Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the
conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
John R. Colter-Carswell discussed The Art of Deal Making: Using External Expertise Effectively as part of the M&A chapter.
Which warranties and indemnities are most valuable as part of an M&A contract in your experience? Do you have a process that helps to formulate an effective schedule for either buy or sell-side clients?
It all depends on how the M&A transaction is structured, but in Mexico the most common warranties are (i) mortgage and (ii) pledge type of warranties. The mortgage warranties are secured by real estate, a piece of land, buildings etc, and the pledge warranties can be secured by share certificates, machinery and equipment and similar assets.
At the most basic level, in Mexico there is normally an intent to negotiate such indemnification terms on the contract to provide the parties to a transaction with a streamlined means of seeking damages for issues that arise after closing. Generally, indemnification provisions address damages arising from breaches of representations, warranties and covenants. However, the buyer will often want to expand the scope of its indemnification protection to address losses that could arise from certain liabilities identified during the negotiation or the due diligence process, which would not otherwise be covered under customary indemnification for breaches of the representation and warranties.
In Mexico most M&A transactions are in the mid-market. To structure this kind of transaction it is customary to have what is called a Practice Management. They will be in charge of all the parties involved including M&A advisors, accountants, finance experts, attorneys and financial institution executives among others. These advisors will follow through all the processes, starting with due diligence and finally executing the agreements.
What methods of financing a deal are most common in your jurisdiction, for instance private placements, asset finance, mezzanine debt? What advice can you provide around structuring debt into a transaction?
The most common kind of financing a deal in our jurisdiction is through a private placement. Funding an M&A though mezzanine debt is not common; the rules are not particularly clear to operate such a deal, but some of these transactions are secured though a foreign financial institutions or venture capitalists.
In Mexico to have access to financing through traditional financial institutions – and for regulatory procedures – the client must have a good credit history, lines of credit and a proven source of repayment. There are strict mandatory requirements, also normally requiring warranties such as mortgage and pledge warranties to be registered and secured in favour of the financial institution during the time of the financing.
Real estate projects such as mixed-use buildings or industrial parks may have better conditions for funding because there are clear rules that involve trust agreements and fiscal facilities. Regarding asset finance, it’s often difficult to raise funds for an industrial project, but for real estate projects this can be a good option.
With various alternatives available to finance an M&A transaction, the challenging issue is getting the appropriate mix of financing that offers the lowest cost of capital. Most important is how optimal the financing is and how well it aligns with the goals and nature of the business deal. It’s vital to plan the acquisition financing structure to fit the actual circumstance of the project to be structured.
Is private equity widely available in your jurisdiction? What are the advantages and drawbacks of financing a deal using equity, in your experience?
Private equity is available in our jurisdiction. This can be obtained through foreign financial institutions or venture capital institutions. Most have representative offices in Mexico providing adequate financial services to a wide variety of industries. Such private equity groups are used widely for group funds and investment companies that provide capital on a negotiated basis. This capital is primarily in the form of equity, likewise stock or equity certificates.
These private equity groups are usually managed by general partners with well-established corporate finance backgrounds and successful investment track records. Their partners are high-net-worth individuals, endowment and pension funds. They look for industry expertise, the amount already invested, transaction structure preference and return on expectations. But as stated, these transactions are not common because the complexity of the financial structures and terms and conditions.
Top Tips – For A Watertight Contract
• One of the principal steps during the process of structuring an M&A deal is to review the fiscal impact according to the type transaction, such as if the agreement is going to be through a (i) Shares and/or Equity Purchase, (ii) Assets Purchase, (iii) IT Purchase, (iv) Real Estate Purchase, among others or a combination of all of them.
• Conducting strategic due diligence across borders, managing cultural differences, integration across borders and establishing a clear organisational structure and lines of responsibility are difficult but critical to the success M&A deals.
• Comply with corporate organisational laws and corporate governance.
• Liability for layoffs without just cause, among others kind of liabilities.
• Non-compete clauses that may not be enforceable, this is very common in our jurisdiction according to our Constitutional Law.