Market
21.05.2015
By mergers.lv
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Some perceptions are simply too strongly entrenched so that they get almost universally accepted and are seldom challenged. In M&A context, one such assumption is that it is primarily about the acquisitions, while another suggests that only investment bankers’ and corporate financiers’ views on deal-making matter. As a result, media get flooded with stories about the acquisition battles, but very little attention is devoted to disposals. And the other members of deal-teams working on the transactions, like lawyers and accountants, get little attention and credit, if any at all.

In their recent report (a full copy of which is available here), Eversheds, an international law firm, takes quite a contrarian position by focusing on corporate divestments and by seeking out the views of deal lawyers. The 159 corporate legal counsels and CEOs polled represent 34 countries and have worked on 2,400 deals across 60 different jurisdictions over the last five years. This makes for a very respectable sample in terms of size and expertise, indeed.

The majority of the participants polled have confirmed that divestments are moving into the centre place of corporate M&A strategies. Despite this, the divestments still do not receive the same level of support and resources as acquisitions do. As one of the lawyers has admitted, “the divestment is left to legal, even though it involves a lot more complexity”.

The valuation and cost allocation have been singled out as the main challenges when selling parts of business. This is considered even more an issue when dealing with private equity buyers who do not have the luxury of existing support systems to service the acquired business after the carve-out. The allocation of general and administrative expenses to the business to be sold, when not done properly, has turned out to be a major value destroyer for the seller.

Almost half of the lawyers polled have responded that better preparation for the deal would be the thing they would do differently, compared to the last transaction they had been involved in. This would include better planning, clearer processes, starting the separation earlier, identifying and addressing the challenges posed by separation, and performing a more thorough vendor due diligence. The deal lawyers do recognise that divestment transactions these days seldom end with the transfer of assets and that the separation process can continue for months or even years thereafter, usually at a significant additional expense.

Apparently, the price offered has ceased being the main consideration when assessing the potential buyers. In an environment where getting the deal done has become more important than maximising proceeds, the buyer’s credibility and track record in deal completion and his reputation in running a business have become the main areas of scrutiny. Similarly, the bidders with committed financing are being preferred compared to those with conditional or uncertain funding even despite their higher bid levels.

The need for being honest with the buyer regarding the motives for selling the business while gaining a good understanding about the reasons behind the buyer’s interest have been ranked almost as important as having prior deal experience to lead a transaction to a successful closing.

In the changing environment lawyers are expected to become more commercially minded in their assessment of risk and capable of recognising the risks worth taking. To quote a CEO of an international company, “some legal people come to you with issues and 100 reasons you can’t do a deal; I need 100 ways it can work”!

© mergers.lv

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