The best contractual mechanisms for European M&A today

Author: Michael Washburn | Published: 17 Oct 2012
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Social turmoil and regulatory forces have slowed growth in European M&A. In this environment, corporate lawyers recommend two contractual mechanisms to remove uncertainty in M&A transactions.

Approximately 38% of global deal value in the first three quarters of 2012 involved a European target. But lack of stability in the region has capped growth in Europe's M&A sector.

Speaking at an October 3 conference in the New York offices of Dechert, the firm's London-based partner Jonathan Angell said the political response to the eurozone crisis had damaged investors' confidence.

"The EU authorities have applied a short-term political band-aid which hasn’t resolved the underlying issues, so the fears keep resurfacing, as tensions shift from Greece to Spain and elsewhere," he said.

London partner Douglas Getter said the many variations of law at the EU, national, state and provincial level further deterred potential investors.

Angell also noted the importance of the revised UK Takeover Code’s stipulation that buyers must proceed with an offer no more than 28 days after publicly announcing it. This is off-putting to US corporate executives considering an acquisition in a volatile country where target valuations may change by the second.

The EU’s Business Transfers Directive, which safeguards the employment contracts of a company changing hands, also raises issues that buyers more accustomed to US M&A are ill-equipped to handle, Angell said.

The work-arounds

Both lawyers recommended using a locked box to fix a purchase price at an early stage, shortly after due diligence on the target had been performed. This can benefit both buyers and sellers. But Angell said sellers have grown particularly fond of it.

“In the last 24 months, the locked box has been used in almost half of the M&A deals, and more often than completion accounts," he said. "It gives the seller greater certainty over the price they are going to get."

There is also growing demand for fixed exchange rates down the line — and here, the dollar rules.

Federico Pappalardo, a partner in the firm’s Munich office said where a price is determined in euros, sellers are concerned about events such as Germany leaving the eurozone.

“Since early this year, we have seen sellers requiring a purchase price to be determined in dollars, at the exchange rate applicable at the time of signing if an euro event occurs,” he said.

Market opportunities

Getter estimated that there are 16 or 17 funds looking to raise over $10 billion for European distressed debt acquisitions.

Germany stands out as an economic powerhouse and driving force behind M&A, Pappalardo said.

“If you look at the landscape, Germany has remained stable," he said. "Its economy is still growing and accounts for approximately 35% of Europe’s GDP."

"The first half of 2012 has seen an increase compared to 2011, which is amazing if you look at other markets," he said.

There have been some high-profile distressed deals, in the traditional industrial sector. And US investors regard Germany as offering targets with solid and healthy balance sheets as well as cash flows in a politically and socially stable environment, Pappalardo said.

See also:

'Greek PE deal overcomes eurozone fears' http://www.iflr.com/Article/3104819/Greek-PE-deal-overcomes-eurozone-fears.html?edit=true