Following a long period of hunkering down and watching for signs of economic recovery, businesses and private equity firms seem to be developing a new appetite for growth. For many of the newly hungry, this means expanding outside home countries through international mergers and acquisitions (M&A). But challenges come with this mission.

Though instant communication, jet travel and global supply chains have shrunk the world, variations in language, culture and law can still have a huge effect on how smoothly a cross-border deal proceeds and, ultimately, succeeds.

In international deals, language alone can be a minefield, says Rebecca Ford, director, Aon Risk Solutions, Mergers & Acquisitions. "Technical terminology may be capable of translation," she says, "but that doesn't mean [it carries] the exact same meaning or implication. … Obviously it's critical to proactively address that."

As part of intensive diligence, it's important to make sure that all parties clearly understand the risks. That's why skilled, local M&A operatives are used; they understand the nuances of local language as well as the differing insurance practices, legal environments and transaction imperatives.

Insurance, Cultural and Regulatory Complexities

Countries also have differing insurance regimes and regulatory environments, as well as varying cultural influences. For example, Ford says an American or British private equity house shopping in southern Europe might be alarmed to learn that companies there often lack business interruption insurance. Risk appetite can also vary; while a large U.S. company might be more inclined to insure against catastrophe and purchase cover with high deductibles, companies in other countries are much more risk averse in their approach. It's the M&A group's job to explain the financial and other implications of such differences to potential purchasers during the transaction process. Further, where a purchaser is uncomfortable with an uninsured area, solutions can be proposed.

When evaluating a business's risks and protections, however, it is important to put all that in the context of local customs and the litigation environment, Ford says. "A balance needs to be struck between local commercial practices and ensuring the buyer's investment is appropriately protected."

Statutory classes of insurance vary between territories, together with the protections available; for example, in some countries compulsory cover for workplace injury may be insured via state schemes and in others insurance is purchased in the open market. Further, some countries have a closed insurance marketplace. All this needs to be understood by a potential purchaser.

Mary Duffy, managing director, Aon Consulting, Corporate Transaction Practice, consults with companies on representations and warranties insurance. Essentially, when a company is sold, the purchase agreement will spell out extremely detailed representations regarding the company, including mission-critical information, and cover everything from suppliers and finances to compliance with laws. Those reps are typically backed up by indemnification by the seller.

After the purchase price, Duffy says, the scope of the seller's indemnification is often the second-most contentious issue in a deal. "In the absence of insurance, it's a zero sum game," she says. "The insurance lets you bundle up a chunk of that liability. The buyer gets protected for its risk, and the seller has increased certainty at the closing."

In fact, the reps and warranties insurance, which can protect both sides, often becomes an essential aspect of the deal. "Because of the perceived hurdles to collecting on that indemnity, there's a fair amount of caution regarding negotiating terms across borders," Duffy says. A firm will worry, she adds, that "if push comes to shove, and I'm going to have to enforce this contract, will we be able to hire the necessary lawyers and other professionals to win in a foreign system?"