Four years ago, Neovasc Inc., then known as Medical Ventures Corp., was a struggling medical-device incubator based in Vancouver.
“The company had some sales, but it wasn’t doing particularly well,” recalls chief executive officer Alexei Marko. Since 2001, it had gone through several incarnations and owners, but still wasn’t getting very far.
Mr. Marko, who joined the firm in 2005 after Medical Ventures acquired a small Canadian biotech firm he owned, was charged with improving the company’s financial situation, in collaboration with its chief financial officer. “We looked at technologies to bring into the company, either through [local] acquisition or internal development,” he recalls.
Then an investor he knew turned him on to two promising biotech firms based in Israel. Both had developed research-proven medical technologies in treating heart disease, but weren’t in a position to bring them to market. Mr. Marko’s company could handle the regulatory approvals and production through its manufacturing facility and commercialize the inventions.
So, in 2008, Mr. Marko’s company acquired both Israeli companies in a share transaction and changed its own name to Neovasc. Since then, the Vancouver-based company has been expanding its product offerings (mainly implantable heart valves and surgical tissue) and its customer base (it now sells globally).
The acquisitions “brought in new technologies, including our leading pipline product, a whole new platform to work on,” says Mr. Marko, whose 75-employee company generated sales of $5.25-million in 2011 and is on track to do more than $7-million this year.
They were “a catalyst that allowed us to play on the world stage,” he adds.
While foreign mergers and acquisitions may seem the stuff of larger companies, a growing number of smaller firms are opening their pocketbooks to pick up firms overseas, says business lawyer Philippe LeClerc, a Quebec City-based partner with McCarthy Tétrault LLP. “It may have been less common before, but more and more small Canadian firms will look to purchase foreign assets as they expand into foreign markets,” he says.
In Mr. LeClerc’s experience, foreign mergers and acquisitions are more common in certain industries. For instance, for biotech firms like Neovasc, it’s sometimes more cost-effective to acquire early-stage technologies belonging to another firm than to try to create something brand-new in-house. Instead of outsourcing technical services to foreign firms, as is common among many information technology companies, some choose to acquire whole foreign firms instead.
Across all industries, it can be advantageous for small Canadian businesses to purchase U.S. firms to “Americanize” their bids for lucrative contracts with U.S. government organizations, Mr. LeClerc adds.
There are other reasons a company might consider buying out a foreign firm. Last September, Victoria-based Angel Accessibility Solutions Ltd., which focuses on injury prevention in health care, became one of three owners of German manufacturer Beka-Hospitec.
For about five years, Angel had been distributing Beka’s bathtubs and patient lifts in Canada, says Angel president and CEO George Szwender. But last year, its supply began to dwindle as Beka struggled. On a business trip to Europe to meet with Beka management, he learned that the company was going under. So, along with a British distributor of Beka products and a Russian investor, a decision was made to jointly purchase the firm.
While a foreign acquisition hadn’t been a burning ambition for Mr. Szwender, it seemed like the smart way to go: Keeping Beka-Hospitec from disappearing meant his company maintained access to its products and could influence their design (Angel doesn’t manufacture the products it sells).
After about four months of “fandangling back and forth with the lawyers,” the deal was done. At the time it didn’t feel easy, but in hindsight, Mr. Szwender says they experienced no major speed bumps.. He figures that being in the right place at the right time, and knowing the company’s owner and management, ensured the process went smoothly.
While a foreign acquisition or merger can bring a wide range of benefits, there are also plenty of potential complications or obstacles. The biggest issues for small companies, says Mr. LeClerc, are a lack the resources, both in capital and personnel. “The time that the management team of a smaller company spends on an acquisition outside of Canada is time they won’t spend running the business here,” he notes.
While most deals can take weeks or months for the legal work to be completed, the “courtship” between a Canadian company and the company it wishes to purchase can take much longer.
It may not be something to rush, either, since relationships can determine whether a deal will be successful. If the culture of two organizations don’t gel, or the principals don’t share the same philosophy, a merger or acquisition can flop, Mr. LeClerc says. He has had clients return after deals have gone south to restructure their company yet again.
There can also be legal challenges associated with doing an international merger or acquisition, says Toronto lawyer Albert Luk of the business law firm Devry Smith Frank LLP. This is particularly true for Canadian firms considering a deal south of the border.
“The U.S. tends to be a jurisdiction of sue first, ask questions later,” says Mr. Luk. If a deal falls apart, U.S. companies can potentially sue for punitive damages. “There’s no cap to pain and suffering or punitive damages in the U.S.,” he warns.
At the opposite end of the spectrum are legal cultures where lawsuits are rarely considered. “In certain parts of the world, it’s seen as a loss of face to sue people, Mr. Luk says. “So, disputes are dealt with privately, rather than pursuing formal litigation.”
As well, , in some countries, legal contracts are considered “living documents,” and Canadian firms can be surprised to discover that a deal may not be really finished even after the papers have been signed, Mr. Luk says. There are also sticky issues connected to intellectual property laws, which don’t exist in every jurisdiction or are considered “suggestions, rather than prohibitions to intellectual property infringement,” he adds.
All of these legal differences make it critical for Canadian companies to lawyer up – both here and overseas. “You make sure you have very good local counsel that understands not only the legal system, but the customs and conventions on how disputes are settled,” he says.
Mr. Luk adds that Canadian firms also need good accounting advice, both in Canada and in the country where an acquisition is being considered, since accounting issues can be just as thorny. Canada doesn’t have tax treaties with every jurisdiction in the world, and in those that it does, some are more favourable than others. So, it’s important to have good accounting expertise to ensure you come out ahead with the government, too, he says.
Another potentially prickly accounting issue: passive income, such as royalties, made outside of Canada, for which Canadian companies may be penalized, Mr. Luk warns.
Practical challenges can also be significant. Mr. Marko found the process of acquiring the two Israeli companies reasonably smooth, but underestimated the growing pains afterward.
“For maybe about a year, we made some sincere and significant attempts to run separate offices,” he says. “But, we found that was fraught with difficulty.”
Travelling between the two countries was a long journey and communicating with technology was tricky, given a 10-hour time difference. Eventually, the company decided to close its Tel Aviv office and consolidated Neovasc’s operations in Vancouver.
Still, “it’s certainly mmore complex than acquiring another Vancouver company, but not in a burdensome way,” he says of making a foreign acquisition.
Even in Canada, many mergers and acquisitions aren’t successful, says Troy Fimrite, CEO of Victoria-based investment brokerage firm Viking Pacific Inc. And “when you cross a border, it reduces the chance of the deal happening,” he adds.
Still, foreign purchases can work out well if done with proper due diligence and expert advice, Mr. Luk says.
“These days, it’s not as simple as putting boots on the ground and saying, ‘We’re doing business here.’ Quite the opposite,” says Mr. Luk. “You might argue that the boots on the ground should be those of local lawyers, accountants and business advisers who know how to have a Canadian enter into the country successfully.
ADVICE FROM THE EXPERTS
- Find a good team of legal and accounting professionals in Canada and on the ground. Canadian legal and accounting firms often have foreign firms elsewhere that they partner with and can liaise with a foreign firm directly.
- It’s simpler to acquire a company in a country that has a tax treaty with Canada – and preferably, a favourable one.
- Ensure the cultures of both organizations are compatible.
- Get to know the business culture of the country you’re dealing with.
- Be cautious if using a foreign firm to acquire passive income. Canadian tax rules can penalize passive income acquired internationally.
- Consider currency risks and the political climate of the country.
- If you’re planning to maintain staff overseas, understand the labour laws. It may be more difficult to lay off staff than you expect.
- Brace yourself for growing pains that you may not be able to predict.
An earlier online version of this story incorrectly stated where Mr. LeClerc was based. This online version has been corrected.