It’s well reported that the virtual boardroom has new-found confidence following the rollout of COVID-19 vaccinations, the beginning of a new administration in the United States, Brexit completing in the UK and a strong stock market performance. With increased confidence, CEOs are actively seeking to buy growth.
But many M&A deals fail to deliver the value case, struggling to drive the expected synergies, affected by a mass exodus of top talent from the seller and an inability to deeply integrate two businesses that are apparently similar but have different cultures and ways of working.
So, what actions can you take to maximise your chances of being in the 2 in 10 deals that achieve the value case?
Have clarity
In the first instance, it’s about being clear on what it is you are trying to achieve - is it a real merger of equals adopting ‘best of both’ principles? Or is it a takeover? It’s important to be open and transparent in communications on this early on to set expectations, as each approach drives a different type of integration. Key for leaders at both ends of the deal is to articulate how the business fits within their strategy and then make sure throughout the process that each other’s strategy is well understood.
Get ‘day one’ right
Then it’s about working towards the first big milestone of ‘day one’ and having a clear blueprint for how you are going to operate that everyone buys into. The best piece of advice is not trying to do everything on the first day. First focus on what you absolutely need to do to get the basics right and then consider what you could do. Every detail is important and needs to be understood and communicated appropriately. For example, can you pay people and suppliers on time, can you bill and receive cash? Getting ‘day one’ right is an important step in creating momentum and credibility in the organisation, so it’s not one to get wrong.
It’s also important not to do too much and not to try to run before you can walk. Integration is a complex gradual process and too much change too quickly is the most common mistake. The change needs to be paced and sequenced appropriately, balancing the need to achieve synergies with the need to win people over.
Agree on joint objectives
Investing time in building great relationships with the organisation being acquired can pay dividends later on and will ensure the transition is seamless. Too often, leadership teams turn inwards and fail to build relationships with their new colleagues. The best companies ensure the leadership teams of both organisations come together through the integration process to talk about joint objectives, make plans and start to work together.
Consider a leadership shake-up
Settling leadership roles quickly to identify who can then help stabilise the rest of the organisation is an important step. It might also provide the opportunity to make changes in the leadership that aren’t necessarily related to the deal. In a context where change is already expected, there is a chance to look at teams and departments who might be underperforming or could use a shakeup and position the move as part of the broader integration process.
From a culture and ways of working perspective, to win ‘hearts and minds’, it is worth spending time figuring out how to knit the two organisations together.
Integrate teams and cultures
From a culture and ways of working perspective, to win ‘hearts and minds’, it is worth spending time figuring out how to knit the two organisations together. Careful integration of teams is fundamental for the success of any merger or acquisition. This often involves bringing together people with very different sets of values, behaviours, leadership styles, mindsets and policies. It’s important not to try to resolve every culture difference or issue immediately - it is impossible from a leadership perspective, and situations inevitably evolve and change over time.
To retain talent in both organisations, it’s important through the integration to lead through open and transparent dialogue. Identifying the strong and influential people from both businesses and ensuring that they are involved early in leading the integration is critical. It pays to understand the potential reasons that could lead people to leave and the concerns of the team with regards to the acquisition. Engaging through positive change and mapping opportunities for growth and development that the acquisition may bring are helpful steps. This includes identifying early on where coaching, content or project management support is needed.
Remain customer-focused
With the leadership being distracted by the deal and integration process, it is not uncommon to lose focus on the customer. Organisations must keep delivering for the customer through the process, to prevent losing them to the competition. It pays early on to speak to customers about the deal, outlining if and how it will impact them and how the change can help them to deliver greater value in their business.
Symbols of change
Finding symbols of change to introduce new ways of doing things can help smooth the integration process. To support the implementation and adoption of the integration, it’s important to ensure that the integration is at the forefront of colleagues’ minds. The best way to do this is through a steady cadence of visible acts of change or “symbols of change.” These will introduce the new way of doing things - for example, sharing success stories, leadership being visible at key customer sites or co-creating a new vision and purpose together.
Measuring success
Finally, measure success simply and pragmatically. The success of the integration should not be measured on activities completed - for example, “plans done and delivered” or “systems integrated”, but rather on how it has achieved the desired impact on the business and unlocked the opportunities as set out in the joint objectives. As such, monitoring the results and supporting the business to ensure the objectives are achieved is an integral part of the integration process. Think about success on a number of dimensions, for example:
Taking these critical integration steps really maximise a company’s chances of realising the value case and increasing shareholder value – the ultimate measure of M&A success.
Online fashion retailer Boohoo has bought out Dorothy Perkins, Burton and Wallis from Sir Philip Green’s failed retail group Arcadia for £25.2 million.
The deal comes only weeks after Boohoo moved to buy Debenhams, a prominent UK high street retailer also owned by Arcadia Group, for £55 million.
Like the Debenhams purchase, Boohoo will acquire the brands and online businesses of Dorothy Perkins, Wallis and Burton, but not the 214 physical stores that come with them. Administrators Deloitte, which has been overseeing the sales, stated that around 2,450 jobs will be lost as these shops wind down their business.
260 head office roles relating to the brands’ design, buying, merchandising and digital operations will be transferred to Boohoo.
John Lyttle, CEO of Boohoo, touted the deal as the newest entry in a “successful track record” of integrating high-profile British brands into Boohoo’s online storefront.
“Acquiring these well known brands in British fashion out of administration ensures their heritage is sustained, while our investment aims to transform them into brands that are fit for the current market environment,” he said.
Asos, an online retail rival to Boohoo, also bought out a number of Arcadia’s largest brands last week. Topshop, Topman and Miss Selfridge were purchased for £330 million in another brands-only deal that did not include stores or warehouses, putting a further 2,500 jobs at risk.
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Commenting on the news of Boohoo’s latest purchases, Sendcloud CEO Rob van den Heuvel cautioned against viewing the move as demonstrating that physical retail no longer has value. “Consumers are craving the face-to-face retail experience now more than ever, with 44% of consumers planning to start shopping at retail stores as soon as businesses reopen,” he noted.
“While shifting to eCommerce may be one of the only ways businesses survive in the short-term - now is not the time to tear down brick and mortar stores.”
Former UK chancellor George Osborne, architect of the austerity drive following the financial crisis, is dropping his portfolio career to work full-time as a banker.
Osborne announced on Monday that he would give up almost all of his eclectic range of jobs to join M&A advisory firm Robey Warshaw as a partner. This will mean departing from the Evening Standard newspaper and his position as a senior adviser at investment firm Blackrock.
“Robey Warshaw is the best of the best, advising great businesses on how to grow, and I’m proud to be joining this first-rate team,” Osborne told the Financial Times.
Robey Warshaw is a small investment bank headquartered in Mayfair, which currently employs 13 people and made a profit of £17.9 million last year. Osborne will become the firm’s first outside partner.
It is unclear how much remuneration Osborne will receive in his new role, though filings at Companies House showed that Robey Warshaw’s highest paid partner received £10 million in 2020 and £27.8 million in 2019.
“We believe that George will significantly enhance the advice we give to clients,” a Robey Warshaw spokesperson said in a statement. “He brings differentiated experience and expertise to our team from his leading roles in global finance over the past decade.”
Robey Warshaw was founded in 2013 and quickly became a preeminent firm in the bulge-bracket deal space. It has recently advised on a range of high-profile deals including Comcast’s $39 billion acquisition of Sky, BP’s $10.5 billion purchase of shale assets from BHP Group, and the London Stock Exchange’s $27 billion takeover of Refinitiv.
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Though he is giving up most of the nine jobs he collected since departing the government in 2016, Osborne will remain chair of the advisory board of Exor, currently managing the Italian Agnelli family’s interest in Ferrari and Juventus.
A deal to merge Fiat Chrysler Automobiles (FCA) and PSSA Group was completed on Saturday. The combined company, Stellantis, will be the fourth-largest car manufacturer in the world by production volume, behind only Toyota, Volkswagen and Renault-Nissan.
The new company will be headed by former PSA boss Carlos Tavares, with other managerial positions to be confirmed in the coming weeks. It will begin trading in Paris and Milan on Monday and New York on Tuesday.
“The merger between Peugeot S.A. and Fiat Chrysler Automobiles N.V. that will lead the path to the creation of Stellantis N.V. became effective today,” the newly merged automakers said in a statement on Saturday.
The plan to merge the two was announced in October 2019, winning the approval of 99% of investors in both companies. FCA and PSA board members finalised the deal shortly afterwards.
According to new industry figures, Stellantis ranks as the world’s third-largest automaker by sales. At close of play on Friday, the company was valued at more than $51 billion.
FCA CEO Mike Manley, who will lead Stellantis’s key North American operations, has said that 40% of the company’s expected synergies would come from the convergence of platforms and powertrains and from optimising R&D investments. 35% will come from savings on purchases, and a further 7% will come from savings on general expenses and sales operations. Overall, Stellantis expecs to cut annual costs by over €5 billion without plant closures.
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The deal will bring several high-profile brands together, with Peugeot’s Citroen and Vauxhall joining Fiat, Jeep and Chrysler under the Stellantis umbrella. PSA will also gain increased access to American markets while FCA will be able to utilise PSA’s latest vehicle platforms, including those specifically designed for EVs, which will help it to achieve new emissions targets.
2020 has been a turbulent year for businesses across the world but as we reached the end of December, there has been some hope for those in the Mergers and Acquisitions (M&A) space. Figures published by the Office for National Statistics (ONS) revealed that, in the three months to the end of September, the value of deals in which one UK company acquired another rose to £4.4bn. This is an increase of £400m in the April to June quarter and £3.2bn from January to March. Across the same period, the value of deals done in which a company from abroad bought a UK business rose to £2.9bn, up from £2.1bn during the previous quarter.
Globally, the market has shown signs of rapid recovery due to the announcement of the COVID vaccine. In fact, companies across the globe announced almost $40bn worth of deals on the day that Moderna revealed trial data that showed its COVID-19 vaccine was highly effective, a week after similar news from Pfizer and BioNTech. According to the FT, this was a clear sign that chief executives are looking to tap cheap debt or use cash stored away during the crisis to carry out strategic M&A. Markets were also buoyed in the same period due to the conclusion of the US presidential election.
M&A deals have slowed during 2020; a year dominated by a global pandemic with reduced investment flowing towards COVID-specific assets classes such as personal protective equipment (PPE), remote working and learning solutions, and back-office technology and infrastructure for firms moving online. According to S&P Global Platts, in the US during the first three quarters of this year, the industry saw just 81 deal announcements, worth a total of US$7.75b; this is compared to 200 deals worth US$47.05b over the same period in 2019.
Despite a bleak year, the market appears to be surprisingly optimistic. According to a poll of executives and M&A professionals, 87% of respondents said they expect M&A activity involving privately-owned companies to increase in 2021. The poll, conducted by law firm Dykema Gossett PLLC, also revealed that more than seven out of 10 respondents expect to close a deal during the next year and 71% believe that the market will strengthen.
In fact, as we head towards the end of the year and Brexit, along with a recovering global economy, there are reasons to be optimistic for the M&A market, including distressed opportunities, cheap debt, new regulation and expansion into secondary market by global firms.
Part of this strengthening deal flow attitude is due to the broader economic recovery and confidence in the market as a whole. In its latest World Economic Outlook, the International Monetary Fund (IMF) predicts the global economy to experience a 4.4% contraction in 2020 and a partial rebound to 5.2% growth in 2021. In Dykema Gossett PLLC’s survey, respondents are optimistic about the economy after the US fell into recession earlier this year. Six in 10 said they hold a positive view of the economy over the next 12 months; 17% hold a negative view, and the remaining 23% held a neutral view.
One strategy is to be aggressive and make acquisitions happen whilst the market is opportune. The other is to sit tight and wait until things normalise.
This is also set to be boosted by a new US President, Joe Biden. In the week of the US election result, share prices were boosted by the largest growth in two months as a Democratic President would result in a major new stimulus package. London’s FTSE 100 closed up by 131 points, or 2.33%, at 5786. Furthermore, all three of the leading barometers of US share prices – the Dow Jones Industrial Average, the S&P 500 and the Nasdaq – were showing gains on the morning of election day in the US.
The M&A market is not only driven by sentiment but also investment into Small and Medium Enterprises (SMEs); a sector that has been hit hard by COVID. However, with a variety of stimulus packages delivered across the globe, large firms have the ability now to take advantage of the environment as we move into 2021. For example, at this moment in time, there are many distressed opportunities. With businesses laying off employees and the unemployment rate in the UK set to hit 2.6 million according to the Bank of England; larger firms have the ability to pick-up intellectual property and infrastructure from struggling firms.
As an expert in helping growing companies secure finance, here are the two approaches that I have seen companies taking and why now is an opportune time M&A.
As an investment banking firm with offices in London and Canada, specialising in M&A, capital transactions and corporate advisory, we are seeing two distinct strategies being utilised amongst our clients.
One strategy is to be aggressive and make acquisitions happen whilst the market is opportune. The other is to sit tight and wait until things normalise.
The former option is proving to be a popular one and there is a strong case for making acquisitions during this COVID-19 induced downturn in the economy. There are five reasons why companies should be considering acquisitions as a growth strategy during this COVID economy.
Acquiring during a downturn has historically produced greater total shareholder returns (TSR). A recent study performed by EY and Capital IQ indicates that companies making acquisitions that totalled 10% or more of their market cap in the 2008 downturn created 5% more TSR over three years than those who did not.
Done properly, strategic acquisitions that serve as a platform for long-term success via revenue, customer and asset growth, will provide the acquirer with the ability to capture above-market returns when market conditions begin to stabilise and grow.
When using debt to finance an M&A transaction, it becomes more affordable when interest rates are low. As I write this, the Bank of England’s base rate is at 0.1%, which means debt financing in the UK has never been cheaper. This low-interest-rate environment has a wide number of implications, the majority of which I will not get into, however, it does translate into a higher capacity for acquirers to service debt, thereby making M&A deals more feasible from affordability, size and aggregate basis.
Using the financial crisis of 2008 as the most recent comparison to what we face today, M&A valuations decreased by approximately 27% during that time. As such, companies making acquisitions during this period observed substantial discounts to market value. When companies, divisions and assets can be purchased for below-market pricing it creates immediate value for the acquirer.
According to the United States Small Business Administration, 90% of businesses fail within two years after being struck by a disaster. When we compare this to the economic impacts of COVID-19, it is certain that many businesses are going to be irreparably damaged. Furthermore, businesses that fail to adopt new technologies and ways of operating in this environment will only fall further behind. As a result, companies and ownership groups who have been negatively impacted by COVID are likely to be open to acquisitions, which can likely be acquired with favourable terms and valuations.
Having excess liquidity on the balance sheet without effective utilisation does not create increased shareholder returns. Therefore, when companies are sitting on excess liquidity it is important to ensure cash is utilised in a manner that is going to generate above-market shareholder returns such as strategic M&A transactions at below-market valuations.
For companies that have confidence in the post-COVID recovery dynamics of their industry and are looking to add strategic value, the time is now to make acquisitions.
The impending Brexit will also be a key factor driving M&A. Companies with sales in the UK and the European Union will have to decide whether they will still want a foot in both markets. Buying UK companies has become more attractive now because Brexit has weakened sterling and made UK assets significantly cheaper. Brexit has also made UK companies unloved, depressing their share prices and making them attractive takeover targets. But UK companies will have to factor in the extra expense of buying EU companies priced in euros if they wish to establish a presence on the continent.
M&A is making a comeback
The evidence pointing to increasing M&A activity is strong. Q4 this year has been the third strongest for M&A activity in two decades, according to the Financial Times*. So far, US$612bn worth of deals has been agreed in Q4, up from $461bn and $491bn in the same quarter in 2019 and 2018 respectively.
While the last quarter of a year tends to be the busiest for M&As as dealmakers try to close deals before the year-end, the number of deals will likely be even higher this year as the backlog of deals caused by the pandemic comes back into play.
The economic background is also supportive of M&A activity. First, the cash required for takeovers is readily available. With interest rates at all-time lows and expected to stay so for some time, it is easier for companies to borrow funds than ever before. Second, the subdued global economy means companies will be strongly tempted to boost their revenues via takeovers.
Certain sectors are more prone to M&A activity. For example, smaller listed companies will become targets because of depressed share prices, while hard-hit sectors such as leisure, tourism, travel and retail will see a lot of struggling businesses become takeover targets. Valuing companies will be harder in the uncertain environment though and buyers able to show flexibility in terms of valuations will be more successful.
As competition hots up in the M&A market, participants will need to ensure they have the right resources to lead the pack. Personnel and expertise are key of course, but they also need the right tools. And a tool that makes deal-making significantly easier is a Virtual Data Room (VDR).
Virtual Data Rooms add efficiency to deals
VDRs bring tremendous efficiency and an array of functionalities to M&A transactions. They began around 20 years ago as online versions of the physical spaces where confidential or sensitive information was held for relevant parties to view. They now provide secure online access to authorised users to conduct the deal process and come with a range of added functionalities.
The Drooms VDR, for example, can be set up quickly and easily, enabling users to operate in a fully regulatory-compliant framework immediately.
So far, US$612bn worth of deals has been agreed in Q4, up from $461bn and $491bn in the same quarter in 2019 and 2018 respectively.
All the required documents can be uploaded, and invitations given to various interested parties, who can be assigned different levels of control within a secure environment. For premium security, documents are transferred exclusively via an SSL connection with AES encryption and a 256-bit key length.
Extensive reporting features mean all activities conducted within the VDR can be tracked and by use of Optical Character Recognition technology, desired terms can be searched for among all index descriptions and documents, with all hits flagged to users. International deals can be made even easier by real-time translations of documents, with new languages being added regularly.
VDRs continue to make substantial technological progress. Some now even incorporate blockchain technology and artificial intelligence (AI). The former is particularly useful in keeping a ledger for legal purposes while AI can be instrumental in conducting highly efficient due diligence.
Due diligence is crucial
The due diligence aspect is pivotal. Being able to conduct due diligence as quickly and accurately as possible is crucial. Failure to do so is the prime reason behind the mistakes made in deals, both by acquirers and those looking to sell.
For sellers, a VDR can help optimise and smooth the due diligence phase. They help to impress and attract a range of buyers, maximising deal values and preventing unwanted surprises by improving the accuracy of historical and financial data and fixing existing discrepancies before negotiations start.
For buyers, optimising due diligence means they can more accurately assess the true value of a target company, for example, in terms of identifying and capturing synergies, resolving leadership issues and assessing how to merge systems and processes. It helps them to prepare fully before a deal closes and afterwards when the integration process must be put into effect.
Leading-edge tools are required
Fierce competition and pressure to do deals mean that players in the M&A market need leading-edge tools if they are to operate effectively. This will likely become all the more apparent in the New Year as Europe adapts to Brexit and recovers after the shock of the COVID pandemic. The winners in the M&A market will be those who ensure VDRs are their first tools to hand.
*Source: Global M&A recovers on vaccine hopes and US political stability, 17 November 2020
UK telecoms giant TalkTalk has agreed to a £1.1 billion takeover deal proposed by Toscafund – its second-largest shareholder – and private equity investors Penta.
TalkTalk announced details of the takeover bid early on Thursday. Should they approve the deal, TalkTalk investors will receive 97 pence per share, a 16.4% premium on its share price on 7 October when talks first began. If this occurs, TalkTalk will be de-listed from the London Stock Exchange.
Including debt, the deal values TalkTalk at around £1.8 billion. Toscafund, which is controlled by hedge fund tycoon Martin Hughes, already controls a 30% stake in the company.
Sir Charles Dunstone, chairman of TalkTalk, spoke optimistically about the benefits the deal would bring for the ISP. “Being a private company would allow us to accelerate adoption and focus on our role as the affordable provider of fibre for businesses and consumers nationwide,” he said.
“The telecoms industry is going through a fundamental reset and we are keen to play our part in it.”
TalkTalk is a budget broadband and phone provider that provides services to around 4.2 million UK customers. In addition to announcing the takeover deal, it published its half-year results on Thursday, showing a statutory pre-tax loss of £3 million during the six months leading up to 30 September compared to a £29 million profit during the same period in 2019.
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The company said it had been heavily impacted by the COVID-19 pandemic, which had left engineers unable to visit customer premises to connect them to the network. It also noted that the closure of third-party overseas call centres had been a detriment to its customer service capabilities. While revenues from phone calls also slipped, the broadband provider noted that data usage had increased more than 40% during lockdown periods.
Shares in TalkTalk were up 1.7% in early Thursday trading. The Toscafund-Penta takeover is slated to take place in the first quarter of 2021.
AstraZeneca, the British pharmaceutical company currently working in collaboration with Osford University on a COVID-19 vaccine, announced on Saturday that it would acquire US drugmaker Alexion for $39 billion.
As part of the deal, the FTSE 100 firm said that Alexion shareholders will receive $60 in cash and about $114 worth of equity per share, a premium of more than $50 per share. Alexion shareholders will own around 15% of the merged company.
The boards of both firms unanimously approved AstraZeneca’s takeover, which is expected to close in Q3 2021. The deal was the result of exclusive talks with no competitor involved, and will broaden AstraZeneca’s portfolio with access to Alexion’s rare-disease and immunology drugs.
"Alexion has established itself as a leader in complement biology, bringing life-changing benefits to patients with rare diseases,” AstraZeneca CEO Pascal Soirot said in a statement. “This acquisition allows us to enhance our presence in immunology.”
Ludwig Hantson, CEO of Alexion, also hailed the deal: "We bring to AstraZeneca a strong portfolio, innovative rare disease pipeline, a talented global workforce and strong manufacturing capabilities in biologics.”
Shares in AstraZeneca fell 9% on Monday as investors moved to price in the deal, which is now awaiting regulatory approval before it can go ahead. Shares in the company have fallen by around 17% from their peak in July, as Pfizer and Moderna have made swifter progress in developing and receiving approval for their COVID-19 vaccines.
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AstraZeneca also revealed on Monday that it will take out a £13 billion ($17 billion) bridging loan to finance its takeover bid.
Arcadia, the UK-based retail group owned by billionaire Sir Philip Green, is set to enter administration imminently, according to the BBC.
Questions over the future of the retail empire were raised on Friday as it emerged that Arcadia had failed to secure a £30 million loan from potential lenders. A spokesperson said at the time that senior leadership were “working on a number of contingency options to secure the future of the group’s brands”.
Rival retail company Frasers Group, owned by billionaire Mike Ashley, said that it had offered Arcadia a £50 million loan to save it from collapsing and was “awaiting a substantive response”. Sources among Arcadia’s senior staff told the BBC they do not expect a last-minute rescue deal.
Arcadia owns several major high street retailers and brands including Topshop, Miss Selfridge, Dorothy Perkins, Wallis and Evans. It has struggled in recent years with a shift in consumer activity from city-centre businesses to online retail, and has acknowledged that the COVID-19 pandemic in 2020 had “a material impact on trading” across its brands.
The retail group operates over 500 stores across the UK and employs around 14,500 people, whose jobs will be at risk should the company enter administration.
Shares in some of Arcadia’s rivals rose on Monday in response to news of the company’s probable insolvency. Next gained 2.8% on forecasts of weakened competition on the high street, and JD Sports rose 6.5% on predictions that it may choose to drop its proposed purchase of Debenhans.
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Online fashion retailer Boohoo, which may be interested in buying Arcadia-owned brands such as Topshop, gained 5.5%.
Frasers Group on Monday also said it “would be interested in participating in any sale process” of Arcadia’s brands should they be sold off.
Phoenix Legal is a full-service Indian law firm with offices in the country’s two major cities and commercial hubs New Delhi and Mumbai. The firm offers an extensive range of transactional, regulatory, advisory and dispute resolution services and advises a diverse clientele which includes companies, banks and financial institutions, funds, promoter groups, public sector undertakings and individuals, both in India and overseas.
Phoenix Legal acts for some of the largest corporations from around the world in different areas, including Fortune 500 companies. The firm has advised on some of the most complex and headline matters in different practice areas.
For an update on M&A in India, we caught up with Manjula Chawla, the Co-founding Partner of Phoenix Legal, who concentrates her practice in the areas of strategic investments, M&As, corporate governance, finance and restructuring, and general corporate & commercial matters, Ritika Ganju, who’s a partner with a practice focused in M&A, commercial transactions and corporate and compliance-related advisory and Kripi Kathuria - a Principal Associate whose areas of expertise include M&A, joint ventures, employment, commercial transactions and general corporate advisory.
Despite the pandemic, India has become a hotspot for M&A in 2020. What do you attribute this to?
India’s ability to be a hotspot for M&A even during these times can be attributed to a gamut of opportunities that Indian businesses offered. These included scope for creation of high value with merged synergies, the constant need for investment in innovative and growing business setups and rescue or rejuvenation operations for financially distressed segments. This was coupled with the consistent belief in India’s potential and the COVID crisis seen only as a temporary slowdown.
Considering the sector-wise activities on the Indian M&A plane in the last six months, the abovementioned opportunities seem to be concentrated in certain core sectors such as telecom, energy and natural resources, banking and IT & ITeS. Amongst the big-ticket transactions expected to create substantial business value, the acquisition of 10% stake in Reliance Jio Platform in the telecom sector by Facebook was the silver lining with a value of USD 62.43 bn. This was followed by an investment of USD 9.5 bn by nine global PE firms in Jio Platforms. The energy and natural resources sector saw some major domestic deals led by NTPC Ltd acquiring a majority stake in THDC India Ltd and a 100% stake in North Eastern Electric Power Corporation Ltd. Among the acquisitions of distressed businesses, SBI consortium took the lead by acquiring a majority stake in distressed Yes Bank. One of the biggest transactions in the IT sector was the 100% acquisition of Piramal Enterprises Ltd.’s healthcare insights and analytics business by US-based Clarivate Analytics Plc.
PE investment has also contributed significantly to the active M&A scenario. Investments from PE picked up during the first half of 2020 at an increase of 27% over the investment recorded for this period in 2019. A substantial portion of this investment went into the booming start-up sector engaged in a wide array of businesses including FinTech, HealthTech and EdTech.
With the Jio-Facebook deal getting the ball rolling in the digital platform market and the expected acquisition of a stake in Jio by Google, more investment and consolidation activity could be in and around the digital sector.
Considering the current economic environment, do you think that this trend is likely to continue?
We are positive about the M&A and investment scenario in coming times despite the pandemic. Unlike the 2008 financial crisis, the international corporate world does not plan to abort expansion and investment opportunities, but perhaps put some of their plans on hold until the world is in a relatively better position. Having said this, the nature of M&A transactions may not be typical in the very near future as deal structures are likely to be more innovative, keeping in mind the commercial uncertainties and ensuring that the survival of the business is the immediate goal.
Digital technology has come out as a winner in these times, opening up a whole lot of opportunities for novel ideas and innovations in the sector. PE investment, which emerged strongly during the initial pandemic period, is likely to continue to lead the investment forefront. With the Jio-Facebook deal getting the ball rolling in the digital platform market and the expected acquisition of a stake in Jio by Google, more investment and consolidation activity could be in and around the digital sector. The start-up sector is likely to continue to receive high traction from PE investors, especially FinTech, EdTech, retail, HealthTech, enterprise infrastructure and logistics segments. This could prove to be good news for homegrown start-ups seeking investments and it could help them remain afloat when many established enterprises struggle to survive.
Considering the uncertain current business environment, India is more likely to structure existing businesses to extract the best value from available resources while minimising costs. Therefore, internal restructuring and reorganisation of businesses could be very well expected in the coming days.
In addition to the above, acquisition of financially distressed businesses is likely to continue and add to the investment activity pool in the very near future.
Lastly, given that valuation of Indian businesses is likely to be more realistic until the world recovers, acquisition and investment opportunities may become all the more attractive for investors as well as corporates proposing to expand.
In what ways has the COVID-19 pandemic affected your work within M&A?
The corporate M&A lawyers of the firm have been fairly busy during the pandemic. We did not see any recession in M&A deals and proposals that were in the pipeline before the on-set of the pandemic and many of these were successfully closed during the months of April, May and June. These deals involved strategic acquisitions and divestitures, fresh PE investment, internal reorganisation of business as well as sale and purchase of distressed assets. Another aspect that contributed to the continuity of work on this front was the staggered closing of transactions which had their first closing prior to March 2020. There was an overall slowdown in the months of July and August 2020, but looking at the inquiries and propositions in discussions, we are confident that corporate and M&A life will not take long to be back on track.
Jason Varney, Corporate Partner at Thomson Snell & Passmore LLP, explores some of the most useful funding sources for business acquisitions.
Although pursuing an M&A transaction may not currently be on every company’s “key priorities” list given the current economic uncertainty as a result of the COVID-19 pandemic, such times do inevitably bring about a number of consolidation opportunities – whether that be as a result of a company insolvency and subsequent fire sale of its business and assets, or through the need to take better advantage of economies of scale by merging two similar businesses.
Whatever the reason behind the proposed business acquisition, a share or business purchase agreement is unlikely to be touched by ink until the acquirer has secured acquisition finance.
There are numerous ways that an acquiring company can secure funding for a business purchase, but the key sources we tend to see in our M&A and finance practice are as follows:
As the old saying goes, “cash is king" – and this is still the case when acquiring a business. Although the vendor of said business will likely, if well advised, require evidence proving the availability of cash reserves to fund the acquisition before signing any documentation; the fact that third party funders do not need to be involved in the acquisition itself means that this is by far the simplest way to fund an M&A transaction.
As the old saying goes, “cash is king" – and this is still the case when acquiring a business.
Debt finance comes in a variety of forms but in essence it involves the borrowing of money and paying it back with interest. The issues to consider when entering the market for acquisition finance are what debt products are available and what is affordable for your business. Incurring debt means providing for the regular expense of loan repayments and will invariably involve a certain amount of control by the financier. In addition, any already existing finance facilities may contain restrictions on further borrowing which may make it difficult to borrow enough money to finance a large acquisition entirely through debt.
Typically cheaper in the long term than issuing equity and advantageous from a tax point of view (as principal and interest repayments are usually tax deductible), issuing debt has many other benefits. Ultimately, the borrower retains control and ownership of its business; once the loan is paid back the borrower’s relationship with the lender ends and the company ceases to be subject to the financier’s restrictions. The lender’s return is fixed, any profit after repayment of debt is for the shareholders.
Depending on the complexity of an acquisition transaction, borrowers may choose the path of incurring senior debt, which typically carries lower interest rates depending on the collateral. Another way of raising finance is issuing bonds or raising mezzanine finance, which is used to fill the missing gap in acquisition finance structures. The riskier a transaction is, the higher the interest rate a lender will typically charge. Interest rates are currently at historic lows, so the cost of borrowing can be low.
A key benefit of raising finance through the issue of further shares in the acquiring company/corporate group (rather than through debt finance, as detailed above), is that in the majority of cases such an investment would not need to be paid back to the relevant investor. The downside, of course, is that the new shareholder(s) will want to see a return on their investment (by way of a preferential dividend, ordinary dividend and/or a capital gain) and most will want some input into the management of the company (whether by way of voting rights or a shareholders’ agreement containing veto rights).
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If the newly acquired business which was funded through equity finance is a success, both the existing and the new shareholders are likely to benefit from such success; but it is in situations where such an acquisition fails to provide the benefits that were envisaged (or where the “failed” acquisition starts to put the wider corporate group under financial pressure), that tensions between the investors will start to emerge. In such circumstances, it is imperative to have a detailed shareholders’ agreement in place to manage any disputes between the investors should the company or its group take a turn for the worst.
Ultimately, the final decision as to how best to fund an acquisition really depends on a number of considerations – such as the market, availability and cost of debt, investor appetite, the company’s current gearing (being the ratio of a company’s debt to its equity), etc.
When considering acquisition funding it would be wise for companies to seek advice not only from lawyers but also, in regards to larger acquisitions, from a corporate finance house; as most companies would benefit from corporate finance input at some stage during their life-cycle.
Members of the Democratic party in the US have called for a temporary ban on mergers and acquisitions (M&As) in America. The proposed ‘Pandemic Anti-Monopoly Act’ would freeze mergers and acquisitions made by companies and financial organisations with more than US$100 million in revenue or market capitalisation.
In Europe, national governments and the EU have expressed concerns that foreign investors may try to take advantage of the financial impact caused by COVID-19 to acquire domestic businesses of strategic interest. The key point for acquirers to note is that deals may be subject to greater challenge from governments.
The over-riding notion to ban M&As is to avoid predatory acquisitions. The belief is that companies experiencing financial distress during the pandemic have less negotiating power when it comes to striking deals. In theory, struggling businesses are more inclined to accept the terms presented to them, meaning they may not realise their true value and could perhaps achieve a more attractive deal in non-pandemic times.
The Democrats in the US also argue that a temporary ban on M&As amongst large corporations would avoid long-term economic consequences, which would be caused by less market competition in the future.
While it seems understandable to relate to the sentiment of such proposals, they will do much more harm than good, and will only contribute to the economic consequences of COVID-19.
An outright ban on M&As could mean that struggling businesses have less opportunity to survive. With an acquisition off the table, a company more realistically faces insolvency. This could result in people losing jobs, while an element of competitiveness will disappear from the market and the government and the country’s road to economic recovery could become tougher.
In theory, struggling businesses are more inclined to accept the terms presented to them, meaning they may not realise their true value and could perhaps achieve a more attractive deal in non-pandemic times.
There is the consideration that the talent who have lost jobs because of the insolvency, then go on to find new employment with a company who may have been a prospective acquirer. This same acquirer may also have the opportunity to purchase the insolvent company’s assets and Intellectual Property (IP) rights at a later date, as administrators look to repay debts. This would be subject to complex negotiations but could essentially mean that after a period of disruption and lost time, the acquiring business still achieves its same objectives at a lower price, whilst the smaller struggling business ends up as the biggest loser.
An M&A ban could also prove counter-productive for any economy that chooses to enforce it. The laws underpinning a ban in one country may not be applicable, or certainly open to a greater challenge, in another geography. This would likely lead to companies looking to invest outside of their home country, creating jobs elsewhere and making financial contributions to another government and economy.
A governing body looking to ban M&As is also likely to be open to challenges from corporations under anti-competition laws. While there will be differences in the policies of these laws around the world, they are often bound by a similar premise of ensuring fair competition and promoting competition for the benefit of the market.
If a large corporation was prevented from taking part in a merger, whilst other companies could make acquisition offers because they had a lower turnover, it is reasonable to assume the excluded company has grounds to make a case of anti-competitiveness. Similarly, if a struggling company faces going out of business and has no option for survival through lack of acquisition opportunities, it’s questionable whether anti-competition policies are being upheld. After all, the ban would be contributing to lesser market competition when a business ceases trading.
Challenges under anti-competition laws would require careful consideration. This could have further negative economic impacts as an acquisition becomes long and drawn out. This may mean a struggling business running out of time to be acquired, resulting in job losses and insolvent debt. The latter can quickly ripple effect throughout supply chains, risking financial losses for other companies and putting further jobs under threat.
Should the ban be viewed as anti-competitive, a government would also need to consider how this impacts its relationship with large corporations. If companies feel trading conditions penalise their success, they may well decide to relocate their operations to another country. This could mean job losses in the home country and a decline in economic contributions, which may impact GDP.
Governments and anti-trust bodies are right to review M&As but it is draconian and short-sighted to consider banning them during the pandemic. It’s impossible to know how long the economic impact and business disruption of COVID-19 will last and freezing M&As until some level of financial stability and prosperity returns is likely to contribute to a higher risk of business failures. It’d be more effective to focus on upholding the laws designed to facilitate fair and competitive M&As.
