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M&A activity has definitely slowed down. Due to economic uncertainty and high-interest rates, companies are hesitant to expand during these times. In addition, executing deals has also become more difficult due to regulatory changes, especially in the tech industry. In this article, Mark Legaspi, Director, Legal - Corporate at LinkedIn, discusses key regulatory considerations for M&A in the current market.
“When you have a deal that’s reportable to the regulators, you need to make your filings as clean as possible as they can very easily kill the deal.” - Mark Legaspi
Key Regulatory Considerations for M&A
According to Mark, regulators are now more aggressive when reviewing deals, with the intention of slowing down or stopping acquisitions. They are now less predictable and less reliant on historical precedent. Because of this, companies are now hesitant to do deals, especially if they are certain that the deal is reportable to the regulators. Furthermore, stricter regulators have changed the dynamics of negotiations and deal documentation. Here are the most impacted aspects of M&A landscapes.
- Timeline - Due to heightened regulatory requirements, deals are now expected to wait 12 to 18 months from signing to closing. This long period raises questions for both parties. The buyer must now assess if their thesis or investment rationale still makes sense after a year. Conversely, the seller will have a hard time running their business during the interim period.
- Negotiations - Regulatory considerations are now being negotiated during the LOI stage. Furthermore, covenants are now more prominent during negotiations, as buyers seek to control the target business during the interim period. This has resulted in many deals dying earlier in the process.
- Valuation - Because of the anticipated 12 to 18 month interim period, both parties are struggling to agree on valuations. Sellers will claim that they can possibly double their size during the wait, which forces buyers to increase valuation dramatically.
Buyers, on the other hand, will do their best to scrutinize how and why the seller’s revenue will double. This will create conflict and could possibly lead to litigations, says Mark. Companies have started putting breakup fees in the letter of intent in case regulatory clearance is not obtained.
- Market perception - Buyers and sellers must understand how the market will react to a transaction, mainly the competitors and customers. Regulators often consult the broader market for their opinion regarding the transaction. Also, competitors and customers may proactively reach out to the regulators and voice their concerns. Being well prepared, early in the process, to answer questions from the regulators are now necessary.
- Confidentiality - Deals must now be more confidential. If the deal leaks to the regulators before buyers are prepared to answer questions and defend their thesis, the transaction could be killed quickly.
Advice for deal teams
Despite these extra hurdles, Mark emphasizes that if the buyer truly believes in the deal’s strategy and synergies, they should pursue it. Buyers must prepare a compelling story for the seller and the regulators about why the deal is beneficial for everyone, including the market and consumers. These narratives must be formed much earlier in the process now.
Furthermore, the deal team must be extra careful about the integrity of their documents. In a reportable deal, the regulators will require the buyer to submit a comprehensive filing of all internal documents detailing the analysis of the deal.
A legal team will also delve into the company's internal system, including non-privileged emails and casual communications with colleagues, looking for conversations that could be perceived as anti-competitive. All buyers need to ensure their documentation is as clean as possible.