DealmakersANZ Q&A Panel Event. The New M&A. Innovation, Earn Outs and Bear Hugs

Transcription

1 DealmakersANZ Q&A Panel Event The New M&A Innovation, Earn Outs and Bear Hugs

2 Innovation in M&A structures Contents Innovation in M&A structures 2 The emergence of earn outs 4 The benefits of bear hugs 6 The rise of warranty & indemnity insurance 8 Challenging market conditions continue to be reflected in deal valuations. But some experts believe these challenges have helped forge new deal mechanisms that may ultimately lead to greater opportunities and increased value for those ready to adapt. Diamond times? 9 Invention and innovation thrive in At the first Dealmakers ANZ event for 2013, becoming more popular will help Australian environment has affected valuations and times of adversity. some of the country s dealmakers compete driven changes to how The more challenging top legal advisors more effectively with deals are structured, the conditions, the discussed the new the biggest predators commented panellist greater the incentive to normal in M&A deals. in Europe and North Nick Humphrey, a find ways to rise above Opinions varied as America. partner with law firm them. This is definitely to whether some Sparke Helmore. true for the Australian of the techniques Uncertainty in the M&A community. and deal structures economic and political 02

3 The New M&A Larger deal teams, longer due diligence periods and challenges in maintaining the value of a deal over the negotiation period were other characteristics of what has been a tough few years in the M&A arena. Dealmakers ANZ Panel (left to right) Brad Howarth: Facilitator, Finance and Technology journalist Jonathan Algar: Partner, Clayton Utz Mark Stanbridge: Partner, Ashurst Australia Matthew Porzio: Vice President, Product Marketing Nick Humphrey: Partner & Head of Corporate, Sparke Helmore Lawyers Jonathan Algar, a partner at law firm Clayton Utz, confirmed the premium paid by bidders to get a deal over the line has fallen. He told the audience that, amongst listed entities, this is due in part to an increase in Peter Dunne: Partner, Herbert Smith Freehills 03 equity prices. If you look at listed deals done in 2011, premiums averaged at around 47 per cent over trading values. Now that figure is 37 per cent. The question now is whether bidders can convince investors to sell at these levels, because strength has returned to equity markets and investors want to be exposed to companies giving yield, Algar said. Herbert Smith Freehills partner Peter Dunne agreed. At the moment we re in somewhat of a holding pattern. People are anxious about valuations and the ongoing performance of the target asset. There is a real desire to understand whether current earnings can be maintained, he said. So what is to be done? According to the #DealmakersANZ panellists, new techniques and more flexible client relationships are helping to get deals across the line.

4 The emergence of earn outs Many deal teams are They are very important US and UK bidders Earn outs are like Aside from earn outs, But what if the buyer adding earn outs to in this climate because generally use earn lending money to the Nick Humphrey said becomes bankrupt, or their deal agreements of uncertainty around out structures more buyer, so the seller material adverse stops making capital to address some of the economy, said than their Australian needs to think about change clauses have expenditures on the the sticking points that Algar. You might have counterparts, added what sort of security also become more business? According lead to transactions a business plan that Algar, suggesting that they are getting, he popular in acquisition to Nick Humphrey, falling over. Earn outs shows earnings will there was plenty we explained. Sometimes agreements. These it s important to are conditions that grow consistent with could learn from them. earn outs can go for four clauses are triggered agree conditions that see a portion of the historical levels, but or five years, especially when an event such as determine whether the value of the transaction buyers won t necessarily However, a possible in the pharmaceutical a terrorist attack or stock earn out still applies in delayed until the believe that. So earn issue with earn outs is and medical devices market crash occurs. each scenario. What business achieves outs give buyers that the seller no longer space. So it s essential They mean neither the you want is a lapsing certain revenue or profit reassurance that they controls the business for both parties to agree buyer nor the seller mechanism that explains milestones. But they won t pay too much for once the deal is agreed, to the amount of access can walk away from the under what conditions can be tricky to execute earnings if things don t with little influence the seller will get to the deal, regardless of the payments would not be successfully. work out as forecast. over whether the buyer business, as well as event. made, he said. follows the original how the accounts will be business plan to achieve determined. the projected earnings. 04

5 ...earn outs are a great mechanism to bridge the funding gap. Fellow panellist Mark Stanbridge, partner at Ashurst debated whether earn outs are really anything new, noting he had worked on many such structures in the late 1990 s. He advised caution, saying, I would be very skittish, not withstanding how sexy they sound. They are incredibly complicated documents. On the buy side, if you put a proper earn out in place you so fetter the ability of the buyer to run the company the way they want to run it, that it becomes virtually impossible for them to make it work during that earn out period. Jonathan Algar agrees saying Earn outs can become overly complex, and therefore subject to litigation, so they need to be carefully drafted. Yet Mr. Algar points to the pro side of the debate as well, noting As a buyer, earn outs are a great mechanism to bridge the funding gap. And because there s less debt, there s less uncertainty attached to the deal. 05

6 The benefits of bear hugs If the offer is attractive... it can put the board in a difficult position to turn it down. When a bidder indicates to a target board that it will make an offer at a particular price provided the board recommends the deal to its shareholders, it is known as a bear hug. Bear hugs have become more prevalent in M&As, according to Peter If the offer is attractive to the target s shareholders, it can put the board in a difficult position to turn it down, Dunne said. However Jonathan Algar suggested that, unlike the recent past, bear hugs will require more work to be successful, about likely synergies. So mutual due diligence can become important to establish the case for the merger. Mr. Algar also indicated that due diligence will become even more critical as scrip-based transactions rise and make it even more trend that will continue. Matt Porzio, Vice President of Product Marketing for Intralinks, agrees this is a dynamic that has been demonstrated globally. Highly acquisitive companies with large balance sheets and the ability to access capital are going out So we are seeing fewer bidders on deals. However the amount of information being shared and that is required for review has increased by almost 40 per cent year on year indicating the increasing value of technology to the due diligence process overall. Dunne, as they allow for particularly where bidders important to prove and really driving the greater certainty while are offering scrip. the synergies the process and leveraging putting pressure on the transaction will realise technology. They are directors of the target You have to look at between two entities. building out deal teams company to recommend whether the combination In this environment it s and not waiting for the offer. of the two entities important to do the due seller to determine Peter Dunne: Partner, Herbert Smith Freehills makes sense. It s not just about the value put on the company. It s also diligence and provide the story to both sets of shareholders. This is a how they are going to share information, he explained. 06

7 Warranty and indemnity insurance will continue to be used and has great potential to drive positive behaviour. Peter Dunne: Partner, Herbert Smith Freehills

8 The rise of warranty & indemnity insurance All panellists were in corporates were not they even knew about Warranty and Indemnity the policy holder is It s especially important agreement that Warranty wanting to give it and it W&I, explains Nick insurance may have covered from the first for private equity sellers and Indemnity (W&I) probably slowed down Humphrey. He notes become so popular is dollar of the loss to who want to remove insurance has proven a cross-border activity a that after some years of of a significant drop deductible policies that cash from the table huge boon over the past little bit. explains Nick fielding the what, how, in price. Costs have involve an excess. and don t want to have few years. Humphrey. why and when s around dropped from around money in escrow or be W&I, it has suddenly four per cent of the His fellow panellists open to liabilities in the A type of assurance that W&I insurance is a gained traction in the US amount insured to about agree that W&I fund, explains Jonathan did not meaningfully great way to bridge market, growing by 41% 1.1 to 1.2 per cent, and insurance has proven Algar. It helps them exist before the GFC, these issues, but it is in the last 12 months up to 1.5 per cent for a great boon to the M&A distribute cash and also W&I has emerged as only in recent times that and helping to re- riskier deals. So it s process. Freehills helps if the seller has a popular means of some markets have invigorate cross border not that expensive and Peter Dunne notes it solvency issues. bridging the value gap come on line with their deal opportunities. it allows parties to be has great potential to between buyers and understanding of its much more comfortable, drive positive behaviour. sellers. benefits. Nick Humphrey credits especially private equity W&I with helping vendors, explains Nick It means you don t In the US, there is this Over the past two or to crack through necessarily have to have deep desire to have an three years, almost some of the inherent He commented that weeks of negotiation inch thick of warranties. half of our deals have conservatism that was there has also been a and can get to a point of On the sell side, been with US buyers stifling the market. move away from first agreement much more Australian PE funds and and it was only recently One of the reasons dollar policies where quickly. 08

9 Diamond times? Economic conditions have created an intense level of pressure on professionals in M&A and in the ANZ capital markets. Agreed value continues to be the challenge for deal teams across the board yet the #DealmakersANZ panel members agreed the industry is adapting to the climate and there are many bright glimmers emerging from a dusty environment. COMING UP NEXT: In the next edition of Dealmakers ANZ, we ll explore the question of value and give you the opportunity to receive a copy of the world s most definitive guide to the primary valuation methodologies currently used on Wall Street. REGISTER NOW - Dealmakers ANZ panel events are heading to Sydney and Melbourne, October 22nd and 24th. Get full programme details here. 09

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