do‘s and don‘ts in digital m&a€¦ · [for comparison: facebook messenger (mobile): 3.5...

Do‘s and Don‘ts in Digital M&A

A short introduction into legal andpractical differences to regular M&A

Robert A. Heym

© Simmons & Simmons LLP 2018. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.

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Agenda

The Facebook / Whatsapp Transaction

Structural Differences in Digital M&A

Legal Due Diligence in Digital M&A

5 Contract Drafting in Digital M&A

Definition Digital M&A


1The Facebook / WhatsApp Transaction


The Facebook / WhatsApp Transaction (1/3) February 2014

• Facebook announces that it has acquired WhatsApp for a consideration of USD 19 billion (USD 4 billion in cash / USD 12 billion in shares / USD 3 billion in RSU units).

• At the time the regulatory approval was granted, consideration in shares inflated purchase priceby another USD 1.7 billion

• Consideration represented 10% of Facebook‘s market value

WhatsApp‘s substance in February 2014- about 50 employees- 2013: revenue USD 10.2 million, loss USD 138 million- 2014: revenue USD 15.9 million, loss USD 232.5 million (in six months)

User Overview in February 2014- about 500 million active users (with highest user activity on all messenger apps) around 10 billion

messages/day

[For comparison: Facebook Messenger (Mobile): 3.5 billion messages/day]

- Massive user growth of about one million new users per day / 25 million new users per month


The Facebook / WhatsApp Transaction (2/3) What is WhatsApp today?


The Facebook / WhatsApp Transaction (3/3) What is WhatsApp today?

1.6 billion active users (August 19) vs. Facebook Messenger 1.3 billion so more users than Facebook Messenger (but now in same group…)

Strong position in multiple countries including Brazil, India, Pakistan andEurope

Retrospective views on the consideration:

Up and coming competitor of Facebook Messenger was integrated intoFacebook

Google was prevented to purchase competitor to Facebook messenger

Massive user growth from 500 million to 1.6 billion since 2014

Return on purchase price?


2 Definition Digital M&A


Definition Digital M&A (1/3) M&A transactions carried out to essentially purchase technology for the

digital transformation of business processes

tech companies buying other tech companies

non-tech companies buying into tech companies


Definition Digital M&A (2/3)• Structure of a „classic“ M&A-transaction:

Seller Purchaser

Target


Definition Digital M&A (3/3)• Structure of a Digital M&A-transaction:

[Investment and Shareholders Agreement]

FoundersFinancial Investors

Management

Purchaser Management

Target

[Management Participation]


3 Structural Differences in Digital M&A


Characteristics of Digital M&A (1/2)Classic M&A Tech M&A

Evaluation profit driven synergy driven

Deal Structure 100% of shares or assets - minority interests- JV‘s- management participation

Object „brick & mortar“ - technology- data- know-how

Deal Security maximize seller‘s liabilityunder reps & warranties

limited liability of founders

Legal Due Dilligence review of full legal documentation

relevance/dominance of IP/IT related issues


Characteristics of Digital M&A (2/2)

Classic M&A Tech M&A

Speed slow fast

Foreign Investors usually not an issue possibly an issue underrestrictions on foreigninvestments

Integration easy/easier complex

Deal Competition exclusivity - auctions- no/reduced exclusivity


4 Legal Due Diligence in Digital M&A


Legal Due Diligence – General (1)

„Classic“due diligence (i.e. review of contracts) may miss several importantmatters:

Usually much fewer documents to review depending on evolution stage oftarget company

Planned sales and profits cannot be reviewed against legal documentation

Protection of business model from being copied usually very limited

disclosure of business model in due diligence is substantial business risk fortarget company

Market environment unknown - competitors working on similiar/comparable technology?


Legal Due Diligence – General (2)

Anticipation of upcoming changes in law and jurisprudence:

Development of regulatory environment for new business models

Example: price comparison websites and ongoing EU antitrust-procedures

Development of merger control regime (i.e. deal-volume vs. sales/ market share as trigger for merger control)

Example: Whatsapp-transaction


Legal Due Diligence – IT Due Diligence (1)

Potential issues:

What IT systems does the target use under what kind of agreements?

Are the target‘s IT systems with those operated by the buyer (IT Integration)?

Does the target process personal data and if so, what kind ofdocumentation is available?

Have there been any security breaches in the past?


Legal Due Diligence – IT Due Diligence (2)

What to look at:

Software License Agreements

IT-Outsourcing-Agreements

Compatibility of IT-systems with internal systems

Data protection ( GDPR and risk of substantial fines)

IT security


Legal Due Diligence – IP Due Diligence (1) Potential issues:

Who owns the IP?

What‘s the current status of the respective rights?

Does the target use open source software?

Did freelancers participate in developing the software?

Are there any legal risks under IP-license agreements?

Are there any litigation risks resulting from IP?


Legal Due Diligence – IP Due Diligence (2)

What to look at?

Status of registration and coverage of patents

Know-how

Social media

Websites & Domains


5 Contract Drafting in Digital M&A


Contract Drafting in Digital M&A (1/6)

• The main objective is to secure the payment of a reasonable purchaseprice as well as the continued availability of the following assets after thetransaction:

• highly specialisedexperts

• founder spiritEmployees

• IP-portfolio

• Software

• Know-howTechnology

• „User GeneratedContent“ (UGC)

• user informationData



How to secure the employees:

Include the management-team of the target company into themanagement of the buyer

Include the key employees by granting long-term incentives

Include „Good Leaver/Bad Leaver“-provisions

Agree non-compete undertakings to protect against the loss of know-howand solicitation by competitors



How to secure technology:

Agree on representations, warranties and indemnifications regarding theIP status of the target company for all known risks

But: Usually substantial restrictions regarding the amount of liability andshort statutes of limitation

Insurance coverage for representations and warranties



How to secure data:

representations and warranties to secure the availability of data andcompliance with GDPR



How to secure payment of reasonable purchase price:

„Earn-Out“-provisions

= founders/management team remain minority shareholders and are grantedan incenctive to increase the company value and participate by sellingremaining shares in the future

Milestone-payments

= incentive for the target/founders/management team if target exceeds certainpre-agreed (mostly commercial) thresholds

Retention-payments

= incentive for employees through bonus payments if they continue to beemployed by the company



Secure against unforeseeable events by including a „Material-Adverse-Change“ (MAC)-provision:

Secure against a material decline of matters relevant for the companyevaluation between Signing and Closing

Legal Consequences: Right of withdrawal

Possibly reduction of purchase price

Always heavily contested because no party wants to undo the deal andall known risks should be fully considered in the SPA (and the purchaseprice).


Conclusions(1)Tech-transactions are highly complex and demand thorough

consideration of all circumstances long before the actual deal negotiations start.

(2)There is deal competition for „good“ tech companies – the path forthe successful closing of tech-transactions is often already laid whenthe initial offer is made to the sellers – consider carefully what will make your offer interesting for the founders and the managementteam.

(3)Always consider the soft factors:(i) make up your mind on how to include your future business partner after the

transaction has closed(ii) you are in most cases also dealing with your future business partner with

whom you will be working together for several years.

Questions?

simmons-simmons.comelexica.com

Thank you for your attention!

simmons-simmons.comelexica.com

Robert A. Heym

Simmons & Simmons LLPLehel CarréThierschplatz 680538 München

T: +49 89 208077 6310M: +49 175 5852500

[email protected]

mailto:[email protected]

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