The current M&A market - except for some hard-hit sectors - is bullish with a strong sellers’ market. There’s certainly an impressive uptick in dealmaking, with soaring multiples, increasingly large deals, omnipresent PE firms and the emergence of SPACs. Even supply chain issues, which are on the downside of the current trends, spur acquisitions as companies are considering deals that give them more control. Sellers wanting to make the most of the opportunities in today’s market should anticipate some inherent risks. Let us elaborate on some of them below.
Competitive or Pre-emptive Bidding? Make the Right Bet
Auctions nowadays remain an attractive alternative to bilateral deals. No wonder why sellers are opting to pitch buyers against each other while keeping control and maintaining competitiveness. Even PE firms, which are often not inclined to participate because of limited resources and time, have now found ways through ‘buy and build’ strategies and Club deals to participate successfully in auctions. Developing strong relations with the management at an early stage is an alternative way for PE houses to hold off other potential bidders. In today’s hot market, we see more disruptions by pre-emptive bidding. Although there are clearly some pros, the con is that pre-emptive bids also bear risks and can turn badly, especially for a seller. Sellers usually reserve all rights in the process letter to treat bidders differently, but they should bear in mind the risk of pre-contractual liability.
Reinvesting in Growth. Carefully Preparing Carve-Outs
Many companies are exiting geographic markets and divesting entire divisions to refocus on their growth strategies and core business. Carve-outs or spin-offs enable them to do this. PE funds are particularly active in this segment. And the shortage of attractive standalone businesses coming to the market will cause financial buyers and strategic players to consider buying carved-out business. Activist shareholders are another driver of carve-outs because they can increase shareholders’ value. Carve-outs come with a certain operational and legal complexity though. This is particularly true for highly integrated businesses with commonly shared premises, IT systems, personnel, and mixed contracts (see also Data Segregation, Migration, and Integration in M&A). We still see sellers surprised by the impact and time to deal with any works council implication, required regulatory approvals, undetected tax issues, and to deal with the discovery or realization that some business elements in the carved-out business are indispensable to the remaining business. Careful planning ahead alongside a thorough due diligence is crucial to untangle the carved-out business successfully.
Riding the Regulatory Wave. Focusing on Deal Execution
There is an unprecedented regulatory scrutiny of M&A transactions. And this is also expanding to include issues such as data ownership and access to critical technology. Sellers want to check at the outset if there are any regulatory consents required, what is the likelihood of obtaining them, and the implications on the timeline. We see sellers in today’s market increasingly pushing the antitrust risk to buyers by imposing hell or high-water provisions and/or reverse-break fees. Sellers should also carefully assess the scope, terms and conditions of FDI mechanisms as they could impact timing and—more importantly—the deal certainty (see also Riding the New FDI Regulation Wave). Last but not least, sellers should proactively identify and address ESG issues to increase the likelihood of completion.
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