22.02.2011
Venturing outside your borders
 |
| CEO of Euro-Phoenix |
|
|
Last week I introduced the owners of a Hungarian company to the owners of a Croatian company that they were considering acquiring. They talked for several hours about their respective industries in each country, and the Hungarian company was shocked to learn about the muscularity of some of its Croatian competitors.
In fact, the largest Croatian company in that particular sector was several multiples the size of the largest Hungarian company. So the tables were turned: the Hungarian company that was considering entering Croatia all of a sudden felt vulnerable: what if the largest Croatian company decided to enter the Hungarian market?
Many of us in Central Europe live in such sheltered environments, seldom venturing away from our home turf, other than perhaps as occasional tourists. This is especially true in the business context: most companies never venture outside their home markets, except perhaps to make a few opportunistic sales.
There are at least three reasons why venturing abroad should be considered seriously by most financially healthy companies:
· First, and perhaps most obviously, it is a potential source of growth. Home markets eventually become saturated. Chances are that if you have a product or service that is competitive at home, there is a real chance that it may also be competitive in other countries.
· Second, it may be an important way to diversify risk. My firm, Euro-Phoenix, for example, began a regional diversification strategy about seven years ago, and over the past three years we have averaged less than 20% of our revenues in our home market. This was quite fortunate, given the economic difficulties faced by the Hungarian economy.
· Third, going abroad is an excellent defensive move as well. Better to meet your future competitors on their turf, learn from them, and learn how to compete with them, before they enter your home market. In this era of globalization, it is only a matter of time before companies from neighbouring countries and beyond will enter your home market. There is no better way to prepare for competition intensifying on your home turf than learning to be competitive on their turf.
Venturing outside your borders is not without hazards. Let me turn the tables with a cautionary tale of expecting too much from foreign expansion. We recently represented an investor who was considering purchasing an internet company. During the due diligence, the sellers gave us a business plan that reflected that this internet company, which had never ventured outside its own borders, was planning to expand into five neighbouring countries in the next three years. The expected valuation of the sellers was greatly inflated, reflecting the expectations of this international growth.
Naturally, there was great trepidation on the part of our client as to what value to ascribe to this international expansion. There are great risks to international expansion, which include:
(a) Cultural differences, which make it easy to misread market trends, consumer behaviour and ways of doing business. Linguistic barriers are generally predictable; it is the cultural differences that tend to create the surprises.
(b) Corporate governance must evolve greatly when progressing from a single office/single country operation to a multi-office/multi-country operation. Failure to have the proper systems in place will almost certainly result in failure.
(c) Human resource risks—will local staff be hired that is capable of delivering the growth expectations?
There is many a slip between cup and lip, especially between theory and execution. Our client did not buy the story of foreign expansion, nor did they buy the internet company. What was lacking was a track record in foreign expansion. Had the target internet company at least developed somewhat of a track record in foreign expansion, whether organic or via acquisition, the story would have been more credible, and the company would have had a higher projected growth rate and therefore valuation.
The analogies clearly demonstrate that it is worth developing beyond one’s borders, but in a way that is very conscious of developing the necessary skills, local knowledge, and risk management. In certain cases, organic growth may provide the optimal risk/cost/benefit ratio, and in others, acquisition.
Les Nemethy is CEO of Euro-Phoenix Financial Advisors Ltd. (), a Central European corporate finance company focused on Mergers & Acquisitions. He is the author of “Unlocking your Company’s Value”, available at
.