IFLR European M&A forum 2018: key takeaways

Author: Amélie Labbé | Published: 26 Sep 2018
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M&A ForumOutlook on M&A – emerging trends, highlights and challenges

  • Conflicting trends of policy uncertainty/rise in oil prices/protectionism and businesses’ need for growth and scale – no industry is immune from this;
  • Political uncertainty hasn’t really had a negative effect on M&A. Low interest rates combined with the need for private equity to spend its capital mean that it is a sellers’ market at the moment;  
  • When it comes to buyer profiles, corporates have an advantage over private equity houses: they can have better synergies with acquired businesses. But, private equity has networks of contacts and sector knowledge of strategics. Where private equity makes the most sense is enabling corporates who are not asset heavy to acquire an asset heavy business – the fund gets a stable stream of cash flows and the corporate can enjoy a better market position;
  • US opportunities have become a lot more attractive because of the recent tax overhaul  – this has spurred greater activity for US corporates to restructure portfolios as they sell non-core assets;
  • Brexit: how will the Prospectus Regulation look before and after March 2019, which competition regime will apply? In practice, everyone is preparing for a no-deal Brexit.

Effects of technology convergence on M&A transactions

  • The speed of technology disruption has made it important for businesses to ensure they are where they should be. But this comes at a price: while businesses recognise it’s important to have the right technology, the size of the bet is huge and costly;
  • In the financial sector, investing in so-called neo-banks is fast: the due diligence is very focused, there isn’t a lot to audit and these types of companies aren’t heavily regulated either. Ultimately, if the buyer can’t make a quick call, they’re out of the loop;
  • Using technology in the M&A process: do you pay someone to review 100s of contracts or do you use much more straightforward technology/an automated process? You still need a human to look at contracts and interpret them: one speaker noted that some of their clients don’t need broadening of due diligence, they want very selective risk assessments;
  • Partnering without integrating probably works best in most sectors: some of the newer fintechs have models of working that are completely different.

Merger controls: key planning considerations

  • Most EU regulators have formalised regulations and processes while the CMA’s relationship with businesses is less formalised/formal, more based on information exchange, intelligence and negotiation;
  • The CMA reviews 200 deals a year, with roughly 50 subject to remedies. In comparison, the German regulator reviews 1000+ mergers a year and not many raise competition issues.
  • Big data, conglomerate mergers, political landscape, national champions - these are all considerations that are currently influencing merger review. In some cases, a political case for clearance runs alongside an analysis of the substance;
  • Post-Brexit, there is an assumption that the CMA will take over from the Commission, and the UK watchdog has increased its budget in anticipation of a 50% growth in its merger workload, especially when it comes to large, complex and cross-border cases;
  • Will there be transitional arrangements? Who takes control of in-flight cases? Will there be an enforcement gap or unnecessary duplication between regulators? All these questions remain unanswered as of yet;
  • When it comes to merger control, parties need to ask themselves how many different regulatory regimes they have to deal with, and consider domestic sensitivities and the fact that there is inter-agency cooperation (the EU Commission talks to the US DoJ and FTC for example).

Joint ventures: elements of success

  • JVs can be useful when a company is looking to expand in a market but doesn’t feel comfortable going there via a method of full inorganic growth;
  • Large companies use JVs with peers to share resources, understand a market or access a particular product/resource/technology/IP. This mitigates the risk of failure;
  • It’s important to think about your exit strategy: what are the objectives of the JV, what happens next? Sometimes a JV has a natural conclusion, sometimes something happens in a distressed scenario: it’s important to sit down at the senior level and discuss what happens and what success looks like.

M&A toolkit: maximising success, minimising pitfalls

  • First of all, it’s key to understand the objective of an M&A before doing a deal as this will help prepare the process and inform the due diligence;
  • On the sell-side, a few tips: prepare the due diligence process (NDAs, data room, site visits, restriction of share information, agreement on structure and contents); anticipate and understand (valuation issues, separation issues, tax, third party consents, clearances, tax)
  • For buyers: are there cross-selling opportunities; what’s the situation with talent acquisition, the cost structure, counterparties; involvement of external or internal shareholders; regulatory landscape; auction sale process or not?
  • When it comes to allocating responsibility, there are no hard and fast rules: a company’s external advisers can do the deal, but on the sell side, having the internal team involved helps a lot;
  • US buyers get to signing a lot quicker than EU buyers, as their appetite for risk and risk profile is influenced by the market they have grown up in. For example, MAC clauses are agreed between signing and closing.

M&A insurance solutions

  • Warranty and indemnity insurance isn’t used to cover identified risks, it’s focused on unknown risks;
  • Policy limitations include: what’s been already disclosed in the policy and share purchase agreement, fraud, anti-money laundering, cyber and the environment;
  • After the financial crisis, the main concern was: would the buyer be able to pay? In the past five or six years, the use of insurance has been driven by financial sponsors, sellers, funds, all of which are looking for a clean exit. Nearly 90% are buy-side policies, with more widespread use in North America and the UK;
  • Buyers need to consider: supplement warranty protection; differentiate a bid in a competitive process; protect management relationships; entry into unfamiliar jurisdictions; financial covenant strength of the seller.

Deal failures and completions – the in-house perspective

  • How does one define a successful/unsuccessful M&A transaction? Is there a universal view or does it depend on the type of M&A: no, this depends on the parties and the aim of the combination;
  • What makes a deal successful: the relationships between the combined businesses, the regulatory process, having a project manager can help, the costs of combining etc;
  • When an M&A fails, it’s for a variety of reasons: management, the people aspect, management isn’t integrated, clash of culture, transition not managed properly;
  • In-house legal team vs external advisors/law firm panels: they work efficiently when responsibilities are clearly allocated. External counsel does the groundwork so maintaining a good relationship is key.