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.
Shai Kuttner discussed The Art of Deal Making: Using External Expertise Effectively as part of the M&A chapter.
Which warranties and indemnities are most valuable as part of an M&A contract in your experience? Do you have a process that helps to formulate an effective schedule for either buy or sell-side clients?
The most important warranties that should always be negotiated into the contract are balance sheet, tax and information warranties. These should be combined with no limit indemnity for any tax claims. These warranties combined with a sound indemnity address the main issues that come up in transactions. Indemnities are the most heavily negotiated part and the heart of the legal issues. Limitations are common practice, and we advise for flexibility according to the importance of the warrantees. Insurance of warrantees may be a good solution in some cases and is becoming more common.
Due diligence is an important tool for assessing whether the transaction should be concluded, to determine whether the economics of the transaction are acceptable and what terms and type of warranties and indemnities should be negotiated. However, relying too much on warranties and indemnities may create a false sense of security. Claiming under warranties and indemnities is not always possible due to time and money limitations that may apply, liquidation or bankruptcy of the seller or other defences potentially available to the seller. This does not make warranties and indemnities not useful – they offer protection and are a good tool for obtaining information from the seller prior to signing the contract.
We emphasise to clients that warranties and indemnities can never replace the value of a well conducted due diligence into the target company and that a buyer must know or learn in-depth about the target he wants to acquire. This means, in addition to well formulated warranties and indemnities, performing comprehensive due diligence that focuses on the legal, financial and tax side, as well as on the commercial side by interviewing management, suppliers and other key parties. In such processes valuable information can be obtained, often information that is not freely disclosed by a seller.
What methods of financing a deal are most common in your jurisdiction, for instance private placements, asset finance, mezzanine debt? What advice can you provide around structuring debt into a transaction?
Financing methods typically used in the Netherlands mainly consist of large tranches of senior bank debt possibly in combination with junior shareholder loans, high-yield notes and/ or debt instruments provided by the seller. Other methods of financing, such as mezzanine debt and privately placed bonds, also occur on a smaller scale. An often noted down side of using mezzanine debt is that the providers usually demand a significant piece of the equity that adversely impact your envisioned return on investment and may create a conflict of interests in maximising long- or short-term returns on investment.
The financing market in the Netherlands is dominated and served largely by Dutch banks working with standardised loan documentation and subject to strict know your customer requirements. The financing market can be described as conservative. This means that, especially for foreigners wanting to invest in the Netherlands, it is advisable to prepare well in advance a financing bid and ensure your relationships with the banks and other lenders are established well in advance. This will significantly improve your chances of obtaining financing as swiftly as possible and prevent any unwanted delays in the acquisition process.
Is private equity widely available in your jurisdiction? What are the advantages and drawbacks of financing a deal using equity, in your experience?
The Netherlands offers a very open and attractive climate for private equity firms. The big international private equity firms are very active in the Netherlands. In addition to all international private equity players, Dutch pension funds are also an active investor in the Netherlands.
The main advantages of using a private equity firm is their ability to execute transactions, expertise and professionalism, connections and proven track record. The main disadvantages are that private equity firms are mainly focused on cashing out over a short period of time and so you have a partner with a different agenda combined with the fact that you have to give up some degree of control.
Top Tips – For A Watertight Contract
• Know the industry and business environment you are dealing with, especially on a cross-border transaction. Consult industry experts on the commercial side and business culture in a new territory. You will save much by asking and learning before the transaction is made.
• Do not dwell on small contractual issues. Make a list of the most important issues that matter most.
• Be fair and transparent. Hiding information or a hidden agenda will eventually be counterproductive and only come back to haunt you. The best protection from litigation is a good and solid relationship developed with the other party. No lawyer or agreement can replace that.