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.
Patrick O’Shea and Gar Smyth 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 goes without saying that the most important warranties in any transaction are fundamental warranties that relate to title and capacity. Beyond these, the value of a warranty or an indemnity will depend on the nature of the target business and what stage of its life cycle it is in. While certain warranties tend to feature in most warranty schedules, we place a lot of value on general compliance and accounting warranties as most issues that arise result from some failure in these areas. Acquirers in different industries will place increased emphasis on specific warranties applicable to those industries and it is important to understand the nuances of the target’s industry when advising your client.
Whether representing a buyer or a seller, WCC start with a broadly similar warranty schedule albeit with different motivations. When representing a buyer, we will invariably add to the warranty schedule and breadth of certain warranties as issues arise during due diligence. When representing a seller in a competitive process, we tend to introduce a comprehensive warranty schedule to our client at the initial stages of the transaction to kick start a thorough disclosure process. We believe the benefits of doing this are numerous in that; (1) introducing a comprehensive warranty schedule facilitates early problem solving and reduces time spent negotiating warranties that are fair and the sellers are comfortable with; (2) it avoids the seller deal team being overwhelmed during a transaction while also tasked with running the business and; (3) it assists WCC to identify any issues that need to be resolved prior to sale or disclosed to the buyer. Our advice is to address any issues as early as possible in the process to avoid any price-chipping further down the process when a seller usually has less leverage.
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?
Mezzanine finance can be prohibitively expensive, so it is usually only considered when bank debt isn’t available, or a borrower doesn’t wish to secure tangible collateral. However, mezzanine finance is usually cheaper than raising equity as owners are required to give up less. For these reasons, we often see mezzanine finance complement other forms of financing such as bank debt and private placements when acquiring a business.
Since the onset of Covid, much of the M&A activity to date is being conducted by private equity funds or private equity-backed acquirers that typically finance their deals through debt and equity. There has also been increased activity in restructurings and acquisition of distressed assets, which are mostly financed through a mixture of private investment and debt as well as further asset-backed portfolio sales, financed from international banks and hedge funds.
Asset finance is the most common form of financing of larger deals in Ireland.
When structuring asset financing into a transaction, there are several important legal considerations that need to be considered. Naturally, understanding complex financial covenants and the borrower’s ability to meet those covenants is paramount. Where an acquisition is being part financed by debt and the assets of the target are used as collateral for the leveraged buyout, the target company will be required to approve the financial assistance of acquiring its own shares. This will require the directors of the target to provide a declaration as to the solvency of the target company for the succeeding 12 months; understanding the personal implications of making such a declaration and identifying the correct directors to make that declaration (i.e. existing directors, incoming directors appointed by the acquirer or a mixture of both) are important factors in any such transaction.
Is private equity widely available in your jurisdiction? What are the advantages and drawbacks of financing a deal using equity, in your experience?
There are several domestic private equity firms in the mid-market in Ireland. However, difficulties accessing debt financing means there are significant opportunities for international firms.
Due to a combination of macro- and micro-economic trends, the private equity sector is set for a significant increase in activity in Ireland.
After the banking crisis in 2008, banks and traditional sources of capital were risk-averse, although they were becoming less so in recent years. Private equity grew in prominence to fill the gap in funding during that time, with PE buyouts accounting for about 20% of M&A activity in Ireland in 2019. A side-effect of the Covid-19 pandemic has been that major domestic Irish banks have suffered losses again for the first time since emerging from the previous recession and look set to become more riskaverse again; this means the role of private equity in backing businesses is likely to increase.
In addition, unprecedented markets coupled with unpredictable events such as Brexit are likely to increase volatility and provide an opportunistic landscape for domestic and international PE funds in Ireland over the next couple of years.
Advantages of financing a deal using equity:
• Equity investor can bring a wealth of experience and commerciality to the business
• Strong potential for sellers to benefit from increased valuation where equity investor is a PE firm
• Target will have access to a healthy balance sheet and follow up funding.
• It requires control of a business to be shared. While this has its advantages, it is important to consider who you partner with
• Can be more expensive than debt because of minimum returns equity investor will seek.
Top Tips – For A Watertight Contract
• A comprehensive, detailed and non-generic Term Sheet will provide a roadmap for the parties to negotiate and agree the final contract and reduce the possibility for ambiguity on agreed terms.
• Clarity and certainty of language regarding closing conditions is critical to any deal. As we have seen with the Covid pandemic, circumstances can change drastically and very quickly so it is imperative that a counterparty cannot rely on ambiguous language in a closing condition to avoid completing.
• Simplicity of language and appended worked examples where the contract contains complex commercial provisions, such as earn-out consideration mechanics.
• Obtaining tax advice at an early stage (pre-Term Sheet) is key as it allows the parties to agree and implement any required tax structuring steps from the outset and build the necessary provisions into the agreements; this is more difficult to introduce at a later stage in a transaction.