KUHN CAPITAL Tuesday, March 20, 2018
Dispatches from the front

Overseas M&A: Watch the Gotchas

April, 2006

We recently ran into a useful ComputerWorld article on the pitfalls of acquiring and operating overseas IT businesses that rang some familiar bells. We’ve seen these “gotchas” in action, and they can kill deals or make you sorry you closed one, so read below and be forewarned.

Jobs at Any Cost
Probably the thorniest obstacle to valuing and closing a European purchase is what appears, at least to Americans, to be overweening interference in your ability to terminate redundant or unproductive employees, or even shuffle job titles. Be prepared for a menagerie of restrictions that range from limits to the scope and conditions of terminations (like onerous employee buy-outs), to the requirement for new owners to seek and follow the advice of employee “work councils”. These job-protecting councils are particularly powerful in Germany, the Netherlands and France. No wonder job growth in these countries lags ours.

Sorry, That’s Confidential
Europeans are sticklers for elaborate data security and privacy protections, in some cases greatly complicating the efforts of companies to access their own critical employee data. For instance, you may be prohibited from e-mailing a French employee’s salary data to your London-based CEO. And if you want simply to compile a list of employees and their skills, you may have to get each listed employee’s permission in advance.

While we think that more stringent IT security and privacy mechanisms aren’t all bad (American practices certainly could use improvement), be sure to budget for the material expenses that may be demanded as you retrofit your IT systems to these sometimes arbitrary and varying European environments.

IP, What IP?
Some terms that are standard in US contracts, including purchase agreements, like "liabilities," "trade secrets" and "confidential information" don’t get traction in other countries.

For example, you may be surprised to find that the rights to your custom software can't be assigned and thereby controlled in some countries, setting you up for a situation in which your customer is free to sell it again, this time to your competitor. Ways around this include drafting 99-year leases or non-compete clauses that make it quite clear the user can't do that. In a word, there are ways to finesse such landmines but you’ve got to know where they are and dedicate specific language to addressing them. And if you’re thinking of buying a company that has failed to effectively protect its IP, caveat emptor.

On a related matter, most American managers keep meticulous files documenting software licenses, contracts and proofs of purchase. Overseas managers often don’t, consistent with a casual attitude toward intellectual property theft particularly commonplace in developing countries. Don’t let the overseas target company’s lax record-keeping expose you to later legal liabilities

A Legal Crazy-Quilt
Despite the European Union, Europe remains a patchwork of varying laws. Because each country retains its unique system, avoid the mistake of thinking because you’ve done business in one, you understand the other. For example, in many developing companies, you may not have legal recourse against an employee who has stolen proprietary code or trade secrets. While India is slowly evolving toward such property protections, China remains hazardous to your IP’s health.

What's the Net Net?
While it's true that overseas IP and employees issues are often a hassle, in a perfect M&A market those incremental buyer costs should be reflected in the target's sale price. Just be sure to consider them.

Ryan Kuhn

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