As with all intimate relationships, partners do not like sharing details of such affairs with the outside world, whether things go well or not. fDi magazine found out just how hush-hush these affairs are when several enterprises, big and small, were contacted to discuss their relationships with their cross-border advisers. Among the many refusals to comment on the subject, one pharmaceutical company explicitly – but politely – declined because it recently had a bad experience with its consultants.

This raises many questions. Are advisers and financiers doing a good job when it comes to helping their clients to expand? Are companies satisfied with the advice and financing products on offer; and how much influence do they have in the decision process?

In particular, the question of who occupies the driver’s seat seems quite hot, considering the degree of blame that consultants receive when corporates get into trouble.

Relationship reality

One company that is open to the subject is Seat Pagine Gialle, an Italian directories and advertising services business that has expanded in the UK, Germany and, more recently, in Turkey. It has been expanding abroad through joint ventures and acquisitions and its chief executive has clear ideas about the reality of the relationship with advisers and bankers.

“We are all adults,” says Luca Majocchi, CEO of the company.  “We can’t simply blame advisers if a deal goes wrong. Companies know that a banker is interested in his deals and wants his clients to make as many transactions as possible. He’s not necessarily interested in optimising the price for the buyer or seller [in an acquisition], the important thing is that the deal happens. There certainly have been instances where we had the feeling that we were contacted or supported by people more interested in the transaction than in its real benefit for us. In these cases, the relationship has a short life.”

However, this does not mean that advisers should be exonerated from accountability when their client’s expansion strategy fails to produce the wanted results, particularly when the market is buoyant and corporates have a diminished sense of risk.

“Companies that buy or invest in other companies have to be careful and avoid the phenomenon of euphoria in the market,” says Mr Majocchi.

“Businesses can feel pressured to make acquisitions at any cost. Intermediaries have only the objective of closing the deal. This forms a vicious circle and it can all end in tears. Advisers have some responsibility for this,” he says.

This situation was typical of the dot-com boom era, when strong markets and widespread confidence in certain business models almost made careful business planning superfluous. Things have changed since then.

Serious planning

“People are more serious in their business planning now when it comes to expanding internationally,” says Mike Sables, a director at accountancy and consultancy firm Tenon. “In the late 1990s, people were coming to the UK because it was seen as the thing to do, without a particular business plan. We see a lot less of that now.”

Jeremy Butler, head of new and emerging markets at KPMG, says: “It’s very hard to make a generalisation. However, I think [the level of pressure to expand] depends on the industry of the company, the kind of market it is in and the margins it faces. It comes down naturally to the structure of the business, and recognising where the company adds value and where it is differentiated from the [local] competition and from the competition in overseas markets.

“At the end of the day, there aren’t many growth markets left in the world. So if you want to access a consumer market that is growing then you would logically enter China, India, Russia, Brazil and the Gulf states,” says Mr Butler.

In less buoyant markets, businesses might feel less enthusiastic about expansion plans and, although it is too early to judge their effects, the current credit market conditions might have an effect in the longer term. “If the [credit crisis] develops, I think it will have an effect on the decision makers,” says Mr Sables. “They would become more cautious.”

Lenders might also become increasingly cautious about their clients’ solvency and about the use of the required financing. Bigger companies should not be significantly affected by this attitude, however, because they usually have sound financials against which banks can lend and liquidity to use as a financing alternative to borrowing or capital raising. And it is not uncommon for big businesses to use their own funds, despite the infinite sources of financing that lenders can offer to clients – general purpose loans, project financing, bond issuance, just to mention a few.

“I was part of a team that presented several financing solutions to a Swiss-based multinational that wanted to expand in Russia,” says a senior banker. “Even if the client swore they would never use their own money to finance the expansion, in the end that’s just what they did: they chose to use their free cashflow.”

Health check

Looking at how decisions are taken and what drives each partner to take them can help in analysing how healthy a relationship is. In a green-field expansion, it seems that consultants do not always have the chance to influence their clients’ decisions and tend to react to precise instructions.

“It is unlikely that we would suggest expansion projects overseas,” says Oliver Leeds, co-head of Barclays’s inward investment team. “We would however act upon a request from a client to assist them with banking services where they have decided to locate parts of their business overseas.”

Moving away from location advice, corporates can also base their expansion strategy on aspects other than tax incentives, good infrastructures or growing consumer markets. Identifying a key employee can be a determining factor when deciding what new locations to expand into. “Companies may have already found a local country manager, in which case the location is often driven by the person they want to hire,” says Mr Sables.

Companies’ expansion is a palatable business for banks. Aside from their advisory and lending activities, most banks have set up specific divisions to cater for subsidiaries abroad. Foreign exchange and cash management services are provided to newly set up companies, along with financing when the local business starts to grow.

This might not be the most lucrative area of banking, especially for big international investment banks, but it creates a strong tie with a new client, which can be sold over more sophisticated – and lucrative – products once the subsidiary becomes bigger.

To win the business, and to keep it, the kinds of services and advice provided at these early stages of the relationship need to be personal. “What companies look for is bank managers who are able to empathise with the position they are in,” says Simon King, relationship director for the UK inward investment team at Lloyds TSB.

“We need to understand the issues that they have and warn them on the ones that they haven’t seen for themselves yet. The key decision makers could be based 6000 miles away and they have to know they can trust us to handle a large amount of money on their behalf. It absolutely is old-fashioned banking,” he says.

Winning trust

Other professionals are attentive to this area, too. Financial, legal and accountancy advisers all have experts in this field. And a wealth of dedicated location advisers has flourished on the back of corporates’ needs for specific expertise on a particular country or area.

Regulation has also in some cases helped in the development of specific expertise in this field. The introduction of the stringent Sarbanes-Oxley regulation in the US, for example, prohibits consultants to provide any other services to listed companies than are already audit clients. Smaller independent location advisers have benefited from this restriction.

“To some extent, we have been beneficiaries of this [regulation],” says Mr Sables. “We can work with the big four [accountancy firms] to provide location advice to their clients.”

Another location consultant says that the big accountancy firms are losing interest in location advice because the fees it generates are relatively small compared with other advisory or auditing services.

Unquantified volume

Quantifying how big a business FDI consultancy is seems challenging. There are no available statistics based on the volume or revenue generated for advisers or banks, and professionals seem to shy away from placing a number on how beneficial their work is to the whole company. One of the bankers interviewed categorically refused to discuss it, and others argued that it is difficult to quantify how much revenue an ongoing relationship with a new subsidiary generates.

This inability to quantify hampers the understanding of how important those services are for the whole organisation and, therefore, under how much pressure these professionals find themselves to generate business. If the pressure on investment bankers to close merger and acquisition deals is known, it is less clear if there is any similar weight on their location adviser and banker counterparts.

Project distinction

There seems to be a distinction between expansion through acquisitions and expansion through green-field projects, however, on the receiving end of the advisory service.

“A start-up or a joint venture project requires a much longer period, both in the study and in the execution phases,” says Mr Majocchi. “When a company invests by building something new, it is much more difficult [to be hoodwinked]. The investment can always go wrong, but not for those reasons. In an acquisition, the speed of the transaction and a rival bid, true or suspected, rush the buyer or investor into the deal. When you build something new, there isn’t competition, and prolonging the decision by days does not make a difference as it could do with an acquisition.”

Financiers and advisers highlight that the very nature of their relationship with companies is based on understanding the client’s needs before suggesting a location, a product or a strategy. It probably is the long-term prospect of the relationship and the need for mutual trust that make good advisers and bankers focus on nourishing a healthy relationship with their clients, and keeping the business going. As Mr Butler puts it: “We don’t hard sell; there is enough going on to keep us occupied.”

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