Merger and Acquisition Strategies to Drive International Expansion

Mergers and acquisitions, or M&A, have become increasingly common in today's economic environment. Recent years have renewed emphasis on international expansion, as companies compete in industries that have greatly consolidated and become dominated by a few major players. Midsize businesses can also use merger and acquisition strategies to drive international expansion and as a means to adapt to this new competitive environment.

Drivers and market dynamics

For midsize companies, the historic primary driver of M&A has been growth, both in terms of revenue and market share. Companies use this strategy to expand into new markets and build their customer bases. Most of the heavily concentrated industries where three or four entities comprise 50% to 90% of the market, such as food service contractors, used merger and acquisition strategies to attain their market dominance. This consolidation of competitors and suppliers drives the need for strategic acquisitions, given that scale is a critical competitive advantage in these industries and the opportunities for organic growth shrink.

Industry changes are another big driver. Trade wars, geopolitical issues, climate change and the COVID-19 pandemic have all disrupted supply chains. Furthermore, COVID-19's impact on consumer demand, office and warehouse needs and layout, and workflow coordination in a partially remote working environment has shifted the drivers. Supply chain disruption has created a more pronounced need to be closer to the customer and revealed the limitations of partnerships. And as the international customer base grows, the need to have facilities closer to the customer grows.

The role of M&A

Businesses also use M&A to expand into new markets, increase revenue, streamline costs and decrease the overhead as a percentage of revenue, as well as obtain intellectual property, such as technology, systems or methodologies. The right deal can provide market share, negotiation power and stronger supplier networks, as well as increase revenues and profitability. Companies also use M&A to acquire talent, particularly in areas where they currently lack highly skilled team members.

Businesses have also shifted toward digital technologies and operating models to boost customer retention and better coordinate internal and external workflows to meet demands. If a business doesn't have this capability in house, it can take years and significant investment to build it. M&A greatly accelerates this process.

To expand internationally, companies have to source individuals on the ground in the target countries and build relationships with local, regional and national governments. They must also develop a deep understanding of the market and then essentially behave like a start-up in their new location. Acquiring another business that already provides similar or complementary services can save a great deal of time. A well-orchestrated acquisition can provide the foundation upon which to either layer additional acquisitions or build out organically.

Financial implications and potential issues

A major prerequisite for adopting an M&A strategy is becoming deal-ready. This means that the company has well-defined systems and processes, strong financial management, good governance and a strong talent team. Although not necessary, it's generally wise for a US company to begin its strategy by acquiring another domestic business to get familiar with M&A from start to integration. Most US deals take 3 months to a year to complete, but overseas deals could take much longer due to the added complexity of different laws, languages and more.

Having sufficient working capital and a strong relationship with your bank is also critical. The funding sources for international acquisitions will often differ given that financial tools, such as letters of credit, play a big role. Management will need to deepen and broaden their network, hire advisors and be hyper-focused to ensure they're well-positioned to conduct due diligence, negotiate and close the transaction.

Types of companies

Because technology is highly global, global expansion is a near necessity for companies to remain competitive—and utilizing merger and acquisition strategies is often the fastest way. Business services companies, which have benefited greatly from the continued push to outsource, can increase margins by pursuing high-growth, less-competitive markets. For manufacturers or distributors, acquiring similar companies or vertically integrating entities from the supply chain may enhance US operations and support international expansion. Biotech and pharma firms can acquire small research entities to directly access foreign research talent.

Except for those that need to expand internationally to survive or reduce costs, companies generally begin considering international expansion at around $10 million in revenue. That said, this depends on the industry. Companies that conduct most business online and have few shipping costs, such as website marketing services, can pursue an international expansion strategy from day one. The sales model—direct or indirect, distributor or original equipment manufacturer—also plays a large role.

The key to finding the right M&A strategy is to understand your company's motivations for expansion and align your approach with long-term business goals. A trusted financial partner can help you ensure an M&A effort is the right move.