Effective Cross-Border M&A Strategies for Global Expansion

Interview with Chester Cheol Joong Kim, the founder and Managing Partner of SU&Partners and CEO of SU&Financial Investment

The SU&Group comprises three companies, SU&Partners, Korea’s Top tier Cross border M&A Advisory, SU&Financial Investment and M-Venture Investment, both of leading SME focused PE firms with accumulating AUM of 1B USD.

Q1. How does the M&A market in Korea compare to other countries?

In Korea, there’s a distinct preference for Initial Public Offerings (IPOs) as an exit strategy. About 80-90% of Korean companies view IPOs as their primary exit, while only 10% pursue M&A. This is in stark contrast to the U.S., where 80-90% of exits are achieved through M&A, with the remaining 10% opting for IPOs. Similar patterns are observed in Japan and Europe. China is also statistically similar to Korea, but from a broad M&A perspective, such as joint ventures, the ratio is known to be higher than in Korea.

Q2. Why do early-stage companies in Korea lean towards IPOs over M&A?

Several factors contribute to this trend. For small and medium enterprises (SMEs), selling a company can incur transfer taxes exceeding 30%, alongside other financial burdens. Moreover, stringent regulations aim to prevent technology theft from acquired SMEs, deterring large corporations from pursuing M&As with smaller firms. To stimulate the micro M&A market, it’s crucial to consider regulatory reforms such as a sandbox for small-scale M&As and tax incentives for reinvestments into the venture capital ecosystem.

Q3. Which industries favor M&A over IPOs for exits and capital raising?

For companies with significant growth potential from a macroeconomic perspective, IPOs remain attractive. Take Meta’s founder, Mark Zuckerberg, for example. He frequently considered M&A during the early days of Facebook but eventually chose the IPO route to align with long-term management goals and investor expectations.

Conversely, sectors characterized by rapid technological innovation and consumer trends, like deep-tech or B2C companies, often find M&A more advantageous. For instance, generative AI technologies, such as those developed by OpenAI, and consumer electronics, like Apple’s iPhone, have spurred new markets demanding swift market entry and aggressive growth—objectives best met through strategic M&A.

Q4. Why should startups prioritize cross-border M&A?

Despite their technological prowess, Korean startups often face valuation challenges due to the limited domestic market. For example, pioneering technologies in messaging apps and social media-originated in Korea but were later eclipsed by global giants like Facebook due to the latter’s expansive market reach. By engaging in cross-border M&A, Korean startups can overcome these market constraints, access larger customer bases, and secure their place in the global arena.

Q5. Can you share successful M&A cases involving Korean startups and global companies?

One notable success is Style Nanda, which L’Oréal acquired. Starting with apparel sourced from Dongdaemun market, Style Nanda evolved into a multi-category brand, including cosmetics, which culminated in its sale for 600 billion won. Another example is the acquisition of Delivery Nation by Delivery Hero, a German company, for 4.75 trillion won, highlighting the value global players see in Korean innovations. Additionally, Dr. Jart’s gradual acquisition by Estée Lauder exemplifies a successful earnout model, where initial partial acquisition is followed by increased stakes based on performance metrics.

Q6. How can companies prepare for successful M&A?

Beyond practical preparations, it’s vital for companies to engage proactively with the capital market. Regular interactions with investors, from seed funding through to Series C, help align a company’s growth trajectory with investor expectations. Participation in global exhibitions like CES, SXSW, and MWC also provides exposure to international investors and potential acquirers, thereby enhancing the visibility and appeal of a company’s offerings on a global stage.

Q7. What cultural and institutional factors should be considered in cross-border M&A?

Japan’s cautious approach to M&A underscores the importance of building long-term relationships before pursuing equity transactions. In contrast, Chinese M&A dynamics are often influenced by government policies and may require flexibility and alternative closing strategies, such as engaging with Hong Kong or Singapore-based private equity firms.

In the U.S., M&A negotiations tend to focus heavily on financial metrics and future profitability, reflecting a straightforward, numbers-driven approach. Understanding these nuances is essential for navigating the complex landscape of cross-border M&A successfully.

Q8. How should foreign companies approach acquiring Korean businesses?

Earnout agreements are prevalent in acquisitions involving U.S. and European companies. This approach allows the acquiring company to purchase an initial stake and increase ownership based on the target company’s performance. This method was used by Estée Lauder in acquiring Dr. Jart and by Delivery Hero in its acquisition of Delivery Nation, enabling gradual integration and alignment of business objectives.

Q9. Why is M&A challenging for startups and SMEs in Korea?

M&A transactions typically require intermediaries who facilitate the deal through various stages, including due diligence, contract negotiation, and post-acquisition integration. In Korea, however, the role of M&A advisors is often undervalued, with advisory fees paid only upon deal completion. This underestimation of advisory services, coupled with the high costs of M&A consulting, makes it difficult for startups and SMEs to consider M&A as a viable growth strategy.

Support from organizations like KITIA can mitigate these challenges by providing essential services such as joint venture establishment, technology transfer consulting, and due diligence for cross-border M&As, thereby lowering the entry barriers for smaller companies.

Q10. What advice would you give to entrepreneurs and investors in the current capital market?

Companies like GE, Google, Microsoft, and Meta have thrived through strategic M&As, leveraging these opportunities to diversify and expand globally. In today’s environment, where the traditional greenfield approach of organic growth is often less feasible, embracing M&A as a growth strategy is crucial. By actively considering M&A, companies can unlock new pathways for sustainable growth and navigate the complexities of the global market more effectively.