Exclusive Q&A on Mergers & Acquisitions
With Jeremy Saideman, Bryan Cave
Posted: 11th December 2014 09:12
1. What are the key components for deal success?
There are a number of key components and M&A deal success is no different to any other form of transaction. Perhaps my top two are as follows. The first (and one that is becoming increasingly important) is for clients to “do their homework”. Due diligence is becoming more and more important – not only in determining the appropriate value for the target, but to flush out any potential issues. When any issues for concern are revealed, the parties should discuss them at an early stage of the negotiations and attempt to allocate the risks between the parties accordingly, whether by way of purchase price adjustment, extensive warranty and indemnity protection, escrow arrangements or otherwise. Secondly, like any form of negotiation, those individuals involved in the negotiation process, whether from within the client or their external advisors, should encourage open channels of communication between the parties and a willingness to adopt new methods and compromise on issues (and perhaps revise their expectations accordingly). Often, particularly in cross-border deals, parties like to shield behind the “we always do deals this way” or “this is the way transactions are always followed in this jurisdiction” approach. Such comments are rarely received by the other side with encouragement and can sometimes prove counter-productive. On most occasions, issues that appear at first to be impossible to resolve, can be resolved with constructive thought and a flexible approach.
2. What are the main risks and challenges when conducting cross-border M&A?
The biggest challenge for the client is the unknown element of different processes involved in the transaction itself (and market practices when it comes to negotiations with the other side), the unknown historic practices of the target, together with issues that potentially arise with post-acquisition integration of the two business entities. Businesses face new risks to their corporate image and reputation and therefore any perceived “wrongdoing” can eventually impact the value of the business as a whole. Extended and in-depth due diligence on the target is therefore becoming a necessary component to any M&A deal – with particular focus on anti-corruption compliance (to meet UK Bribery Act, FCPA and similar statutory obligations); an understanding of cultural activities and reporting systems in the foreign territory; and an understanding of the trading activities of the target (to ascertain compliance with an ever changing landscape of UN, national or cross-community sanction obligations). There are other additional “local law” challenges that will need to be explained to the client and addressed - for example in the area of employment and the ability of a U.S. buyer to make significant changes to the employees of the target immediately following an acquisition.
3. Since 2010, tax inversions have played an increased role in cross-border deal making, and this year it accounted for 66% of proposed U.S. outbound deals. Do you believe that regulators renewed attempts to clamp down on this perceived method of tax avoidance will deter future activity?
I recently discussed this issue with one of my tax colleagues, who informed me that multinationals are drawn to the UK in particular since its territorial system of taxation only imposes taxes on profit generated within the UK’s borders. This is in contrast to the US global system of taxation which takes into account profits generated in any jurisdiction, to the effect that US-domiciled companies can often end up owing more tax than they would if they were owned by a foreign entity. Many countries have made their corporate tax systems more competitive over recent years, for example the UK (where we had seen a number of companies seeking exile in Ireland for a few years). As was the case with the UK, it may well be time for tax reform in the US.
Clearly, tax inversion activity is a “hot topic” in the U.S. which has raised the attention and wrath of lawmakers and President Obama, with claims that such actions deprive the government of tax revenue while corporations still take advantage of all the benefits of operating in the United States. There appears to be continued efforts to clamp down on such activity. Whether or not the renewed attempts to clamp down on this perceived method of tax avoidance will deter future activity remains to be seen and may become the subject of litigation and/or political wrangling on Capitol Hill. In my view, the public’s perception of such “perceived tax avoidance” activity may prove a more significant factor. Large corporations are having to take notice more and more of public opinion, consumer responses and shareholder activism and this may therefore make corporations think twice before embarking on such activity.
4. Why is it important to consider the tax issues and implications of a possible deal at the very outset?
One of the first issues to be considered in any deal in the UK is to assess whether the objectives of the parties will best be achieved by a share purchase (ie. stock purchase) or purchase of a company’s business and assets. However, the differing tax objectives between a buyer and seller cannot always be fully achieved within the same tax structure. For example, one of the tax advantages of a share sale for a corporate seller in the UK is the substantial shareholding exemption and if such exemption applies, a seller may be reluctant to agree to an asset sale (the buyer may prefer an asset purchase where it does not wish to take on tax and other liabilities that would arise from a share purchase). By way of further example, the transfer of shares in the UK attracts stamp duty at the rate of 0.5% of the value of the consideration payable. This rate compares favourably with the UK stamp duty land tax rates for property acquisitions on an asset purchase deal.
As regards the acquisition itself, a review of the target’s tax computations and historical compliance should be a key component of the due diligence exercise. It will also form the basis of the extent to which a buyer will seek “protection” from the seller, by way of warranties and indemnities in the purchase agreement itself, covering possible exposure for any unpaid tax liabilities of the target.
5. Are you noticing any particular trends in financing methods?
Our middle market M&A practice has observed some changes in the ways that deals are financed. Many of our clients who are strategic buyers have sufficient cash on their balance sheet to permit a fairly low leverage acquisition and certainly private acquisitions with cash consideration remains a prevalent form of deal structure. Where external finance is sought, other clients have partnered with commercial finance companies rather than traditional bank lenders simply because the terms were generally just as favorable. Market conditions, such as low interest rates (and therefore relatively “cheap” debt) and continuing cash reserves, should continue to provide a favourable environment for financing deals.
6. In your opinion what jurisdictions and industries should we be keeping an eye on for M&A activity in 2015?
Predicting such matters is of course a difficult (if not an impossible) exercise. However, from the various forecasts and studies I have seen, in my opinion 2015 will see a continuation of the M&A activity seen in 2014 in the so-called “mature” markets – the U.S., the UK and other European countries and the Asia Pacific (APAC) region (particularly South Korea, Singapore and Japan). As ever, much will depend on economic and political stability in various parts of the world, however as economies hopefully improve (even modestly), companies will look to mature and developed markets as less risky options for investment and growth. The energy and power and technology sectors may be the most likely sectors to look out for, followed by activity in the manufacturing and consumer sectors.
Jeremy Saideman is Counsel in the Transactions Group in the London office of international law firm Bryan Cave and has over two decades of experience advising clients on legal issues, including transactional, commercial and corporate governance matters. His focus lies in cross-border and domestic mergers and acquisitions, joint ventures, disposals, restructurings, shareholder agreements and other commercial business models and contracts. Mr. Saideman’s clients include large multi-national corporations, mid-sized businesses and entrepreneurs who are either expanding their operations in the UK and across Europe or entering the UK for the first time. His practice encompasses a broad range of industries including manufacturing, technology, science, mining, leisure and retail.
Mr. Saideman can be contacted on +44 (0)20 3207 1277 or by email at email@example.com