described in M&A negotiations by practitioners such as Eastling, Bethge, and Chan? Quite closely. For instance, China and Japan place greater value on long-term outcomes than do people in the U.S. Germany, China, and Japan all appear to value collective effort over individual recognition to a greater degree than the U.S. does. Perhaps the most important lesson is that the cultures of countries are unique in many of Hofstede’s ratings and that these differences should be carefully considered during the deal process. The forces driving cross-border M&A transactions are likely to accelerate, and U.S. sellers are ever more likely to encounter a foreign bidder among the most promising buyer candidates. It’s crucial that cross-border cultural issues be carefully considered in evaluating and closing a cross-border sale. That most important negotiating adage of placing yourself in the other person’s shoes takes on added significance in executing a cross-border deal. Conducting thorough research of the acquiring country’s culture, doing your homework, and using experienced local advisers are extremely important. Warren Coleman is a Senior Consultant, and Russell Warren is President, of The TransAction Group, a Cleveland-based investment banking firm that specializes in mergers and acquisitions. 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