Latest trends in M&A transactions

Legal trends in M&A transactions and company sales and acquisitions
10 Nov 2022

Table of contents

This month we bring to our blog an eminently practical article on the latest trends in M&A transactions that we have been noticing in the M&A area of CECA MAGÁN Abogados and in which we are involved. Some of them are a matter of pure opportunism and others just reflect an adverse economic and geopolitical situation. Both especially affect Sellers, whose profile is mostly Spanish entrepreneurs without second generation who, through hard efforts, have generated successful businesses that put them in the focus of buyers and who after many years decide to sell and no longer have to worry about their business. Together with the explanation, we will provide the solutions that we, as M&A expert lawyers, are implementing.

Trend in M&A transactions: Due Diligence "to get to know you better"

Years ago, a Due Diligence was relevant in determining the health of a company subject of an M&A transaction and its results were key or allocating the risks and guarantees to be provided by the seller. In fact, such a level of objectivity was reached that to resolve the epic arguments as to whether or not the Due Diligence was complete or whether or not the Buyer is an expert in the industry, a fairly democratic solution was chosen, consisting of depositing before the Notary the content of the VDR (virtual data room) along with the signing of the SPA (sale and purchase agreement), bringing certainty to the process.

However, in the last few years has appeared the first M&A trend that is brought here today, the "to get to know you better Due Diligence”, which is perhaps a legacy of the distressed M&A transactions that took place in the last years. 

In those, the review process works the same, but the problem arises when, after performing an endless Due Diligence, the Buyer's advisors when negotiating the liability regime of the SPA, claim literally that the Due Diligence “was only done to get to know the company better and that no effect should arise therefrom limiting Seller's liability” and of course refusing to deposit the VDR.

The opportunistic M&A trend from the point of view of the Buyer and its advisors is to believe that the lack of deposit of the VDR benefits them, because if a contingency arises, no one will be able to tell them that they have already reviewed documentation on the subject from which its existence could be inferred. But this is not entirely true, because this lack of clarity as to the content of the Due Diligence generates an opacity, which could well turn against the Buyer in an eventual litigation aimed at discussing a contingency not accepted by the Sellers.

Our advice is that whenever possible the VDR should be annexed to the SPA and filed with the Notary and the solution, in the event that the Buyer refuses to do so, will be to file it by the Seller unilaterally in a notarial protocol immediately afterwards to the signing of the SPA, so that at least we gain certainty as to its date and content, been difficult for anyone to deny in the future that this was the content of the VDR.

From Buyers' leverage to financing against Sellers in M&A transactions

Historically, when an industrial investor or Investment Fund went on a buyout, it had the money or had secured the necessary financing to do so, in fact, it was said that buyouts only made sense when the buyer leveraged part of the price. Those were the days when money was cheaper than the future cash flows of the target company and those margins were played on when the Buyer planned his investment.

Nowadays, with the increasing difficulty in raising cheap capital and the opportunism of some, the trend is spreading to buy companies "in instalments" by financing directly against the seller, paying between 50% and 60% of the price at the signing of the transaction and deferring and splitting the rest over two or three years.

Our advice in this regard is that when launching a competitive process for the sale of a company, both the Seller and its advisors should carefully study the binding offers they receive from potential Buyers, giving priority to offers that imply payment of 100% of the price upfront at the signing of the transaction or, at least, the highest percentage possible, and only accept deferment and instalments of any amount against the granting by the Buyer of a performance bond on first demand, avoiding, as far as possible, the comfort letters, as we do not know what will happen "upstream" from the Buyer in two or three years' time.

Sometimes, higher valuations hide worse payment conditions and guarantees that must be very well calibrated, because the cost of opportunity can be very high and add concern to the Seller, who shall wait two or three years to receiving the full price, in a very uncertain economic and geopolitical context.

From the financing of the Seller to the purchase of a controlling stake

Beyond the above, currently we are identifying transactions in which Buyers just purchase a controlling stake at closing, keeping the seller as administrator and leaving aside the purchase of the remaining equity with just vague future commitments.

Their argument is that this way the Seller will endeavor to excel the company’s profit, which historically was done, by agreeing an Earn Out motivating the Seller to continue working for the company and maximizing the profit for a few years after the sale.

This approach entails high risks for the Sellers, because in this case we are no longer talking about financing a part of the price, but of losing control of their company and remaining just as a minority shareholder, which is not much encouraging and, in the meantime, maintaining full responsibility for their company as directors.

Except for very particular cases, we advise against this option and if there is no choice, we would recommend not only negotiating a shareholders' agreement protecting the Seller but addressing an irrevocable put option on the minority stake for near future and a price equivalent to the company’s initial valuation along with a payment guarantee if the Seller exercises his option. This way Buyer's vague future commitment will become certainty for the Seller.

As lawyers with expertise in M&A transactions, we can help you to consider all possible approaches to these market trends. Contact us here.

José María Pastrana

Socio del área mercantil

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