Growth Path to EMEA

by Lesley White, Head of Global Commercial Banking International, Bank of America Merrill Lynch and Paul Taylor, Head of Sales EMEA, Global Transaction Services, Bank of America Merrill Lynch

Corporates looking to expand abroad need a strategic approach before embarking on an international growth path. As well as generating revenue growth, a presence in multiple markets outside their home market enables companies to reduce their country risk by insulating themselves against economic challenges through a diversified base of both local and global clients.

For many US large and mid market corporates EMEA, which is comprised not only of European Union (EU) countries in Western Europe and Central and Eastern European (CEE) but also other non-EU CEE countries and countries in the regions of the Middle East and North Africa (MENA) and sub-Saharan Africa, is an attractive growth opportunity.

While the Eurozone debt crisis continues to create uncertainty, it is important to remember that Western Europe remains one of the most prosperous and stable trading blocs in the world and most countries in the region continue to recover economically. The other regions that comprise EMEA also offer compelling investment propositions, especially for companies in specific industries or sectors. For example, some countries in CEE have established strong reputations as relatively low cost manufacturing and service locations (compared to Western Europe) and have a highly educated workforce, a transparent legal environment and robust transport and other infrastructure.

This combination of a mature, but still untapped market (relative to the US) in much of the EU, with the emerging markets of CEE, MENA and sub-Saharan Africa, makes EMEA unique. However, while the EU offers the ability to do cross-border business relatively easily because of clear and harmonised regulatory, legal and tax environments, EMEA overall is still a highly diverse region.

Preparation for entering EMEA

Companies expanding into EMEA, either organically or through mergers and acquisitions (M&A), should consider their approach before entering the region. Firstly, they should review which markets they want to initially target, which is an operational decision. As described above, while it is feasible to enter multiple EU markets from a single EU member state, differences in market characteristics or the language spoken mean it must be carefully planned. In other EMEA markets, market selection is even more important given their greater diversity.

Having decided on the most suitable markets, a company should consider its operational and treasury strategy. Some companies make the mistake of thinking what works in their home market will work abroad. However, companies must consider the local customs, work force, legal and tax environments. Instead, it may be more advisable for companies to use the opportunity afforded by expansion to reassess existing treasury strategy. Critical questions that need to be addressed as part of this reassessment include: How centralised or decentralised are existing entities? Does this organisational structure meet the company’s operational and treasury objectives? Similarly, treasury should consider how applicable existing strategies, processes and policies – with regard to risk management, foreign exchange (FX) or inter-company lending, for example – are to the new market the company is entering.

Specific market-related issues that should be considered when expanding into a new country include: a country’s tax, legal and regulatory environment and its payments and receivables instruments and practices, including clearing. The company must perform a detailed analysis and work out the implications of these country characteristics for its day-to-day operations as well as its ability to achieve its strategic objectives.

Corporates also need to think about their staffing requirements in order to implement an appropriate cash management and treasury structure and the availability (and cost) of necessary expertise. Between the company’s home market and its new target market companies need to establish a plan for how these can be navigated and accommodated.[[[PAGE]]]

Overcoming complexity

While a cautious country-by-country approach to entering new markets in EMEA might seem sensible, in one sense it negates one of the principal attractions of the region – namely its size. Many US companies typically aim to access opportunities in multiple countries as part of their expansion plans. From a treasury perspective, this presents obstacles including the need to work with a different bank for transaction services in each market, which introduces complexity in terms of relationship management as well as increased counterparty risk.

An alternative option is to select a single bank that has comprehensive reach across the countries where the company plans to operate. This strategy has the benefit of significantly lowering costs by increasing efficiencies and consolidating volumes by simplifying relationship management and limiting counterparty risk.

If the company chooses to work with a bank with which it already has a relationship in the US, there could be further benefits. Documentation may be streamlined because of the existing relationship and there could be advantages in terms of availability of credit, based on the relationship with the parent company. In addition, provided the bank offers global tools and solutions, treasury can gain the benefits of consistency and standardisation while staff should be familiar with the various solution interfaces.

As importantly, a bank that already has a deep understanding of the company’s strategic goals and treasury working practices can work with the corporate to help shape its entry strategy. The company can draw on the knowledge and expertise of the bank’s network across its target EMEA countries and identify potential challenges, such as whether its signatory protocols are appropriate or whether its existing structures can be easily adapted to new subsidiaries. The bank can also provide practical advice on payment instruments and local business terms, for example, ensuring that the company optimises efficiency in its new market from launch. Similarly, the bank will be able to offer up-to-date advice on anti-money laundering and know-your-customer requirements across different EMEA countries.

Financing a new operation

Expanding into a new market is expensive: corporates must consider carefully how – and where – they will raise the necessary capital. In advance of raising capital, a company should work with its banks to review its existing capital structure and define its requirements.

Possible options for raising finance include debt or equity finance. Short-term or long-term debt can be raised, either in the company’s headquarters or through offshore funding; a further decision is whether debt is raised from the capital markets or the bank loan market (and what structures are used). Corporates need to pay special attention to the jurisdiction in which funding is raised: some markets in EMEA (especially in MENA or sub-Saharan Africa) are extremely restricted in terms of availability of funds and therefore could carry significant costs.

Advisory assistance from a bank is essential when considering how, when and where to raise capital. Although there are some broad trends – for example, mid-cap companies typically raise debt at headquarters level – each company structure is unique and therefore must be considered on its own merits. Moreover, even in developed and liquid markets financing conditions can change rapidly and opportunities to take advantage of attractive market conditions may be fleeting. Similarly, regulatory regimes, especially in emerging EMEA countries, are often subject to unexpected change.

One noticeable trend during the post-financial crisis period, especially among large corporates, is that treasury has become more involved in strategic funding decisions. Treasury has always been responsible for working capital management but increasingly it is being seen as a critical funding resource for strategic initiatives such as growth, either through expansion or M&A. Increased recognition of the value of working capital management has led some companies to elevate the importance working capital metrics as goals for various units within the business.

Working with the right bank

Companies considering entering EMEA recognise the opportunities it offers. However, they must also be realistic about some of the challenges it presents. Working with a global bank – especially one familiar with the company from its home market – offers enormous advantages and helps to overcome some of the challenges. It ensures that costs and risks are effectively managed and provides access to a wealth of knowledge about operations, cash and liquidity management, payables and receivables management, funding and technology.

However, at a time when companies are becoming increasingly global – by expanding to EMEA, for example – many banks are becoming less global. As regulations proliferate, banks are finding it too costly to operate in every local market. Corporates embarking on a new journey in EMEA should ensure that their bank provides services in the target country. Through integrated partner banks global banks can offer a seamless integrated solution in smaller markets, allowing its clients access to a local bank provider without the need for separate agreements or additional counterparty risks.