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M&A beachcombers: no escape from longer due diligence
2011 has been an interesting year for the M&A market in London. Activities have been (understandably) subdued by the economic climate, while in September new rules were introduced by the UK Takeover Panel to make the M&A process more transparent.
From our overview of the M&A marketplace we also observed that the due diligence process seemed to be taking longer, with more cross-border parties involved than ever before. We noted more parties working on deals remotely, particularly on tablets, notebooks and smart phones.
In order to understand these trends in more detail, we undertook an online survey with our clients to uncover their views on the Takeover Panel rules, general due diligence, and how likely M&A specialists are to be working on deals remotely – even on holiday.
Mobile devices have made it much easier to work on deals while out of the office – 89% of respondents said that they use a mobile to work on a transaction. The most popular devices are Blackberrys (73.3%), iPhones (22.2%) and iPads (17.8%).
The percentage of deals involving multiple countries is now relatively high, with 12% of respondents reporting that 100% of deals that they had worked on in the past three years were international. Only 5% said that 100% of deals involved only one country, while the highest proportion (29%) said that up to half of their transactions involved cross-border work.
The increased time and complexity involved in conducting M&A due diligence has led to nearly three quarters (72%) of deal makers working on a transaction while on their most recent holiday.
Due diligence challenges
According to the research, the majority (62.2%) of respondents said that the due diligence process had become more complex over the past three years. A small minority (6.7%) said that the due diligence process had become less complex, with the remainder saying that they had not noticed a difference. Greater complexities are likely to have been introduced by a number of factors, not least the increased risk aversion demonstrated by many companies.
There were similar responses to the question of whether the due diligence process has become longer or shorter over the past three years. Well over half (57.8%) of respondents said that they spend significantly more time on due diligence, compared with just 6.7% who said that they took significantly less time. Just over a third 35.6% said that they hadn’t noticed any difference.
Given that respondents believe M&A deals are becoming more complex and time-consuming, it’s not surprising that the biggest cause of stress is lack of time. More than a third (36.7%) named this as the biggest source of stress when working on a deal. Only 4.4% of respondents said that spending too much time travelling was the biggest cause of stress, reflecting the fact that so many people can now work on deals remotely from tablets or smart phones. The second biggest source of stress was highlighted as ‘other parties not delivering information on time’ (26.1%), followed by ‘poor or inaccurate documentation’ (21.7%) and ‘pressure from other parties’ (14.4%).
Impact of the Takeover Panel’s new rules
While 39.8% of respondents said that the new rules will achieve the Takeover Panel’s objective of improving the effectiveness and transparency of M&A activities in the UK, just over a quarter (25.5%) believe that they will actually have a detrimental effect on potential M&A activity. Only 15.3% think the new rules will not make any difference to the way in which M&A activities are managed. While it’s early days for the new regime, the rules are due to be reviewed and possibly extended to a wider group of listed companies in early 2012.
Almost half of respondents (43.3%) said that they thought the new Takeover Panel rules would make M&A activities more time-consuming, while 40.2% believe that they will make them more expensive. Even worse, 16.5% of people said that they believed the new rules would help to drive M&A activities away from the UK to other financial centres. So while most people thought that the rules would improve transparency, there are some fears that they will actually increase the cost of carrying out M&A activities or even lead to lost business.
The jury appears to still be out over whether the new Takeover Panel rules will be easy to enforce, with responses roughly split three ways. As the regime becomes the norm for those involved in UK M&A activity, we will begin to see cases where the Takeover Panel takes action against those who fail to follow the rules.
One of the key points of the new Takeover Panel rules is that the identity of companies bidding for a target business should be made public, mainly in the interests of the target company and its shareholders. However, the majority of M&A specialists (59.1%) believe that target companies should not be required to reveal potential bidders and should have the choice to keep them confidential. One concern could be that the new regime makes it more difficult for prospective bidders to carry out due diligence procedures within the time limit of 28 days – after which they must make a formal bid or step back.
Our clients are clearly concerned about the extra time and expense involved in complying with the new regulations and most would like the choice to keep details under wraps. While it appears that some potential targets may be able to win dispensation from the panel over the requirement to name bidders, in most cases we have to move with the times and adapt to the new rules.
Those companies that become more efficient in their M&A activities will be able to take advantage of this new regulatory landscape. For bidding firms, these changes will place ever greater emphasis on the need to conduct due diligence as swiftly and efficiently as possible.
These new rules put the final nail in the coffin of old fashioned, paper-based due diligence in favour of virtual data rooms, which speed up the due diligence process by enabling review teams to work online, at any time, from anywhere in the world.
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