Traveling with Friends

America's new role as a destination for inbound cross-border deals has been a much-discussed theme going into the New Year. Both high-profile mega deals and off-the-radar smaller transactions are abundant enough that the deal community seems content even in the face of harsher economic winds. In fact, according to Dealogic, roughly 21% of all U.S. transactions in November were inked by foreign buyers, including five of the 10 largest deals that occurred that month.

But while cross-border activity should provide a cushion if domestic buyers clam up, U.S. lenders and perhaps other service providers could be at a disadvantage trying to court these new clients if they haven't already made inroads overseas and forged relationships with the foreign entities who are now doing much of the acquiring.

Take the acquisition of Pennsylvania-based Breeze Industrial Products Corp. by German buyer Norma Group, an industrial manufacturer owned by U.K.-based 3i Group. When Norma acquired the company, it lined up international law firm Dechert as legal counsel and financed the deal with German lenders Commerzbank and WestLB, with GE Commercial Finance also assisting on the debt. (Dow Jones reported that the three lead arrangers launched a €375 million syndication to finance the acquisition in November.)

"There is going to be a preference among foreign buyers to use lending sources that they're familiar with," says Dechert's John LaRocca, a partner in the law firm's Philadelphia office. He even noted that in the case of Norma's Breeze acquisition, the bank meetings and debt arrangements largely took place in Europe, even though the deal occurred in the U.S. "All of the heavy lifting was done there."

While the bank and lending arenas have truly become international in recent years, differences still exist from market to market. But with foreign lenders increasingly playing a larger role arranging U.S. debt, it could be expected that they will also introduce new conventions to the U.S. lending landscape. In the Breeze deal, for instance, the buyer signed on to the transaction without requiring a financing contingency, because the lenders came in with an extremely strong financing package. "In Europe they're called 'fund-certain' commitments and they're more common," LaRocca says. "Unlike the U.S., where lenders have all sorts of outs, and even more so in today's financing environment, this deal didn't have any ... Even with a significant change in the market, the financing will stay in place." He adds that removing those outs gave Norma a leg up against rival bidders for Breeze.

With all of the turmoil from the subprime fallout impacting the U.S. bulge brackets, there are some who also believe that foreign lenders might be better positioned to compete domestically. Elsa Berry, the head of U.S. corporate finance for BNP Paribas tells Mergers & Acquisitions that she's "never been busier." A large part of that, she cites, is the relative health of her bank.

"All of the banks have been affected one way or another, but not the same extent that the American institutions have been impacted," she says, noting, though, that the impact can only really be measured on a case-by-case basis. And foreign banks, such as HSBC (which had to set aside $35 billion for two of its structured investment vehicles in November), are by no means immune to the headwinds facing the industry.

With that said, Berry notes that, in general, the overseas banks were more conservative than their U.S. counterparts during the past few years, and, if their books are in better shape, it could also give them an advantage domestically.

Still, the primary driver of Berry's increased activity, especially when it comes to cross-border deals, is the relationships that BNP Paribas fostered over time. And she believes that will only help as more foreign buyers race in to the U.S. market.

"The European banks have built their business on these longstanding relationships," she says.