Companies commonly expand into other countries via a merger or acquisition of an existing company in that country. In this article, we explain what mergers and acquisitions are, and when they might be useful during international expansion. We also explain why using the services of a Professional Employer Organization (‘PEO’) might be a crucial part of your international expansion strategy.
What are Mergers and Acquisitions?
A merger means the joining of two companies, creating one new company. An acquisition is the takeover of one company by another. In all cases, the goal of mergers and acquisitions (or ‘M&A’), is to improve profitability or reduce risk in some way. Specifically, the reasons for M&A might include (but are not limited to):
- Economies of scale. By joining forces, fixed costs may be reduced by removing duplicate functions and departments. For example, one company may not need two separate HR departments;
- Goodwill. One company may wish to associate itself with the successful brand name of the other company;
- Increased market share. This can occur when one company is buying out a major competitor, and therefore increasing its share of the market;
- Cross-selling. With M&A, one company could more easily market a product or service to the other company’s customers. For example, a life insurance company could market its products to customers of a bank that it is merging with;
- Taxation. In some cases, M&A can present tax advantages;
- Market Diversification. By picking up customers in a new market, you can diversify risk from economy or business shocks in one particular market. This could apply both to geographical diversification, and diversification in your offerings;
- Recruitment/Human Resources. M&A can be a useful mechanism for accessing the staff of another company. This is more common with the acquisition of small companies;
- Acquisition of intellectual property. One company may own rights to intellectual property which would be valuable to another.
Summary: M&As can have many different purposes. In all cases, the company seeking the merger or acquisition considers that this will aid profitability, or risk for the company in some way.
Mergers and Acquisitions and International Expansion
Often your entry to the global marketplace, is motivated by wishing to expand your existing enterprise into a new territory. There are various different ways in which this can be carried out, including incorporating a new company, a joint venture, or a PEO. However, sometimes you may wish to expand by merging with, or acquiring, an existing company in another country: Many of the reasons for M&A will also coincide with the reasons that you have to expand your existing business into another country. For example:
- You may wish to diversify by moving your business into another country. For example, there may be an opportunity to acquire a competitor for a reasonable price that already has a foothold and a client base in that country;
- You may identify that employees you would like to acquire are located in another country, and use M&A to bring them into your business;
- There may be intellectual property located in a company based in another country that you would like to acquire.
Once you have decided that M&A is the right move for your business, you then need to determine what the best way of achieving that is. We set out further below how using a PEO can be an important part of the is M&A strategy.
Summary: An M&A may be a crucial part of your international expansion strategy where your expansion does not involve setting up an entirely new business in the target country.
What Is the Role of a PEO?
An International PEO is an organization that uses a co-employment model to hire workers on behalf of your company.
The PEO is the ‘employer of record’, and is legally responsible for the employment relationship and related compliance matters. At the same time, your business maintains day-to-day oversight of the employees and has the services or the employees completely at the disposal of the business.
While the exact services offered by PEOs can differ, the best PEOs takes responsibility for:
- Payroll. This includes calculating employee pay, making required deductions, and ensuring that all employee benefits are distributed correctly;
- Human Resources. This includes managing annual leave, absences, and setting up insurance;
- Tax. PEOs have expertise with respect to the tax structure, and tax compliance requirements, in your selected country. They can also advise on related tax matters;
- Global Mobility Consulting. A PEO can advise on immigration issues, and the visas required for any workers arriving in the new country;
- Employment contracts. PEOs can create employment contracts customized for the particular region that you seek to operate in;
- Recruitment. PEOs are able to recruit the right staff for your business from the local area;
- Legal services. A PEO may provide legal services for the specific area in which you seek to operate. This could include support with mergers and acquisitions as well as support with setting up a corporation.
Summary: As well as employer of record services, many PEOs provide a range of associated business, legal, and compliance services to support international expansion.
What Are the Benefits of a PEO for a Merger or Acquisition?
There are benefits to using the services of a PEO as part of your merger and acquisition strategy. These benefits include:
- Providing strategic advice prior to M&A. When carrying out your due diligence prior to M&A, you need the best advice you can from an organization on the ground in the new country. A PEO can provide professional advice on how matters such as payroll, human resources and recruitment could be implemented in your M&A;
- Facilitating M&A. Some PEOs will have the capability to support M&A itself. You should check whether the PEO you are engaging with has this capability;
- Implementing a PEO solution. Merging, or acquiring a new company in another country, requires consideration of how the employment, payroll, and human resources will be managed for the new company. In most cases, the most cost-efficient and quickest mechanism of ensuring that this is carried out with full compliance, is to implement a PEO solution: The PEO takes on ongoing administrative and compliance responsibility for employees as the ‘employer of record’.
Summary: A PEO can be of benefit at various different stages of M&A.
Mergers and acquisitions are often an important part of your international expansion. Instead of starting an entirely new business in another country, you can secure the benefits of acquiring or merging with an existing company.
In many cases, using the services of a Professional Employer Organization (‘PEO’) is a useful component of your merger and acquisition strategy.
Note, not all PEOs will provide all of the services outlined above. At New Horizons Global Partners we provide the full complement of professional services you may need for M&A as part of an international expansion. We can provide assistance in the merger or acquisition itself, and ongoing PEO solutions to be the ’employer of record’ for your employees in the newly acquired or merged entity.