The ins and outs of mergers and acquisitions

14 Sep 2018

M&As are currently booming. Deals worth a total of $3.6 trillion were agreed in 2016 – the second highest volume since the global financial crisis (source: Barclays).  Why?  Despite some uncertainties the economic fundamentals are strong;  investors/buyers are purchasing rival or complimentary businesses in order to accelerate otherwise slow organic growth. 

Sensitivity over client data can inhibit deals; smaller businesses can feel threatened and at risk if they open up sensitive client data to larger competitors, meaning they lose the chance to take advantage of what might be a great offer. So, how do they navigate through the minefield?

Buyers will always want to carry out “diligence” on a target, a process by which legal and financial records are analysed by the buyers’ lawyers and accountants. The process is designed to confirm whether or not the target is worth the price offered by the buyer.  The diligence questions cover all aspects of the business including customers, suppliers, logistics, staff and risk.  If the price is reduced or if the buyer simply decides to withdraw, the target will have revealed sensitive information, but has no deal.

There are some serious threats to consider.

In terms of deals commenced against deals completed, the overall chance of  success is  just 50% (source: Investopedia )   The prospects increase rapidly as the deal continues and both parties are more committed - emotionally and financially (fees/cost).  However, until the deal is finally signed off buyers can walk away with no obligation. 

Key steps sellers can take:

1. Non Disclosure

The first line of protection is a non disclosure agreement, to ensure that customers or employees are not unsettled.  These are negotiated documents, but should be relatively standard, although it is sometimes possible to negotiate a costs indemnity if the buyer pulls out without good reason. This would mean the seller loses the deal but at least gets some or all of their professional costs paid.

If the seller’s position is strong enough, they may be able to get the buyer to pay a returnable or non returnable deposit.

2. What sort of information is it legitimate to withhold during the negotiations?

Whilst NDAs say that buyers can only use information on the target to assess the deal, it is often very difficult to prove they have done otherwise.  If the buyers subsequently change their pricing or approach to key customers, was that as a result of the information they obtained, or their own strategy?   There are various techniques deployed to deal with this:

  • Withhold or "redact” (blackline or cross through) key information - prices, contract duration - even customer names (this information is then revealed near to completion);
  • Restrict access to information to the buyer’s advisers (accountants/lawyers) early in the process, so they can see the business is credible and report to their clients - without giving the buyer’s internal team direct access;
  • Include a non staff “poaching” obligation in the NDA - it is harder to make these stick with the amount of social media/LinkedIn information now available, but it can be done.

3. Can you resist too much?

Whilst important to push for an early “indicative offer” it can be hard to tell a buyer’s real reasons for an approach.  You do not want to reject potentially attractive deals before seeing if they are genuine, but whenever unsure,  limit the information to high level financial information (updating published accounts information) and insist the buyer signs an NDA and makes an offer in principle before going further (“heads of terms” or “letter of intent” - a short summary of the price and deal parameters).

There is a level of risk which is worth a target taking to unearth a fantastic offer. Professional advisers - corporate finance “deal” advisers and corporate lawyers - can act as “gatekeepers”, helping to appropriately limit initial information and providing a level of protection to sellers.

4. Can you create a competitive process/increase cost for buyer of withdrawal?

If your business or sector is “hot” and the value is high enough, consider getting advisers to run a competitive process. The benefit of this is that it draws buyers into the deal process, spending money on advisers whilst maintaining a competitive tension.  Often the seller provides the buyer with a basic due diligence report (on itself), (vendor or seller diligence), which increases the control the seller has on information provided. Buyers are asked to give their best and final offers and sometimes there is a two-stage process.  Buyers are even asked to confirm their initial offer after diligence returning a seller drafted acquisition agreement (normally buyer drafts).  The competitive process is involved and more expensive and is generally used in larger deals, but can work well.

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