IFLR European M&A Forum 2019: key takeaways

Author: Lizzie Meager, Jimmie Franklin | Published: 18 Sep 2019
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Outlook M&A: assessing key market trends

There are pros and cons in what is on the M&A horizon. While there is confidence in the sector index, geopolitical and macroeconomic factors at bay in Europe also remain a significant factor

EMEA is seen as being in a lower mode of activity in comparison to other parts of the world where there is more engagement in the market

Retail is generally performing weakly, while there is more positivity about the technology market, which panellists expect a continuation of growth in

The prospect of a no-deal Brexit hangs low, and continued uncertainty about what will actually happen is inevitably plaguing the market. One panellist described it as "interesting sphere to watch"

When a merger or an acquisition is made, integration of staff is a key challenge

Biggest risk to foreign direct investment (FDI) are isolationist policies, with fears about the way that the US is going and speculation this will mean fewer transactions

Emerging markets are viewed as promising for FDI engagement, though dependent on burdensome regulations. China is particularly exciting

In a poll of attendees, antitrust and regulatory conditions were regarded as the hardest aspect to negotiate in M&A, while earnouts came last.

Executing an effective due diligence process: what to look for

"To me, the due diligence process is the beginning of the actual deal. Not just a process of ticking a box": ultimately, compliance and regulatory issues are key to any deal

Due to disclosure issues, those participating in M&A should expect potential buyers to look at everything possible

The panel feels that M&A teams should include operational staff and not just be led by the legal teams, who can risk becoming the "glue" in a transition

While there is some interaction, artificial intelligence (AI) is viewed as a faraway prospect for M&A legal. Some firms are beginning to use it

Site visits are essential when engaging with emerging markets. Interviews with management are important too – and don’t use external advisers for this part of the process

GDPR is becoming a huge part of the due diligence process, with teams having to ensure that they get it right

Redacted documents were urged by panellists as a way to prevent disclosing personal data during the merger process

ESG is playing a more important role in due diligence, and funders are becoming very concerned about it.

M&A opportunities from spin-offs, split-offs and carve-outs

Spinoffs have now shifted from simply being used in public transactions to private transactions as well

The objective of transactions like this has evolved over time – geography often plays a key role

Shareholder activism plays a significant role in the kinds of deals being undertaken. This has led to demergers in some cases

Stakeholders need to look at the capital and debt structure before the start of the process, as it is long and costly. They also said that trade-off decisions need to be made carefully as they can upset shareholders

Companies need to take into account how much of a role the parent company will play going forward, when beginning the process and shaping a business plan

It is very important that what you agree to spin off is a standalone business due to the antitrust issues that can be involved

When spinning off, panellists discussed the role of IP licences and the need for parent companies to ensure quality controls are undertaken.

Merger controls

Brexit is a huge risk factor due to the uncertainty and issues that a swift, non-transitional exit could mean for companies

Companies could conceivably be involved in an EU-wide merger just before a no-deal Brexit, which has the potential for regulatory confusion if agreements are put in place

Competition regulators will continue to work together for successful remedies after Brexit. The process will be different, but in terms of substance, there will still be similar outcomes

Early on in the process is seen as when mistakes are most likely to happen. There is always a risk of stakeholders jumping the gun

Providing excessive information can be a significant burden in the merger control process. Companies are having to provide more and more documents. Stakeholders should not shy away from using technology such as databases to maintain checks on these documents

The process can involve a "tough guy" approach from regulators. However, enforcement action generally only takes place when the approach has been wrong from the outset

Open and honest conversations with the regulators is also essential. This can lead to more progress and better outcomes than "keeping your head down, and hoping for the best".

What can we gain from digitalisation?

The days when you had to change the way you work to embrace the benefits of AI have gone – lawyers don’t have to think that differently anymore, and there’s no need to learn to code

You used to have to train the technology too. That has changed – but it’s important not to remove the lawyer from the process either

Technology helps lawyers do the best possible job for clients by allowing them to focus on what’s most important in a transaction rather than getting bogged down by documents

Technology, particularly AI, can also help the issue of burnout which is a huge area of focus for bar and law societies worldwide

Technology can also be used for non-legal due diligence, particularly around GDPR and broader data privacy compliance.

Shareholder activism

Activism has been used incredibly effectively to take on arms and tobacco companies

The practice is continuing to grow in popularity across Europe

In the US it’s common for activists to bump into each other in the same trades – often as many as three activists will be going for same company, often with the same demands

If the returns are there, no company is safe from the threat of activists – but they should not be viewed as negative

Index funds outstripped active management on the S&P500 in May this year for the first time ever. As it grows there are fewer and fewer active managers holding management to account

Activists see opportunities to put pressure on bidders to improve the terms of their offer – a strategy an increasing number of activists are deploying – but so are more traditional types of investors, too

Avoiding activism is all about communicating with shareholders. If your existing shareholder base is happy, it’s less likely for activists to be able to take hold. They make the most of existing dissent

This is shifting things – for instance, more companies have capital markets days now than ever before, which can only be positive

Activists often spend two to three years studying a company before going in so their understanding is far deeper than a sellside analyst – they should not be underestimated or dismissed as pariahs.

W&I insurance: an update

There’s been an influx of specialist tax liability underwriters and capacity in the past year

Deals are getting bigger – many are now over the £1 billion mark

30-35% of EMEA mid-market M&A parties buy a W&I policy, which represents huge growth – particularly in private equity. It’s now becoming a key requirement in private equity, with those that don’t buy one required to justify why not – so it’s often easier to just get a policy

This trend is changing the way due diligence works

Seller-buyer flips are growing in popularity. W&I brings it to the table at early stages – frustrating for insurance providers, but representative of the broader shift

The UK market sees huge pressure on W&I rates, largely being driven by new entrants. This can be negative for the market overall but is stabilising now. This has an impact on the breadth of cover

Claims are being paid, and are becoming more severe – which is proof the product does work

The highest proportion of claims relate to financial statements and tax. The majority of tax notifications in Europe are related to VAT

84% of claims in past 10 years have resulted in payment

European W&I is seeing US-style enhancements: indemnity basis of cover, materiality scrape, nil de minimis, and no warranty spreadsheets. Still a limited market in Europe doing this type of policy, but they are out there

Transfer pricing and secondary tax liabilities aren’t covered by W&I.

Learning the hard way – common pitfalls to avoid

Very few firms have a truly global presence so it’s important to establish this at the beginning

Some firms are very good at project management but oftentimes professional project management support is required – and this is often key to in-house lawyers’ decision in appointing counsel

Other things in-house look for from law firms: efficiency, experience in market, their use of technology, diversity and cultural fit – all of these are as important as fees. The team working on the transaction itself must be diverse too

Some firms are losing work over the diversity point – which has nothing to do with how good they are

Human mistakes can happen – important not to relax too much around the other party nor make assumptions. Unexpected things can always happen

Make sure you have a leak protocol and that everyone in the company is aware of it – including investor relations, communications teams in particular

Sometimes we’ll have external consultant scrub data room, impartial set of eyes looking for gaps. Generally data room makes disposals incredibly unappealing.