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March 6, 2024

Problems don’t usually surface at the early stages because it's the honeymoon phase. Both the buyer and the seller would like to see the deal happen, so they work together to build momentum. And often that means postponing dealing with some of the more difficult and contentious issues. However, these M&A challenges are inevitable and will arise as the deal progresses.

In this article, Douglas Barnard, former Executive Vice President, Corporate Development and Legal Advisor at CF Industries, discusses effective strategies to overcome M&A challenges.

"In most deals, the difficult issues surface when the lawyers and tax professionals first get involved.  It's then crucial to see if zero-sum issues can be transformed into common ground. If you're creative, you can often turn these challenging issues into opportunities for agreement." – Douglas Barnard

Mindset to prepare for M&A

To improve chances of M&A success, there are two crucial things deal makers must do at the outset of a deal: Understand the lay of the land better than anyone else, and always act like an honest broker. This way, people will allow you to work your magic, find ways to find common ground, and cross off issues one by one. 

There are four components that go to the lay of the land:

  1. Understand the relative negotiating leverage - Who is more eager to buy/sell? Does the seller have alternatives? Are there competing bidders? Can the seller defer selling it if the time isn't right.
  1. Synergies - Does the buyer have synergies? And if they do, how do they compare to competing bidders' synergies? Is the acquisition strategically important to the buyer because buyers behave very differently if it's strategically important to them to get the deal done.
  1. Identify impediments to closing - the need for regulatory clearance, which is increasingly difficult today, and the need for financing, as opposed to a buyer that can just write a check without financing. And ultimately, what is the likelihood of success or failure if the deal hangs in the balance on regulatory clearance or financing. 
  1. Understand where the buyer is on the learning curve -  Does the buyer already know going in just about everything worth knowing about the target? Or will they need to do a lot of due diligence to get comfortable and understand what they might be buying? 

After knowing the lay of the land, and after triaging on the issues, deal professionals can add a lot of value by turning those issues and finding common ground, so that the parties can put the issue behind them and get to closing.

Overcoming M&A challenges between signing and closing

The period between signing and closing can be challenging, especially if there's a significant delay for reasons like regulatory clearance or financing. Deteriorating market and capital market conditions can cause  buyers to reassess their willingness or ability to close the deal.

Other risks include unexpected difficulties in obtaining regulatory clearance. In deals involving public companies, stockholder activism could emerge, with activists potentially opposing the deal's terms from both sides. Also, there might be a major lawsuit or major regulatory investigation aimed at the target between signing and closing.

A crisis might develop affecting the buyer or the target between signing and closing. So given all the things that could happen, these are some of the most heavily negotiated provisions in acquisition agreements. The answer is to get top lawyers who know their way around deals to deal with it in the acquisition agreement and then hope for the best that all's quiet. 

Mitigating post-merger integration risks

The single biggest risk during post-merger is loss of talent or demotivation of talent at the target, particularly in sectors like tech and professional services. It's crucial to ensure key talent remains motivated and committed, as they are the invaluable assets that help run the company. 

There are various ways to mitigate this risk. Strategies like deferring liquidity for key individuals can be effective, reducing the urge to leave after receiving a payout. While seller non-competes have been a classic approach, their current legal standing is questionable. Therefore, focusing on incentive retention packages and having the right culture are more reliable methods.

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