Valuation challenges in cross-border M&A: Insights for sellers and buyers

By Matteo Paggi, Partner at Translink Corporate Finance Italy

Overcoming valuation challenges in cross-border mergers and acquisitions (M&A) is a multifaceted process requiring deep insight into macroeconomic factors, cultural nuances, and financial intricacies. Translink Corporate Finance plays a critical role in guiding sellers and buyers through these complexities, ensuring accurate valuations that foster successful outcomes. In this article, we explore the key factors shaping valuation in cross-border M&A and how they influence negotiations and deal success.

The role of macroeconomic factors in cross-border M&A valuations

Economic environments significantly influence the valuation process in cross-border M&A. Countries involved often operate within vastly different economic landscapes shaped by GDP growth, interest rates, and fiscal policies. These factors translate into varying levels of business risk and return expectations, making it imperative for both sellers and buyers to understand the economic contexts of all parties involved.

For instance, a company in a high-growth economy may command a higher valuation due to strong revenue potential compared to its counterpart in a slower-growth market. Buyers must assess whether the premium paid aligns with the actual risk-adjusted returns, while sellers should understand how their regional economic conditions position them competitively.

Inflation also plays a pivotal role in valuations. Significant disparities in inflation rates between countries can create challenges. High-inflation environments can erode the value of future cash flows, decreasing valuations, while low-inflation scenarios often enhance the perceived future earnings potential. Adjusting valuation models to reflect the inflationary conditions of the target country – by modifying discount rates or cash flow projections – is essential for realistic appraisals.

Market conditions such as liquidity, investor sentiment, and financial stability further complicate valuations. Volatile markets typically increase perceived risk, prompting buyers to demand higher returns or apply deeper discounts. Conversely, stable markets can attract premium valuations.

Recent data indicates a resurgence in cross-border M&A activity. In 2024, global M&A value rose by 16.4% year-on-year, with Europe’s lower valuations (8.3x EBITDA) compared to the US (10.3x EBITDA) fuelling cross-border activity. While deal momentum is still strong, uncertainty around potential tariffs and trade policy shifts means many business owners are taking a measured, wait-and-see approach to cross-border opportunities.

Currency exchange rates and their impact on valuation

Exchange rate fluctuations play a critical role in cross-border M&A valuations. Currency volatility can significantly affect the value of an acquisition, either making deals more attractive or less feasible depending on exchange rate movements. Buyers paying in stronger currencies can often secure deals at a discount, while sellers receiving payments in weaker currencies may face lower realised values post-transaction.

A strong buyer’s currency can lead to increased purchasing power, allowing them to negotiate more favourable terms. Conversely, if the buyer’s currency weakens against the target country’s currency post-deal, the cost of servicing acquisition-related debt or repatriating profits could erode financial gains.

Hedging strategies, such as forward contracts or currency swaps, can mitigate some of these risks. Buyers and sellers must work closely with experienced advisors to assess exchange rate risks and implement suitable hedging techniques to preserve deal value.

Cultural differences and their influence on valuation

Cultural nuances between countries significantly shape the valuation process in cross-border M&A. The perception and assessment of value often differ based on cultural attitudes towards risk, negotiation styles, and decision-making frameworks. Sellers and buyers must address these differences proactively to avoid misunderstandings and misaligned expectations.

For instance, decision-making processes in Western markets may prioritise data-driven analysis, while some Asian markets might weigh relational trust more heavily. An awareness of these cultural nuances allows both sellers and buyers to approach negotiations with mutual respect, fostering smoother communication and more realistic valuations.

Additionally, emotional factors often intersect with valuation considerations, particularly for sellers. In cultures where legacy and reputation are paramount, the decision to sell a business may involve emotional elements that influence the seller’s willingness to negotiate. Buyers who recognise and respect these sentiments can build stronger relationships with sellers, paving the way for smoother transitions post-transaction.

Regulatory considerations and valuation adjustments

Regulatory frameworks vary significantly across jurisdictions, influencing the ease of conducting business, taxation, and compliance requirements. These factors directly impact valuation, as businesses operating in heavily regulated environments may carry additional costs associated with compliance and operational constraints.

For example, acquiring a company in a region with stringent labour laws or complex licensing requirements may lead to higher integration costs post-acquisition. Buyers must factor these regulatory costs into their valuation models to avoid overpaying. Similarly, sellers should highlight compliance strengths and robust governance structures to justify premium valuations.

Political stability also plays a key role in cross-border M&A valuations. Countries experiencing political uncertainty may see discounted valuations due to heightened risks. Conversely, businesses operating in politically stable environments often command higher multiples, attracting international investors seeking security.

The importance of advisors in cross-border M&A

Advisors such as Translink Corporate Finance play an indispensable role in overcoming valuation challenges in cross-border M&A. Their expertise spans geographies, local regulations, cultural dynamics, and market conditions, equipping them to provide strategic guidance tailored to each transaction.

Advisors facilitate alignment between sellers and buyers, ensuring clarity in expectations and minimising potential conflicts. They also bring critical insights into macroeconomic and microeconomic factors, enabling parties to adapt valuation models for accuracy. This role extends to negotiation support, where advisors advocate for favourable terms, creating value for all stakeholders.

In addition, advisors assist in identifying and mitigating risks that could undermine valuation credibility. For instance, they evaluate regulatory frameworks that might influence deal feasibility or potential tax implications that could impact net valuations. Their ability to manage these complexities ensures that sellers and buyers achieve equitable outcomes.

Best practices for overcoming valuation challenges

To address the complexities of valuation in cross-border M&A, companies should consider the following best practices:

• Thorough due diligence: Conduct comprehensive research on the target country’s economic environment, inflation trends, and market dynamics. Understanding these factors lays the foundation for realistic valuation models.
• Cultural sensitivity: Engage cross-cultural experts to bridge gaps in communication and decision-making styles. This step is especially valuable when negotiating terms and assessing value perceptions.
• Local market insights: Leverage the expertise of advisors with in-depth knowledge of the target market. Local insights can illuminate risks or opportunities that may not be apparent from a global perspective.
• Scenario analysis: Incorporate scenario planning into valuation models to account for uncertainties such as exchange rate fluctuations or regulatory changes. This approach provides flexibility in deal negotiations.
• Transparent communication: Foster open and honest dialogue between sellers and buyers. Clarity in communicating expectations helps avoid misalignments and builds trust.

The future of cross-border M&A valuation

As globalisation continues to drive cross-border M&A activity, valuation challenges will evolve. Economic conditions such as rising interest rates, geopolitical tensions, and inflationary pressures will remain central to deal assessments. Similarly, cultural integration will grow in importance as businesses expand into regions with diverse social and economic norms.

Technology and data analytics are also poised to transform valuation processes. Advanced valuation tools can analyse vast datasets to predict market trends, assess risks, and enhance decision-making accuracy. For both sellers and buyers, adopting these technologies offers a competitive edge in navigating cross-border deals. With the expertise of Translink Corporate Finance, businesses can confidently overcome valuation challenges and secure optimal outcomes in the evolving global M&A landscape.