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.
Rio Lassatrio 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?
In M&A transactions, there is a certain risk about some facts, matters or circumstances that would be uncovered once the transaction has been completed, which, if known from the beginning, would likely have caused the buyer/seller to reconsider the terms of the deal.
Warranties and indemnities (W&I) are designed to manage the risks associated with the transaction through a contractual framework. The W&Is are important because they cover specific and different matters. The more detailed the W&Is, the more accurate the risks could be mitigated. However, in practice, no matter how they are drafted, W&Is are only as good as the financial strength of the indemnitor. Hence, it is safe to minimise the risks and adjust the price and to realistically reflect the risks, rather than solely relying on W&Is that may have to be enforced through litigation.
In practice, these W&Is may be considered in drafting the definitive
a. assets (including title to assets and encumbrances), material contracts, licenses and the target company’s business operations
b. financial accounts and records
c. compliance with laws and regulations
d. employment matters (including any employment liabilities or
claims due to the transaction)
e. disputes/litigation matters
f. tax matters
g. intellectual property rights
h. accuracy of information
i. breach of any obligation of the seller
j. any failure to obtain, maintain or secure any necessary licenses including any necessary consents from, or to file necessary notifications to, any third parties (including any governmental authority)
k. Material adverse effect.
In a nutshell, to formulate an effective schedule in an M&A transaction one must understand the business objective for the transaction and be fully committed to abide with the agreed timeline. Preparing a detailed deal structure is also important, otherwise it would create uncertainty which could delay the transaction timeline.
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?
Payment by cash either generated through debt or equity is the most common method to finance M&A transaction in Indonesia.
Other forms of financing, such as asset finance, is also possible but the law requires it to be assessed by an independent assessor and to go through several procedures after the closing of a transaction, which makes it less popular compared to cash payment.
To structure debt into a transaction, it is critical to contain risk through risk assessment and careful structuring of loan documents. The risk assessment involves the prediction or estimation of cash flow returns of transaction and maintaining a balance of low debt-to-equity-ratio as this will show how the company’s financing is proportionately provided by debt and equity.
Careful structuring of loan documents plays an important part since the company (as borrower) needs to determine what kind of assets will be used as collateral for the debt. The company also needs to know in what condition or situation the loan documents can trigger an event of default and put them at risk, especially when using different types of assets as collaterals. If a guarantor is involved, additional issues concerning the scope and limitations on remedy will arise and must be properly structured and understood.
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 still not yet widely available in Indonesia. Private equity funds are usually set up outside Indonesia’s jurisdiction, and then subsequently invested directly into the Indonesian target company.
Private equity transactions are generally in the form of an M&A transaction and therefore subject to Law No. 40 of 2007 on Limited Liability Company. If the target company is a public company, then such transactions will also be subject to Law No.8 of 1995 on Capital Market and regulations issued by the Indonesia Financial Services Authority. To date, there are no specific regulations that regulate private equity transaction in Indonesia.
In general, equity funding can be derived from unused dividend that was allocated in a special reserve fund of a company or by issuing new shares or selling existing shares.
With that said, the main advantage of using equity financing would be that no repayment is necessary, as it does not involve repayment of a loan or interest to the lender. Financing using equity also does not consider a company’s creditworthiness rating, especially if the company has a poor credit history or lack of a financial track record.
On the other hand, the main drawback of equity financing is giving up some control over the company if the source were through issuing new shares or selling existing shares to an investor. The investor may structure in some way to obtain control over some of the company’s strategic business decisions, and with the dilution of shares ownership it means that existing shareholders will have to share profits with the new investor.
Top Tips – For A Watertight Contract
• Make sure it is written clearly and be specific
Try to make it simple and avoid using ambiguous phrases that could be interpreted in different ways by different people. Having specific wordings could avoid different interpretation.
• Precisely outlining the parties’ rights and obligations
Each party must have a clear understanding of their rights and obligations under the contract. This should include the understanding of a party’s rights to end the contract.
• Consult with an experienced transactional lawyer
The most important thing is to find and consult with an experienced transactional lawyer to make sure that you have cover all the legal bases, which will then protect you from potential problems in the future.