Christina Wojcik, vice president of legal services at Seal Software, breaks down the steps to consider throughout the M&A process.
With over $3.9 tn in deals signed globally in 2016, last year was in line with the third largest year on record for M&A activity.Interestingly, the volume of withdrawn deals in 2016 reached $842 billion (769 deals), the highest such volume since 2008, partly reflecting heightened regulatory pressure.¹
2017 does not appear to be following suit. In the first quarter of 2017, the total number of deals announced fell by 17.9 percent versus the first quarter of 2016, but overall deal value was up by 8.9 percent to a total of $678.5 Bn. This appears to be a trend back to 2015, with fewer but larger “megadeals.”²
The trend is that while M&A is healthy, there is a clear increase in broken deals. Between Brexit concerns and antitrust regulations in the US, an increasing number of deals are breaking down before they are concluded.
M&A deals are complex events that require overcoming a hefty number of obstacles, including corporate governance, form of payment, legal concerns, contractual issues, regulatory approval and tax issues. It is very challenging to fully assess and understand the kinds of contractual risks, restrictions, obligations, and exposure companies will take on after the deal is closed.
Uncovering this information requires many hours of manual contract review work from either a law firm or lower-cost legal service provider. Before they can even begin reviewing the documents, organisations first must find and centralise all the relevant contracts. This may sound simple, but tracking down thousands of contracts, which have been created in varying formats, across different departments, and stored in various locations over the years is an arduous and sometimes overwhelming undertaking.
The Real Work
Once all contractual documents are collected, the real work begins of extracting contract data, and having that data be useful before closing a deal. Legal teams must review a host of provisions, and not fully understanding assignment or change of control provisions can be especially detrimental to the dynamic of the acquisition. If your contracts cannot be assigned or if change of control triggers automatic termination for cause, the strategic value of the acquisition may be called into question, leading to many hours of renegotiation.
In addition to assignment and change of control, here are a few more to consider:
- Be aware: Auto-renewal
Many sales organisations work to negotiate auto-renewals and every procurement department dreads tracking auto-renewal provisions. If the goal is to terminate a contract within the specific notification period, you must know which contracts contain the provision and the window for cancellation. A missed auto-renewal can result in hidden costs that most companies will not have considered. One of our customers, a large energy company, discovered they were auto-renewing a lease costing $400,000 per year on property they didn’t use, three years after a takeover.
- No nonsense: Non-competes & non-solicits
Monetary damages can also occur if a company breaks a non-compete or non-solicit clause. It’s important to know whether contracts include these provisions, as a non-compete is a promise from both the buyer and seller to refrain from engaging in activities with competitors. A non-solicit clause prohibits a company from trying to lure or hire the other company’s customers or employees, and this is particularly relevant when two companies in the same industry merge, as many of each company’s existing customers or partners are likely competitors.
- Identify: Indemnity
The acquiring company should clearly understand what the target company has agreed to indemnify, and these limitations of liability can be very complex and should be heavily negotiated prior to closing an M&A deal.These are often the most negotiated provisions and typically have cross-references which makes them especially difficult to fully comprehend. Careful review of the indemnification provisions of each contract is needed to ensure that these provisions align with the combined entity’s indemnification standards and practices.
- Limit: Unlimited liability
When startups are motivated to close a new deal, especially with big, recognisable brands, they will often accept potentially unacceptable provisions. This is commonly seen with limitation of liabilities. Accepting unlimited liability does not necessarily pose a large risk to a startup, because they have much less to lose. However, it can pose a significant risk to an established organisation with much higher exposure if they accept that unlimited liability. It becomes very important that the acquiring company quickly identifies the contracts containing unlimited liability and look to renegotiate amend or possibly terminate the contract. We worked with a software giant which bought a startup and discovered it had inherited numerous unlimited liability provisions – a small problem for the $1.5 million startup, but a much bigger problem for the $1 billion company.
The Silver Lining
As M&A activity increases, especially within the startup world, knowing what’s in contracts is more important than ever, and having easy access to and visibility into contracts data is essential. Due to the time sensitivity on many M&A deals and the manual labour often required to analyse contracts, most companies resort to sampling just a small portion of the target company’s contracts with the assumption that if the sample passes the test, the rest will as well. But, countless cases prove that this approach exposes the acquiring company with risk they had not anticipated. Luckily, current contract technology offers machine learning and natural language processing solutions so that organisations going through the M&A process can streamline the due diligence process to consolidate contracts, pinpoint and understand risk, and uncover vendor consolidation opportunities.
Contract intelligence solutions can also help to alleviate some of the M&A concerns companies have when it comes to Brexit. By gaining full insight into the terms impacted by the separation from the EU, such as governing law, currencies, and other commercial terms, companies may find that the merger, acquisition, spin-off, etc. will actually give them a competitive advantage or provide for growth.By extracting metadata and clauses through a sophisticated search and analytics, businesses can quickly understand the risk and opportunities in those contracts and determine if there is still value to the deal.This will help facilitate closures with the added security of fully knowing what is being acquired. So no need for extra water or paracetamol, because understanding contract terms will prevent the post-deal hangover that so many rushed deals result in.
- JP Morgan’s M&A Global Outlook
- CNBC “Number of global M&A deals tumbles in Q1 2017 while overall value rises”
Duo glide around world’s largest fountain in Dubai
Paragliders Llorens and Goberna take magical flight above the Palm Fountain.
Horacio Llorens and Rafael Goberna defied gravity to perform The Breaking Pointe flight around the world’s biggest fountain at The Pointe, Palm Jumeirah in Dubai. Here is all you need to know:
– Spaniard Llorens is a five-time world champion and Infinity Tumbling Guinness World Record holder, who has performed a series of spectacular projects during the last five years including paragliding with a flock of starlings and with the beautiful Aurora Borealis as a backdrop.
– Brazilian Goberna was a Guinness Book of World Records winner at only 12-years-old and, in December 2016, he took to the skies above one of the seven wonders of the natural world when paragliding at Iguazu Falls.
– This time around, the duo teamed up in Dubai to showcase The Palm Fountain at the Pointe, Palm Jumeirah. They overcame a tricky preparation period to expertly glide between the fountain’s powerful jets of water.
– Spanning across the boulevard, the Palm Fountain features two giant floating platforms covering 14,000 square metres of sea water. Reaching an impressive 105 metres high and lighting up the Dubai sky with 3,000 LED lights, the fountain “dances” to hit songs from sunset until midnight.
– They undertook training first at Paramotor Desert Adventure on January 12 to test out their brakes and motors with technician Ramon Lopez finally arriving after being held up by the heavy snow in Madrid.
– Training was crucial for the challenge of flying during the night with low visibility as safety director Alan Gayton ensured they had a reserve parachute in case of a technical issue with the main parachute. Llorens and Goberna also had to study the movement of the water with great precision in order not to get caught up in the jets of water
– Flying over water, it was also mandatory to have a lifejacket with rescue boats, jet skis and divers on hand which came handy when Goberna suffered a technical malfunction on the first January 14 practice run.
– After repairs long into the night, they returned to Paramotor Desert Adventure to test out the motors again before completing the stunning flight on January 15 with Llorens and Goberna performing in harmony.
– Llorens, 38, revealed: “As soon as we got the opportunity, we wanted to fly there. We needed to know the area really well beforehand and we needed to know how to ‘play’ with the fountain – this was new for us. Such strong streams of water shooting 100 metres up is a lot, so we had to be really prepared.”
– Goberna, 26, explained: “The motor wasn’t flying so good because, prior to arriving in Dubai, it was last used in Europe at high altitude. I needed to adjust the carburettor in the air inside the motor. In the first practice flight over the water, I broke one propeller. I really couldn’t understand what was happening and then another one broke. Eventually, a backup motor was required. After a long journey, the final result was beautiful! The team worked incredibly hard to make it.”
– Llorens added: “The highlight for me was playing between the super shooters with Rafael, because it’s something we’ve never done before; it felt really new and really powerful.”
EU sets itself jobs, training and equality targets for 2030
By Jan Strupczewski
BRUSSELS (Reuters) – The European Commission on Thursday announced goals for the 27-nation bloc to reduce poverty, inequality and boost training and jobs by 2030 as part of a post-pandemic economic overhaul financed by jointly borrowed funds.
The EU executive arm said the European Union should boost employment to 78% in 2030 from 73% in 2019, halve the gap between the number of employed women and men and cut the number of young people neither working nor studying to 9% from 12.6%
“With unemployment and inequalities expected to increase as a fallout of the pandemic, focusing our policy efforts on quality job creation, up- and reskilling and reducing poverty and exclusion is therefore essential to channel our resources where they are most needed,” the commission said.
The goals, which will have to be endorsed by EU leaders, also include an increase in the number of adults getting training every year to adapt to the EU’s transition to a greener and more digitalised economy to 60% from 40% now.
Finally, over the next 10 years, the EU should reduce the number of people at risk of poverty or social exclusion by 15 million from 91 million in 2019.
“These three 2030 headline targets are deemed ambitious and realistic at the same time,” the commission said.
The goals are part of the EU’s set of 20 social rights, agreed on in 2017, to make the EU more appealing to voters and counter eurosceptic sentiment across the bloc.
They say everybody has the right to quality education throughout their lives and that men and women must have equal opportunities in all areas and be paid the same for work of equal value.
The unemployed have the right to “personalised, continuous and consistent support”, while workers have the right “to fair wages that provide for a decent standard of living”.
(Reporting by Jan Strupczewski; Editing by Nick Macfie)
UK aero-engineer Meggitt eyes return to growth after pandemic slump
LONDON (Reuters) – British engineer Meggitt said that it could return to profit growth in 2021 provided there are no further lockdowns, despite a weakening in the struggling aviation market at the end of 2020 and early this year.
Pandemic restrictions halted much flying globally last year and forced plane makers Boeing and Airbus to cut production rates, dragging down suppliers like Meggitt, which makes and services parts for such aircraft.
Meggitt’s underlying operating profit plunged by 53% to 191 million pounds ($267 million) in 2020, it said on Thursday, despite continued growth in its defence business which makes parts for military jets and accounts for about 45% of the business.
Meggitt, however, said it expected air traffic to recover in the second half of the year which would help it return to profit growth over the year, although its guidance for flat revenue disappointed analysts who had expected growth of 6%.
Meggitt’s Chief Executive Tony Wood said in November that he had expected flying to start to recover by Easter, but new variants have led to more restrictions and delayed the recovery.
“It has gone back a couple of months… it’s now very much in the summer,” Wood said of the recovery in an interview on Thursday.
Further in the future, Meggitt is positioning itself for the move to lower emissions flying, and its sensors and electric motors will be used on electric urban air mobility platforms, such as flying taxis, and in hybrid aeroplanes being developed.
But Meggitt said new tax breaks announced in Britain’s annual budget on Wednesday aimed at encouraging investment would not change its plans.
“Yes, it will be a benefit. Are we looking at any acceleration as a result specifically of that? Not really,” Woods said.
Shares in Meggitt were down 1% to 427 pence at 0943 GMT. The stock has risen by 50% since news of a COVID-19 vaccine last November, but is still down 23% on where it was pre-pandemic.
($1 = 0.7165 pounds)
(Reporting by Sarah Young; Editing by Alistair Smout and Susan Fenton)
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Duo glide around world’s largest fountain in Dubai
Paragliders Llorens and Goberna take magical flight above the Palm Fountain. Horacio Llorens and Rafael Goberna defied gravity to perform...