International Deal Making – Assisting Acquirers

QUESTION ONE – In your experience, what are the key considerations that international clients should have the front of mind when assessing a target company for acquisition in your jurisdiction?

During the due diligence process, legal violations and tax shifts by a target person or company are shed. Furthermore, investigative institutes pay more and more attention to overall aspects, such as corporate culture, environmental standards and IT security.

Commercial due diligence and business due diligence are linked together, as they both focus on market analysis. In commercial due diligence, the company focuses on the marketability, therefore the company-related aspects play an important role: an analysis of the target company takes place and the focus is on purchasing and distribution. Who are the suppliers, what contracts have been concluded with them and how efficient is the distribution chain? Furthermore, it investigates the management of materials. Quality and quantity play an important role in this sector. Research and development are often interesting too: does the target company work to promote innovations in its field? This paves the way for future potential.

In order to assess the company and its position on the market, the next analysis step takes less account of the company itself and analyses the market sector in which it operates much more. Thus, it is possible to find out who the major com­petitors are, and which products and services contribute to their success. Which business model do the participants of a given market follow and what are the results obtained?

The business due diligence goes further, investigating how the market developed. To influence a buying decision considerably may be mergers, new competitors or market downturns. Each of these operations describes in which playing field your target company is located. Where possible, customer surveys are also used to find out more about the company’s external effectiveness.

QUESTION TWO – How would you, as a professional advisor, approach the due diligence process to ensure all bases are covered prior to a sale price being agreed?

Planning and coordination are critical factors in due diligence. The extent and depth of the analysis to be implemented in order to balance the cognitive needs of the investor must be agreed between the parties with some constraints:

• time (the deeper the due diligence, the more time required)
• confidentiality (the greater the level of detail, the higher the number of people involved in the process with a consequent increase in the risk of leaks)
• professional skills (as the thematic extent of the checks increases, so does the number of professional specialisations necessary to cover the areas of interest)
• the cost (the greater the involvement of expert third parties, the higher the cost of due diligence).

A clear definition of the objectives is fundamental for the success of the due dili­gence: unclear, non-shared or unrealistic goals limit the significance of the investi­gation work with respect to the cognitive needs of the investor.

QUESTION THREE – Once an acquisition is agreed, what are the key clauses or warranties and indemnities you would recommend for inclusion in the sales contract?

Clauses concerning the guarantees are usually written in a particularly analytical way. This is the preferred contractual technique in Anglo-Saxon countries, where contracts are characterized by being particularly detailed.

The analytical list of the guarantees is generally accompanied or replaced by clauses of closure. These relate to disputes between the company and third parties; however, it appears more effective to limit this to a general clause attesting the absence of any dispute.

Turning to the content of the clauses, a common distinction is that between the guarantees pertaining to the ‘title’ of the participation and the guaran­tees relating to the ‘content’ of the participation.

The clauses on the ‘title’ are those that refer directly to the character­istics of the shareholding and of the target under the corporate profile. For example, the seller guarantees that he is the owner of the shares or quotas and that they are free from any right of third parties; or the seller guarantees that the company has been validly constituted and is validly existing according to the national law that regulates it.

The clauses on the title are usual in contracts for the sale of shareholdings, and the seller can hardly refuse to grant such guarantees to the buyer. Such clauses are generally not subject to quantitative limitations to com­pensation of the damage: even where there is thresholds responsibility of the seller, they do not apply to this type of guarantee, too basic to be the object of any limitation.

More important, in practice, and therefore the subject of major negotia­tions, are the guarantees relating to the ‘content’ of the investment (assets and liabilities of the company). They can relate to the most diverse topics and vary from case to case, depending on the sector in which the com­pany is active.

The most common guarantees in contracts for the acquisition of share­holdings include those concerning the budget. Related to the guarantees on the balance sheet, it is possible to mention those in tax matters, essen­tially proving the statement that the company has always respected all its tax obligations. From an economic point of view, the guarantees can be important for employment relations and social security and pension contributions.

Tips for completing a successful cross-border acquisition

The agreement must be a good strategic agreement.

The objective must have a good strategic logic, such as access to a new market or technology or the recognition that a competitive advantage can be created through the inclusion of new skills linked to individual skills. The acquisition must make the purchasing company a stronger competitor on the market to make sense.

Financial strength is required to complete the deal.

This includes the ability to afford the purchase, but also to pay the interest on all the loans that the buyer contracts to make the purchase.

It is also necessary to make the necessary investments in the target or in the reality resulting from the merger, and to be able to manage company performance which may have slowed down in the short term, due to distractions linked to integration.

Your company must also have a culture that can work well with the target’s corporate culture.

If the target of the acquisition is a company that has a savings approach and you instead have an innovative and revenue-oriented approach, it may be difficult to combine these different approaches. Indeed, cultural homogeneity is a major determinant of the success of post-acquisition integration.

If the operation you have in mind does not have at least these characteristics, I strongly suggest you avoid it. If all the aforementioned criteria are met (strategic, financial and cultural), it will be possible to proceed with the acquisition by entering into the merits of a more thorough evaluation.

This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.