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.
Questions answered by Simeon Okoduwa and Gabriel Onojason of Alliance Law Firm
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?
As you know, there are two main types of acquisitions of a limited company, namely a share sale or an asset sale. Due diligence exercises throw up areas requiring warranties and indemnities.
Most valuable warranties in M&A contracts include:
• Warranties relating to the legal standing and compliance status of the company being acquired
• Warranties covering the extent of contingent liabilities to the business could be exposed
• Warranties relating to the reliability and integrity of audited financial statements and the financial position of the company at the time of transaction closing.
Most valuable Indemnities include:
• Indemnity against the crystalisation of any contingent liabilities
• Indemnity against the imposition of regulatory sanctions or fines arising from poor or inadequate compliance standards
• Indemnity for any specific issue about which a purchaser is concerned as a result of the due diligence or disclosure exercises.
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?
Some of the ways by which deals may be financed in our jurisdiction include the following:
• Exchange of stocks
• Debt acquisition
• Cash payment
• Issuance of bonds
In this jurisdiction, a merger or acquisition typically entails the first option, i.e. exchange of stocks. This financing option is preferred because the parties share risks equally, or almost equally.
With respect to raising funding through the debt route, bonds and loans come into play. While bonds enable an easy and quick way of raising of funds through current shareholders or the general public, it may have the drawback of having to await the bond’s
maturation before it could be utilised for the deal. Direct debt from financial or other institutions on the other hand may be immediately deployed to finance a deal upon disbursement.
However, interest rates are a primary consideration when funding mergers and acquisitions with debt because the costs of funds could quickly skyrocket and increase transaction costs. In an environment such as Nigeria, where interest rates have been in double digit figures for several years, it becomes a highly unattractive proposition for the parties, especially the buy side. Companies are well advised to build up an optimal capital structure before adopting this methodology for deal consummation.
Is private equity widely available in your jurisdiction? What are the advantages and drawbacks of financing a deal using equity, in your experience?
In Nigeria, investment into PE firms are mostly sourced from insurance companies, pension funds, financial institutions and high net-worth individuals.
In recent years, Nigeria has witnessed a surge in PE investments. In 2019, the African Private Equity and Venture Capital (AVCA) described Nigeria as one of the “most attractive destinations for PE investments. In 2019, PE in Nigeria recorded investments valued N277.64 billion ($767 million) between January and February, 65% of which was recorded on the Cocacola – Chi Ltd deal in 2019. Instructively, in contrast, 2018 recorded N62.27 billion ($172 million) in PE investments, thus making it an almost 345% increase in 2019.1” However, this growth could be stunted by the effects of the Covid-19 pandemic.
Top Tips – For A Watertight Contract
In drafting watertight contracts, it is advisable that parties include the following clauses:
• There must be an offer and an acceptance of the critical terms that regulate the rights and obligations of the parties and should, preferably, be in writing
• Consideration that indicates the value exchange generated by each party
• A dispute resolution clause that specifies the governing law and mode of dispute resolution between the parties
• Indemnities and warranties that address some of the concerns which may have arisen from the due diligence exercise
• The proper parties and execution. Parties should ensure that they have proper authority to enter and execute in law.
From my experience, the advantages of equity finance include:
• It is a relatively cheap means of sourcing funding as opposed to, for instance, debt finance/bank loans, which require periodic servicing of accruing interest obligations; continuing costs are thus minimised.
• Investors are just as interested in the success of the business as subsisting shareholders and can introduce their skills,contacts and experience in enhancing corporate and shareholders’ value.
• Where there are growth prospects and improved earnings, investors are more willing and able to provide additional funding for the business.
• Raising equity finance could be time consuming and costly, while diverting attention, at least temporarily, from core business operations.
• Equity funding usually involves the loss of some level of control either in terms of power to make management decisions, i.e. voting powers, or in shares dilution i.e. smaller share of the business.
• It usually introduces the obligation to observe a higher level of legal and regulatory compliance and provision of regular information to investors which could prove quite cumbersome and costly.