Jean-François Alandry of You Are Capital participated in The Art of Deal Making: Using External Expertise Effectively

Foreword by Andrew Chilvers

For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.

If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.

These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.

Jean-François Alandry discussed The Art of Deal Making: Using External Expertise Effectively as part of the M&A Advisory chapter.
How has the M&A landscape changed in the aftermath of the Covid-19 pandemic? Has it changed the nature of deal making in your jurisdiction and which industries have seen most activity?

During the lockdown period very few deals were closed. Pes and VCs were focused on crisis management of their existing portfolios and multinationals and privately-owned companies

were dedicated to managing their ongoing activities under the challenge of Covid-19, so that the external growth was a priority for very few. From mid-June onwards the market started to open

up again and look at potential M&A deals. This involved taking the “New Reality” into account with the necessary co-existence of the pandemic, and since the beginning of September there has been frenetic M&A activity, as if the market wants to catch up on all the deals that have not been done to date.

Some sectors are very active in M&A such as technology (cloud computing, managed services, digital transformation consultancy etc.), lifesciences (biotech, pharma, medical devices, clinical analysis etcs), food industry, e-commerce/e-business, logistics and food distribution. Meanwhile, others are still very quiet such as hotels, restaurants, tourism, retail, transport of passengers etc.

What advice could you give potential clients on effective pre-deal planning? For instance, preparing a business for sale in your jurisdiction or ensuring transparency for a buyer?

Many sectors are involved in a necessary concentration process that has been accelerated by the “New Reality”. Our advice to clients, depending of course on their size, market share and financial situation, is to participate actively in this concentration process and be one of the first movers, and if possible as a leader. There are mechanisms to compensate the possible dilution generated by lower present valuations. Accepting a reasonable dilution to concentrate on buying smaller actors with a high discount can create substantial value.

When it comes to sales processes it is important to prepare well-documented re-forecasts that take into account the “New Reality”, to explore in advance the possibility to accept earn-outs or ratchet formulas and propose short and competitive “commando” beauty-contest processes. This helps to counter the high volatility of the market and therefore the risk of failure due to major, frequent and unpredictable macro-economic or social changes. The VDDs are back and trendy at the moment.

What deal structures prove most effective in your jurisdiction (e.g. asset vs share deals)? Are there any important legislative anomalies that international clients considering a merger or acquisition in your jurisdiction should be aware of?

The deal structure that is common for non Covid-19 affected sectors at the moment is a transaction based on 2019 figures with no discount, but with an adjustment in value if EBITDA in 2021 (or even 2022) does not reach at least 2019 EBITDA.

What also needs to be considered are deals in some strategic sectors that are now subject to European and national restrictions for non-European buyers. As of early April this year, the European Commission published guidelines to EU Member States requesting them to adopt or enforce their foreign investment screening mechanisms to protect sensitive assets from foreign takeover during the crisis. It’s important to take this fact into account when it comes to defining target buyers.

Top Tips – Effective Negotiation Strategies In Your Jurisdiction

• The negotiation strategies have to favour short but competitive processes. These are on updated and state-of-the-art documentation, selected and realistic targets and advice from sector specialised advisors to avoid unrealistic valuations/ deal structures. Of course, negotiation positions will have to be more or less flexible considering the impact of the “New Reality” on the evolution of affected sectors, the market position of the clients and their financial situation. Flexibility will be required for valuation purposes when it comes to upfront payments and earn-outs or future value correction mechanisms.