eversheds report - streamlining for success: m&a divestment and separation trends

Streamlining for successCorporate divestment and separation trends

Streamlining for success Corporate divestment and separation trends

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Contents


01 Research methodology02 Summaryofkeyfindings03 1. Introduction05 2.Managingconflictinglegalandcommercialpriorities07 3. Understanding what you are selling09 4. Changing approaches to divestments12 5. Assessing potential buyers14 6. Negotiating the challenges of cross-border sales17 7. Increasing deal value and certainty

Research methodology

Interviewees were selected from an independent sample of the largest companies inEurope,theUS,Asia-Pacific,Africa,LatinAmericaandtheMiddleEastwithsignificantM&A deal experience. They were asked about trendsaffectingtheirbusinesses’divestmentactivity, their experiences, and lessons learned on previous deals.

The study collects the views of 159 interviewees from34differentcountries.80%wereingeneral counsel or senior in-house legal rolesand20%wereCEOsandotherseniorexecutives involved in M&A transactions.

Inthepastfiveyears,respondentshadworked on over 2,400 M&A deals across 60 jurisdictions.Nearlytwofifths(39%)ofthesedeals were divestments.

Qualitative research was conducted through face-to-face and telephone interviews by Eversheds M&A lawyers and independent legal research consultancy, RSG Consulting, between August 2014 and January 2015. Additional data was collected through written responses in January 2015.

In addition, a survey was conducted of 50 Evershedslawyersfromthefirm’scross-borderM&A group. Insights from their experiences working on recent divestments are included in the regional analyses. This group of lawyers had worked on over 1,000 deals, including 400 divestmentsinatleast42differentcountriesover the past three years.

The analysis was conducted for Eversheds by RSG Consulting. The anonymity of respondents was preserved in accordance with market research standards.

The Eversheds M&A Divestment Report is a collection of the views of general counsel, senior in-house deal lawyers, business and strategic directors and senior executive management.

Interviewees in the research sample were based in 34 countries.

ArgentinaAustraliaAustriaBahrainBelgiumBrazil

CanadaChinaColombiaCzech RepublicDenmarkEcuador

EstoniaFinlandFranceGermanyGhanaHong Kong

IndiaIsraelItalyLithuaniaMexicoNetherlands

PolandQatarSingaporeSouth AfricaSwedenSwitzerland

Tunisia

UKUnited Arab Emirates

USA



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Summary of key findings 1. Introduction

– Morethantwothirds(72%)ofin-houselawyer respondents had experienced tensionsorsignificantdifferenceswiththeir business colleagues when planning a divestment. The most common complaint was that divestments were more complicated, yet did not receive the same support, time or resources as acquisitions.

– Yet businesses are now changing the way they view divestments. Divestments are moving to the centre of company strategic M&A plans. At the same time, business is becoming more aware of the difficultiesassociatedwithrunningthesedeals and the processes that need to be followed to be successful.

– The most difficult divestment challenges related to understanding what is being sold. This covered separation and transition issues, post-closing considerations, and associated costsandexpenses.Thespecificchallenges most frequently named by interviewees were: identifying and valuing assets for sale and allocating costs, communication around transitional issues, and IT separation and transfer.

– Experienced practitioners are more likely to be changing how they approach divestments.Onaverage57%of respondents said they were taking a new approach to divestments. However, interviewees who had worked on ten or more deals in the past 5 years were a third more likely to be changing their approach.

– Sellers are now spending significantly more time in the early and preparatory stages of the deal. The shift is from a ‘signandmanage’toa‘manageandsign’process, which involves: starting deal preparation earlier, creating detailed separation plans, and more vendor due diligence.

– Over half (54%) of those interviewed said price was not their main consideration when assessing a buyer. Rather than only looking for the highest price, deal teams are weighing competing bids by examining a potential buyer’scredibilityincompletingdeals,reputation and track-record in running a business, the likelihood of competition or other regulatory delays, and its treatment of employees and other stakeholders.

– On cross border divestments, a majority (70%) of respondents had experienced difficulties related to local regulatory frameworks when selling assets. Two fifths(41%)ofrespondentsnotedthatfailing to pay attention to local business culture and processes had caused them serious problems when selling a business in the past.

– When asked how they had increased deal value or deal certainty in the pastonlyathird(32%)ofrespondentsreferred to the application of legal or technical expertise. In-house legal advisers had most often increased deal value or certainty by playing an active role in project management and maintaining good communications with the counterparty.

– Onthelegalside,contracts with sufficient flexibility to allow sellers to respond to changing circumstances were by far the most important legal contribution GCs and M&A counsel felt they could make to the sales process. Contracts that allow a seller to break outofadealorreceivethebenefitofany enterprise value increase were seen as important safety nets, particularly in regulated industries.

Divestments are a complex, challenging and necessary part of the business lifecycle. Despite this, they received little attention in strategic reviews of M&A prior to the financialcrisis.Whenspokenofatall,theywereseen as a less interesting sideshow to value-enhancing acquisitions. However, the most experienced and successful dealmakers say this view is both outdated andcommerciallyflawed.

Divestments are increasingly seen as aneffectivetooltoincreaseandretainshareholdervalue,andaneffectiveuseofcapital. By using divestments strategically, management teams can streamline businesses, refocus corporate priorities andimplementeffectivechange.

In short, divestment strategies have now movedtothecentreofmanycompanies’M&A plans. At the same time, changes in the commercial and regulatory landscape have made deals less certain and more complex. Divestments are taking longer to complete, and companies are changing the way they are managed.

Withthisinmind,weaskedrespondents to share the biggest challenges they face in running divestments and the most valuable lessons they had learned. This report is a collection of those insights and experiences.

What is currently driving divestment activity?

Whilethemajority(59%)ofintervieweesare primarily focused on acquisitions, a largeminority(41%)wereeitherfocusedon divestments or both acquisitions and divestments equally. Half of those interviewed said they were planning some divestment activity in their own businesses in the coming year.

Otherscommentedthattheyexpected to see an increase in divestment activity more broadly. As businesses become more complex and diverse, a process of retrenchment to core business lines is expected to follow.

“ Companies are recognising that it’s more complicated to divest assets now People oversimplified it in the past and now they recognise that divestiture is more complicated than integration.”

VP and Assistant General Counsel, retailer

“ As the pace of technological change picks up, more parts of businesses will need to be sold off. A big manufacturing company, for example, has hundreds of different businesses under one roof, but it can only really be a market leader in a few of those. Increasingly, if a company is not a market leader in non-core areas, it will have to sell those assets to companies that specialise in them.”

General Counsel, telecommunications company

What is the current focus of respondents M&A activity?

59%

26%

15%

Acquisitions

Divestments

Both equally



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Whiletherewasavarietyofdriversbehindcurrentdivestments,morethanhalf(56%) of those interviewed said divestments were of non-core activities. This was either a

result of retrenchment to core business lines(36%)orsheddingassetsfollowing anacquisition(20%).

Many companies now take the view that divestments are critical to unlocking value for shareholders. However, commercial and legal priorities often diverge in the course of a sale.

Overtwothirds(72%)ofin-houselegalrespondents had experienced tensions or significantdifferenceswiththeirbusinesscolleagues when planning a divestment. The most common complaint was that

divestments do not receive the same supportfrom business as acquisitions. However, a number of respondents noted that this view is changing and business is becomingmoreawareofthedifficultiesassociated with running a divestment.

In this section we consider some of the most common areas where divergent legal and commercial interests can create tensions.

“ Getting back to our core market is the focus of our divestment strategy and technology has a lot to do with it. The capital and technological barriers to entry are growing each year and it’s hard to be an expert in a lot of very divergent business lines.”

Associate General Counsel, industrials company

“ The biggest problem is just that we don’t have a dedicated business unit or team responsible for divestments. Acquisitions get a lot of support but divestment is left to legal, even though it involves a lot more complexity.”

Assistant General Counsel, retailer

“ Divestment is changing from a sales process to a business process. It’s no longer looking at what legal requirements and process requirements we need to comply with. The new reality is starting with what we’re trying to achieve, what value we want to achieve, and basing the M&A strategy around that.”

Corporate Strategy Office, consumer goods company

“ Generally we struggle with business wanting divestments to go as fast as possible. Handling the tension between the business desire to go as quickly as possible and the legal need to get separation right is one of the main issues I face now.”

Senior Corporate Counsel, supply chain company

2. Managing conflicting legal and commercial priorities

Retrenchment to core business lines

Shedding assets post acquisition

Market change/ evolution

Divestment of underperforming assets

Financial pressure/ reduce debt

Impact of regulations

0% 5% 10% 15% 20% 25% 30% 35% 40%

Percentage of respondents

What is driving your divestment activity

Where have you experienced points of tension or divergent views between

legal and the business on a divestment?

Legalandoperationalworkstreams not aligned

Insufficientattention paid to deal risk

Risk averse approach from the legal team

Business sets unrealistic timelines for M&A

Separation issues not given adequate scope

Regulatory barriers ignored by the business

Business creates overly ambitious transaction structures

0% 5% 10% 15% 20% 25% 30% 35%




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Legal teams want more involvement before commercial negotiations take placeThe tendency of business to shake hands on a deal before any legal issues have been raised or resolved was a common source of frustration for in-house lawyers.

A large number of in-house counsel said that business too often failed to explain theircommercialdecisionseffectively.They also felt that legal could play a greater role in identifying transactions that would deliver little value. In particular, in-house counsel noted that legal and execution difficultiesfacingsmallervaluedealsfrequently outweigh the commercial gains. Early involvement would allow them to identify these issues.

Respondents also suggested that earlier involvement of legal teams might lead to more realistic deal terms and more manageable timelines.

Getting business to take legal seriously remains a problemWhiletheviewoflegalteamsasanobstacleto deal making continues to prevail at some companies, far more common was a perceivedlackofunderstandingoflegal’sfunction. Several respondents complained that they did not feel representations and warranties were taken seriously by executive management and that many key items on the M&A timeline were dismissed as “something for legal.”

Legal teams need to take a commercial view of risk At the same time, a number of business and legal respondents argued that legal teamsarestilltooriskaverse.Whilelegalteams identify transaction risks, more commercially-minded lawyers can also decide which risks are worth taking. There was a widespread sense that legal teams with a low appetite for risk end up overcomplicating deals and lose sight of commercial drivers.

Legal and operational staff need to be better alignedA lack of connection between legal and operational workstreams has caused unnecessary delays to the divestment process. Respondents felt that there needed to be a far closer relationship between the lawyers negotiating deal terms and regulatory clearances, and the operations teams executing the transaction.

“ When difficult issues arise on a sale, I hear, ‘just hand it over to legal to sort out’. The speed of sale process versus deal certainty and protections in the documents need to be balanced. If the deal moves too quickly it will only give rise to post closing complications which come back to haunt the business.”

General Counsel, construction company

“ Legal counsel is always trying to eliminate any potential risk, while the business team want to close as soon as possible, even if it means taking more risk.”

Investment Manager, international media company

“ Companies are successful because they adopt the attitude that anything is possible if you put your mind to it. Unfortunately, it does mean that practical issues are just left in the background.”

General Counsel, telecommunications company

The most frequently mentioned problems faced when running a divestment related to understanding the business for sale. Issues related to identifying, separating and transferring IT systems posed a particular difficulty.Thespecificchallengesmostfrequently named by interviewees were:

1 Identifying and valuing assets for sale and allocating costs

2 Communication around transitional issues

3 IT separation and transfer

Identifying and valuing assets for sale and allocating costsIdentifying and valuing assets to be separated, and accurately allocating costs and earnings to a carved up business posed asignificantchallenge.Agreeingvaluesand costs was considered to be more of an art than a science. The process was made moredifficultbecausefewwereaffordedthe luxury of developing a full and detailed separation plan prior to negotiations.

Valuation and cost allocation presented particular problems when sellers were faced with private equity buyers who do not have existing support systems to service the entity being sold. In such situations sellers found calculating general andadministrativeexpensedifficult.Thedangeroflosingvaluethroughartificialcostallocation was a real issue.

3. Understanding what you are selling

“If you don’t know the asset you’re selling then you can be on the back foot from day one, scrambling around to provide answers.”

Senior M&A Legal Counsel, financial institution

“ Organisations have grown in scale and complexity and the role of technology in those organisations has also grown. When you’re carving out a part of a business, IT is likely to be the biggest challenge.”

Deputy General Counsel, multinational retail company

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08 09

Communication around transitional issuesMostoperationaldifficultiesresultedfrom poor communication surrounding transitionalissuesand,specifically,the transitional service agreement. Respondents in general felt that this aspect of the deal was poorly managed both internally and externally. Those who felt their companies where handling divestments poorly often expressed uncertainty as to individual roles in transitional arrangements.

IT separation and transferIT separation is a growing challenge for most companies and now requires enhanced planning. Respondents reported problems with documenting and overseeing the execution of IT transfers, and suggested their companies needed to pay more attention to this aspect of the M&A process.

A number of respondents noted that commercial pressure to speed up IT transition had caused post-closing problems that could have been averted with better planning.

“ The lesson we’ve really learnt is that you should never underestimate the IT separation aspect of a deal. I can think of many deals where IT separation has put a stop or at least a temporary pause on the disposal. The big trend is really the entanglement of IT and it’s becoming increasingly problematic.”

Senior M&A Counsel, industrials company

“ We try to think through what the buyer needs so that we can run the IT separation properly but it’s difficult to do that when you are asked to consult with the IT project manager, not the legal manager. The IT guys don’t have a good understanding of the business or legal point of view and it’s safe to say that we don’t understand the IT issues, so it’s like a very long and frustrating conversation where you speak past one another.”

Senior VP and Global M&A Counsel, retailer

Companies are changing how they approach divestments Overhalf(57%)ofrespondentstoldusthey are changing the way they approach divestments. They included interviewees from all jurisdictions, market sectors, and company sizes.

In the 2012 Eversheds report, ‘M&A Blueprint:frominceptiontointegration’, we found that legal advisers with experience working on ten or more cross-border M&A transactions were less likely to face problems during the integration phase of their deals.

In our current research, we found a similar linkwithexperience.Whilejustunderhalf (46%)ofthosewhohadworkedonfewerthan ten deals over the past 5 years were taking a new approach to divestments, thefigureroseto61%forthosewithexperience of ten or more deals.

How are companies responding to these challenges?Ofthemajorityofrespondentswhosaid that with hindsight they would dosomethingdifferentlyontheirlastdivestment,nearlyhalf(45%)saidtheywould make sure they were better prepared for the deal.

4. Changing approaches to divestments

What would you have done differently on your last deal?

Better preparation for the deal

Better deal management

Better engagement with stakeholders

Other

Morefocusonfinding the‘right’buyer

Better understand local laws and culture

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%


Are you changing your approach to divestments?

Yes

No

57%43%



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Better planning and clearer processesThe most important lesson learned was that better preparation for the deal helped avoid bottle-necks in the sales process. Interviewees wanted more time and information to organise the process and carry out a vendor due diligence exercise before the start of the project.

The shift in attention towards the early stages of a deal is also providing in-house counsel with greater foresight of the issues that are likely to arise during the transaction. This puts them in a better position to direct negotiations and protect their organisation from adverse risk apportionment.

Better planning and clearer processes included:

1 Starting deal preparation earlier

2 Creating detailed separation plans

3 Greater focus on vendor due diligence

Starting deal preparation earlierAllowing more time to carry out deal preparation including separation planning and vendor due diligence was one thing many interviewees would change.

Withoutearlyinformationfromtherelevantbusiness functions, there was a risk of separation issues falling between the cracks during the planning phase only to delay a deal closing later down the track.

There was pressure to get deals done quickly, so some noted that more preparation required additional resource rather than longer timeframes. It was also considered important to devote senior management time to potential separation issues at an early stage.

Creating detailed separation plansA large number of respondents reported that separating assets was becoming more complicated and that legal teams could do more to prepare and educate their businesses for separation challenges. As a result, detailed separations plans had become essential.

Processes and comprehensive checklists were considered essential to help automate separation planning, manage timeframes and plug knowledge gaps.

A comprehensive understanding of the requirements for the transitional issues in separation is required if businesses are to make an informed allocation of costs. Interviewees suggested that prioritising the TSAanddiscussinganyissuesattheLetterof Intent stage would lead to more realistic timescales and help prevent unnecessary loss of value.

Separation planning no longer ends with the sale

Businessesarealsofindingthatseparationplans now have to account for a period that can last months and even years after theassetshavebeentransferred.Legalcounselexpressedfrustrationatfindingthat‘ghostentities’survivingadisposalcannotbe wound up without additional time and expense.

Greater focus on vendor due diligenceAs pricing becomes less certain and assets are scrutinised more rigorously than ever before, a number of legal teams are conducting their own analysis of risk and liability in order to facilitate divestments. Onthewhole,sellerswantmoretimetoconduct a thorough vendor due diligence before the negotiations process begins.

The view was echoed on the buyer side. A thorough vendor due diligence report couldfillgapsinknowledgeatthetargetbusiness after it is sold. In rare cases, it was also considered important for possible post-deal litigation.

“ The lesson we’ve really learnt is that you should never underestimate the IT separation aspect of a deal. I can think of many deals where IT separation has put a stop or at least a temporary pause on the disposal. The big trend is really the entanglement of IT and it’s becoming increasingly problematic.”

Senior M&A Counsel, industrials company

How far ahead can you plan for separation?

Onthesubjectofwhetherseparationproblemscouldbeovercomebyforwardplanning as early as when the business is acquired, respondents were divided.

Somefeltthatnon-coreassetscouldbeidentifiedinadvanceofanacquisition andkeptondistinctITplatforms.Thiswouldsignificantlysimplifytheseparationprocess when these assets were placed on the market.

Othersarguedthatitwouldbeimpracticaltofullyidentifynon-coreassetsinadvance, or that the synergies gained from one system outweighed the costs of operating parallel systems.

A selection of the divergent views are shared below:

If we know we might eventually sell a business we are careful to keep it separate as much as possible. We are conscious at the acquisition stage that this might be something we want to sell later and a lot of effort is made to keep it separate. It makes for an interesting dynamic going in to an acquisition with the divestment plan already in mind.”

Senior VP and Assistant General Counsel, retailer

When we make an acquisition we usually know we will dispose of one or more parts in future and that it will be much more difficult to do so if we integrate. Nonetheless, we proceed with the integration. You have to integrate, even if you know it will cause problems when divesting later on.”

General Counsel, European healthcare provider

If you grow part of the business through acquisitions then there will be a heavy focus on integrating. But the moment one of the bits becomes non-core you find that cutting it away is very difficult. I don’t know how you could avoid this type of situation. One of the best ways to harmonise a business is to get all your IT on the same platform, so it’s a case of planning around it rather than avoiding it. That is definitely the big issue in disposals at the moment.”

M&A Counsel, industrials company



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5. Assessing potential buyers

What factors other than price do sellers consider when assessing a buyer? Many companies recognise that the highest bidder for an asset is not necessarily the most attractive bidder. In fact, over half(54%)saidpricewasnottheirmainconsiderationwhenassessingabuyer.Withdeal certainty becoming more of an issue than price for many sellers, legal teams are weighing competing bids by examining a number of considerations.

The most important non-price factors respondents considered when selecting a potential buyer were:

1 Buyer’s credibility or track record in completing deals

2 Buyer’s reputation or track record in running a business

3 The likelihood of competition or other regulatory delays

4 Welfare of employees and other stakeholders

Buyer’s credibility or track record in completing dealsApotentialbuyer’scredibility,mostnotablyitsfinancialcredibility,wastheprimaryconcern sellers had when assessing bids. Withincreasingpressuretocompletedeals,overaquarter(29%)reportedthatbuyerswithsecurefinancingwereoftenpreferredtohigherbidderswhosefinancingwasuncertain or contingent. The prospect of having to run due diligence on a buyer was frequently mentioned as an inconvenience that most sellers would prefer to avoid.

Buyers with a reputation for sticking to the price set out at the Heads of Terms stage wereseenaswelcomesafebets.Withmore international private equity buyers and foreign strategic buyers entering auctions, sellers are having to rapidly learnlessonsabouttherisksandbenefitsassociated with an unfamiliar universe of bidders.Establishingthebuyer’sfinancialcredibility in these circumstances is making M&A more complicated.

Buyer’s reputation or track record in running a businessThe second major concern was the reputational risk of dealing with certain buyers. A number of respondents said that they have turned down topping bids due tothisfear.Sellersconsideredthebuyer’sethical and cultural values to be important factors in their decisions.

Ensuring an asset remained viable was an obvious concern for companies that would continue to rely on it as part of their supply chain. There was also a clear preference for dealing with a buyer capable of sustaining the asset, even in situations where the seller intended to sever all ties.

The likelihood of competition or other regulatory delaysA number of respondents pointed out that antitrust and regulatory delays are increasingly factored in when selecting a buyer. The negative consequences a delay may have on suppliers and customers means another deal with more certainty may be a more attractive option.

In particular, competition issues often complicate deal planning, particularly in Europe. Respondents noted that the European Commission may require that upfront buyers are in place to address business overlaps created by a deal, before they will grant approval. The use of these ‘upfrontremedies’forcesbuyersandsellersto work together to identify potential overlaps or competition issues that may be triggered by a deal.

Welfare of employees and other stakeholdersThe fate of employees post-sale was a surprisingly common concern. In some instances, employee welfare was linked to reputational and regulatory concerns. This was particularly noticeable in industries that rely heavily on government subsidies and in which sellers could jeopardise future contracts by acting with disregard toward theirstaff.Moregenerally,therewasasincere desire on the part of sellers that staffbetreatedwellbyanynewowner,andthat customer and supplier relationships would not be adversely impacted.

“ We had a buyer offering nearly twice the price of the others, but we didn’t deal with them because we were concerned about their ethics.”

Corporate Vice President and GC, consumer electronics company

“ We have a much publicised customer-centric approach, so we need to make sure whoever buys one of our companies is a reputable buyer that will continue our customer-centricity.”

Senior Legal Counsel & M&A Counsel, insurance and pensions provider

“ What’s interesting is that there is an increasing focus now on how confident we are a bidder can actually take over the asset. Technological capabilities and integration ability are the things we look at more and more.”

Senior Group Legal Counsel, financial services company

“ With too much antitrust risk you find that sellers prefer to sell for a lower price and take a safer deal.”

General Counsel, semiconductor manufacturer

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14 15

6. Negotiating the challenges of cross-border sales

Whenaskedtonamethecountriesinwhichtheyhadencounteredthemostdifficultiesduring a sale, respondents overwhelmingly referenced regulatory issues. A large minorityalsomentioneddifficultiesarising

fromdifferencesinlocalbusinesscultureand processes. These concerns related to both the location of the assets and counterparties, and were prominent in developed as well as developing markets.

Early engagement with local counsel is critical to cross-border success

The most common error was taking for granted that a counterparty would hold the same assumptions and follow the same processes when running a deal. These problems can be overcome by holding early discussions with local counsel and engaging with a counterparty to agree on a common approach before the deal progresses.

Respondents working for multinationals told us that the standard terms and conditions of their contracts often appear unnecessary or excessive to counterparties that are less experienced in cross-border M&A. Understanding this problem had enabled them to run smoother deals by acknowledging the counterparty’sconcerns.

Dealing with an inexperienced or difficult counterpartyDealing with buyers less accustomed to the terms of cross-border M&A was a recurring difficultyforanumberofrespondents.Inparticular, they found that less experienced buyers did not understand the risks involved in the deal or the guarantees on which the seller was insisting.

Global or regional players noted that they typically faced raised expectations from smaller counterparties who expected them toactinacertain‘professional’manner.In these situations sellers felt they were followingprocessforprocess’ssakeorwere being asked to conform to needlessly high standards. Conversely, sellers from larger companies had been frustrated by smallerplayers’lackofprofessionalisminrecent M&A negotiations.

Regulatory issuesKnowing the rules is still critical to cross-borderdivestment.Overtwothirds(70%)ofrespondentshadexperienceddifficultiesrelatedtolocalregulatoryframeworks when selling assets. Europe, ChinaandLatinAmericawerenotedforhaving particularly demanding or opaque regulatory requirements.

Themostcommonregulatorydifficultiescompanies experienced in foreign jurisdictions were uncertainty resulting from inconsistent application of the law, timeframes for regulatory approvals, or rapidly changing regulations.

Understanding local business culture and processesGlobalisation and increased cross-border dealflowshavemadeitalltooeasytoignore the importance of local variations when it comes to doing business. Two fifths(41%)ofrespondentsnotedthatfailing to pay attention to local business culture and processes had caused them serious problems when selling a business in the past.

Problemsresultingfromculturaldifferencesbetween local management and incoming owners were a common obstacle to cross-border deals. In situations where local management does not want to work under aforeigninvestor,conflictscanarisethatderail a deal unless close attention is paid to their concerns.

Why have you found it difficult to do deals in foreign jurisdictions?

Regulatory issues

Localbusinessculture and processes

Inexperienced or difficultcounterparty

0% 10% 20% 30% 40% 50% 60% 70% 80%


“ People try to deal with us in a professional manner because it is one of the largest companies in Europe, but we sometimes want to sell an asset quickly like any other company and not have to go through the whole long process of checking boxes”

General Counsel, European oil & gas company



16 17

What are the regional obstacles to doing deals?Weaskedbothin-houserespondentsandEvershedspartnerswhattheyfeltwerethemostcommonandsignificantchallengestheyfacedwhendoingdivestmentsinparticularglobal regions. The following table highlights key obstacles to be aware of when doing cross-border deals.

Western Europe

Eastern Europe

Middle East

AfricaAsia-

PacificLatin

AmericaNorth

America

Heavy regulatory burden

Slow and/or unpredictable regulatory authorities

Uncertainty around the law

Notary costs

Corruption/ nepotism

Employee friendly labour laws

Restrictions on foreign investors

Business culture

Strict environmental regulations

Moderate obstacle Significantobstacle

Whenaskedforspecificexamplesofthingsthey have done to increase deal value or guarantee deal certainty, only a third (32%)ofrespondentsreferredtotheapplication of legal or technical expertise.

The rest pointed to non-technical contributions they had made in the past, including project management or maintaining open communication with the counterparty.

The key lessons learned and strategies recommended to increase deal value and certainty were:

1 Clear and cooperative communication with the buyer

2 Motivate and communicate with local management at the target

3 Keep a close eye on conflicts of interest

4 Build flexibility into legal contracts

5 Plan for delays

7. Increasing deal value and certainty

“ Success in an M&A deal is more to do with approach and mentality than process. It’s always the same process but the results vary wildly, and that is down to how you approach the other side”

Senior Legal Counsel, financial services company

“ The key is that you are clear and open about what you want to achieve so no one wastes time trying to unpick the other’s motives. If you don’t agree on price then you don’t agree. There’s no shame in saying you don’t agree with the valuation.”

GC & Company Secretary, industrial services

What would you have done differently on your last deal?

0% 5% 10% 15% 20% 25% 30% 35%


Application of legal expertise

Project management

Communicating or maintaining relationships with the counterparty

Assisting with commercial negotiations

Experience of previous deals

Other



18 19

Clear and cooperative communication with the buyerBeing honest about motives for disposing of a business and working cooperatively with buyers is key to sellers running a smooth sale. Many respondents noted that when both sides have clarity on the sale process, particularly with respect to TSA issues and employee transfers, a deal is far more likely to close.

Respondents also noted that they saw little point in trying to conceal information detrimental to a divestment as it would likely be discovered in due diligence anyway.

This was also seen as the most frustrating traitofsellers.Whenonthebuy-side,anumber of respondents said that it was likely to cause them to walk away from a deal.

Clarity on motives and intentions was also seen as a key part of the psychology of deal negotiations. Respondents felt that understandingthebuyer’smotivesgavethem a key lever to increase value. Those with a wide experience of M&A said that sellers must always arrive at the negotiating table capable of explaining why they are selling an asset and why the acquirer should buy it.

Motivate and communicate with local management at the target companyMotivating local management is key to forestalling dips in performance. Respondents noted that local management teamsoftentaketheparentcompany’sdecision to divest as a negative judgement on their leadership. In these situations, respondents saw either a dip in the business’sperformanceorafailureofmanagement to allocate resources to the deal.

To prevent these problems arising, respondents advised that any divestment shouldbeexplainedintermsoftheparent’schanging strategic priorities and that local management should be clear that it is not a result of their failure to implement a commercially sound strategy.

Keep a close eye on conflicts of interestLocalbusinessmanagersatthebusinessfor sale are often the only ones who fully understand the assets and costs. They play a fundamental role in identifying risks and ensuring operational continuity. However, these managers can have divided loyalties when it comes to divestments.

Whileusefultohavesomeonewhoknowsthe business inside out involved in the transaction, it is essential to have a central team or a transaction lead who will not have a vested interest in the business once sold.

Build flexibility into legal contractsContractswithsufficientflexibilitytoallowsellers to respond to changing markets were by far the most important technical legal contribution GCs and M&A legal counsel felt they could make to the sales process. Contracts that allow sellers to benefitfromanincreaseinenterprisevalueprovide an important safety net, particularly in regulated industries.

Planning for delaysThe business needs to plan for the consequences of a delay to a divestment to ensure customers and stakeholders are kept fully informed. There is a risk of the business’sperformancefallingoffdueto a delay to closing. Customers facing uncertainty about the new owner of a business can delay extending or entering into new contracts. Employee performance, especially at senior level, can also be adverselyaffected.Themostimportantthing an M&A counsel can do is plan for delay and ensure customer and employee concerns are fully addressed in the event of deferred closing.

“ If you spend a year on a deal and the world changes, either because of the regulators or the market, and you have to revisit the terms then the question is: Have I put enough flex in the contract to allow the new situation to be represented? Have I allowed enough flex to get us out of it if the company’s focus shifts?”

Senior Legal Counsel & M&A Counsel, insurance and pensions provider

“ The thing I appreciate most is when lawyers come up with solutions and find a way around the obstacles. Some legal people come to you with issues and 100 reasons you can’t do a deal; I need 100 ways it can work for the company.”

President and CEO, international energy company

“ Businesses regard themselves as having failed if they are to be sold. It can become a very political situation which you do not want to be involved with.”

M&A Counsel, industrials company

“ In divestments we have had issues with managers. It’s a problem of allegiances changing and them thinking about how the new boss will treat them rather than what the old boss wants. The only way to deal with that is through process. You need to think about what information you need from them upfront and then make sure you get as much as possible before they realise they’re going to be working with someone else.”

Corporate Strategy Officer, food and beverage company


20 21


Eversheds global M&A teamEversheds operates as one team from around the world. For further information on our global M&A team, including country contacts, please refer to eversheds.com

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