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The rise of the cross border transaction - The costs of cross border - EY - Global

The serial transactor advantage The costs of cross border

Financing costs – rising inflation and currency fluctuations

1. Financing costs: capital flows into rapid-growth markets are stoking inflation and currencies. The potential for currency risk remains an unexpected cost for transactors.

International policy is creating another source of currency risk. If successful, pressure on the Chinese to revalue could raise costs substantially for exporters.

Mode of entry costs – choosing the right partner and accuracy of valuations

2. Mode of entry and valuation - when asked to advise on where to pay most attention in investing in rapid-growth markets, respondents point to the mode of entry. Over time, given increased liberalization in many markets, the mode of investment may need to change. 

This should be considered on entry. When acquiring companies respondents consider valuation to be the key challenge. Transactors may find it difficult to extract accurate data to undertake a valuation.

Operational costs – R&D costs and finance function integration

3. Operational costs. Anything that increases the cost of production is a concern. The highest unanticipated costs relate to R&D investments. This is increasingly important as many are now investing in R&D capability in emerging markets.

Regulatory costs – evolving regulatory systems and high levels of bureaucracy

4. Regulatory costs. Obtaining licenses is a particular challenge for respondents. Transactors should “future-proof” investments by anticipating regulatory change in their investment appraisal.

Human capital costs – shortage of the right talent and high levels of attrition

5. Human capital. Rising demand for a finite pool of skilled workers is pushing up wages and creating high levels of turnover. To counter this, transactors need to build an employer brand and pay attention to training and compensation.

Political costs – Government instability and dealing with bribery and corruption

6. Political. Political risk management forms a critical part of entry but should stay on the radar throughout. Although some political risks, such as expropriation, have diminished, others, such as bribery and corruption, remain a key concern.

More than one-third of companies underestimate the costs of investing in rapid-growth markets.

To complement our analytical work on M&A Maturity, we have also looked at risks around cross border deals experienced by leading transactors.

We surveyed almost 1,000 CFOs around the world for our recent study: 'What lies beneath? The hidden costs of entering rapid-growth markets'.

This identified a series of practical issues that serial transactors have seen in their cross border transaction experience.

More than one-third of companies underestimate the costs of investing in rapid-growth markets. Companies should not simply assume that rapid-growth markets are also low-cost ones. Among our survey respondents, more than one-third say that the overall costs of investing in rapid-growth markets were higher than they expected.

Time overruns are an even bigger problem, with 43% saying that the investment took longer than they had anticipated. Unexpected costs in rapid-growth markets can be a serious issue. With low per capita incomes requiring transactors to adopt a high-volume but low-margin business model, even small increases in costs can erode profitability.

Of the many and varied costs of market entry, there are six we have identified as areas of particular concern for transactors. In order of the reported likelihood to overspend, they are:

  1. Financing costs – rising inflation and currency fluctuations
  2. Mode of entry costs – choosing the right partner and accuracy of valuations
  3. Operational costs – R&D costs and finance function integration
  4. Regulatory costs – evolving regulatory systems and high levels of bureaucracy
  5. Human capital costs – shortage of the right talent and high levels of attrition
  6. Political costs – Government instability and dealing with bribery and corruption

Serial transactors have learnt from experience about these challenges and have developed skills and process to overcome these, often delivering superior returns as a result.


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