Last week I introduced the owners of aHungarian company to the owners of a Croatian company that they wereconsidering acquiring. They talked for several hours about theirrespective industries in each country, and the Hungarian company wasshocked to learn about the muscularity of some of its Croatiancompetitors. In fact, the largest Croatian company in that particularsector was several multiples the size of the largest Hungariancompany. So the tables were turned: the Hungarian company that wasconsidering entering Croatia all of a sudden felt vulnerable: what ifthe largest Croatian company decided to enter the Hungarian market?

Many of us in Central Europe live insuch sheltered environments, seldom venturing away from our hometurf, other than perhaps as occasional tourists. This is especiallytrue in the business context: most companies never venture outsidetheir home markets, except perhaps to make a few opportunistic sales.There are at least three reasons why venturing abroad should beconsidered seriously by most financially healthy companies:

• First, and perhaps most obviously, it is a potential source of growth. Home markets eventually become saturated. Chances are that if you have a product or service that is competitive at home, there is a real chance that it may also be competitive in other countries.

• Second, it may be an important way to diversify risk. My firm, Euro-Phoenix, for example, began a regional diversification strategy about seven years ago, and over the past three years we have averaged less than 20% of our revenues in our home market. This was quite fortunate, given the economic difficulties faced by the Hungarian economy.

• Third, going abroad is an excellent defensive move as well. Better to meet your future competitors on their turf, learn from them, and learn how to compete with them, before they enter your home market. In this era of globalization, it is only a matter of time before companies from neighbouring countries and beyond will enter your home market. There is no better way to prepare for competition intensifying on your home turf than learning to be competitive on their turf.

Venturing outside your borders is notwithout hazards. Let me turn the tables with a cautionary tale ofexpecting too much from foreign expansion. We recently represented aninvestor who was considering purchasing an internet company. Duringthe due diligence, the sellers gave us a business plan that reflectedthat this internet company, which had never ventured outside its ownborders, was planning to expand into five neighbouring countries inthe next three years. The expected valuation of the sellers wasgreatly inflated, reflecting the expectations of this internationalgrowth.

Naturally, there was great trepidationon the part of our client as to what value to ascribe to thisinternational expansion. There are great risks to internationalexpansion, which include:

(a) Cultural differences, which makeit easy to misread market trends, consumer behaviour and ways ofdoing business. Linguistic barriers are generally predictable; it isthe cultural differences that tend to create the surprises.

(b) Corporate governance must evolvegreatly when progressing from a single office/single countryoperation to a multi-office/multi-country operation. Failure to havethe proper systems in place will almost certainly result in failure.

(c) Human resource risks – willlocal staff be hired that is capable of delivering the growthexpectations?

There is many a slip between cup andlip, especially between theory and execution. Our client did not buythe story of foreign expansion, nor did they buy the internetcompany. What was lacking was a track record in foreign expansion.Had the target internet company at least developed somewhat of atrack record in foreign expansion, whether organic or viaacquisition, the story would have been more credible, and the companywould have had a higher projected growth rate and thereforevaluation.

The analogies clearly demonstrate thatit is worth developing beyond one’s borders, but in a way that isvery conscious of developing the necessary skills, local knowledge,and risk management. In certain cases, organic growth may provide theoptimal risk/cost/benefit ratio, and in others, acquisition.