M&A Advisory: assisting, negotiating, leading (part 2)
To nobody’s surprise advisors normally compete with each other – so there is reason to be happy about the exceptions. In part 1 of this article we mentioned a number of reasons to let the M&A advisor take the lead on transaction related negotiations and not misunderstand that M&A is all about introductions (I wish it was, at times).
We now attempt to broaden this view and hence forward favorize the term „company sales“. Equity financing transactions seem similar enough in that – for the most part and ignoring a few complexities – in both cases shares are sold.
Company sales, and I may mot mention this for the first time, need not be compared to a private real estate transaction. Whereas in the case of the latter, the status quo is informative enough, it will not get you very far in the example of the former. Take the monthly economic evaluations („betriebswirtschaftliche Abrechnung/ BWA“), usually readily available, very common and popular in Germany. But how meaningful without previous year comparison and annual statements several periods into the past? I argue: not very. As if one took a one frame picture of a running horse on a race corse. It won’t tell you a lot about the performance in the race. And the finishing line is hopefully many years into the future for any constantly evolving company.
Conveying company performance and future potential is always tied to some effort. The buyer in turn needs his time too to assimilate information and make his board comprehend the deal overall. Which at the end of the day is the reason why transactions usually go through drawn out phases that imply an inceasing readiness of the parties to go through the deal together.
The M&A advisor may now be expected to juggle a number of balls, from the analisis of company performance over the illustration in pitch decks on to approaching investors, moderation of so called management presentation, thus the preparation of actual negotiations and thus support of actual, final negotiations. But how about the legal aspects of the transaction?
Say hello to the corporate lawyer. The type of consultant that likely co-exists in the greatest harmony with the corporate finance advisor.
Depending on where you come from you will have likely been exposed to the legal profession to a lesser or higher degree. Leave that image aside. Obviously lawyers in large firms are not pro bono driven, but with an experienced lawyer in your transaction team you gain access to one more personality helping you to weigh off the many decisions to be taken in the course of the transaction cycle.
Depending on how the transaction is structured, the preparations alone may be significantly more complex than aforementioned analysis and illustration of the target in its market. In the course of a vendor due diligence, thus a broader analysis of company by a third party on behalf of the seller, strengths and weaknesses would be screened proactively. Or the legal advisor focuses on the legal and contractual situation of a company in order to find remedies for potential weaknesses or to be at least aware of any issues when debating seller guaranties at a later point in time. Here the selling respectively financing team is indeed well advised to apply sound judgement to it’s own situation and consider such steps in preparation.
But both constellations appear rather as exceptions. Let us instead consider a transaction in which the seling shareholders manage the first steps independently and buyer/ investor start considering an LOI (thus „Letter of Intent“). What happens next?
In preparation for this phase in the project the M&A advisor most certainly already contacted potential M&A lawyers on behalf of the client. After signing a mandate agreement the seller may then recur to a dedicated „financial advisor“ as well as a „legal advisor“. Why the quotation marks? Because the competencies of these consultants usually complement each other and the two areas are tightly entwined. Actually I have difficulties to think of clause that is exclusively legally relevant and not by the same token also important economically. So in this context rights are probably almost always also values.
So now it’s high time to inform the lawyer about the current status of the discussions, comprehensively, even if a binding agreement has not been signed yet. But how comprehensively?
For one it is really also important for the lawyer to be aware of the business model and KPIs of the companny to be sold. After all these cornerstones are decisive for the SPA (Sales and Purchase Agreement).
Thereby – we mentioned a race course further up – not only the present is important, but always also the future. Some payments may be dependent on the future development of the conmpany to be sold („target“), and are therefor not certain. In order to limit uncertainties in the final contracts it is therefor advisable to share these data with the lawyers too.
In addition: the buyer is obviously represented by a whole range of parties as well, consisting of the advisors of the buyer, his shareholders and the managers directly or indirectly involved with the transaction. The business model of the buyer is furthermore important for the synergies expected from the transaction.
All these parameters and elements are not strictly related to clauses and penalties but must be understood by the lawyer involved just as well as by the M&A advisor and the rest of selling team in order to competently manage the overall situation.
Once the process moves to the draft of an LOI, purchase price expectations and certain other parameters will have been discussed as well. But only all aforementioned informations taken together allow the lawyer to draft the LOI not only as non binding formality but as the milestone within the transaction it needs to be in my view.
The timeframe after the LOI is often used to pursue two processes in parallel. For one one gets closely acquainted with the advisors of the buyer that take care of the (buyer) due diligence and on the other this time frame is also taken advantage of to prepare the final SPA. Always assuming that both sides have sufficient confidence in a positive outcome of the due diligence.
Which is to say that there is of course dependencies between the progress of the due diligence and the SPA. Nobody wants to incur conseiderable sunk costs, finding that considerable fees were invested in vain.
But the interdependencies between legal, financial and other themes stretches even further and requires experience from various areas, continuous internal discussions and debate.
The buyer may for instance judge that the Due Diligence showed that from his point of view a correction of the already agreed upon purchasing price or certain other clauses is required.
Furthermore the questions of the buyer in the DD process allow for conclusions on sensitivities. What is particularly important, what in turn is of lesser concern? This new assessment of the buyer can be valuable in subsequent negotiation rounds.
At the end of a phase in which an impressive amount of due diligence questions has been answered and more than one (or two) SAP versions exchanged, a contract with a long list of attachments lies on the table. This then usually provides for initial payments that may already be tied to conditions – or not tied to conditions at all, aforementioned subsequent payments that potentially vary depending on company performance and legal/ economic consequences of some events.
This overall package can only be judged as a whole, a separation of legal from economic questions is possible, but not meaningful (paraphrasing a proverb you may know).
Thus when the aforementoned article stressed the role of M&A advisor in the negotiations, we now emphasize again that transactions are team endeavors. It is, always, the expertise of several parties that leads to success. In this case the expertise of the corporate lawyer in conjunction with the M&A advisor.