The Legal Zone (Season 1, Episode 7): Are Cross Border Deals Dead?

Transcript

Introduction

Hi, I'm Regina Campbell, the managing attorney here at The Campbell Law Group, and I want to welcome everyone back for the seventh episode, season one, of The Legal Zone. Hopefully they've been really helpful, and I hope you enjoy today's topic. Today we're going to talk about whether cross-border deals are dead. This is a particularly timely issue, because just recently, on November 8th, the United States opened up the borders for more international travel.

It's believed that it's going to bring back the business investors, bring back some of the entrepreneurs, and increase the deal flow, so to speak, of what's going on across the borders. We do think it's going to have that effect. But interestingly enough, from the first quarter of 2021 to the third quarter, it has actually been a stellar year for M&A transactions, surprisingly cross-border ones. According to Bloomberg, by the way, the United States is one of the top acquirers, as usual, along with the UK, Canada and also Japan.

Why cross-border deals are far from dead

So it definitely seems that cross-border deals are far from being dead. If anything, I think they're only going to increase now, with the opening of some of the borders and the reduction of the pandemic's effect right now, as some of the countries are loosening up. Of course, some countries are experiencing more surges than others. It's anticipated, hopefully, that this is going to diminish as time goes on and each country gets more access to vaccinations.

Which brings us to the overall importance of cross-border deals and why they're happening. This pandemic has certainly caught me off guard. I would have thought we were heading toward a meltdown like in 2008 and 2009. But this pandemic really has been a re-adaptation for companies. Unfortunately, some have gone under and not done well. Others have thrived. This has definitely been a tale of which companies can adapt and are innovative, and of the use of technology to adjust to the circumstances and the changes in the consumer markets, in addition to the commercial markets.

So with the opening, the embrace of international travelers, it is going to allow not just international travelers to come here. Of course, Americans are traveling more too, now that there is more vaccination and more clarity in the rules of the different countries as far as vaccination and who can come in and who can't.

Talent and the Great Resignation

I think one of the other pressures this country is going to see, which is probably going to increase the need for cross-border deals, or to find synergies across the ocean, so to speak, is going to be talent: talent acquisition. As everyone knows, there is a Great Resignation occurring in the United States right now, and it's leading to a shift in the types of jobs employees are looking for, and to people reskilling themselves. Overall, I think in the long term that is going to give the United States a boost and effectively increase employee mobility and satisfaction, hopefully including pay.

Some people don't like that idea. As a business owner myself, I know a lot of the business owners I represent are concerned with the trend. However, I think in general it should be a good trend, because it should create more opportunity, and also more money for people to spend, and a better standard of living, which leads to more political stability.

But in general, I think some of the acquisition issues we're having here with employment and talent are often going to be filled by other countries, countries that have a more stable workforce in particular industries and skills. That seems to be driving those types of synergies. And obviously political stability, government regulation, how they've been handling COVID, and what the outlook looks like, not just short term but long term, is driving a lot of companies to look for subsidiaries and other companies that can complement their global enterprise, or potentially the domestic companies they may have in the United States. They're finding that to be a better fit than trying to find local companies in the United States, so to speak.

Regional consolidation and distressed companies

However, there is some consolidation going on in the domestic arena as well. For the most part, I find it more regional. I'm a smaller business attorney and owner, not with one of the big firms, so I'm not as familiar with the larger-scale deals. Of course, you hear about some of them on TV, and some of the antitrust issues they raise.

But in general, I see some regional consolidation, sometimes due to distressed companies being bought up by someone who may have done well, whether because they received funds during COVID or because they had certain types of contracts that were structured in a manner that allowed them to survive COVID better. They want to grab the customer base, the potential technology or the equipment that another company has, and those companies are being bought out, unfortunately sometimes in distressed circumstances. But that seems to be the pattern that occurs regionally and locally.

Capital, political stability and technology

The other thing to consider with cross-border deals is the availability of funds and money, and being able to bring money out of a country or into a country. There have been some issues here, some upheaval in general on a political basis, with what's going on in certain countries in South America, including even Colombia, which has always had a very close connection with Miami, Florida and the United States. It seems to be having some political upheaval, which is dampening some of the deals in Colombia and some of the South American countries. However, it is pushing some of the residents of Colombia and other countries to want to come here.

So once again, as we always know, the political environment and stability also drive potential deals, and drive people into countries or out of countries. This is no exception.

Another thing to take into consideration is access to capital and to funds. The United States once again always seems to have a very friendly environment for that, a credit-rich or capital-rich type of economy. And companies seem to be sitting on a lot of cash, particularly tech companies. So once again, it's the synergy of certain technologies working and surviving the COVID disaster, so to speak. A company might find a smaller tech company that has a technology it's no longer able to scale up or bring to market on a larger scale, and it comes in and says, "Hey, you know what, I've got this. I think we come together, and I buy you out, and I bring your technology in to complement ours." I think those have been the biggest winners.

So in general, what I'm seeing on a small scale in Miami, as a Miami corporate attorney, is people interested in purchasing companies, with a lot of money to potentially expand and also look into acquisitions in other states, and sometimes other countries. But for the most part, what I've been experiencing has been local.

Tips for a cross-border deal

So, a couple of tips when you're looking at doing a cross-border deal, or maybe even a local cross-border deal, state to state, not international. You need to look into, maybe more importantly than before, how friendly that state's or country's COVID laws are, what kinds of lockdowns or procedures they have in place, what their health circumstances are, and whether their political circumstances are stable.

Many people around the world would actually be concerned, for the first time, about the United States. However, those concerns still seem to be dampened by the fact that this still seems to be the primary location for companies to go acquire other companies, and this becomes the parent company, the remaining company. So that indicates some stability and practicality in keeping it a United States company. Even though there are concerns about stability in the United States, there are also concerns all around, in different countries.

So one of the tools is to make sure you understand the landscape, and the local landscape of that particular country: not just the country itself, but actually the city and maybe the local provinces, before you get involved in any kind of cross-border deal, so to speak, whether it's mergers and acquisitions or other transactions, which I haven't really discussed much today. But it's the same general concept. You want to understand what the environment is. Is your money going to be safe there? What kind of assets will remain in the country, versus being expatriated or exported back to the United States? What's the structure of the deal: is it a stock or a cash deal? Do these companies have large debts?

Valuations after the pandemic

When you figure out valuations, one of the major concerns I've seen is that some companies had a dip, some a significant dip, that was unusual due to COVID. A lot of times they were running off credit lines for a certain period of time, and they're catching up now. But it might skew the valuation of the company. So it's important to maybe extend deals long enough that you either have a look-back period that evens things out, or basically find a baseline for the value of the company, depending on whether you're selling or purchasing.

Of course, if you're a purchaser and you did a valuation right now, some of these companies might be cheaper, and you might have an interest in buying them at this time. If you are a seller, you may want to consider drawing out that timeline and the valuation time period, with your financials and your income over time and what happened during the pandemic, to try to normalize it and maybe get a better price for your company.

Closing

So these are some of the things. Hopefully this has been helpful. It's really more preliminary stuff we're talking about here, and I just thought it was so important right now, because when everyone thinks that cross-border deals are dead, they're really, really not. As always, human ingenuity and determination find a way, at all costs, so to speak, to continue to go forward and to create, hopefully, what's best for everybody and overall a better future. That's something to consider when we go forward, even as business owners: what that looks like and how you can partake in it.

I want to thank everyone for joining us. Hopefully you enjoyed this podcast. If you'd like to see some of the other ones we've done, please go see us on YouTube. Become a subscriber. You can see other podcasts on our website, and we ask you to come follow us on all our social media accounts. We hope you enjoyed this, and stay tuned for the next podcast. Take care.