Last March, when the pandemic was just arriving in the UK, M&A activity ground to a halt. This didn’t last long though, with CEOs confined to their rooms, and with little else to do, they started to merge and acquire over Zoom. This trend has shown few signs of slowing and we have now had three consecutive quarters of more than $1trn in M&A deals. Conducting this number of deals remotely, and at high speed, has made carrying out pre-deal due diligence and post-deal synergies harder than ever for in-house lawyers.
To discuss these challenges, Lex Mundi hosted a roundtable at The Lawyer’s General Counsel Summit 2021. Lex Mundi vice president Eric Staal, CEO Helena Samaha and head of North America Jenny Karlsson were the facilitators and there were number of leading GCs across a range of industries. To encourage discussion, Lex Mundi shared the results of its 2021 Global M&A Trends Report, which had found the top concerns for in-house lawyers were, among others, deal structures, antitrust and due diligence. In Europe, target valuation and the economic environment were top of mind for many respondents.
Deal structures and valuations
The demand for high quality targets means that it is currently a sellers market. The issue with this is it pushes some owners to be overly ambitious in the valuations of their businesses. “When we look at EU targets, we see that the assets are massively over valued which is preventing potential deals,” said one of the GCs.
The lack of up-to-date figures also makes it tricky to come to fair valuations. Covid-19 has been such a disruption for businesses, both in terms of sales and costs, it can be difficult to compare figures year on year. “People are relying on their 2020 EBITDA and trying to pass that forward as sustainable EBITDA but we know full well their profit has benefitted from reduced costs in the last year,” bemoaned one of the lawyers. For lots of companies it is pure guesswork at the moment.
Foreign investment restrictions
One of the big regulatory trends of Covid-19 has been the tightening of foreign investment restrictions. Countries increasingly want to protect their prized assets from foreign takeovers – and will change their regulations regularly to do so. “Many countries require FDI approvals and lots use the rules creatively for purposes they were not designed for,” complained one of the lawyers. “This is especially problematic for cross border deals that transcend a few jurisdictions,” he continued.
Monitoring the evolving regulations is especially tricky for international companies. Most of the GCs lean on external counsel for guidance on the regulations in countries where they have no lawyers present. “One of the key roles for my team members is to monitor the rules in their jurisdictions. In other jurisdictions we lean on outside counsel who can give us a quick overview,” explained a lawyer.
Post-merger synergies and tricky due diligence
As a result of an increased focus on ESG and regulatory risk, participants agreed that in-house teams were carrying more responsibility for enhanced due diligence and post-closing integration in the current market environment. With respect to realising post-closing synergies, Lex Mundi proposed three models for managing merger integration.
Everything being virtual makes it difficult to do effective due diligence before the deal and to then benefit from synergies afterwards. One of the biggest issues lawyers had was onboarding new colleagues when you couldn’t talk to them in person. Often key personnel would leave after the merger had been completed. “We had quite senior people leaving when you would normally hope to build a much better connection with them,” said one lawyer.
The due diligence before the deals is also much trickier over Zoom. In the past people would visit the company in person which would give them a better understanding of its culture and would allow them to see the systems in action. “Virtual due diligence has been one of the biggest challenges and is one that will not be over for a while, especially for international transactions,” said a lawyer.
One proposed solution to this was to hire bigger risk teams. However, the issue is that there are often bottlenecks on the sellers-sides. No matter how many members of the risk team there is, there are only so many questions the selling company can answer. It is a sellers market in many cases, so lawyers don’t get a chance to dig as deep as they would want. “You need to be willing to change your appetite for risk,” urged one GC. It could be counterintuitive for lawyers to take on more risk, but the advice to the group was: “when you are paying such overvalued prices anyway, a small amount of legal risk doesn’t seem as important”.