Introduction:
With a very large merger and acquisition (M&A) team in our firm, we see more than our fair share of M&A transactions in India and cross-border transactions into and out of India.
The objective of this article is to share some of the experiences we have had in Indian M&A where buyer mistakes have either caused the transaction to fail or significant financial detriment to the buyer in the hope that it will help encourage buyers to avoid such mistakes in the future.
- Buyer Deal Team
Every buyer needs a strong in-house commercial team and a strong and experienced set of external advisers (accounting, financial, legal and other) to ensure that the transaction is executed smoothly, efficiently, and as quickly as possible. If the buyer does not have adequate resources in-house, then the buyer should outsource the assignment to expert M&A professionals.
On one of our deals, the buyer counterparty had its set of in-house and friendly related advisors who took extremely theoretical positions on many points. There was over-emphasis on certain issues which had no impact whatsoever both from a risk and value perspective. Our client was on the verge of abandoning the transaction until outside professionals stepped in to save the transaction at the last minute.
- Planning & Preparation:
M&A parties are often very keen to immediately move from a handshake to the execution of definitive transaction documents. Commonly, due process is not followed in the initial stages of the deal due to time constraints of the buyer team.
Poor planning and preparation is the result of the lack of due process and this leads to poor decision-making, inefficiency, and poor execution in the deal.
Sometimes the fundamental objective of the transaction is not clearly defined. In other cases, the value of the target is not properly evaluated and the pricing is not right. In certain cases, the strategic fit and synergies between buyer and target are not synchronized. All of these and other factors need to be considered carefully in planning.
Buyers commonly underestimate the tasks, expertise, resources, and time necessary to execute an M&A deal, which is often complex and difficult. Good planning for the transaction is the solution to ensuring that a buyer has the expertise, resources, and time to execute its M&A transaction.
Good planning, preparation, and project management are about evaluating and understanding the tasks, the expertise, the resources, and the timing required to successfully complete an M&A transaction and supplement any deficiencies on the buy side. Often this does not happen and as a result, buyers initiate deals and find themselves deficient in material respects during the course of the deal. Sometimes they can “scramble” to overcome the problem and in other cases, they need to abandon the deal.
- Confidentiality & Exclusivity
A confidentiality or non-disclosure agreement (NDA) is often considered by buyers as only relevant to the seller and so unilateral NDA's are commonly entered into for the benefit of the seller. However, confidentiality with respect to the buyer's identity, the existence of negotiations and the terms of any proposed deal are just as important to the buyer. In most cases, this information can easily be used against the buyer by the seller to leverage another buyer, for example by telling the other buyer about what the first buyer has done. Also, sellers are often exposed to other confidential information regarding the buyer. Accordingly, buyers should consider mutual NDA's to protect their confidential information from disclosure or misuse. .
Also buyers should consider securing an exclusivity arrangement with the seller for a specific period to give the buyer time to undertake its diligence and negotiate a deal. Buyers often insist on exclusivity before they incur substantial costs in pursuing the purchase, for example, in undertaking extensive due diligence. An exclusivity agreement will prevent the seller from dealing with any other parties during the exclusivity period. This will not prevent a situation where the buyer is ultimately outbid by a third-party purchaser but it is intended to give the buyer “clear air” within which to conclude a transaction.
- Early Legal advice
Buyers and target entities agreeing on the principles of the transaction without the buyer seeking legal advice from lawyers is common in the early stages of a transaction. In one transaction we were involved in, parties executed a term sheet agreeing the transaction commercials without any legal advice. Subsequently, the term sheet was shared with us to draft the definitive transaction documents. However, the transaction structure agreed in the term sheet was in contravention of the Indian exchange control regulations. As a result, the transaction structure was revised delaying the transaction and rendering the term sheet useless. Therefore, it is advisable to seek legal advice at the outset before agreeing the commercials and the transaction structure to ensure that the transaction complies with applicable laws.
- Term-Sheets
It is very important to have a term sheet, memorandum of understanding or heads of agreement (“Term Sheet”) for an M&A transaction. The Term Sheet sets out the principles of the deal and a road map for the transaction.
Often Term Sheets become over-prescriptive. In certain circumstances, this is justifiable to some extent, for example, where the substantive terms of the Term Sheet are legally binding. Otherwise, term sheets should be restricted to the deal principles.
We recall a deal where parties became over-prescriptive in the Term Sheet discussions. The buyer engaged in protracted negotiations on almost every aspect of the Term Sheet with every point being negotiated like it was the definitive transaction document. As a result, our seller client walked away and quickly agreed on a simple term sheet with a buyer containing the headline terms.
- Due Diligence
Buyers often seek to limit due diligence to reduce transaction costs. More often than not this is unwise.
In one of our deals, the buyer did not conduct detailed legal due diligence on the target entity. There were certain non-compliances on the licenses and government approvals that were not rectified by the target entity. The investor had to invoke the material adverse effect clause and terminate the agreement. However, it was a long-drawn dispute which resulted in the loss of time and expense for the buyer.
In another matter, our client did not want to conduct diligence on the target entity. We conducted routine litigation searches on the Target. As a result of the diligence, we came across various litigations involving considerable amounts wherein the target entity was involved that was not privy to the buyer.
We always recommend to our clients that they invest in conducting due diligence on the target.
However, due diligence to be conducted requires special attention from buyers both in the planning and execution of the diligence investigations. A great deal of time and money can be wasted doing due diligence on things that do not matter, that is, things that are not material to the transaction for the buyer. Diligences that go too far also alienate and antagonize sellers who may take a negative view of a buyer, especially in a competitive bidding process. We have seen buyers who want to diligence every detail of a target when in many cases most of those details have no relevance to the buyer's valuation of the target or pricing of the transaction. So, for example, in a services business, the key elements of the business are the people who deliver the services and the contracts with clients and that is where the diligence should normally focus.
In other cases, for example, where the diligence information provided by the seller is materially deficient, further time and effort by the buyer team will be essential.
The point is that diligence needs to be balanced and focused - too little diligence is as bad as too much diligence and vice-versa.
- Deal Fatigue & Transaction Documents
Getting a deal done quickly and efficiently is important for a buyer because time is the buyer's enemy. The longer it takes for a buyer to close out a deal the higher the risk that another buyer will emerge or that the seller may change its position.
Seller deal fatigue is a major cause of deals failing considering sellers run out of patience during the deal process. In many cases, this occurs because buyers do not plan and execute the transaction in a manner that is efficient. Further, the buyers are oblivious to the seller's frustration with how the transaction is being conducted by the buyer.
Buyers need to plan and execute their M&A transactions in an efficient and time-sensitive manner. During the course of a transaction, buyers must be sensitive to the seller's attitude to the transaction and need to communicate with the seller at multiple levels during the deal to understand the seller's position.
Some examples of deal fatigue cause either alone or in conjunction are:
- Long detailed non-binding term sheet negotiations that extend beyond deal principles;
- Intrusive detailed due diligence investigations into matters that are not considered critical;
- Endless detailed unnecessary negotiations on the transaction documents are one of the reasons driving sellers to abandon deals.
- M&A Dispute Resolution
Disputes frequently arise in M&A transactions.
In our experience buyers spend less time thinking about ways to resolve disputes in the transaction.
Often disputes could be easily and expeditiously dealt with by expert determination using an expert or experts with the appropriate experience and expertise having regard for the nature of the dispute. This is particularly important in pre-closing disputes where time is of the essence.
Arbitration is the preferred method of substantive dispute resolution. Parties to the transaction should keep in view the important decisions to be made with respect to governing law, where the seat of arbitration will be, and which courts will have jurisdiction with respect to interim relief. Often these issues are dealt with as an afterthought and their importance is only realized when it is too late.
- Terminating Counsel Early
Some buyers perceive outside legal counsel is an unnecessary additional transaction cost as opposed to a valuable contributing member of the M&A deal team.
For this reason, that is to limit cost, some buyers only use outside counsel to negotiate the transaction documents and after they are executed outside counsel plays no further part in the transaction.
In one of our transactions, the buyer in a major acquisition transaction disengaged us after the transaction documents were negotiated and executed. The investor decided that closing and post-closing actions could be completed by their internal legal team without involvement from outside counsel. The transaction was subject to certain government approvals and when they were not forthcoming in a timely manner the buyer's in-house legal team agreed to the seller's request to waive those government approvals. However, the government authorities on becoming aware of the transaction issued a show cause notice to the buyer and seller seeking an explanation for not obtaining the government approvals for the transaction in advance of closing. This led to significant delay and additional costs for the buyer because of the resultant multiple exchanges with the parties until the approvals were sought and given. The requirement for the government approvals should never have been waived and we would not have agreed to this occurring with the end result that the delay and additional costs incurred would have been avoided.
Conclusion:
This article discusses a few of the many buyer mistakes we see being repeated in M&A transactions we deal with in India on a regular basis. Of course, where we are involved, we counsel our clients to avoid these mistakes. However, in certain circumstances, clients do not involve us considering clients sometimes deem fit not to involve us to avoid additional cost. The message in this article is that it is necessary to involve outside counsel to assist from an early stage of an M&A transaction throughout the transaction and any cost savings that might be made by excluding outside counsel will more often lead to an adverse impact on the parties.
(This article has been put together with contribution from various members of the firm)
The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com
