Worries about compliance and governance standards in companies that are takeover targets are having a chilling effect on the international M&A market, a major international study has shown.

The study, by the Economist Intelligence Unit for international law firm Baker & McKenzie, says that unless they raise their game on legal and compliance due diligence, businesses in developed countries will lose out to emerging-market rivals in cross-border M&A.

The report confirms that executives worldwide remain focused on M&A opportunities in BRIC nations (Brazil, Russia, India and China). Interest in CIVETS countries (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and ‘fragile states’ is also growing.

However, poor strategic planning combined with a lack of facility for operating in higher-risk jurisdictions has prevented businesses in developed nations from capitalising on these economies’ high growth rates.

According to the study, internal compliance issues head the list of obstacles to a cross-border acquisition: 46% of senior executives interviewed listed it in their top three challenges, while 41% were deterred by protectionist measures and 35% by regulatory restrictions or uncertainties.

Top geographies for acquisitions

Developed market companies
44% BRIC
24% Developed markets
16% China
10% Brazil
9% Other Asia
9% Other Europe
8% Russia
8% India

Emerging market companies
30% BRIC
26% Developed markets
21% Other Asia
11% China
8% India
6% Middle East
5% Other Africa
5% Other Latin America

Tim Gee, Baker & McKenzie’s global head of M&A, told the Gazette that the findings have implications for corporate counsel. ‘Corporate compliance is the big issue, and those concerns are now much broader than Bribery Act or [US] Foreign Corrupt Practices Act compliance,’ he said.

Companies wanted assurance that target businesses were ‘acting appropriately’ on matters such as where taxes are paid and where profits are taken. Corporate counsel therefore need to have closer involvement in ‘pre-transaction planning’.

Legal and compliance issues also lead the list of concerns for senior executives in developing countries when considering merger targets in other developing countries. But their experience of operating with such uncertainties at home leads to greater confidence in the due diligence they are able to conduct, the study shows.

This matters because competition for companies in target jurisdictions has increased. According to the study, 33% of developing nation companies are seeking acquisition targets in BRIC and CIVETS countries. Among developed nation companies, the figure is 48%.

Developing nation companies, Gee noted, have ‘lived life in the rough and tumble of emerging markets’, and therefore are more capable when it comes to negotiating complex, onerous and sometimes arbitrary regulatory demands.