IFLR European M&A Forum highlights

Author: | Published: 30 Sep 2015
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On September 29, IFLR held its inaugural European M&A Forum in London. Here are the key takeaways from the day's panels

How to negotiate private M&A transactions

  • European banks have increasingly been divesting non-core businesses as a result of capital requirements
  • Because of this there has been an increased level of risk awareness of buyers. Bidders are aware that many bank assets could be toxic. This is leading to lengthier negotiations
  • The volatility of the commodity market makes M&A very difficult in the sector. There is a delta between sellers' expectations and buyers' aspirations
  • There has been a rise in dual tracks, but speakers warned that the main challenge is to maintain competitive tension in the process
  • To do this, sellers need an enthusiastic management team who are genuinely open to both options, in order to convince bidders that there is a real and credible alternative to a buyout
  • The use of warranty and indemnity insurance is on the rise but it remains to be seen whether they offer true protection until workout situations test any claims that are made

Acquisition finance: analysis of options

  • More companies will invest in both bonds and loans for their acquisition financing next year
  • Covenant loose and covenant lite are both options for those raising financings. Floating rate notes are less popular but still used
  • The test ahead next year will be whether the high yield market becomes more flexible in terms of the controls they will relinquish to take flow back from loan market. There has already been some relaxation around non-call provisions
  • There is no consistency around intercreditors and structures of deal. It is unclear how those differing structures will pan out in event of a down turn
  • Alternative lenders are on the rise. But panellists criticised those that are occasionally willing to sacrifice financial, legal and commercial due diligence in the pursuit of mandates

How alternative legal providers can play a bigger role in large-scale M&A

  • An increasing number of clients are looking at how to combine alternative service providers (ASP) with law firms in getting a deal done
  • But there will always be a place for corporate lawyers, and panellists agreed they could not envisage a time when ASPs conduct all M&A activity
  • ASPs are often be most useful on due diligence; when using law firms for this, clients often agree to fixed fees, which mean they always overrun
  • ASPs can also be very effective in helping with post-deal integration, which can be harder than executing the deal itself
  • They are less likely to become involved in SPAs and other transaction documentation
  • To best manage the dynamic between a law firm and ASP working for the same client, the general counsel must lead the deal, and it must be clear which sections of the deal are run by which advisor

Using legal techniques to narrow the valuation gap

  • Using an earnout clause to ensure a seller benefits from any short-term upside after the sale can be problematic – they are difficult to draft, and to be effective the seller must trust their counterparty
  • Other practical issues are: how regulate the conduct of the business; how to separate the impact of macroeconomic changes; and what level of support the seller needs
  • When used in relation to asset for which you don't know its value, the earnout can be scheduled against different levels of performance. In that situation, the accuracy of the underlying information is critical
  • Tax structuring is key for any bridge provision, to make sure it is taxed as intended
  • For defined contingencies, rather than a bridge it can be easier to split that amount down the middle. But buyers can be reluctant to pay that extra amount if they think it should be borne by the seller
  • These techniques are usually only available in private M&A, but contingent value rights can be structured to create the same effect in a public deal

FOCUS: Shareholder activism

  • Activism is a growing theme across equity markets. With time, more capital and a broad remit they can target iconic companies
  • All activists have been painted with a dark brush in the past as destructive, but for them it's about pushing management to make changes and unlocking value
  • It's unclear whether there is evidence that short-term shareholder engagement is any worse for a company than long-term
  • Activists are now borrowing tactics from the US and bringing them to Europe
  • Institutional investors pay little attention to a company's rating on the corporate governance index
  • In Europe there's a cultural expectation of consultations between investors and management before things get hostile. In the US, sometimes companies won't even know they're being targeted until there is a filing with the SEC
  • The only real defence strategy against activists is to always be prepared. Communication is key

Transatlantic deal flows: opportunities for growth

  • Asian conglomerates are entering the US M&A space, increasing competitiveness
  • Increased M&A activity is only natural as companies, most notably tech companies, go global. But more traditional telecoms deals still tend to be domestic
  • Berlin is becoming hotspot for international investments. Big industrial sales in next 12 months will see gap narrowing between UK and Germany and destination of choice
  • Starting to see more auction share purchase agreements and reverse break fees in deals as management terms improve

FOCUS: Regulatory scrutiny of European M&A

  • Engaging with regulators early on (if possible) can really help. They have particular difficulty understanding economic interests
  • High-profile insider trading cases have heightened banks' awareness of how important compliance is
  • The new sponsor regime is 100% where investment banks are under the spotlight, causing them to think twice as to whether they wish to participate
  • Bankers are becoming compliance officers, which distracts from their job – but this is their job now
  • Recordkeeping is the buzzword of the sponsor regime – regulators say you must be able to prove why decisions were made, why insider information has been declared public and who is responsible for what
  • Banks are getting everything pre-vetted by clients, making sure whoever is in possession of insider information knows they are and when the information will be made public
  • The Senior Managers Regime is being taken very seriously. One of the key worries is the reversal of the burden of proof