Top 10 Key Challenges of Cross-Border M&A Integration

Cross-border mergers and acquisitions (M&A) are expected to increase in 2023 as 68% of executives take a greater interest in international deal-making. Unfortunately, cross-border M&As have a failure rate of up to 70% due to post-merger challenges that jeopardize value creation. 

New markets, product diversification, and fortified supply chains are front-of-mind for stakeholders. Still, insufficient post-merger integration planning can hold them back from realizing the true potential of a deal. Integration teams often need help overcoming PMI challenges that, when left unaddressed, can result in employee attrition, synergy target delays, and lower deal value. That’s where an employer of record (EOR) can help. 

This article looks at some of the most common challenges of cross-border M&As and how an EOR like Deel can mitigate them.

Hiring and paying new employees quickly

The more delays there are during an M&A, the higher the cost. An acquiring company may have to set up foreign entities to enter a new market or to hire an employee compliantly. But Know Your Customer (KYC) laws are lengthening the time it takes to open a bank account in another country, which is required to open an entity.

Some countries also require multiple government agencies to approve business applications. For example, to incorporate federally in Canada, you’ll need permits and licenses from federal, provincial/territorial, and municipal governments. In Germany, the process includes applying to the IHK (Chamber of Commerce and Industry) for a company name and objective check, submitting your trade registration with the local trade office, and registering with the Transparency Register.

When it comes to payroll, most providers take more than six months to set up, and simple changes often come with a lengthy back-and-forth process. These procedures can hold up M&A implementation and prolong the transitional services agreement (TSA).

With Deel’s Global Payroll, you can get your entire team’s payroll up and running in less than half the average time, easily make changes in-platform, and get direct 24/7 support from our expert team. Run payroll in 90+ countries, review all salaries in one place, and pay your entire team with a single invoice.

High consultation costs and entity set-up fees

Companies pursuing an M&A may hire consultants to help support senior executives with decision-making and developing an integration roadmap. For a mid-sized business, most M&A advisors have a minimum retainer fee ranging from $50,000 USD to $250,000 and price-dependent success fees. 

Setting up and running a new legal entity is also costly. The average is $100,000 per entity, depending on the location and maintenance costs, which can include:

• Formal registration fees (national and possibly state/regional)
• Recurring office expenses (some countries require a physical office address)
• Minimum capital requirement
• Ongoing legal consultation fees to ensure local compliance
• Ongoing administrative costs (payroll, insurance, and tax filing)
• Hiring costs for a Resident Director
• Entity teardown fees (if your company leaves the country)

See also: How Much Does an EOR Cost vs. Opening an Entity?

Using Deel also helps you save money on your tech stack. Instead of paying for multiple systems to manage payroll, compliance, employee visas, independent contractors, and EOR employees, you can do it all in one place for one price with Deel. 

Managing international compliance requirements

Generating compliant international employment contracts requires specialized knowledge of global HR practices and local labor laws. Without an internal team or system to manage this process, you increase your risk of fines or penalties. And when you set up your own entity, you may encounter additional compliance challenges.

Employees undergoing a business transfer are entitled to certain legal protections that vary by country. Let’s look at the European Commission’s Acquired Rights Directive (ARD), transferable liabilities, and Collective Bargaining Agreements (CBA) as examples.

European Commission’s Acquired Rights Directive (ARD)

The ARD impacts all European Union member states and ensures any employee engaged in an M&A transaction transfers to the new business. This protection means you cannot terminate employees following a business transfer in countries where this legislation applies.

Transferable liabilities

In most cases, acquiring companies must provide new employees with the following liabilities that are equal to or better than the seller’s terms:

• Salaries
• Pensions
• Accrued vacation
• Bonuses
• Healthcare
• Other contract employee benefits

Collective Bargaining Agreements (CBA)

A Collective Bargaining Agreement (CBA) is the process of negotiating employment terms between an employer and a group of workers, which takes place between company management and a labor union. 

A CBA often covers a variety of subjects, including anything the law requires of the employer (salary, overtime, benefits, working conditions). Employees’ rights under a CBA—especially if mandatory—may complicate an M&A or carve out.

Integrating tech and system synergies

Merging or acquiring another company includes adopting its systems and integrations. Established companies are likelier to have custom-built solutions and legacy systems that may not work for their new operating model. 

As part of the M&A integration planning process, companies should compare their tech stack against the purchased company, identify the systems and tools they retain, and develop a training program to ensure a seamless transition for employees.

Inheriting misclassified workers

Every country classifies employees vs. independent contractors differently, further complicating a cross-border deal. If the target company has hired independent contractors who should be classified as employees, the buying company takes on that legal risk and liability.

Inheriting expats

If you’re acquiring a business unit that employs expats, you may be responsible for sponsoring their visas. In some countries, such as the US, you may be able to use the original employer’s approved labor certification if you’re considered a successor-in-interest (SII) of the original company. 

According to the US Citizenship and Immigration Services (USCIS), a company is considered an SII when they’ve purchased, merged, or changed corporate structure, or significantly changed owners. SII status is determined by three factors:

• The job opportunity offered by the SII employer must be the same as the job opportunity originally offered on the labor certification
• The burden of proof is on the SII employer to establish eligibility
• The petitioner must fully describe and document how the SII employer assumed ownership of the original company

Retaining newly-acquired talent

Retaining talent from an acquired company requires clear communication, cultural integration, and a smooth onboarding process. The impact of poor PMI on retention is significant, with 47% of key employees leaving after a major transaction and 75% leaving within three years. 

Communication

Employees often feel out of the loop during the M&A lifecycle due to poor communication and expectation-setting by leadership. The acquiring team will need a communication plan for affected employees, whether they’re being transitioned onto the new team or receiving severance.

Benefits harmonization and matching

In M&As, acquiring companies must provide employees with benefits that are as good or better than the seller’s terms. HR teams and integration leaders may be inexperienced with international requirements, which can lead to legal liability and employee attrition.

What happens if an EOR’s benefits aren’t as good or better than the target company’s? In that case, the EOR may recommend the acquiring company outsource the benefits individually and provide employees with a stipend to cover additional costs.

Let's say ABC Global Tech acquires XYZ Tech. XYZ Tech offered their employees group life insurance as a benefit, but it’s not offered by the EOR used by ABC Global Tech. ABC can then source life insurance individually, and employees can get additional expenses reimbursed on the platform.

Onboarding

Large organizations face an attrition rate of over 16% within the first six months of hiring due to confusing orientation, information overload, and unorganized processes. Acquiring companies must develop a clear and easy onboarding process to help new hires transition to their new company.

Culture and connection

75% of acquirers struggle with cultural integration issues that require serious intervention. As part of their acquisition integration strategy, leaders must build initiatives that help new employees feel connected to their workplace, culture, and purpose from day one. Employees who don’t feel connected are 90% less likely to produce great work and 11 times more likely to experience burnout.

• Connections: Help your team connect and forge stronger relationships with watercooler topics, interest groups, and meetup roulettes
• One-to-ones: Prepare, run, and track one-to-one meetings between employees and managers
• Pulse surveys: Collect feedback and monitor engagement metrics by creating, scheduling, conducting, and reviewing surveys

Protecting intellectual property and data

You may jeopardize your intellectual property (IP) if you rehire an acquired employee as an independent contractor. In the US, for example, contractors generally retain ownership of their work, unlike employees, whose employer automatically owns the copyright of work. 

IP and data protection laws also vary from country to country. Therefore, pre-existing intellectual property contracts, non-disclosure agreements, and data protection measures may not be bonafide.

Using an EOR also increases data protection for growing companies, as they only need to send confidential information to one provider. EORs must sign a Data Processing Agreement (DPA) with every client. A DPA requires employers to handle employee data securely and privately, ensure General Data Protection Regulation (GDPR) compliance, encrypt and back up data, and secure network communications to prevent leaks. 

Risk of permanent establishment

Permanent establishment (PE) is when a tax agent determines a business’s steady, continuing, and taxable presence in a foreign country. 

If a business is considered to have PE in a foreign country, its tax burden increases significantly. Any revenue earned inside that country must be taxed accordingly based on domestic tax laws (notably value-added tax, but not only) and the period of time the company is deemed PE.

Through Deel’s EOR service, you can compete on deals in international jurisdictions and reduce the time to close while mitigating risks. The EOR will act as the official and legal employer for foreign workers and will be responsible for submitting all employer and employee taxes per local tax rules. 

Learn more about PE risk and how to reduce it.

Retaining employees’ service history and rights

Employees’ service history is often tied to their performance management, milestones, and bonuses. This information can be lost during an M&A deal if records are not carefully maintained.

In a TroopHR interview, Deel’s Head of People explained the impact HR tech has on employee confidence and relationships. “HR technology helps you build and sustain trust with your team members by showing them you have accurate data about their work engagement with you, have their history of progression and performance, and understand and apply the compliance requirements for them based on their employment status and country.”

Get our complete guide to using EOR for global mergers & acquisitions

An employer of record like Deel can provide valuable support and due diligence during the M&A integration process, keeping employees satisfied and operations running smoothly. Deel has acquired five companies over two years, and our team of experts has helped companies of varying sizes execute M&As in 30+ countries.

In our guide, How to Use an Employer of Record to De-risk Global M&As, we cover:

• EOR services and features
• When and when not to use an EOR for M&As (with examples)
• The fundamentals of a successful M&A
• The M&A process
• How Deel can help