Executing M&A from a Legal Perspective

Lawyers are wired to identify, seek, foresee, and mitigate risks in transactions. So it's no surprise that executing M&A deals from a legal perspective is all about risk management. Helping us identify these risks is Brett Shawn, Senior Vice President, Assistant General Counsel at Warburg Pincus. 

"Too much of an abstract framework is the mistake that lawyers make, but not being abstract enough is a mistake that non-lawyers make. - Brett Shawn

According to Brett, his job became more difficult these last 18 months. The market has become too seller-friendly, and they are finding themselves agreeing to things that they won't usually agree upon. Understanding risks also became more difficult since people are now doing things that have never done before. On the contractual side, people are now protecting themselves from a pandemic on their purchase agreement. 

But pandemic or no pandemic, there are certain risks that you need to be aware of that can stop the entire deal altogether. Knowing how to mitigate these risks will help you close the deal faster and more efficiently. 

Diligence Risk

The most basic risks that you need to watch out for are diligence risks. You need to verify everything that the company has told you by reviewing all of the contracts and financials. 

However, there are things that you cannot see during diligence. It's hard to prove something that doesn't exist. This is where representations and warranties come in handy. You can go after a seller that intentionally defrauded you unless they didn't know about it. 

Financial Risk

There is also a risk around consummating the deal itself. If you, as a buyer, are trying to get a loan from the bank to fund the deal, the bank will ask to assess the seller. You need to put a covenant with the seller in place to cooperate with the bank to get your funding. Otherwise, the deal might fall off. 

It is also in the seller's best interest to cooperate because they don't want the 5% reversal fee at the end of the day, assuming the deal has one. They would like the deal to come through as finding another buyer can be taxing, and the existing buyer already knows too much about their business. 

Antitrust Risk

If you are a private equity acquirer, then you don't have much antitrust risk. Chances are, you have a lot of business portfolios and none of them are competing against each other. However, strategic acquirers usually buy competitors which triggers more antitrust risk. If you are a strategic acquirer, you need to be prepared for your deal getting reviewed, how long it takes, and what remedies you can do to push the deal forward. 

Deal Jump Risk

Deal jump risk is usually for public companies. Board members have a fiduciary duty to get the highest price for their stakeholders, resulting in deal jumping. If someone else suddenly wants to pay more than the original buyer, they can jump to the new buyer. 

If you are the existing buyer, you can protect yourself by placing a termination fee on your contract or matching rights. However, this only applies to US companies because in the UK, for example, they don't allow termination fees.

Red Flags

Be on the lookout for red flags. For example, if basic information is difficult to access.  They might be hiding something, and receiving inconsistent information can also create credibility and trust issues. Also, private companies can sometimes be too informal with their processes which can cause a problem in the long run.

PE Firms vs Public Companies Acquirers

If you are a seller, choosing between a PE firm and a public company depends on your deal rationale. PE firms will generally keep the management team, so if you want to continue growing the company and looking for help, expertise, and money, a PE firm might be the better option for you. 

Oftentimes, public companies can pay a lot more money due to their lower cost of capital synergies. If you are looking to retire and want a bigger payout, public companies may be the way to go.

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