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creating value in an increasingly complex
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2008
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FWE-BOOK
international
mergers & acquisitions
creating value in an increasingly complex
corporate environment
2008
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Auctions in the M&A process

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FWE-BOOK
2008 International Mergers & Acquisitions:
Creating Value in an Increasingly Complex Corporate Environment
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2008 INTERNATIONAL MERGERS & ACQUISITIONS
g Contents NOTE: These Contents pages are interactive.

Clicking on an article will take you to the relevant page.
About the Publisher . . . . . . . . . . . . . . . . . . . 7

Acknowledgement . . . . . . . . . . . . . . . . . . . 8
CHAPTER ONE:
Introduction 9
2007: a story of two halves . . . . . . . . . . . . . . . . 10

Sovereign wealth funds . . . . . . . . . . . . . . . . . 16
CHAPTER TWO:
Statistical data 19
M&A trends 1997-2007 . . . . . . . . . . . . . . . . . 20

Financial sponsor trends 2000-2007 . . . . . . . . . . . . . . 29
M&A and private equity in 2007 . . . . . . . . . . . . . . . 34
CHAPTER THREE:
Global outlook 39
Will the next wave of M&A create more value? . . . . . . . . . . 40

International M&A takes centre stage . . . . . . . . . . . . . 43
Recent developments and their implications for M&A in 2008 . . . . . . 46
Emerging markets and M&A activity . . . . . . . . . . . . . . 49
Developments in merger control in the EU and worldwide . . . . . . . 53
www.financierworldwide.com | FW
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INTERNATIONAL MERGERS & ACQUISITIONS 2008
CHAPTER FOUR:
Private equity markets 57
The case for value creation focused LBOs . . . . . . . . . . . . 58

Is there a credit crunch in the mid-market? . . . . . . . . . . . 61
The changing face of the MBO . . . . . . . . . . . . . . . 64
CHAPTER FIVE:
Structuring and negotiating the deal 67
Preparing a company for sale to maximise value . . . . . . . . . . 68

Steps to a successful private company sale . . . . . . . . . . . . 71
Non-binding preliminary agreements: use good faith with caution . . . . 74
Auctions in the M&A process . . . . . . . . . . . . . . . . 78
Domestic versus foreign acquirers: managing an international sale process . . 81
Going global: successfully negotiating multi-jurisdiction transactions . . . . 85
Key issues in structuring and negotiating leasing company acquisitions . . . 88
Drafting material adverse change clauses . . . . . . . . . . . . 93
Deal certainty and recent dislocations in the credit and M&A markets . . . 97
Drafting and negotiating purchase agreements to anticipate challenges . . . 101
Effective earn-out provisions in sale & purchase agreements . . . . . . 104
Risk allocation driving force behind the M&A process . . . . . . . 106
Directors duties in M&A transactions . . . . . . . . . . . . . 109
M&A an insurable risk? . . . . . . . . . . . . . . . . . 112
Exploring the potential of joint ventures to create value as
opposed to outright M&A . . . . . . . . . . . . . . . . 115
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CHAPTER SIX:
Accounting and financial challenges 118
Valuing assets in M&A under IFRS 3 . . . . . . . . . . . . . 119

Growing influence of IFRS in M&A: why dealmakers should care . . . . . 122
Valuation and solvency analysis in failing firm claims . . . . . . . . . 125
CHAPTER SEVEN:
Due diligence and integration 128
The evolution of diligence: how a multi-discipline approach gives buyers a

competitive edge . . . . . . . . . . . . . . . . . . . 129
Commercial due diligence and the nine levers of corporate growth . . . . 133
Sell-side online datarooms . . . . . . . . . . . . . . . . 137
Utilising the extended customer chain to enhance due diligence . . . . . 139
Due diligence trends in Europe commercial, operational and cultural twists . 144
Due diligence and integration planning in cross-border transactions . . . . 146
Breakthrough value creation in M&A . . . . . . . . . . . . . 150
Cross-border M&A: downstream implications . . . . . . . . . . 153
Integration the key to a successful merger . . . . . . . . . . . 157
Protecting your cultural assets through an integration . . . . . . . . 161
Human resources a fundamental part of the planning phase . . . . . . 164
Maximising deal value through the human side of M&A integration . . . . 167
Post-deal soft skills in emerging markets . . . . . . . . . . . . 170
IT integration challenges in M&A . . . . . . . . . . . . . . 174
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CHAPTER EIGHT:
Environmental issues 177
Climate change and the cost of carbon: incorporation into M&A deals . . . 178
Identifying opportunity in the carbon era . . . . . . . . . . . . 180
The affect of market turmoil on the treatment of
environmental liabilities in transactions . . . . . . . . . . . . 183
CHAPTER NINE:
Sector analysis 185
Trends in independent oil company M&A . . . . . . . . . . . . 186

European airline industry: value creation through M&A . . . . . . . 190
M&A boom in the CEE telecommunications market . . . . . . . . 195
CHAPTER TEN:
Regional view The Americas 198
The M&A world comes to the United States . . . . . . . . . . . 199

Taking advantage of the weak US dollar . . . . . . . . . . . . 203
Deal or no deal . . . . . . . . . . . . . . . . . . . 206
A brief glossary of US M&A terms . . . . . . . . . . . . . . 209
Recent developments in Canadian M&A . . . . . . . . . . . . 212
New rules of the game in Canadian antitrust . . . . . . . . . . . 216
Canadas foreign investment review process . . . . . . . . . . . 219
New developments spur M&A growth in Latin America . . . . . . . 222
New incentives for investing in private equity in Chile . . . . . . . . 226
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CHAPTER ELEVEN:
Regional view Europe 228
Managing pan-European transactions for US buyers . . . . . . . . . 229

Glimmers of optimism: better times ahead for the UK M&A market . . . . 232
The German M&A and private equity market . . . . . . . . . . 235
The Spanish M&A market: entering a tunnel? . . . . . . . . . . . 238
Trends and prospects for the Spanish M&A legal market . . . . . . . 240
Developments in the Netherlands corporate and takeover law . . . . . 243
Forced unbundling of Dutch energy companies . . . . . . . . . . 246
Private equity and public takeovers in Switzerland: finally a happy marriage? . 249
Current state of the Nordic M&A market . . . . . . . . . . . 253
Financing options and capital structures . . . . . . . . . . . . 256
Directors and officers duties according to Swedish law . . . . . . . 259
Takeovers of Norwegian listed companies . . . . . . . . . . . 262
M&A in Finland . . . . . . . . . . . . . . . . . . . 266
In search of deal security the Finnish version . . . . . . . . . . 270
Practices, trends and acquisition structures in the Finnish property market . 273
Regional regulatory features of M&A deals in Russia . . . . . . . . 276
Antimonopoly policy in Russian M&A deals . . . . . . . . . . . 280
Recent trends in the Russian M&A mid-market . . . . . . . . . . 284
Nature and scope of M&A in Ukraine . . . . . . . . . . . . . 287
Sector-specific M&A in Ukraine . . . . . . . . . . . . . . . 290
Due diligence in Ukraine . . . . . . . . . . . . . . . . . 293
Antimonopoly laws in Ukraine . . . . . . . . . . . . . . . 296
Legal issues in Romanian M&A . . . . . . . . . . . . . . . 300
The Baltic M&A markets . . . . . . . . . . . . . . . . . 304
Completing a successful deal in the Baltic States . . . . . . . . . . 307
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CHAPTER TWELVE:
Regional view Asia Pacific 311
Recent trends in Japans M&A market . . . . . . . . . . . . . 312

Buyouts, takeovers and surrounding legal issues in Japan . . . . . . . 315
Australias foreign investment framework: a more challenging
landscape emerging for M&A . . . . . . . . . . . . . . . 318
Control of foreign investment in Australia . . . . . . . . . . . 322
M&A in emerging Asia . . . . . . . . . . . . . . . . . 327
How to speed up M&A deals in China . . . . . . . . . . . . . 331
Will cross-border buyouts in China ever be feasible? . . . . . . . . 336
Rules and issues surrounding M&A with Chinese companies . . . . . . 340
Necessities in a cross-border Indian deal . . . . . . . . . . . . 344
Mergers under Indias new antitrust laws challenges ahead for enterprises . 347
US-bound acquisitions by Indian companies . . . . . . . . . . . 350
Legal issues and regulatory issues in Indonesias M&A market . . . . . . 354
CHAPTER THIRTEEN:
Regional view Middle East 358
The Middle East as an emerging market . . . . . . . . . . . . 359

The growth of IT investments in UAE and the wider region an improving legal
infrastructure . . . . . . . . . . . . . . . . . . . . 362
CHAPTER fourteen:
Contributor glossary 366
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About the Publisher
Financier Worldwide is a leading publisher of news and analysis on

the global corporate finance market place. Financier Worldwide
delivers in-depth commentary, research, and practical analysis that
bridges the gap between theory and practice in the complex world of
corporate finance.
Through a series of online, print and digital publications, the

organisation has become recognised as a leading source of
intelligence to the corporate dealmaking community. Financier
Worldwide products reach a sophisticated and influential group of
professionals responsible for doing the deals that move markets and
shape the corporate economy.
Financier Worldwide tracks the latest trends in Mergers &

Acquisitions, Private Equity & Venture Capital, Bankruptcy &
Corporate Restructuring.
This e-book, entitled International Mergers & Acquisitions: Creating

Value in an Increasingly Complex Corporate Environment, is
published in an exciting new interactive digital format. It is the first in
a series of e-books to be developed by Financier Worldwides digital
publishing division in 2008.
To learn more about this and other e-books scheduled for

distribution, please contact James Lowe on +44 (0) 121 710 5560 or
email james.lowe@financierworldwide.com.
7
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Acknowledgement
Data featuring in this e-book was compiled with the help of

Dealogics M&A Analytics team.
Dealogics M&A Analytics provides a comprehensive view of M&A

activity worldwide covering a wide array of transactions such
as public offers, open market purchases, stock swaps, buyouts,
privatisations, recapitalisations, share buy-backs, acquisitions
and includes industry leading financial sponsor coverage. Each
transaction provides information on target and acquirer, deal
value, advisers, financials, multiples along with a detailed deal
commentary. M&A Analytics provides a host of analytical tools to
help analyse transactions, regions and industries efficiently.
L+ L- 3 4 CONTENTS
CHAPTER ONE:
Introduction
9
L+ L- 3 4 CONTENTS
g 2007: a story of two halves
by Salim Mohammed
In 2007 global mergers & acquisitions year, all but two of the top 10 deals were
reached historic levels with $4.83 trillion announced in the first half of the year.
in announced deal volume. This surpassed The two deals announced in the second
the 2006 record of $3.91 trillion by 23 half of the year were BHP Billitons hostile
percent. Due to the credit crunch, which attempt on Rio Tinto and Rio Tintos own
hit in the summer, the year became a story acquisition of Alcan in July.
of two halves with volume surpassing $2.7
trillion in the first half but then dropping 21 The second half slowdown was notable
percent in the second half. for the smaller number of billion dollar
deals that crowded the first half of 2007.
In fact, September 2007 volume of There were 376 deals over $1bn announced
$216bn was the lowest month for global in the second half, down from 466 deals
announced M&A volume since November announced in the first half. Deals over
2005. BHP Billitons bid for Rio Tinto in $10bn dropped to 17 in the second half
November 2007, valued at $152bn, helped from 29 in the first half. In addition, the
push second half volumes above $2 trillion. average deal size totalled $187m in the
When looking at the top deals of the second half of 2007, down 30 percent from
iH versus 2H, 2002-2007
3000 25,000
2500
20,000
2000
15,000
Value ($bn)
Volume
Value ($bn)
1500
Volume
10,000
1000
5,000
500
0 0
1H 2H 1H 2H 1H 2H 1H 2H 1H 2H 1H 2H
2002 2003 2004 2005 2006 2007
Source: Dealogic
L+ L- 3 4 CONTENTS
an average of $260m in the first half of record, shy of the record BCE spin-off of
2007. part of Nortel in 2000.
As the frenzied pace of first half deal Hostile or unsolicited bids heated up in
activity gave way to caution, transactions 2007. There were 949 hostile/unsolicited
took longer to complete. The average time bids in 2007, up from 374 in 2006. Although
to complete a deal rose to 91 days in the volume for these bids was up 36 percent in
second half of the year, up from 85 days in 2007 from 2006 ($929bn in 2007, up from
the first half. $683bn reported in 2006), volume was still
short of the record $1 trillion posted in
Significant events of the past year 1999.
In 2007, finance was the top targeted Cross-border M&A represented 41 percent
sector with $720bn, accounting for of total announced volume with $1.99
15 percent of global M&A. The RBS trillion in 2007, up 78 percent from $1.12
consortium (RBS, Santander and Fortis) trillion in 2006. The US was the most
beat out Barclays and completed the targeted nation by foreign acquirers with
acquisition of ABN Amro for $96bn in the $363bn in announced deals in 2007, up 67
fourth quarter of 2007 making it the largest percent from $218bn in 2006 while the
completed deal of the year and the fifth Netherlands saw the biggest year-on-year
largest on record. increase, rising 642 percent to $188bn,
due in large part to the $96bn acquisition
Altrias spin-off of Kraft Foods, valued at of ABN Amro. The UK was the leading
$56bn, at the end of the first quarter was acquirer nation with deals worth $307bn in
the second largest transaction of the year 2007, up from $83bn in 2006 driven by five
and also the second largest spin-off on deals over $10bn.
sector activity 2007
Finance ABN Amro / RBS, Fortis, BSCH $95.6bn
Real Estate/Property Archstone-Smith Turst/Tishman Speyer, Lemhan Brothers $20.6bn
Utility & Energy Endesa/ENEL, Acciona $52.6bn
Telecom BCE/Providence Equity Partners $48.5bn
Oil & Gas GlobalSantaFe/TransOcean $17.6bn
Technology IBM repurchase $12.5bn
Mining Rio Tinto/BHP Billiton $152.0bn
Healthcare Medlmmune/AstraZeneca $14.9bn
C onstruction/Building Eiffage/Sacyr Vallehermoso $23.8bn
C hemicals Lyondell Chemical/Access Industries $19.2bn 2007 Volume $bn
0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0

Value $bn
*the largest deal in the sector is noted
Source: Dealogic
11
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Emerging market targeted M&A volume generated from Asia Pacific (excluding
reached $909bn in 2007, up 43 percent Japan) companies reached $1.9bn in 2007.
from $634bn in 2006 and became the Japanese companies generated revenue of
highest annual total on record. Emerging $490m.
market cross-border inflow increased 43
percent to $371bn in 2007 from $260bn in For the volume league tables, Goldman
2006. Sachs led the global and US advisory
rankings in 2007 while Morgan Stanley led
The year ended with sovereign wealth the European rankings and UBS led the
funds (SWFs) making four significant Asia Pacific (excluding Japan) rankings.
investments into well known financial Goldman Sachs, Morgan Stanley, JP
institutions. Faced with billions of dollars Morgan and Citi all advised on deals worth
of write downs, Citigroup, UBS, Morgan over $1 trillion in 2007. Previously, only
Stanley and Merrill Lynch all received Goldman Sachs tipped the trillion mark in
investments by Asian and Middle Eastern 2006.
sovereign wealth funds within the course of
a month. These four investments totalled Financial sponsors break records, then
over $30bn and were about two-thirds of hits the brakes
the total SWF investment of $48.5bn in
2007. The full 2007 figure was a 165 percent The booming buyout market experienced a
increase on $19.2bn invested in 2006 and a slowdown in the latter half of the year due
five-fold increase from the $8.2bn invested to the credit crunch. Even with only about
in 2005. In fact, SWF investment made up six months of deal making time before the
1 percent of M&A, up from 0.5 percent in credit market dried up funding, financial
2006. sponsor buyout volume hit a new record
high of $796bn in 2007, an increase of 9
For the year, investment banks racked up percent on the previous record $730bn
revenues of $26bn though global M&A reached in 2006. Putting the two halves in
advisory. This figure was up 21 percent comparison, second half volume reached
from $22bn reached in 2006. Of the $221bn, down 62 percent compared to first
total, US companies generated a total of half volume of $575bn.
$10.8bn, just besting European companies
who generated $10.5bn. Advisory revenue With the announcement of the $44bn TXU
top 5 announced Global Financial Sponsor M&A Buyouts 2007
Announced Target Target Nat. Acquirer/Financial Sponsor Target Sector Deal Value
($bn)
29-Jun-07 BCE (93.7%) (Bid No 1) Canada Providence Equity Partners; Teachers Private Capital; Telecommunications 48.5
Madison Dearborn
26-Feb-07 TXU United States Kohlberg Kravis Roberts; TPG Capital; Goldman Sachs Utility & Energy 43.8
Capital Partners
21-May-07 ALLTEL United States TPG Capital; Goldman Sachs Capital Partners Telecommunications 27.9
2-Apr-07 First Data United States Kohlberg Kravis Roberts Finance 27.7
3-Jul-07 Hilton Hotels United States Blackstone Dining & Lodging 25.8
Source: Dealogic
L+ L- 3 4 CONTENTS
buyout in February by KKR, TPG Capital percentage of total M&A in June when it
and Goldman Sachs Capital Partners, accounted for 38 percent. However this
the previous record held by KKR for the dropped to only 11 percent in November,
RJR buyout was broken after 19 years. the lowest level since February 2005.
However, just four months later, Teachers
Private Capital, Providence Equity Partners Emerging market financial sponsor
and Madison Dearborn set another record buyout volume reached $47bn in 2007,
with the BCE buyout at $48.5bn. up 17 percent from $40bn in 2006 and
represented 6 percent of global buyout
In all, there was a record nine $10bn- volume. India was the most targeted nation
plus buyouts announced in 2007 and with a total volume of $8bn accounting for
158 above $1bn. However, of these, no 17 percent of all emerging market financial
$10bn-plus buyouts and only 37 $1bn-plus sponsor buyout volume. China was the
buyouts were announced from August to second most targeted nation with $6bn of
December. volume, down 28 percent on 2006.
The average deal size for buyouts from Although emerging market financial
August to December was $221m, down sponsor buyout volume has fallen steadily
77 percent from its peak of $958m in both since peaking at $7bn in August to $3.5bn in
May and June. In fact, monthly volume for December, the falloff has been less intense
financial sponsor M&A buyouts peaked in as the non-emerging markets. Finance
May at $159bn and declined to $27bn in was the top industry targeted by financial
December. sponsors in the emerging markets with
$6bn. The largest deal was the $767m bid
All financial sponsor M&A activity (entry by Carlyle Group and Citi for a 6.6 percent
buyouts, portfolio company transactions stake in Housing Development Finance
and exit deals) reached its highest Corp of India.
GLOBAL M&A BUYOUTS (excluding add-ons) 2007
$m - Volume represents full week volume

BCE
- Largest majority acquisitions of the week are noted

70,000
Archstone Smith
60,000
Penn National Gaming
Edgars Consolidated Stores
TXU
Thomson Learning
Alliance Data
Service Master
Alliance Boots
Intelsat
Cardinal Pharmaceutical
Radiation Therapy Services

Gold Reef Casino Resorts
Alltel
Laureate Education Inc
First Data
50,000
Hilton
Alexander Mann Solutions

Sagem Communications
US Foodervice
PPG (automotive glass)
Global GardenProducts
Abbot Group
40,000
Carestream Health
Noranda Aluminium
Dollar General
Regent Seven Seas

Pride International
Countrywide plc
Goodman Global
Alliance Atlantis
Groupe Elis
Pinnacle Foods
Bureau Van Dijk
Alliance Medical
Almatis GmbH
30,000
Interpool
Asurion
USI Holdings
Tokyo Star
Avaya
IBERIA
SafeNet Inc
Sequa
UN Ro-Ro
20,000
GET AS
OGF SA
Kellwood
Biffa
3 Com
Polynt
10,000
NCL
0
Week Feb 4
Week Jan 1
Week Feb 11
Week Jan 7
Week Jan 14
Week Jan 21
Week Feb 18
Week Feb 25
Week Mar 4
Week Mar 11
Week Mar 18
Week Mar 25
Week April 1
Week April 8
Week April 15
Week April 22
Week April 29
Week May 6
Week May 13
Week May 20
Week May 27
Week June 3
Week June 11
Week June 17
Week June 24
Week July 1
Week Nov 4
Week Nov 11
Week Nov 18
Week Nov 25
Week Dec 3
Week Dec 10
Week Dec 17
Week Dec 24
Week July 8
Week July 15
Week Aug 12
Week Aug 19
Week Aug 26
Week Sep 2
Week Sep 9
Week July 22
Week Sep 16
Week Oct 28
Week July 29
Week Sep 23
Week Sep 30
Week Oct 7
Week Oct 14
Week Jan 28
Week Oct 21
Week Aug 5
Source: Dealogic
13
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Regional highlights AstraZeneca for $14.9bn in April.
The Americas Canada targeted M&A volume reached

$259bn, up 67 percent from $155bn, fuelled
US targeted M&A volume reached $1.6 by two significant deals: the BCE buyout
trillion in 2007 a slight increase on the for $48.5bn and the Alcan acquisition by
2006 $1.5 trillion volume. Despite a record Rio Tinto for $43bn. Latin America targeted
second quarter ($581bn), second half M&A volume totalled $110bn in 2007,
volume dropped 42 percent as multi-billion up 15 percent from $96bn in 2006 with
dollar deals disappeared. Financial sponsor 41 percent of volume from deals with an
buyouts, which accounted for 33 percent of acquirer outside the region compared to 48
US targeted M&A in the first half ($331bn) percent in 2006.
fell to just 18 percent of volume in the
second half ($107bn). Europe, Middle East and Africa
Volume from deals over $1bn dropped Europe targeted announced M&A reached
significantly in the second half. However, its highest annual volume on record with $2
mid-market volume (deals valued between trillion, driven by robust volume in the first
$100m and $1bn) remained fairly stable half. Western European volume reached
average monthly volume for deals over $1.6 trillion in 2007, the highest yearly
$1bn dropped 39 percent from the first volume on record. Although second half
half to the second half, while mid-market volume slowed 24 percent compared to
average monthly volume decreased only 2 first half, it was still the third highest half-
percent over the same time period. year volume on record after the first half of
2007 and the second half of 1999.
US targeted cross-border M&A volume
reached $363bn in 2007, up 67 percent Eastern European volume reached $277bn,
from $218bn in 2006, fuelled by 16 deals an increase of 59 percent compared to
over $5bn compared to eight deals in 2006. Eastern Europe bucked the global
2006. The UK was the leading acquirer trend with the second half recording an
of US companies with $51bn in 2007, up increase of 102 percent compared to the
49 percent from $34bn in 2006, boosted first half with volume reaching $186bn, the
by the acquisition of Medlmmune by highest half year on record. Russia was the
top 5 announced GLOBAL TRAnsactions 2007
Announced Target Target Nat. Acquirer Acquirer Nat. Deal Value

($bn)
08-Nov-07 Rio Tinto United Kingdom BHP Billiton Australia 152.0
25-Apr-07 ABN Amro Holding (Bid No 2) Netherlands Royal Bank of Scotland Group; Banco Santander Central United Kingdom 95.6
Hispano; Fortis Group
31-Jan-07 Kraft Foods (88.1%) United States Existing Shareholders United States 56.1
02-Apr-07 Endesa (55.03%) (Bid No 3) Spain ENEL; Acciona Italy 52.6
29-Jun-07 BCE (93.7%) (Bid No 1) Canada Providence Equity Partners; Teachers Private Capital; Madison Canada 48.5
Dearborn
Source: Dealogic
L+ L- 3 4 CONTENTS
most targeted nation in Eastern Europe $551bn in 2007. First and second half
with $176bn in volume, up 75 percent volume were virtually the same. China
from 2006. The acquisition of 25 percent led the region with $144bn in announced
of Norilsk Nickel by Russian Aluminum transactions, an increase of 38 percent
(Rusal) for $13.3bn was the largest Russian on $104bn in 2006 and accounted for 26
targeted deal announced in 2007. Russias percent of the regions volume.
deal volume mainly consisted of domestic
deals, with 22 percent of its volume coming China continued to be the top nation
from cross-border acquirers. attracting foreign investment with $40bn,
up 39 percent on 2006. Cross-border deals
Middle East targeted volume totalled accounted for 28 percent of total China
$39bn in 2007, up 36 percent from 2006. volume this year. India also attracted
Telecommunications was the most substantial foreign investment, tripling
targeted industry in 2007 with $19bn volume to $32bn from $10bn in 2006.
doubling from 2006, followed by finance
with $9bn, up more than three-fold from Outbound cross-region M&A reached
$2bn in 2006. $219bn in the fourth quarter, driven by
the $152bn bid for UK based Rio Tinto by
The Middle East became the fourth most Australia-based BHP Billiton. The figure
active acquiring region for cross-border was way above the previous quarterly
investment with a volume of $106bn record of $51bn in the fourth quarter of
in 2007, three times the $34bn in 2006, 2006. Inbound cross region M&A broke
fuelled by 25 deals over $1bn. The US the $100bn barrier for the first time with
was the most targeted nation by Middle $179bn.
East investors with $34bn accounting
for 32 percent of total Middle East cross- Australia was the most targeted nation
border investment, fuelled by the $11.6bn with $42bn, representing 23 percent of
acquisition of GE Plastics by SABIC and total inbound activity in the region.
Kuwait Petroleums acquisition of Dow
Chemical for $9.5bn. Japan targeted M&A reached $186bn in
2007, on par with 2006 volume of $183bn.
Overall, EMEA targeted announced M&A Finance was the most active sector in 2007
reached the highest volume on record with with $56bn, down 4 percent on 2006. The
$2.1 trillion, up 38 percent from $1.5 trillion healthcare sector saw a marked increase,
in 2006. The first half of 2007 totalled $1.1 up four times on last year to $10bn.
trillion, the highest half-year volume on Outbound cross-border volume was down
record but this dropped 11 percent to reach 56 percent on last year while inbound
$996bn in the second half. cross-border volume was up almost four
times in 2007 compared to 2006.
Asia Pacific
M&A volume in Asia Pacific (excluding Salim Mohammed is the director of M&A at
Japan) was up 37 percent on 2006 reaching Dealogic.
15
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g Sovereign wealth funds
by SONIA KALSI
On the back of the credit crisis, sovereign border SWF deals totalling $106bn. Activity
wealth funds (SWFs) are emerging as a since 2005 has accounted for $99.3bn of
serious investment source for companies in that total. Deals per annum have more
financial distress. Leading western banks than trebled since 2004, with 30 in 2005
forced to make huge write downs have and almost 40 in 2007, compared to the
turned to SWFs, whose buying power is 10 per annum prior to 2004. The first two
rapidly increasing. According to a recent months of 2008 have already witnessed 14
report, the total write down figure at the SWF deals.
end of January this year by the major
banks was over $150bn. SWFs, with an Total deal value in 2007 reached $48.5bn,
estimated fund pool of $3 trillion globally, a 165 percent increase from the $19.2bn
have helped ease this burden by injecting in 2006 and a 492 percent increase from
large sums of capital, totalling $52.7bn, in the $8.2bn in 2005. In the first two months
exchange for minority stakes. of 2008, total deal value has already hit a
remarkable $24.4bn exceeding all total
The Sovereign Wealth Fund Review, annual figures since 1998, except 2007. The
released by Dealogic in March 2008, shows proportion of SWF investment of all M&A
that since 1998 there have been 166 cross- activity was just over 5 percent in the first
sovereign wealth fund investments 1998february 2008
60.0 40
35
50.0
30
40.0
25
No. of Deals
Value ($bn)
Value ($bn)
30.0 20
Volume
15
20.0
10
10.0
5
0.0 0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Jan 1
2008 -
Feb 29
2008
Source: Dealogic
L+ L- 3 4 CONTENTS
two months of 2008, up from 1 percent in Dhabi Investment Authority. Merrill

2007 and 0.5 percent in 2006. The average Lynchs write down of $22.4bn was eased
deal size has also grown. In the first two by a $12.8bn investment by SWFs led by
months of 2008, the average deal size was Kuwait Investment Authority and Temasek
$1.7bn, 40 percent higher than the $1.2bn Holdings. The impact of Morgan Stanleys
average in 2007 and 271 percent higher write down of $9.4bn was reduced by
than the $469m average in 2006. a $5bn SWF investment led by China
Investment Corp. A whopping $53.5bn (88
The buying power of SWFs is proving a percent) of investment has poured into
godsend for western financial institutions the finance sector since September 2007,
hit hard by the economic downturn. The following last summers subprime crash.
report shows that the finance sector
attracted the most investment from SWFs Trailing the US as target countries for
from 2007 to February 2008, totalling investment were Switzerland, which
$60.7bn. This, coupled with the falling accumulated $12.1bn during the period
dollar, has put the US in the lead among (largely made up of the $11.5bn invested
countries targeted for investment. From in UBS by the Government of Singapore
2007 to February 2008, $43.1bn of SWF Investment Corp.) and the UK with $8.8bn.
investment found its way to the US. Much In terms of investment by sector, real
of this was attributed to investments estate followed finance at $4.7bn and retail
in large US banks to offset huge write was third at $2.3bn.
downs. Citigroup recorded a write down
of $19.9bn but received $20bn in an According to the report, the $3 trillion
SWF investment led by the Government held by SWFs is largely accounted for by
of Singapore Investment Corp and Abu the UAE Abu Dhabi Investment Authority,
top 10 nationalities for swf investment inflows 2007february 2008
50,000
45,000
40,000
35,000
30,000
Value ($m)
25,000
20,000
15,000
10,000
5,000
0
United States Switzerland United India Japan Australia Singapore Turkey Sweden Pakistan
Kingdom
Source: Dealogic
17
L+ L- 3 4 CONTENTS
which holds $875bn, Singapores two funds surpass $10 trillion in value. Their rapid
with a combined $489.2bn, and the China growth rate has led to political debate in
Investment Corp. with $200bn. Between the US and EU, over concerns about their
2007 and February 2008, Singapore was the operating models, motivations and long
top regional acquirer, followed by the UAE term intentions. As a result, governments
and China. Dealogics report deliberately have been pushing for increased
excludes pension plans, such as Norways transparency and accountability. The G7
Government Pension Fund, due to and the International Monetary Fund
operational differences when compared have pledged to establish a best practice
with SWFs. code of conduct for SWFs but have gained
varying degrees of support from individual
Two SWFs analysed in the report also funds.
own and operate private equity firms.
Since 2003, the leading investment by The wealth of investment SWFs can offer
the private equity arm of Dubai Holdings, distressed companies is proving attractive,
Dubai International Capital, was $1.5bn in as they continue to bail out leading
the UKs Tussauds Group. For the private financial institutions and others hit by the
equity investment arm of Government of credit crisis. The first two months of 2008
Singapore Investment Corp., GIC Special already showing rapid growth in deal value
Investments, the largest investment was and volume, so even if markets do ease,
$562m in Australian Mayne Group Ltd. SWFs are well on their way to becoming a
firm and competitive fixture in cross-border
According to data from Merrill Lynch investment.
and Morgan Stanley, by 2015 SWFs could
LARGEST SOVEREIGN WEALTH FUNDS BY ASSETS UNDER MANAGEMENT
1000.0
900.0
800.0
700.0
600.0
Value ($m)
500.0
400.0
300.0
200.0
100.0
0.0
US: Alaska Algeria: Libya: Libya Qatar:Qatar Singapore: China: Kuwait: Saudi Singapore: UAE: Abu
Permanent Revenue Invesment Investment Temasek China Kuwait Arabia: GIC Dhabi
Fund Regulation Authority Authority Holdings Investment Investment Various Investment
Fund Corp Authority Authority
Source: Dealogic
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CHAPTER TWO:
Statistical data
19
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g M&A trends 1997-2007
Global M&A 1997-2007

6,000 40,000
35,000
5,000
30,000
4,000
25,000
Value ($bn)
Volume
Value ($bn)
3,000 20,000
Volume
15,000
2,000
10,000
1,000
5,000
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Dealogic
Year Deal Value Volume The graph provides a clear indication of the
($bn)
global deal boom that began in 2004 and
1997 1,548.3 17,910
reached new highs in both value and volume
1998 2,317.5 23,224
in 2007.
1999 3,222.0 27,756
2000 3,335.5 31,196
Of course, based on credit volatility in the
2001 1,755.0 27,065
second half of 2007, the line is set to turn
2002 1,322.4 25,359
2003 1,452.8 23,164
south in 2008. But how steep will its
2004 2,061.2 26,244
decline be?
2005 2,937.4 31,122
2006 3,916.8 33,429
2007 4,873.0 37,267
(Announced transactions)
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Global financial sponsor m&A 1997-2007

900 3500
800
3000
700
2500
600
Value ($bn)
500 2000
Volume
Volume
Value ($bn)
400 1500
300
1000
200
500
100
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Dealogic
2006 and 2007 were the golden years of Year Deal Value
($bn)
Volume
private equity. It was the most active period 1997 64.8 678
for buyout pros in the industrys history. 1998 76.1 958
1999 130.9 1416
The jump between 1997 and 2007 is 2000 120.9 1745
astonishing. Volume increased by 363.7 2001 76.1 983
percent while value increased by an 2002 117.9 1045
astronomical 1,121.2 percent. 2003 157.8 1206
2004 275.7 1691
Whether this asset class can replicate 2005 344.1 2651
a similar high point in future years is 2006 733.5 3137
anyones guess. Some say the industry took 2007 791.4 3144
advantage of several factors which created

(Announced transactions. Figures include
an almost perfect dealmaking environment, acquisitions or divestments by portfolio companies)
and that we are unlikely to see such a
culmination again. Others argue that private
equity has been through down cycles before
and emerged stronger.
21
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Global leveraged loans 1997-2007
2,000 3,500
1,800
3,000
1,600
1,400 2,500
Deal Value ($bn)
1,200
2,000
Volume
Value ($bn)
1,000
Volume
1,500
800
600 1,000
400
500
200
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Dealogic
Year Deal Value Volume Todays leveraged finance market is almost

($bn) unrecognisable compared to a decade ago.
1997 405.3 2,218
New structures, new products and a host
1998 515.1 2,444
of new players drove a huge rise in activity
1999 559.7 2,402
from the low point in 2001 to the onset of
2000 540.8 2,347
the credit squeeze in mid-2007 .
2001 378.3 1,859
2002 432.1 1,879
Although the volume of leveraged loans
2003 578.5 2,073
2004 726.8 2,586
increased by only 36.8 percent between 1997
2005 1,003.3 2,860
and 2007, their total value ballooned by
2006 1,284.0 3,070
340.6 percent over the same period.
2007 1,786.1 3,035
L+ L- 3 4 CONTENTS
regional M&A 1997-2007

2,500 16,000
14,000
2,000
12,000
Americas Deal Value

10,000
1,500 Asia Pacific Deal Value
Value ($bn)
Volume
EMEA Deal Value
8,000
Americas Volume
1,000 Asia Pacific Volume
6,000
EMEA Volume
4,000
500
2,000
0 0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Dealogic
While deal volume remained fairly stable

in the Americas, both the EMEA and
Asia Pacific regions experienced dynamic
growth between 1997 and 2007. In fact,
Asia Pacific generated the highest number
of transactions in 2007, although the total
value of deals was much lower. In the same
year, EMEA overtook the US for the first
time to become the leading region by deal
value.
Year Americas Asia Pacific Deal EMEA Americas Volume Asia Pacific Volume EMEA
Deal Value ($bn) Value ($bn) Deal Value ($bn) Volume
1997 1,035.3 106.0 407.0 10,959 1,376 5,575
1998 1,637.3 109.6 570.7 12,832 2,315 8,076
1999 1,741.7 252.0 1,228.3 12,935 3,742 11,079
2000 1,842.4 334.6 1,158.5 12,507 5,149 13,540
2001 927.9 226.9 600.2 10,093 4,824 12,147
2002 571.0 190.4 560.9 9,048 5,593 10,718
2003 642.1 229.9 580.8 8,758 5,081 9,325
2004 964.9 336.2 760.0 9,670 6,793 9,781
2005 1,326.2 498.9 1,112.3 9,945 9,218 11,959
2006 1,794.8 584.2 1,537.8 9,591 11,194 12,644
2007 1,984.7 743.8 2,144.6 10,583 13,571 13,108
23
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UK versus US M&A 1997-2007
14,000
14,000.0 120,000
12,000
12,000.0
100,000
10,000
10,000.0
80,000
8,000
8,000.0
($bn)
($bn)
Volume
Volume
60,000
Value
Value
6,000
6,000.0
40,000
4,000
4,000.0
20,000
2,000
2,000.0
0
0.0 0
UK US
Source: Dealogic
UK US Of the two world heavyweights in country-

Deal Value ($bn) 2,982.3 12,511.8 specific M&A, the United States is clearly the
Deal Volume 29,229 96,124 dominant force, hosting more than $12.5
(Announced transactions) trillion worth of deals in almost 100,000
transactions between 1997 and 2007. The
UK, despite being second on the global
league table by a clear margin, has provided
less than a quarter of US transaction value
over the same period.
L+ L- 3 4 CONTENTS
country specific M&A VALUE 1997-2007
1,600
1,400
1,200
1,000
Value ($bn)
800
600
400
200
0
lia
il
na
ce
d.
az
an
ad
di
pa
Fe
ra
an
hi
In
Br
m
an
Ja
st
Fr
an
er
Au
si
us
R
Source: Dealogic
Excluding the US and UK, Germany

generated the most M&A value between
1997 and 2007, closely followed by France.
Although there is a sizeable drop to the
BRIC countries (Brazil, Russia, India and
China), these emerging markets have made
up ground in the last few years, and the
gap between them and established Western
markets should close further over the next
decade.
Australia Brazil Canada China France Germany India Japan Russian Fed.
Deal Value 590.8 299.0 1,086.8 531.0 1,222.6 1,347.2 163.5 1,204.0 415.3
($bn)
25
L+ L- 3 4 CONTENTS
country specific M&A VOLUME 1997-2007
20,000
18,000
16,000
14,000
12,000
No. of Deals
10,000
8,000
6,000
4,000
2,000
0
lia
il
na
ce
d.
az
an
ad
di
pa
Fe
ra
an
hi
In
Br
m
an
Ja
st
Fr
an
er
Au
si
us
R
Source: Dealogic
Looking at country-specific volumes reveals

that pockets of activity around the world
do not necessarily correlate to total deal
values.
Here, Japan took the lead by a clear margin,

with over 17,000 deals. Australia and
Canada saw far more activity than the total
deal values suggest. China actually overtook
France and came very close to Germany by
number of deals.
Australia Brazil Canada China France Germany India Japan Russian Fed.
Deal Volume 11,373 2,412 12,870 11,403 10,116 11,784 5,290 17,414 4,817
L+ L- 3 4 CONTENTS
TOP 10 ACTIVE SECTORS BY VALUE 1997-2007
Insurance
Food & Beverage
3%
3%
Construction/Building Finance
3% 22%
Healthcare
9%
Oil & Gas

9%
Real Estate/Property Telecommunications

9% 21%
Utility & En ergy

10% Technology
11%
Source: Dealogic
Over the last decade, Finance has provided

the highest total amount of deal value,
closely followed by Telecommunications,
which reached its peak in the 1999-2000
boom.
27
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top 20 announced M&A transactions, by value 1997-2007

($bn)
14-Nov-99 Mannesmann AG (99.6%) Germany Vodafone AirTouch plc United Kingdom 172.2
08-Nov-07 Rio Tinto plc (Bid No 1) United Kingdom BHP Billiton Ltd & plc Australia 154.4
10-Jan-00 Time Warner Inc. United States America Online Inc United States 112.1
04-Nov-99 Warner-Lambert Co United States Pfizer Inc United States 111.8
06-Mar-06 BellSouth Corp United States AT&T Inc United States 101.9
25-Apr-07 ABN Amro Holding NV (Bid No 2) Netherlands Royal Bank of Scotland Group plc; United Kingdom 95.6
Fortis Group; Banco Santander Central
Hispano SA - BSCH
01-Dec-98 MOBIL CORP. United States EXXON CORP. United States 85.6
17-Jan-00 SmithKline Beecham plc United Kingdom Glaxo Wellcome plc United Kingdom 79.6
11-May-98 AMERITECH CORP United States SBC COMMUNICATIONS INC United States 76.2
28-Jul-98 GTE Corp United States Bell Atlantic Corp United States 74.6
26-Jan-04 Aventis SA France Sanofi-Synthelabo SA France 71.3
11-Aug-98 Amoco Corp United States British Petroleum Co plc United Kingdom 64.3
05-Jul-99 Elf Aquitaine SA (95.56%) (Bid No 1) France TotalFina SA France 63.1
28-Jan-00 Nortel Networks Corp (35%) Canada Existing Shareholders Canada 61.7
05-Jan-99 Airtouch Communications Inc (Bid No 2) United States Vodafone Group plc United Kingdom 61.5
28-Jan-05 Gillette Co United States Procter & Gamble Co United States 60.8
06-Jul-01 AT&T Broadband United States Comcast Corp United States 60.7
15-Jul-02 Pharmacia Corp United States Pfizer Inc United States 59.8
18-Feb-05 UFJ Holdings Inc (Bid No 2) Japan Mitsubishi Tokyo Financial Group Inc Japan 59.1
14-Jan-04 Bank One Corp United States JP Morgan Chase & Co United States 56.9
Source: Dealogic
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g Financial sponsor trends 2000-2007
GLOBAL FINANCIAL SPONSOR BUYOUTS 2000-2007
900,000 3,500
800,000
3,000
700,000
2,500
600,000
2,000
Value ($m)
500,000
Value ($m)
Volume
400,000 1,500
Volume
300,000
1,000
200,000
500
100,000
0 0
2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Dealogic
In two years, 2006 and 2007, the total Year Value ($m) Volume
value of announced buyouts worldwide was 2000 120,916 1,746
almost 40 percent higher than the previous 2001 76,150 985
six years combined. 2002 117,880 1,048
2003 157,947 1,210
In 2000 the average deal size was $69m. By 2004 275,724 1,695
2007 it had almost quadrupled to $252m. 2005 344,110 2,655

2006 734,866 3,140
2007 792,551 3,144
29
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us targeted FINANCIAL SPONSOR BUYOUTS 2000-2007
500,000 1,400
450,000
1,200
400,000
350,000 1,000
300,000
800
Value ($m)
Volume
Value ($m)
250,000
Volume
600
200,000
150,000 400
100,000
200
50,000
0 0
2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Dealogic
Year Deal Value ($m) Volume As the worlds leading economy and the
2000 54,067 627 most developed market for buyouts, the
2001 25,432 353 US remained the destination of choice for
2002 51,341 413 private equity houses.
2003 64,761 518
2004 121,126 725 In 2007, transaction value increased over
2005 155,359 1,049 2006 despite a drop in the number of
2006 423,276 1,207 transactions.
2007 441,161 1,077

L+ L- 3 4 CONTENTS
EUROPEAN targeted FINANCIAL SPONSOR BUYOUTS 2000-2007
300,000 1,400
1,200
250,000
1,000
200,000
800
Value ($m)
Volume
Value ($m)
150,000
Volume
600
100,000
400
50,000
200
0 0
2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Dealogic
Europe, like the US, hosted a gradual Year Deal Value ($m) Volume
increase in buyouts since the early part of 2000 55,389 936
the new millennium. In contrast to the US, 2001 43,400 509
however, there were more deals announced 2002 59,608 514
in 2007 than 2006 but their total value 2003 81,107 543
actually declined from the previous year. 2004 122,085 715
2005 165,966 1,224
2006 246,000 1,278
2007 212,777 1,326
31
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rest of world targeted FINANCIAL SPONSOR BUYOUTS 2000-2007
160,000 800
140,000 700
120,000 600
100,000 500
Value ($m)
Volume
Value ($bn)
80,000 400
Volume
60,000 300
40,000 200
20,000 100
0 0
2000 2001 2002 2003 2004 2005 2006 2007
Year
Source: Dealogic
Year Deal Value ($m) Volume Buyout markets have sprung up outside the
2000 11,460 183 US and Europe, as leading buyout houses
2001 7,318 123 look beyond their traditional borders for new
2002 6,932 121 opportunities. The appetite for emerging
2003 12,080 149 market deals has accelerated, particularly
2004 32,514 255 as these countries actively develop the
2005 22,786 382 legal and financial infrastructure to support
2006 65,591 655
private equity transactions.
2007 138,612 741
(Announced transactions) In 2007, the total value of announced deals

was only 12 percent lower than combined
totals for 2000 to 2006.
L+ L- 3 4 CONTENTS
top 20 announced financial sponsor buyouts, by value 1997-2007

($bn)
29-Jun-07 BCE Inc (93.7%) (Bid No 1) Canada Providence Equity Partners Inc; Ontario Teachers Pension Canada 48.5
Plan Board; Madison Dearborn Partners LLC
26-Feb-07 TXU Corp United States Kohlberg Kravis Roberts & Co; Texas Pacific Group; Goldman United States 43.8
Sachs Capital Partners
20-Nov-06 Equity Office Properties Trust (Bid United States Blackstone Real Estate Partners LP United States 38.9
No 1)
24-Jul-06 HCA Inc United States Bain Capital Inc; Kohlberg Kravis Roberts & Co; Merrill Lynch United States 32.7
Global Private Equity
21-May-07 ALLTEL Corp United States TPG Capital LP; GS Capital Partners LP United States 27.9
02-Apr-07 First Data Corp United States Kohlberg Kravis Roberts & Co United States 27.7
02-Oct-06 Harrahs Entertainment Inc United States Apollo Management LP; Texas Pacific Group United States 27.4
16-Nov-06 Clear Channel Communications Inc United States Bain Capital Inc; Thomas H Lee Partners United States 26.4
(Bid No 2)
03-Jul-07 Hilton Hotels Corp United States Blackstone Group LP United States 25.8
29-May-06 Kinder Morgan Inc United States GS Capital Partners LP; AIG Global Asset Management Hold- United States 21.6
ings Corp; Riverstone Holdings; Carlyle Group Inc
29-May-07 Archstone-Smith Trust United States Tishman Speyer Properties; United States 20.6
Lehman Brothers Private Equity
30-Mar-07 Alliance Boots plc (85.013%) (Bid United Kingdom Kohlberg Kravis Roberts & Co United Kingdom 20.5
No 1)
15-Sep-06 Freescale Semiconductor Inc (Bid United States Blackstone Group LP; Carlyle Group Inc; Texas Pacific Group; United States 17.6
No 2) Permira Ltd
23-Jan-06 Albertsons Inc United States SuperValu Inc; Schottenstein Stores Corp; Kimco Realty Corp; United States 17.4
Cerberus Capital Management LP; Klaff Realty LP; Lubert-
Adler Real Estate Funds; CVS Corp
19-Jun-07 Intelsat Ltd (76%) (Bid No 1) Bermuda BC Partners Ltd Bermuda 16.4
12-Sep-05 Hertz Corp United States Clayton Dubilier & Rice Inc; Carlyle Group Inc; Merrill Lynch United States 15.0
Global Private Equity
30-Nov-05 TDC A/S (87.9%) Denmark Nordic Telephone Co ApS Denmark 13.9
27-Jun-06 Univision Communications Inc (Bid United States Madison Dearborn Partners LLC; Thomas H Lee Partners; United States 13.6
No 2) Texas Pacific Group; Providence Equity Partners Inc; Saban
Capital Group Inc
28-Mar-05 SunGard Data Systems Inc United States Investor Group United States 11.8
18-Dec-06 Biomet Inc United States Blackstone Group LP; Kohlberg Kravis Roberts & Co; United States 11.4
Texas Pacific Group; Goldman Sachs Capital Partners
Source: Dealogic
33
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g M&A and private equity in 2007
global M&A 2007
1,800 12,000
1,600
10,000
1,400
1,200 8,000
Value ($bn)
1,000
Value ($bn)
6,000
Volume
800
Volume
600 4,000
400
2,000
200
0 0
Q1 Q2 Q3 Q4
Source: Dealogic
Despite volatility in global financial markets Announced Value ($bn) Volume

in the second half of 2007, overall M&A 2007 Q1 1,094.8 8,046
was fairly stable throughout the year, 2007 Q2 1,610.0 9,725
particularly in terms of deal volume. 2007 Q3 1,006.7 9,595

2007 Q4 1,161.6 9,901
L+ L- 3 4 CONTENTS
FINANCIAL SPONSOR buyouts 2007
400 900
350 800
700
300
600
250
Value ($bn)
500
Value ($bn)
200
Volume
400
Volume
150
300
100
200
50 100
0 0
Q1 Q2 Q3 Q4
Source: Dealogic
Announced Value ($bn) Volume The credit crunch sent shockwaves through
2007 Q1 197.1 778 the global private equity industry in the
2007 Q2 376.6 854 middle of 2007. As the graph shows, the
2007 Q3 131.7 803 effect was immediate.
2007 Q4 86.0 709
35
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regional M&A 2007
2,500
2,000
1,500
Value ($bn)
1,000
500
0
Americas Asia Pacific EMEA
Source: Dealogic
In 2007, EMEA edged out the Americas by Announced Americas Asia Pacific EMEA
deal value. Asia Pacific, although trailing by 2007 1,984.7 743.8 2,144.6
a fair distance, increased its share of global (Announced transactions)
activity.
L+ L- 3 4 CONTENTS
country-specific M&A 2007
1,800
1,600
1,400
1,200
Value ($bn)
1,000
800
600
400
200
0
Australia Brazil Canada China France Germany India Japan Russian UK US
Fed.
Source: Dealogic
Country Value ($bn) Unsurprisingly, the US M&A market towered

Australia 131.7 over other countries in 2007. But other
Brazil 46.0 standouts were Canada, which claimed third
Canada 259.6 spot by almost $70bn over Japan, and the
China 144.9 Russian Federation, which eclipsed France
France 164.3 and almost matched Germany. China was
Germany 188.4
not far behind with around $145bn.
India 62.0
Japan 191.0
Russian Fed. 181.6
UK 588.7
US 1,593.2
37
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top 10 active sectors 2007
Chemicals
5%
Construction/Building
6%
Finance
21%
Healthcare
7%
Mining
8%
Real Estate/Property
14%
Technology
8%
Oil & Gas

9%
Utility & En ergy
Telecommunications 12%
10%
Source: Dealogic
In 2007, the majority of deals were

announced in the Finance sector. Real
Estate/Property and Utility & Energy were
also active.
L+ L- 3 4 CONTENTS
CHAPTER THREE:
Global outlook
39
L+ L- 3 4 CONTENTS
g Will the next wave of M&A create more value?
by Stephane Cohen-Ganouna and Natalia Danon-Boileau
After the M&A activity slowdown of the the existence of some country specificities
early 2000s, the market is experiencing a regarding the average transaction size.
new surge of mergers and acquisitions. It is Although M&A operations are much more
largely known that in the past, two-thirds numerous in the UK than in other European
of M&A transactions have destroyed value, countries, France is the place where large
often resulting in abject failure. In this scale operations occurred most frequently.
context, the key question today is: Will the Between 2000 and 2005, the average
new wave of M&A create more value than value of transactions was $1.2bn in France
the previous one? compared to $1bn in Germany and $500m
in the UK.
Lessons from the past
Second, an acquirers previous M&A
We have tried to identify the reasons experience has an influence on value
driving value creation and value destruction creation. Our study indicates that frequent
in M&A deals by analysing 2500 M&A buyers (involved in one or two acquisitions
transactions that took place over the past a year) are more likely to create value. On
10 years in Europe. Four lessons jump out of the other hand, a company which carried
this study and from our experience. out less than one M&A transaction over the
past 10 years will risk destroying value.
First, there is no statistical correlation
between the value creation and the size As a matter of fact, previous experience
of the transaction. However, large scale will allow a company to better evaluate
transactions (more than $1bn) tend potential synergies with its target. A more
to destroy value whereas small scale realistic approach on future synergies will
transactions (less than $50m) tend to be translated into appropriate pricing.
create value. During 2004-2005 periods, Previous experience also implies greater
for instance, small scale transactions in our capitalisation of knowledge about the
sample have an average positive return integration process (tested integration
after one year of 6 percent, compared to methods in the pre- and post-acquisition
-5 percent for the large scale transactions. phases) and nurtures a more open, less self-
Furthermore, the average return weighted absorbed company culture.
by transaction amount is below the average
non-weighted return, which means that Third, a merger or acquisition can act as a
large scale transactions are obviously catalyst in uncovering significant savings
tending to destroy more value than small which were previously concealed. These
scale ones. unforeseen savings could theoretically
have been identified regardless of the M&A
In this respect, it is interesting to mention operation. We have found that only half of
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the synergies publicised in the past were Better evaluation of the management and
indeed true synergies, implying that the the human capital during the due diligence
integration of these companies had actually process. Another point of attention during
produced a greater result than simply the due diligence process is an in-depth
adding these entities together. The other evaluation of the management team and
half consisted of savings that could have the human capital of the target. In fact,
been made without the M&A operation. some groups start copying LBO practices
and taking into account from the due
Finally, value creation depends on how diligence phase HR assets and cultural
the merger preparation and post-merger differences, as a valuable input to structure
integration process is managed. In fact, the forthcoming merger preparation and
although the market is positive about value integration.
creation after five days in 54 percent of
deals, the average rate of value creation Realistic evaluation of the synergies and
decreases to reach only 40 percent one their efficient implementation by dedicated
year after the announcement, reflecting, line people. In some companies, line people
among other issues, integration failure or work together with the due diligence team
insufficient realisation of planned synergies. to carry out evaluations of the expected
operational synergies, thus producing a
Best practices and advanced approaches better evaluation of the target.
The key to efficient management of During the integration phase, devoted

the M&A process is the optimum use of teams of dedicated line people follow up on
traditional best practices: evaluation the realisation of synergies and ensure their
of the targets strategic interest and of fast and full-scope implementation.
the potential synergies, retention of key
people, preparation of an integration Efficient management of the antitrust
plan, massive use of internal and external notification process. The ongoing
communication and, obviously, speed of consolidation process in many industries
integration. In fact, it is imperative to keep
leads to an increasing number of large
the ongoing business under control during scale cross-border mergers. For these
the integration period, as there may be kinds of operations, winning the approval
one, two or even three years between the of antitrust regulatory bodies has become
date of closing and the completion of the a critical issue. The companies M&A
merger. While some teams are working on capabilities will also depend on their ability
the establishment of the new group, other to articulate structured and professional
(different) teams must remain focused on approaches to address antitrust issues;
sales and customers: this requires transitorye.g., analyse their need to notify, define
management systems. their notification strategy, prepare their
associated dossier and draw up contingency
Some companies now go beyond those plans in case the operation fails (such as
practices, improving their chances to create Schneider/Legrand, GE/Honeywell). Such
value. What are these advanced approaches an approach will help anticipate as much as
to merger? possible how negotiations with authorities
will evolve to better control the approval
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process and its impact on the operation. previous acquisition experience, these
companies have defined and adopted
Preserving the value of human capital. a standardised M&A process helping to
The staffs motivation is indeed the most address all operation phases in a coherent
critical component in a mergers success. and coordinated way. Also, they define
Maintaining staffs dynamism will ensure tools, methods, checklists and a team to
continuity in the companys management mobilise in case of a forthcoming M&A
at a transitional time when the new group transaction.
can be unstable operationally. Boosting
motivation will require appointing the top- The advanced practices mentioned above
management very fast, within a few days, are only emerging. Even if the value
before or after the closing. In this matter, creation remains highly unpredictable,
again speed prevails over perfection. Our the generalisation of those new practices
survey shows that in 60 percent of cases, should lead to better value creation and
key managers are actually appointed within better value capturing in future mergers
30 days before or after the closing. and acquisitions.
Adoption of standardised acquisition and

integration processes. Some frequent
acquirers have developed an extremely Stephane Cohen-Ganouna is a principal and
formalised process, a sort of acquisition Natalia Danon-Boileau is a senior manager
and integration machine. Based on their at BearingPoint.
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g International M&A takes centre stage
by Eric Benedict, Shepard Spink and George Varughese
With the increasing globalisation of Asian markets, showing more stability,

business coupled with the protracted according to Dealogic. Buyers and sellers
weakness of the US dollar, M&A activity is are still demonstrating an appetite for
now playing out on a much larger stage, deals, with foreign buyers, buoyed by
creating new opportunities for international financial strengths, becoming more active
investors and growth-oriented companies participants in what they perceive to be a
in emerging market countries looking to fertile environment for acquiring US assets.
penetrate Western markets. Unlike earlier
periods, such as the 1980s, which saw a Currency valuation is one driving factor. For
spike in international transactions, evidence the last several years, foreign currencies
suggests that recent activity is indicative of have been stronger against the US dollar.
a more permanent global trend, with M&A Leading the pack is the euro, which hit
targets of the past becoming the acquirers a record high against the dollar in late
of today and tomorrow. February, exceeding for the first time $1.50.
Many economists predict further weakness
However, while market forces such ahead for the dollar, as a number of US
as increasing access to global capital economic factors, including declining home
and favourable currency valuations are prices and waning consumer confidence,
providing transactional tailwinds, inherent continue to pressure the greenback. With
challenges remain. For new global business US assets now roughly 20-30 percent
ventures to be successful over the long cheaper than they were a decade ago,
term, acquiring companies will need to find foreign buyers see an opportunity to
ways to not only leverage strengths, such bargain hunt. This is especially true of those
as low cost manufacturing, but overcome in oil-rich nations which are flush with
relative inexperience managing complex liquidity.
global enterprises.
For companies in countries not enjoying
Driving forces petro capital, another important factor
has been the increasing willingness of
The buyers local banks to provide funding for deals.
With the balance sheets of many US and
While worldwide M&A volume has plunged international banks suffering as a result of
from the historic highs reached in recent the subprime mortgage crisis, local banks
years, deals continue to get done. Even as in emerging markets, which had far less
the US continues to see major declines, exposure than their US counterparts, are
overall activity is down just over 6 percent stepping up to provide debt financing for
compared to 2005s January-February total, deals. The trend is likely to continue. At the
with international activity, particularly in same time, local governments, which in the
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past often tended to frown on international have become much more difficult to
expansion, are showing greater support execute as evidenced by recent data.
for companies looking to acquire foreign Beyond financing, however, combining with
assets. companies outside of the US has become
a viable strategic option for many growth-
The maturation of foreign companies, oriented businesses. US companies, which
both in terms of size, sophistication and have developed a strong domestic market
experience, has also been a catalyst in presence, are seeking to attract foreign
driving recent M&A activity. Historically, buyers with an eye toward leveraging cost
foreign companies with the necessary advantages in foreign markets, such as
market presence and management depth raw material access or labour rates. And
to be serious international acquirers again, because the pool of foreign buyers
have been few and far between. This has has expanded beyond Europe and Japan
changed dramatically in recent years, to now include emerging markets such
particularly in the wake of significant as Brazil, Russia, China and India, among
growth in the Asian market. A new universe others, M&A opportunities have increased
of capable, cash-rich and strategic-minded exponentially.
buyers, who have successfully developed
a critical mass in their domestic markets, Looking ahead
have emerged and begun to make their
presence known. Even when the dollar rallies, the US
capital markets relax and the economy
Netherlands-based ArcelorMittal, the strengthens, we are likely to continue to
worlds largest steelmaker by output, see significant interest in US assets among
provides a case in point. In 2006, CEO foreign buyers. In the past, companies
Lakshmi Mittal an Indian steel mogul who with the strength and the staying power
ranks among Forbes 10 richest CEOs in the to engage in significant acquisitions have
world further expanded the steel empire primarily been based in the US and Europe.
he established over several years with the Now, companies in markets outside the
acquisition of European steel giant Arcelor. US and in nearly every industry have
Since then, ArcelorMittal has continued on reached a critical mass and the number
an aggressive acquisition spree, announcing of active buyers is likely to continue to
35 acquisitions around the world in 2007 increase. In addition, as the geographic
and indicating the pace would continue this boundaries of global capital fade as
year. investors pursue areas of highest return and
workforces become more international,
The sellers national corporate identity will become less
and less relevant.
From a sellers perspective, international
deals have emerged as an important option Within this environment, however,
for US companies navigating a challenging significant challenges remain and how
economic environment. With the US credit international buyers deal with these hurdles
markets virtually shut off and the overall will be a key factor in determining the
domestic economy continuing to show ultimate success of these transactions. At a
signs of weakness, pure US transactions time when more foreign governments are
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showing greater support for international forming alliances with US partners, and
M&A, the US could begin to take a more retaining individuals with the expertise to
isolationist stance particularly if the navigate the range of management and
economy weakens further or national regulatory issues will all be important
security concerns heighten. Already we factors in executing a long-term business
have seen a number of potential deals strategy.
scuttled or postponed. National security
concerns among lawmakers, for example, Conclusion
postponed 3Com Corp.s transaction with
Chinese technology company Huawei International M&A activity has been a
Technologies Co. relative bright spot in an otherwise doom
and gloom deal environment. Rather than a
A greater test will be how this new group short term phenomenon, the activity and
of corporate acquirers overcomes relative the driving forces behind it suggests a
inexperience entering new markets more permanent trend of large and middle
and running global enterprises. Simply market US and European companies being
leveraging strengths such as low-cost acquired by sovereign funds or companies
manufacturing bases will not be enough with global ambitions that are located in
to achieve success and staying power. strong emerging markets.
Management will need to be equipped
to deal with a range of regulatory issues But as foreign buyers take advantage
and prepared to quickly develop global of market conditions and leverage their
capacity in critical operations, such as strengths and acquire US assets, they must
information technology systems, supply be mindful of the challenges inherent to
chain and distribution, as well as enhance entering any new market and take steps
their capabilities in areas such as brand to position the business for the long
management and sales and marketing. term. Many have already discovered that
creating meaningful value through M&A
Steering through the US obstacle course transactions, particularly when premiums
which in many cases requires extensive have been paid, comes down to properly
experience, knowledge and relationships executing the strategy and actually
in the marketplace, community and realising the anticipated synergies.
government will be a challenge for even
the most skilled executives if they are
mainly accustomed to operating overseas.
Utilising valuable resources within the Eric Benedict, Shepard Spink and George
acquired company or bringing in new Varughese are managing directors at Alvarez
executives with deep knowledge of the US, & Marsal.
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g Recent developments and their implications for

M&A in 2008
by Tom Hopkins and Jason Northcutt
It was the best of times; it was the worst strategic buyers. The steep increase in
of times. So might Charles Dickens have defaults in the US subprime market led
described the acquisition financing markets several lending institutions to fail or file
in 2007. Fuelled by private equity sponsored for bankruptcy and has had broad effects
buyouts using readily available credit, the throughout global credit markets. In
number and value of M&A deals in the response, lenders have become more
US reached record levels in 2006 and the cautious by increasing credit spreads,
first half of 2007. Private equity sponsors decreasing leverage ratios, and insisting
doing mega deals, including The Carlyle upon more restrictive covenants from
Group, Kohlberg, Kravis & Roberts and The their borrowers. Despite Federal Reserve
Blackstone Group, received unprecedented attempts to increase liquidity by cutting the
media attention. Several recent fed funds rate by 225 basis points between
developments, however, make it likely that September 2007 and January 2008, we
strategic buyers will return to prominence expect lenders risk tolerance to remain
in 2008 and beyond. Also, partially as a relatively low. Private equity buyers will
result of the impact of less activity by have to readjust their expectations with
private equity sponsors, sellers are likely to regard to financing terms and lower their
have less leverage at the bargaining table. valuations of targets. Strategic buyers,
by contrast, often are cash rich or able
During the recent M&A boom, extensive to rely on existing lines of credit to fund
liquidity in the credit markets created acquisitions.
intense competition among lenders.
Borrowers found themselves able to obtain Second, differences in the ways in which
acquisition financing cheaply at more private equity buyers and strategic buyers
aggressive leverage multiples, at lower tend to view and analyse companies may
spreads, and with fewer and less restrictive also lead to greater competitiveness by
covenants than ever before. As a result, strategics. Private equity sponsors have
private equity sponsors often were able finite holding periods and only want
to pay higher valuations and offer more companies that can deliver an internal rate
cash than their strategic counterparts. The of return in excess of 25 percent over the
ability of private equity sponsors to outbid investment horizon. Private equity sponsors
strategic buyers is likely to lessen as a result are further limited by credit pricing
of several recent events. and financial models that forecast their
anticipated returns and determine their
First, the much-publicised credit crunch willingness to proceed with a transaction.
that began in mid-2007 will make it more Strategic buyers, by contrast, often have
difficult for private equity sponsors to a longer horizon and intend to integrate
obtain competitive financing to outbid them into their existing business lines.
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Additionally, strategics often include venture or retire, these requirements can

non-financial factors in their transaction be unattractive. Strategic buyers, however,
analysis, such as synergies, defensive have operational executives and systems
advantages and other competitive factors. in place to run the business and are less
sensitive to keeping management in place.
Non-financial aspects of an acquisition
agreement such as time to close, allocation Third, amendments to Rule 144 and Rule
of risks and lack of closing contingencies 145 by the US Securities and Exchange
can also play a significant role in Commission (SEC) that became effective
determining the winning bid for a company. on 15 February 2008 will also likely benefit
Because strategic buyers often have a strategic buyers. Strategic buyers often
strong grasp of the fundamentals of the issue their securities to sellers as part
targets industry (and possibly of the target of the merger consideration. Sellers,
itself), they are often better positioned understandably, prefer liquidity and want
to assess the scope and magnitude of the ability to resell these securities as soon
potential risks posed by the targets as possible. The changes to these rules
business. Private equity firms, however, reduce or remove restrictions on secondary
often have to educate themselves about sales, which should allow strategic buyers
the targets industry and specific business, to use their stock as transaction currency
which is a time consuming process. Further, to increase the valuations of the targets.
since a private equity firm is compensated Below are summaries of some of the
only if its returns are in excess of a hurdle primary changes to Rule 144 and 145 which
rate, sponsors often take a more hard- are most likely to benefit strategic buyers.
line view of the targets potential risks,
which results in transaction agreements Rule 144 provides a safe harbour for
that allocate greater economic risks to the resales of restricted and control securities.
sellers. Restricted securities include securities
issued in a transaction not involving a
Most private equity firms do not have the public offering, such as where a strategic
human capital required to operate their buyer issues unregistered shares to the
portfolio companies day-to-day. Private stockholders of a target in a private
equity buyers often require management placement. Control securities are securities
stockholders to roll over a significant of an issuer held by an affiliate of the
portion of their equity rather than cashing issuer. To qualify for a Rule 144 resale of
out 100 percent of their holdings. They will restricted securities, several conditions
also likely insist that most or all of the key must be satisfied. These conditions
management sign long-term employment limit the ability of holders of restricted
contracts as a condition to closing. Even securities to resell the securities, and
though the selling stockholders will therefore reduce their value to the
continue to hold a stake in the target holders. The Rule 144 amendments most
going forward, the private equity firm will significantly affect secondary sales of
control the company and the sellers will restricted securities by non-affiliates and
find themselves as minority stockholders. make it easier and faster for sellers to get
For a selling stockholder that is looking liquidity for their company. As amended,
to cash out and move on to the next Rule 144 (i) shortens the holding period
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for restricted securities of reporting governing control securities will continue to

companies to six months from one year; apply).
(ii) allows non-affiliates of reporting
companies to freely resell restricted In addition to strategic buyers regaining
securities after the six month holding competitiveness over private equity
period if the issuer satisfies the public sponsors, the ongoing credit crunch is likely
information condition; and (iii) allows to reduce the overall number of bidders;
non-affiliates of reporting or non-reporting therefore, we expect sellers to have less
companies to freely resell restricted leverage generally against buyers in the
securities without complying with any Rule negotiation process. We expect fewer
144 conditions after a one year holding auctions, resulting in lower valuations.
period, rather than two years. Affiliates Where auctions are commenced, we expect
of reporting companies will still need an increase in preemptive bids with go-
to comply with the Rule 144 limitations shops a limited ability of the target to
and requirements when selling equity search the market post-signing for other
securities of the issuer under Rule 144. potential buyers. As a result, target boards
The holding period for affiliates of non- of directors will have to be increasingly
reporting companies remains one year, mindful of their fiduciary duties relating to
and will still need to comply with the Rule business combinations. Agreement terms
144 limitations and requirements when will likely become more buyer-friendly, such
selling equity securities of the issuer under as more conditions to closing for buyers
Rule 144. and lower indemnity baskets and higher
indemnity caps and escrows.
Simultaneously with the amendment
to Rule 144, the SEC also substantially In conclusion, we think the continuing
eliminated the presumptive underwriter credit crunch and the associated deal
doctrine in Rule 145. Under prior law, an execution risks involved in selling to private
affiliate of a target who received securities equity sponsors will result in increased
in a registered transaction was deemed competitiveness by strategic buyers. Also,
to be an underwriter. Even though the the recent relaxing of rules regarding
securities were not restricted securities secondary sales should increase the value
(because they were sold in a registered to sellers of receiving a buyers securities,
transaction), to negate this underwriter especially if the buyer is a reporting
status, the resale had to comply with company. Less activity from private equity
Rule 145 (which mirrored the Rule 144 sponsors is likely to lower the valuations
requirements, without the holding period and otherwise lead to more buyer-friendly
and Form 144 requirements). Now, except terms in deal agreements.
in limited circumstances, affiliates of a
target who receive shares registered on
Form 4 will be able to freely resell them Tom Hopkins is a partner and Jason
immediately, unless the holder is also an Northcutt is an associate at Sheppard,
affiliate of the issuer (in which case the rules Mullin, Richter & Hampton LLP.
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g Emerging markets and M&A activity
by Ian Coleman
There are numerous trends currently there are associated threats. Companies
affecting the cross-border M&A market. seeking to complete M&A deals in their
Investors from emerging economies home markets face fresh competition
are increasingly interested in developed from investors in the developing world. As
economies. Activity by private equity funds competition grows, so do the prices that
is growing in emerging economies. National must be paid.
investment strategies are growing. New hot
sectors are emerging, particularly financial Notable among the new investors from
services and infrastructure. Valuations the developing markets are sovereign
are rising as a result of emerging market wealth funds, which are likely to have a
investments. considerable impact on future investment
flows. In 2007, the value of such funds grew
Acquirers looking to complete M&A by around $1.3 trillion, while new issues of
transactions in emerging markets face government gilts worldwide totalled just
many challenges. Fiscal and legal regimes $600bn. Seeking a home for their surplus
are often unpredictable. There is a need cash, sovereign wealth funds have begun
to identify key tax issues. Buyers must turning to new, higher risk investments
choose the appropriate method of market including listed companies and private
entry. Cultural differences can be a major equity. This trend seems set to continue.
hindrance. Finance facilities are limited. For example, as long as energy prices
There are differing approaches to business remain high, sovereign wealth funds from
valuations and accounting policies. Political oil-producing states will continue to grow in
risks must be assessed. size. If sovereign wealth fund investments
quadruple over the next 10 years, as has
Key trends been suggested, their influence on cross-
border M&A will increase further.
International investment flows are
changing. Whereas in the past the direction While investors from emerging markets
of flow was almost universally from the are creating competition for deals in more
developed to the developing markets, developed economies, western private
this is no longer the case. Last year, for equity funds are similarly increasing
example, saw the Anglo-Dutch steelmaker competition in developing markets. PE
Corus acquired for 6.2bn by Tata Steel of funds already account for a large proportion
India, which outbid a Brazilian rival. of corporate acquisitions in established
markets, and this phenomenon looks likely
While this changing environment creates to be repeated elsewhere as PE houses seek
opportunities for businesses in developed new high growth opportunities.
markets seeking new investment finance,
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The impact of PE funds in emerging investigating the service opportunities open

markets is, of course, affected by the to them in developing economies. Desire to
availability of debt finance. Hence the upgrade infrastructure in emerging markets
recent credit crunch has had an inhibiting is also stimulating interest both in corporate
effect, one which is encouraging some PE investments and in the ownership of assets
funds to look to sovereign wealth funds as such as roads and bridges. 3i, for example,
alternative sources of finance to bank debt. has launched an infrastructure fund on the
However, if this crunch proves to be merely London stock market.
a cyclical event, over time increasing PE
involvement in cross-border M&A will fuel There is, however, a potential inhibitor of
existing inflationary price pressures. M&A in developing markets going forward,
and one which could affect all sectors the
National investment strategies are increased valuations attached to companies
also likely to shape future M&A trends. and assets in those markets. In China, for
For example, the Chinese government example, high personal savings ratios,
announced at the seventeenth Communist the relatively limited equity market and
Party Congress a new national strategy to strong interest from overseas investors
make higher value investments. Initially, have pushed up equity prices. Western
Chinas outbound investment was largely companies could find it increasingly difficult
focused on securing the countrys supply to find growth opportunities at valuations
chain delivering the raw materials, that are acceptable to their shareholders.
natural resources and energy needed to
fuel growth. Now the Chinese are keen to Key challenges
explore opportunities in more knowledge-
intensive industries. Such national Businesses seeking to complete M&A
investment strategies add additional transactions in emerging markets face
competitive heat to the M&A arena, with numerous challenges. To begin with,
acquisition decisions no longer being driven emerging markets are inherently fast
solely by traditional financial metrics. moving, and this can be true of their fiscal
regimes. Until last year, for example, China
As a corollary, some countries are showing encouraged foreign investors by offering
signs of a growing mood for protectionism more favourable tax arrangements than
so-called resource nationalism to were available to domestic companies. This
prevent domestic businesses and treasured is generally no longer the case. Investors
national assets from entering foreign thus need to consider the potential for tax
ownership. If such tendencies develop into regimes to be altered, and not necessarily
confirmed national policies, cross-border in a favourable way.
M&A activity could stagnate or fall.
They also need to identify the tax policies
For the moment, however, deal volumes that have the greatest impact on the
remain high. Some sectors, such as financial relative success of an investment. Investors
services and infrastructure, are enjoying often focus primarily on the tax incentives
particularly strong interest among investors available when making an investment,
from developed markets. Private bankers such as the availability of tax relief on debt
and insurance companies are increasingly interest costs. However, the long term
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investment success of a transaction may towards sole control investments and

be more greatly affected by the investors organic growth models, where local
ability to realise value from the investment regulations allow.
in a tax efficient manner in the future. Given
that some tax regimes penalise or inhibit Whatever the market entry model,
capital or profit withdrawal more than cultural differences between domestic
others, this is an important issue for upfront and developing economies need to
consideration. be understood. The moral and ethical
frameworks that exist in a number of
If assumptions cannot be made about the emerging market countries are not the
continuity of the fiscal regime, the same same as those in developed economies. In
goes for legal systems. The presumption certain territories a monetary reward for
of contractual certainty is the bedrock assistance might be expected, whereas
of business in the developed world, elsewhere this might be deemed a bribe.
but can break down in some emerging These are serious legal issues, with
markets where political motivations potentially far-reaching implications. For
sometimes appear to override the rule of example, directors can fall foul of the US
commercial law. The longer term in nature Foreign Corrupt Practices Act as a result
an investment is, the more reliant it is on of actions that take place miles away
specific legal structures and institutional from the US. Our survey of global chief
stability. The need to accommodate legal executives found that cultural issues are
flexibility, as well as fiscal flexibility, in M&A considered the biggest impediment to
deals is therefore an important issue for cross-border M&A, particularly during the
investors. post-deal integration period. It is essential
that cultural norms and expected business
Another challenge is the most appropriate practices are made explicit prior to any
method of market entry whether through transaction being completed. This extends
forming a joint venture with a local party or to an understanding of the governance,
going for sole control. Established practice control and reporting structures that will be
has generally been to form a joint venture established the structural manifestations
with a local partner. The inward investor of corporate culture.
benefits from the local partners cultural
understanding and contacts, but may The options for financing and for
subsequently seek to buy out the partner if successfully hedging M&A investments
the venture proves successful. That model in developing economies can also be
now appears to be losing favour, perhaps constraining. Although bilateral or
due to its associated problems. It can, syndicated bank finance may be available,
for example, be hard to agree on shared corporate bond markets are generally
objectives for the venture. If the venture less developed than in more advanced
is successful, the inward investor can have economies which may inhibit emerging
difficulty extracting full value many market acquirers. This will change gradually
agreements give the local partner pre- in India efforts are being made to create
emption rights in the event of a sale. As a a financial centre in Mumbai, but this will
result, there are early signs of a trend both take time.
in developing and developed economies
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Differing approaches to valuation unstable regimes is being lost from the

methodologies can also arise. In some corporate consciousness. Companies may,
markets the standard basis for agreeing therefore, be underestimating the political
a price is depreciated cost, rather than risks associated with emerging market
discounted cash flow. Even where the transactions. This is a particular problem for
latter is accepted, estimating risk and cross-border investments involving major
establishing the appropriate discount rate physical assets, which are relatively difficult
may not be straightforward. Variations to withdraw from without significant losses
in accounting policies can also create being incurred.
difficulties in interpreting reported figures.
These and other technical issues all need to Even so, across all sectors, M&A activity
be overcome. with developing economies remains a
high priority for companies from more
One other possible challenge for investee established markets. Despite the many
companies looking at opportunities in challenges involved, the need to find
developing markets concerns their ability growth opportunities will continue to
to assess political risk appropriately. High stimulate transactions.
turnover rates among senior executives
in developed economies are arguably
resulting in rapid corporate memory
loss. Awareness of problems that have Ian Coleman is head of emerging markets at
previously arisen due to politically PricewaterhouseCoopers LLP.
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g Developments in merger control in the EU and

worldwide
by David Harrison and Rachel Cuff
Review of a potential transaction by one August 2007, introducing a merger control

or more competition authorities can regime. The law has been a decade in the
seriously affect the structure and timing making, and will come into force in August
of a deal, whether it be an acquisition, 2008. Certain important elements, such
merger or joint venture. Many jurisdictions as thresholds for merger control to apply,
prohibit implementation of a deal before still remain to be finalised, but pre-merger
merger clearance is obtained, and time- notification will be required. Of particular
periods for review of the transaction can concern is the requirement that acquisitions
be considerable. The impact of merger of Chinese companies by foreign companies
control worldwide is increasing as more go through national security checks,
jurisdictions introduce new, or revise although details of this obligation are not
existing, regimes. Such legislation is yet clear. In addition, observers are keen
frequently produced in order to facilitate to see how the new law will be applied to
self-assessment of a transaction by the Chinese state-owned companies, and how
parties, and thereby to avoid prohibition the overarching requirement for behaviour
by competition authorities of notified to be appropriate for a socialist economy
deals. However, the fact that outright will be interpreted.
prohibition of transactions remains
relatively rare in many jurisdictions should Indias new regime introduces mandatory
not deflect attention from the emphasis merger notification where specified
that competition authorities such as the assets or turnover thresholds are met.
European Commission place on ensuring However, the law incorporates a domestic
that their merger rules are respected, and nexus element, with notification to the
their willingness to use their enforcement Competition Commission of India (CCI) only
powers against merging parties (and even required where both parties have assets
other countries) that attempt to circumvent or turnover in India. Under the new Indian
those rules. law, the suspensory period following
notification of the merger, during which
Development of merger legislation the transaction cannot be implemented, is
worldwide theoretically 210 days. The relevant period
under the previous regime was 90 days,
In recent months, two industrial and this change has caused significant
superpowers, India and China, have concern. However, the implementing
passed new merger legislation, bringing regulation for the new regime (currently
their regimes further into harmony with only in draft form) introduces an interim
more mature systems such as those of the period of 30 days for the Indian authorities
European Union and the United States. to take an initial view, upon the expiration
China adopted its first competition law in of which approval of the transaction can
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be presumed. As the CCI is not yet fully The Office of Fair Trading (OFT) in the UK
constituted, the regime is not currently issued revised guidance in November 2007
being enforced. regarding situations in which it will view
the markets affected by a merger as not of
Jurisdictions with well-established systems sufficient importance to justify a referral
of pre-merger clearance have also been to the UKs Competition Commission.
developing and clarifying their rules. Such The de minimis market size threshold was
reforms are often driven by an aim of raised from 400,000 to 10m. The OFT has
facilitating self-assessment by companies applied the revised thresholds in a number
and their legal advise`rs, in order to of cases since their introduction, but has
minimise the amount of pressure put also clarified that, as a matter of policy, it
on the limited resources of competition will not apply the de minimis thresholds
authorities. in cases where any harm to competition
could, in principle, clearly be remedied by
The European Commission has been clear-cut undertakings in lieu of a referral to
continuing to review and develop its the Competition Commission.
merger legislation. In April 2007, the
Commission published a draft Notice on Yet other countries are in the process of
remedies acceptable under the EC Merger reviewing and amending their merger rules.
Regulation, with the aim of updating its The Federal Supreme Court of Germany
current 2001 guidelines. The guidance has confirmed the geographic extent of
relates to modifications that may be Germanys de minimisprovision, confirming
proposed by parties to a transaction in that the relevant geographic market for
order to remedy competition concerns this provision refers to the German market,
identified by the Commission in its merger and not to a wider geographic market.
control review. The draft Notice has been Clarification of the de minimis exception
subject to a public consultation, and is in both the UK and Germany should
expected to be adopted in the first half of better enable companies operating within
2008. relatively small markets to avoid becoming
subject to the merger control regimes of
In 2007, the Commission also adopted these countries.
guidelines on non-horizontal mergers, to
complement its guidelines on horizontal Norway has made proposals aimed at
mergers, which were introduced in 2004. improving the efficiency of its merger
The non-horizontal guidelines relate to review system, and is considering
both vertical mergers (between parties prohibiting implementation before
operating at different levels of the supply clearance of any transaction that has
chain) and conglomerate mergers (between to be notified. Currently pre-clearance
parties active in closely related markets). implementation is only prohibited when a
The Commission also combined four complete notification has been requested
important pre-existing notices (relating to by the Norwegian competition authority or
the calculation of turnover, as well as to the made voluntarily.
concepts of concentration, full-function
joint ventures and undertaking concerned) The Czech competition authority is in the
into a Consolidated Jurisdiction Notice. process of creating best practice guidelines
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on pre-notification contacts between for consumers and most likely [lead] to

merging parties and the competition higher prices for more than 14 million EU
authority, and Australia is, at the time passengers using the 35 routes on which
of writing, consulting on draft revised the merger would create a monopoly or
merger guidelines. As merger notification dominant position. Ryanair, whose chief
is currently voluntary under the Australian executive accused the Commissions
system, such guidelines are of particular decision of being bizarre, illogical,
importance in enabling companies and manifestly inaccurate and untenable, has
their legal advisers to ascertain whether appealed the decision to the European
voluntary clearance should be requested. Court of First Instance (CFI).
Merger control activity by competition The level of caution with which the
authorities Commission approaches a decision to
prohibit a merger will only have been
While competition authorities work to increased by the decision of the CFI in July
improve their merger control legislation, 2007 to award partial damages toSchneider
they continue to review notified mergers Electric for loss stemming from the
and sanction companies that do not adhere Commissions 2001 prohibition of its
to the rules. merger with Legrand. The CFI annulled the
Commissions prohibition decision in 2002,
The European Commission received a considering that the Commissions analysis
record number of merger notifications in was riddled with errors and omissions.
2007, with the figure exceeding 400 for The Commission has appealed the CFIs
the first time. With over 60 notifications judgement awarding damages.
received in the first two months of 2008,
the level of notifications appears to be The Commission has, however, made it
remaining reasonably constant. clear that it expects its rules relating to
merger control to be respected, and in
The Commissions approach in relation particular those relating to pre-clearance
to merger control continues to be implementation of a deal, or gun-jumping.
relatively non-interventionist. Of some In December 2007, the Commission
3700 notifications received since 1990, conducted surprise inspections at the
the Commission has prohibited only 20 premises of merging parties, INEOS and
proposed mergers, and only two since 2002, Norsk Hydro, looking for evidence that the
although a significant number have been companies had exchanged commercially
cleared conditionally, after a first phase or sensitive information to such an extent that
a second phase investigation, on the basis they could be considered to have already
of commitments by the notifying parties. implemented the deal. This is the first
However, 2007 saw the Commissions first time that the Commission has conducted
prohibition decision since 2004 and the raids in response to concerns about gun-
first of Competition Commissioner Kroess jumping and, although it has now closed
tenure, in relation to the proposed Ryanair/ its investigation and approved the merger,
Aer Lingus deal. The Commission concluded the inspection serves as a reminder that the
that the merger of the two leading airlines Commission has significant investigative
operating from Ireland would reduce choice powers in this area, as well as the ability to
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impose considerable financial penalties. and Poland regarding mergers with a

Failure to comply with an authorised Community dimension and falling within
Commission inspection in the context of a the Commissions sole competency under
merger investigation could lead to fines of the EC Merger Regulation. For example,
up to 1 percent of a companys turnover, further to the Commissions approval
while fines of up to 10 percent of turnover of the acquisition of the Spanish energy
could result from implementation of a company Endesa by German-based E.ON,
merger before approval is granted by the the Spanish National Energy Commission
Commission. imposed conditions on the acquisition.
Further to a number of formal requests and
Nor can the presumption be made that decisions, the Commission referred Spain to
the merger regimes of smaller countries the European Court of Justice, which ruled
will not raise concerns and can therefore in March 2008 that Spain had failed to fulfil
be disregarded. Jerseys Competition its obligations under the EC Treaty.
Regulatory Authority, for example, has
imposed its first fine on a company for The cost of flouting merger control
failure to notify a merger until after the rules can be high, leading to significant
acquisition had been completed. The fine fines or even a requirement to undo
of 10,000 was imposed on the Italian a completed transaction. With more
travel restaurant company Autogrill countries developing sophisticated merger
regarding its acquisition of Alpha Airport regimes, companies need to ensure that,
Groups, clearly demonstrating that some when assessing the benefits of a potential
smaller competition authorities will not transaction, they are aware of the merger
hesitate to apply their powers to large control obligations and risks in the
international companies operating within jurisdictions relevant to the deal.
their jurisdiction.
The Commission has also shown its teeth

in its response to displays of economic David Harrison is a partner and Rachel Cuff is
patriotism by countries such as Spain an associate at Berwin Leighton Paisner LLP.
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CHAPTER FOUR:
Private equity markets
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g The case for value creation focused LBOs
by Olivier Sibenaler and mathieu baudouin
As it sparked off spiralling debt cost, proved attractive for newcomers, as its
the subprime crisis has undoubtedly mechanisms once mastered by a happy
shaken the private equity industry, more few financial engineers became available
particularly acting as a brake on buyout to the rank-and-file. All it took to get
funds activity. Large operations involving involved in LBOs was money. With low
players of the likes of KKR were indeed debt costs and abundant liquidities, the
abruptly cancelled. Those collateral effects, 2000s brought providential circumstances:
influential as they may be, should not hide global private equity fundraising grew
that since the mid-90s the industry has threefold between 2002 and 2006, with
gone through a more fundamental, less the top 10 funds raising between $8bn and
visible reshaping process. Although many $16bn. The value of LBO transactions also
reasons may be invoked to support the boomed from $80bn in 1999 to $440bn in
assertion, four key factors actually prevail. 2006. Unsurprisingly, those alluring market
They have brought about a restructuring conditions called for an increase in the
environment in which funds are confronted number of players, with approximately 2700
with new challenges. The latter, combined private equity funds in 2006, 850 of them
with a soaring secondary LBO market, being devoted to buyouts. As one of its
induce stronger demands in terms of consequence the commoditisation of the
value creation for private equity backed LBO market came along with the gradual
companies. What is at stake today is the vanishing of cheap good deals.
funds ability to develop competitive
advantages that produce high IRRs based External factors have added to those
upon genuine industrial and commercial internal tensions. Intensifying competition
strategies. was also propelled by corporations
that are back in an M&A market that
The buyout industry is under growing reached an estimated $3.8 trillion in
pressure, both from the inside and the 2006. LPs increasing degree of expertise
outside. The prevailing endogenous factor and selectivity has fostered internal
is todays intensifying internal competition, competition. From the mid-90s investment
fuelled by the commoditisation of LBO banks have also helped to reshape
techniques. Exogenous factors include the industry, as middlemen between
limited partners (LPs) increasing expertise, buyers and vendors, as well as advisers.
the extension of market intermediation Generalised banking pitches caused every
and newly healthy corporations with an player to be in possession of the same
appetite for M&A. average amount of information, paving
the way for greater market efficiency. The
Approximately 25 years after its early banks role is also evidenced in the auction
beginnings, the buyout industry has process, leading to mounting pressure on
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bids. Those factors have brought more funds profitability is significant. Economic
efficiency to the markets far from the performance of bought-out companies
early days of LBOs when deals depended appears dramatically unequal. A recent
on personal contacts. report by Standard & Poors found that 53
percent of the companies in the sample
But those changes have raised new used failed to meet their EBITDA forecasts.
challenges for PE firms. As funds strive to Here too, EBITDA underperformance or
entice better informed LPs they have no overperformance has a high standard
choice but to promise high IRRs. But those deviation (22 percent according to S&P). As
are already high, at least on average. As a result, those funds that are determined
The Economist stressed, from 1980 to 2000 to survive and secure access to cash on
the average fund generated higher gross a long term basis cannot merely rely on
returns than investing in the S&P 500. The traditional levers including financial
average IRR in Europe was estimated to be engineering and tax integration that are
13.7 percent at 2006 closing. proving insufficient in a context of intense
competition and commoditisation. They are
Besides and thanks largely to the now compelled to increase their companies
mounting efficiency of investment banks EBITDAs; in other words, create value
competition on the markets for targets through either side of the P&L statement.
has caused both multiples and debt ratios
to go up. Purchase multiples in 2007 were But what about companies that have
about 7.15x EBITDA (for a $1.85bn deal), already been bought out once? Market
compared to 5.75x in 2004. Debt multiples intermediation and commoditisation
followed a roughly similar pattern, from are indeed translating into multiplying
5.2x EBITDA in 2005 to 6.1x two years later. secondary LBOs. About 20 percent of LBO-
As for debt ratios, they reached 77 percent controlled entities were sold to other PE
in 2007, of which 80 percent was classed as firms in 2007, against less than 4 percent
in fine. in 2001. More secondary LBOs means the
development on the market of companies
Those challenges confront buyout funds that have theoretically gone through a
with a major issue, one that may shape process of basic cost reduction, including
their future: what new sources can be purchases and WCR management. In their
identified for funds to build competitive case value creation needs a wider array of
advantages and come up with IRRs that deeper, more implicating, measures.
meet LPs expectations, in an environment
where operations are put at risk by greater Building a competitive advantage will
multiples and fast-growing debt leverage? require scrutinising the market potential
of purchased companies and thinking in
Not unlike Orwells Animal Farm the terms of strategic positioning. This is a clear
PE industry is unequally rewarding. necessity for secondary LBOs, since cost
Profitability is closely related to size; levers were used in the course of the first
average returns at large funds were LBO. Competitive advantages in the future
twice as high as those at small funds, are likely to rest increasingly on the ability
while medium entities fell in between. to carry out successful growth strategies.
In addition, standard deviation among Two different investment rationales
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build-up and rollout can be chosen, such transactions requires specific skills and
each of which follows specific aims and savoir-faire which are increasingly available
introduces specific levers. First, funds need from external advisers.
to define their aims, whether they intend
to implement operational synergies or plan The challenges facing buyout funds
to boost sales efficiency. It is those very demand renewed reflection on the essence
strategies that can provide the funds with of corporate value creation. Those on the
an ability to loosen the grip, make up for right track will hold an advantage over
the pressure produced by higher purchasing the rest of the pack. In terms of economic
multiples, and implement momentum of value creation through build up and rollout
value creation. strategies, poorly performing small funds
clearly start the race at a disadvantage.
To phase in such strategies and make sure But the dice are not yet cast. In those
they are profitable, it is necessary to target conditions, it is still unclear whether the
companies that closely fit ones needs. That market will go through concentration
goal contradicts the particular conditions and further evolve toward a model split
that characterise an intermediated market between niche-focused small funds (in
and lead to one-size-fits-all rather than terms of areas and industry) and large
custom-tailored operations. To match the generalists.
expectations, the fund has to strike a deal
with a target that until it was approached
had never planned to be bought not
to mention the eventuality of a buyout. Olivier Sibenaler is a principal and Mathieu
Convincing shareholders and completing Baudouin is a consultant at BearingPoint.
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g Is there a credit crunch in the mid-market?
by Mounir Guen
As many major financial institutions suffer and forced to defend their actions and
from bone-crunching losses, their position, their assertion that they actually improve
bullishness, and business outlook have been the operations and profitability of their
deeply affected. While many are pointing portfolio companies rather than add to
fingers at banks which aggressively offered national unemployment.
debt packages to purchase companies,
fuelling ever larger deals, it takes two to Meanwhile, the private equity universe
tango; more than a few general partners has continued to expand. Deals, exits and
willingly took advantage of the buoyant portfolios grew larger. Average deal sizes
credit markets to benefit their investors. increased 265 percent from 2000 to 2007,
Consequently, the private equity market according to Dealogic. Funded by investors
witnessed some amazing activity and a slew writing ever-larger commitment checks,
of acquisitions on an unprecedented scale. mega funds emerged, still touting their
In 2007, $800bn of deals were executed, middle market heritage. The definition of
with almost $600bn of that completed mid-market became so wide in the last
in the first half of the year, according to few years that the sheer breadth of mid-
Dealogic. This included record-breaking market managers began to resemble the
deals such as Blackstones $38.9bn Grand Canyon. Then, as the risk appetite
acquisition of Equity Office Properties and changed overnight, all went silent. Activity
the $45bn acquisition of TXU by a private generated by financial institutions dropped
equity consortium led by KKR and TPG. dramatically, with fourth quarter 2007
activity falling 70 percent year on year from
However, not all was rosy in private equity 2006.
land. The most recent credit cycle has
brought new tensions and new learning However, it is in this broad middle market
experiences for general partners who that we witness a private equity nuance.
now suddenly understand the concept Here, general partners did not get caught
of responsible public ownership and up in the land of leverage, and were not
the necessity of ensuring clarity of their as involved with the euphoria that swept
intentions, especially in the public eye. through the larger end of the market.
Within the last year, private equity firms These general partners tended to have
have come under intense scrutiny with more of an operational focus, buying and
respect to the transparency of their profits building sound companies, or establishing
and operations. Their benefit to society platforms, focusing on growth and
has been questioned. A number of the preparing companies to be market leaders
larger firms that had previously been that could weather market cycles. In
humming along without a care in the world fact, truly mid-market general partners
have been dragged into the spotlight continued to exit companies for a healthy
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profit in the last few years, riding the rising continue to be relatively strong. Funds
tides while still making investments at raised in the emerging markets have grown
attractive acquisition multiples and not exponentially in recent years. Between
loading up their acquisitions with debt. 2003 and 2007, the amount of capital raised
While they could easily have taken on more has risen on an annual basis by 69 percent
debt in every acquisition, these general in the Middle East & Asia, 82 percent in
partners conservatively chose not to, as Latin America, 90 percent in Emerging
they wanted to position their companies for Asia and 132 percent in Central & Eastern
the future. Europe and Russia, according to Emerging
Markets Private Equity Association. This is a
By leveraging prudently, they were buying trend that has been mirrored in investment
insurance for their portfolio companies. activity, as a growing percentage of global
And, like all good insurance programs, private equity activity is attributable
business protection has been there in a to the emerging markets. In 2001, they
time of need. Today, these general partners accounted for 4.5 percent of private
have not missed a beat in the pace of their equity fundraising and 3.3 percent of deal
investments. While others wonder how volume. By 2007, they accounted for 15.9
they will put together the next deal, these percent of fundraising and in the first
mid-market private equity firms are as busy half of the year, accounted for 7 percent
as ever in developing their portfolios. In of global LBO deal activity, according to
contrast to the larger end of the market, Thomson. Additionally, there has been a
mid-market deal activity gained 19 percent marked increase in distressed investment,
in the third quarter of 2007 over 2006, and particularly in the last two years.
increased 55 percent in the fourth quarter
of 2007 over 2006, according to Dealogic.
One point to note is that given the size of
smaller transactions, new players in the
form of local banks are stepping up to
provide prudent financing. While others wonder how they will put together the

We see these trends in the US mid-market, next deal, these mid-market private equity firms are
where a number of general partners who as busy as ever in developing their portfolios.
are raising successful funds up to $2bn have
achieved great exit multiples, and continue
to make interesting investments. We also
see these trends in Europe where there is
still a great deal of value and inefficiency to
exploit in the middle market, particularly Ultimately, the recent events have had
for the local players who have unparalleled an impact even on the mid-market
networks in their respective markets. players who maintained a conservative
approach. First, while the banks are open
Significantly, we also see this in the for business, the debt packages available
emerging markets where there is often today are not as attractive as they were
conservative use of leverage (if any) while 18 months ago. Second, valuations have
growth rates are the main focus and come down on unrealised investments;
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and since many investors in private equity wealth funds in order to finance them, the
use mark to market valuation techniques, circumstances surrounding the mid-market
the funds in their portfolios are currently are relatively insignificant. Furthermore,
showing lower performance even though they will be short lived as the mid-market
the underlying companies may be doing continues to exhibit resilience, opportunity
fine. However, compared to the large end and performance.
of the market where private equity firms
are being forced to look at much smaller
deals than would normally fit their strategy
and also potentially share their larger Mounir Guen is founder and chief executive of
deals with increasingly powerful sovereign MVision.
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g The changing face of the MBO
by Oliver Hoffman
Management buyouts (MBOs) have not have as deep pockets as some trade
become an established feature of the buyers) the upsides can be beneficial. With
corporate landscape over the last 25 years. a sale to management the owner can sell
The concept itself is simple. Who better without having to disclose potentially
to buy a business than the people who sensitive information to someone in the
manage it? The reality is more complicated trade. Also confidentiality surrounding sale
and a whole industry of corporate finance discussions can be better protected than
advisers, corporate lawyers, bankers and when a business is being marketed to a
venture capitalists has been spawned wider audience.
to help management teams (and the
shareholders from whom they buy their Second, a plentiful supply of capital has
businesses) through the buyout process. helped. Pension fund managers and
This article highlights the reasons MBOs wealthy individuals alike saw the returns
have become so popular. Additionally made by those that invested in some of
it looks at the trends seen in the MBO the early MBOs and have allocated large
marketplace in the last few years as a amounts of cash to be invested in this
pointer towards the future of the MBO. market. The banks too have seen that there
is profit to be made in lending to companies
Why have MBOs become so popular? going through a buyout and have set up
specialist leveraged finance teams to
In a nutshell, an MBO is the purchase of provide finance to this market.
a business from its shareholders by the
current management, usually with funds Third, management teams have been lured
provided by a bank and/or third party equity by the prospect of making life changing
providers. amounts of money as well as taking control
of their own destiny. This money making
The MBO has become such a phenomenon opportunity comes from financial leverage.
for three main reasons. First, it gives a In most cases, a management team buys all
business owner an alternative to selling or most of the shares in the company with a
to a trade buyer. Smaller businesses in relatively small amount of their own money.
particular are often difficult to sell as they The bulk of the money is provided by third
can be below the radar and interest level parties (banks and/or equity investors).
of larger acquirers. The option of a sale to Over the next four to five years they use the
the management team therefore opens profits generated by the business itself to
up another avenue of possibility to the pay off the banks and investors. What they
owner. Although there is sometimes a are left with is a business with little or no
financial downside for a vendor in a sale to debt that can be sold, potentially making
management (as management teams do a very large profit for themselves. Tens of
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thousands of pounds are often turned into to provide 60 to 70 percent of the finance
multi-millions for successful management for an MBO with the balance coming from a
teams. VC.
But MBOs are not without their downsides. In the early 2000s, many VCs saw greater
If a business veers off-plan and fails to profits to be made by financing larger
deliver the profits required to pay off transactions and moved away from smaller
its borrowings, the outcome can be MBOs (i.e., those with a purchase price
devastating. Surveys have estimated that of below 5m). Management teams were
up to a third of businesses that go through unable to meet the price aspiration of
a buyout fail in their first few years with vendors with bank borrowings alone and
administration or receivership often a asked the vendors to fill the gap left by
consequence. Most advisers operating in VCs by deferring payment of some of the
the MBO arena will argue that the majority purchase price, typically by two to three
of MBOs that go wrong do so because the years. This debt plus deferred structure
MBO team overpaid for the business and has now become commonplace and has
burdened it with too much debt. Hindsight virtually replaced debt plus venture capital
is a wonderful thing. at the smaller end of the market.
Higher risk than an MBO is a management The secondary buyout. Having moved away
buy-in (MBI). The principles of an MBI from the smaller deals market but with
are the same as that of an MBO with the massive funds provided by investors, VC
exception that the management buying providers are awash with cash seeking a
the business do not currently work for home. As Corporate UK has become a well-
the company they are buying. MBIs are fished pond for MBOs in recent years, VCs
particularly common in circumstances have been prompted to invest in businesses
where the incumbent management team already under VC ownership. These
does not have the strength and depth to situations, commonly known as secondary
mount an MBO bid themselves. These are buyouts, typically involve one VC buying a
higher risk than MBOs as there is greater business from another, enabling the first to
potential for problems in the business to be crystallise its profit and return funds to its
hidden by vendors and only unearthed once investors. Often new management teams
the company has been acquired. are introduced as the first team cashes in its
stake along with the outgoing VC.
Recent trends in the MBO marketplace
A move away from MBIs. Having looked
The importance of vendor finance. Changing retrospectively at where they have made
attitudes of those that fund MBOs has money and where they have lost it, the
led to changes in the way MBOs are put funding markets have moved away from
together and structured. The most notable financing MBIs in the last few years. This
development seen in the last five years is has lead to the BIMBO short for buy-in
the increased role played by vendors in management buyout a hybrid of an MBO
helping MBO teams, particularly in smaller and an MBI where an MBI team or individual
businesses, achieve an MBO. In the 1980s leads the purchase of the business
and 1990s, it was commonplace for banks supported by the existing managers of
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that company. The perceived risk of this buyouts will soon become the norm for
type of transaction for funders is lower as larger deals in the same way that debt plus
the inclusion of the existing management deferred has become the norm at the lower
reduces the likelihood of problems arising end.
within the business after purchase that
were not previously identified. The appetite for MBOs from management
teams, vendors and the financial
A view of the future community alike shows no signs of abating.
While it will undoubtedly continue to re-
The MBO market is likely to become invent itself, it is a fair bet that the MBO will
increasingly polarised with a divide forming be with us for many years to come.
between large and small deals. With VCs
focusing on progressively larger deals and
bigger and bigger funds being raised for Oliver Hoffman is a corporate finance partner
investment by them each year, secondary at Mazars LLP.
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CHAPTER five:
Structuring and
negotiating the deal
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g Preparing a company for sale to maximise value
by Richard Lieberman
Business owners and management are impending retirement or the death of key
often so consumed with operating and personnel. Some will sell due to financial
growing their businesses they do not difficulties or a similar crisis. Others will
adequately prepare their company for sale. sell as a strategic method of growing the
When those owners finally decide (or need) business or to gain better access to capital,
to sell their businesses, they may miss markets and products. Regardless of the
opportunities to maximise the value of their reasons, a company that is prepared for
company or minimise the tax impact of sale will generally fare better in the sale
the proposed transaction. Poorly prepared negotiations than those that have not
companies may even face a dearth of undertaken proper efforts.
buyers for their business.
When to prepare for a sale
Deficiencies in key areas can discourage
potential buyers from bidding for the To help maximise the value of a company
company, delay the transaction (which (as well as the after tax net proceeds
increases the chances it will not close) or from the transaction), business owners
lead to a lower purchase price. Similarly, should devote attention to preparing their
unaddressed problems can result in greater company for sale as early as possible. Those
retained liability of the seller or reduced preparations can even commence when
payouts on earn-outs. The expense of trying preparing the companys organisational
to resolve the issues while in negotiation documents. Shareholder and operating
often far exceeds the cost a seller would agreements often identify the rights and
have spent fixing them before the obligations among the equity owners
transaction arises. with respect to the sale of their interests.
Addressing those issues at the outset
Conversely, sellers who adequately can help owners and management avoid
prepare their company for sale can be disputes at the time of a prospective
more opportunistic when engaging in transaction.
transactions and often can negotiate better
results for their equity owners, employees Starting early in the process can have
and other constituents. Transactions with additional benefits. For example, business
prepared companies can close faster with owners can integrate a potential sale with
less expense. their estate planning process, to help
minimise estate and gift tax obligations.
Sale transactions can result from a variety Those owners could benefit from valuing
of circumstances. Prospective purchasers their business and transferring assets to
and their advisers often approach a seller. their estate well before the sale. Similarly,
Sellers may seek to sell due to their converting the form of the business entity
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from one type to another, such as from a engagement of the other professionals,
taxable corporation to a limited liability to address regulatory and legal issues in
company, will have tax ramifications that structuring the transaction, to evaluate
should be carefully analysed with the duties of the management to the equity
companys advisers. Those actions could owners and to serve as a resource to their
affect the net proceeds to the seller, but client. Some acquisition intermediaries
may need time to have a significant benefit. may discourage hiring counsel until later, to
permit them greater freedom in structuring
Business owners can still do much to the business terms of the transaction, as
prepare for a sale even after discussions well as the terms of their own engagement.
with the buyer have begun. The negotiation Experienced counsel, however, should
and due diligence process often provides facilitate, not hinder, those processes, while
adequate time to address many issues. helping the seller to protect its interests.
Some may even be resolved with the
knowledge, consent and perhaps Preparing for a sale
encouragement of the prospective buyer.
Among the steps to prepare for a sale,
Assembling an advisory team sellers should consider evaluating the
following issues. Of course, the list is not
Prospective sellers should consider exhaustive, and the advisory team can
the identification and engagement identify other areas of review particular to
of experienced professionals to assist the seller.
throughout the sale process. The advisory
team typically includes investment bankers Company records. Buyers will scrutinise
(sometimes called business brokers or the companys contracts, customer
advisory intermediaries) and legal, tax, correspondence, organisational documents,
accounting and financial advisers. In- minute books, accounting, tax and financial
house professionals, who know the buyer, records, patents and similar rights and
and experienced and objective outside other important documents.
professionals can form a powerful advisory
team. Compensation arrangements. Sellers should
evaluate whether key personnel need
Experts in other areas should be engaged incentives to remain with the company
as appropriate for the transaction. during and after a sale. Employees react
Knowledgeable advisers in various differently to change, and the loss of key
disciplines, such as information technology, personnel during a potential sale can
can be added as needed. Purchasers adversely impact the proposed transaction.
entering into a new industry or market can Sellers should not assume that the
benefit from hiring consultants to advise transaction process can be consummated
on those issues. International transactions in secret, and employees often know
often warrant engagement of qualified or suspect a transaction is in process
professionals in each jurisdiction. long before management discloses the
prospective transaction.
Sellers should consider hiring legal counsel
early in the process to assist with the Employee policies. Companies should assure
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that appropriate policies and agreements bidders and prepare the companys sale
are in place to protect its trade secrets, strategy. An integrated team approach
patents and other intellectual property. It is permits a business owner to benefit from
often difficult to implement those policies the expertise of its team members and
while trying to consummate a transaction, may relieve some of the burden on the
especially if the parties are trying to seller, who must still operate the company
maintain confidentiality. Buyers will also throughout the process, as well.
review other company policies, plans and
procedures to evaluate their adequacy. Business owners would be well advised to
adequately prepare their company for sale.
Litigation and other known problems. Most The effort and expense should inure back
companies have some problems, such as to the seller in higher net proceeds and a
ongoing litigation, customer claims and faster and smoother process. Sellers can
similar issues. Appropriate resolution of benefit from those preparations, regardless
those items can help maximise a companys of the circumstances leading to the sale
value, but doing so often cannot be or when they commence the process,
achieved prior to entering negotiations with although greater flexibility remains for
the buyer. The advisory team can help guide those who begin the process well before a
the seller to the best method of presenting prospective sale.
the matter to the buyer, as well as to help
negotiate the impact of those issues on the
proposed transaction.
Together with its advisers, business Richard Lieberman is chairman of the

owners can take steps to prepare their Corporate, Securities and Finance
company for sale. The advisers can also Department of Jennings, Strouss & Salmon,
identify and negotiate with prospective PLC.
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g Steps to a successful private company sale
by Frank A. McGrew IV and Dunn Mileham
Selling a privately held business may be succession planning are among the most
the most important financial event in a common reasons business owners cite
business owners life years of hard work for selling their businesses. While the sale
offer the prospect of financial security for of the business in accordance with terms
life. However, without proper guidance and desired by the owner may be the ultimate
financial advice, this exciting moment can outcome, the means to the end should start
quickly turn into a misadventure in which well in advance of the liquidity event. In
the owner may not realise the full value of fact, it is never too early to plan for a sale.
his or her company. From day one, business owners can have
a positive impact on the outcome of the
Before and throughout the process, a liquidity event by focusing on the following
number of questions are inevitable. What key issues:
is my business really worth? What is the
right transaction structure? What can I do Finances. While many private businesses
to make sure the transaction closes with start small and use off the shelf accounting
minimal difficulty and maximum after-tax software, it is important to keep detailed
proceeds? financial records and increase bookkeeping
/ accounting functions as the business
Selling a business is a complex and time- grows. Owner expenses should be kept to
consuming process, and the addition a minimum and should be clearly identified.
of family members and close friends as Audited financial statements (or, at the
employees and/or shareholders often minimum, reviewed statements) will be
adds to an already complex situation. In viewed favourably by both strategic and
order to make the process as smooth as financial buyers and will expedite the
possible, goals and specific issues must be process.
clearly defined with appropriate advisers
at the onset of a prospective transaction. Management. Business owners should
Clearly defined goals and objectives will build a competent, independent middle
allow the team of trusted advisers to seek management team. During diligence,
out the best deal for the seller to achieve buyers will always question the capabilities
maximum benefit. However, it is important of the management team. An average to
to remember that the best deal may not poor team can detract value, while a solid
necessarily provide the highest price. group can increase value and interest in
the business. Additionally, while the seller
Private companies are sold for a number of the business may take his proceeds
of reasons. Liquidity, personal balance and retire to the beach, the ongoing
sheet diversification, restructuring, growth viability of the company may be left in
capital needs, ownership transition and the hands of its management. In certain
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instances where the seller may have Advisers. Last but certainly not least,
some continuing interest in the ongoing business owners should build a team
financial performance of the business (via of trusted financial and legal advisers.
an earn out, stock consideration, etc.), Throughout the growth of the company
the capabilities of the management team from inception to sale an attorney
may have a material impact on the sellers (or firm) well versed in corporate law will
ultimate financial consideration. be an invaluable resource. The second
key member of the team should be an
Employees. Employees are the backbone external accountant, preferably from a
of a company. Unlike the owner, and in regional firm with dedicated tax and audit
some cases the management, many of the capabilities. An investment banker skilled
employees will stay with the business post- in M&A and also knowledgeable about the
transaction. Business owners may consider particular industry is the third key team
having key employees sign confidentiality member. Working in conjunction, these
and/or non-compete agreements in order three advisers will be able to orchestrate a
to keep proprietary business processes transaction that fulfils the sellers desires
and trade secrets in-house. When a sale while minimising disruption to the business.
process commences, owners should
consider notifying key employees of A key role of the advisers, particularly
the process and keep them informed of the investment bankers, is the marketing
changes. Unannounced unfamiliar faces process. An investment banker who
lurking around in suits during diligence may understands the industry in which the
cause undue angst among trusted and loyal company competes is imperative. Bankers
employees when their continued focus is lacking industry knowledge will be unable
needed more than ever. to target the marketing to the most likely
set of prospective buyers.
Legal structures / tax implications. When
forming a business, owners should consult Relationships with both strategic and
with attorneys and tax professionals financial buyers is key to a competitive
regarding the pros and cons of forming process, as there may be pros and cons of
an S-corp versus a C-corp. A number of a transaction with each. Financial buyers
variables will influence this decision, and tend to (i) seek above average returns
a choice of one corporate structure over (although they are potentially more
another may hinder a process or leave the reasonable now than in recent years); (ii)
business owner with an undesirable tax look for experienced senior management
burden. teams with sound growth strategies; (iii)
typically invest in a preferred security and
Customer base. A large and diverse require majority control; (iv) partner with
customer base with identified new business management; (v) prefer capital be used for
targets can add value to a company and growth; (vi) look to exit the investment in
ease buyer concerns about customer a set timeframe (three to seven years); and
concentration. Owners should maintain (vii) require audited financials.
detailed prospect reports and evidence of
successfully growing the customer base. On the other hand, strategic buyers (i) can
be readily identified and are increasingly
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global in nature; (ii) may be able to pay a financial performance. Finally, they have
premium price due to synergies or cost attractive growth characteristics with
elimination; (ii) can use stock as currency limited quantifiable downside risk.
if they are a public company; (iii) may
have an upper level management which Success, however, does not happen
is expendable; and (iv) may have lighter overnight, and a sale process should not
diligence requirements due to knowledge be taken lightly. An emphasis on pre-
of the industry. sale preparation, data validation during
pre-marketing diligence and well crafted
While no two sale transactions are the marketing materials presented to qualified
same, companies that yield premium buyers will ensure a competitive process
valuations in todays market share that yields the most desirable outcome to
certain similar characteristics. First, the seller.
they hold a leading position in a viable
industry. Second, they are led by a strong
management team. Third, they enjoy Frank A. McGrew IV is a managing director
sustainable competitive advantages. and Dunn Mileham is a vice president at
Fourth, they have achieved outstanding Morgan Joseph & Co. Inc.
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g Non-binding preliminary agreements: use good

faith with caution
by Robert Coyne and Kevin Evans
Business negotiations often reach a stage attributes, the ramifications of cavalierly

at which one or more parties want what using common business terms such as
they have agreed to in principle to be good faith can be very different.
recorded in writing. The parties may sign
a term sheet, letter of intent or heads of United Kingdom
agreement all variations on a common
theme. These preliminary agreements spell Generally the English courts are reluctant
out, in summary fashion, the key terms to enforce obligations to negotiate in
of the proposed deal. These preliminary good faith, whether implied or express,
agreements are often stated to be non- because such a concept is perceived to be
binding, such as by the use of the words, irreconcilable with the parties freedom
subject to contract, or subject to the of contract. In addition, good faith is
execution of a definitive agreement. considered vague, a type of agreement
to agree and therefore too uncertain to
One party may request the inclusion enforce. It is also difficult to say whether the
of a mutual obligation to negotiate the termination of negotiations was brought
definitive agreement in good faith. This about in good or bad faith. Moreover, since
request may be a difficult one to reject it is difficult to determine whether good
why wouldnt each party agree to negotiate faith negotiations would have produced
in good faith to finalise the deal? It may be a final agreement or what the terms of
tempting for a party to conclude that such a that agreement would have been, how
statement is harmless, since the term sheet can the loss for breach of any good faith
is non-binding. obligation be determined? In the leading
House of Lords case of Walford v. Miles
If, for whatever reason, one party changes (1992), the court said: While negotiations
its mind, can it simply walk away from the are in existence, either party is entitled to
non-binding arrangement? Does it make withdraw from these negotiations at any
a difference if the term sheet includes time and for any reason. There can be thus
a statement to negotiate a definitive no obligation to continue to negotiate
agreement in good faith? until there is a proper reason to withdraw.
Accordingly a bare agreement to negotiate
This article considers the differing impact has no legal content.
of a provision to negotiate in good faith
in the common law systems in the United However, the inclusion of a provision to
Kingdom (no impact), Australia (some negotiate in good faith was considered
impact), and the United States (a significant more recently by the English Court of
impact). Although the common law in Appeal in the case of Petromec v. Petroleo
these three jurisdictions has many similar Brasileiro (2005). The court commented
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that it did not consider that Walford v. contractual duty of good faith is recognised
Miles was binding authority that an express in Australia, both under common law and
obligation to negotiate in good faith would statute, it is not imposed on all contracts.
be completely without effect. It suggested While the courts may seek to imply a
that when the parties enter into a written duty of good faith in the negotiation of
contract that includes a provision for good contractual obligations, they will not
faith negotiations, and in particular when override a contracts express language. The
legal advisers have been involved, then it express non-binding nature of the term
may be appropriate for such a provision to sheet makes it likely that the Australian
be enforceable. courts would not imply an obligation to
negotiate in good faith when there is a non-
Thus, when it is clear that the term sheet is binding term sheet.
not binding and is only a bare agreement
to negotiate, then Petromec would have no But what of the express obligation? It is
impact on the traditional position espoused generally accepted that parties may by
in Walford. Under English law, there is no contract bind themselves to negotiate
recognition of an implied obligation to in good faith. But there remain practical
negotiate in good faith, and the inclusion difficulties with this concept. Significantly,
of an express provision does not, in the the courts have held that any express
absence of a binding agreement, limit obligation to negotiate in good faith needs
a partys ability to walk away from the to be sufficiently specific as to the elements
negotiations. of the obligation. In our example, because
no attempt has been made to define what
Australia is intended by the obligation, or what
should happen if good faith negotiations
The existence and scope of an obligation break down, the courts are again unlikely to
to negotiate in good faith is not yet settled enforce the obligation.
in Australia. Traditionally, Australia has
followed the English courts and been If parties to a term sheet wish to bind
reluctant to recognise an obligation themselves to negotiate in good faith in
to negotiate in good faith. However, reaching a definitive agreement, because
Australian courts have recently appeared the concept of good faith is uncertain
more willing to depart from this position. and evolving, they should define what
In Coal Cliff Collieries v. Sijehama (1991), it is that they mean by good faith. Even
the validity of an express agreement to in the scenario of a binding obligation
negotiate in good faith was considered. to negotiate in good faith, a partys
The court rejected the proposition that no obligations under Australian law are not
promise to negotiate in good faith would onerous. Generally, the obligation can be
ever be enforceable by a court. Subsequent fulfilled by simply taking part in the process
cases in Australia have followed this of negotiations. Beyond this, there is no
approach. requirement that a party act for or on behalf
of or in the interests of the other party, nor
How does the current state of the law does it require a party to act otherwise than
in Australia impact on our non-binding by pursuing its own interests.
term sheet scenario? Although an implied
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United States stated their intention that the preliminary

agreement is non-binding pending the
Any general statement of the law in the US definitive agreement, a court will impose
is fraught with problems. English courts an obligation to continue good faith
have only to consider decisions of higher negotiations.
English courts. Australia, which also has
a federal system, has state courts that There is little doubt that US courts will
tend to take notice of the developments recognise express obligations to negotiate
in other states and a High Court that in good faith. In Itek Corp. v. Chicago
ultimately resolves questions of contract Aerial Industries (1968), a letter of intent
law for the whole of Australia. In contrast, containing both a no binding effect clause
in the US there is no effective review of and a provision stating that the parties
state law by the US Supreme Court. As a make every reasonable effort to agree
result the common law of what it means to upon and have prepared as quickly as
agree to negotiate in good faith develops possible a contract, was found by the
independently in 50 jurisdictions. That Delaware Supreme Court to impose an
being said, it is possible to extract some obligation to negotiate in good faith.
general guidance. Similarly, in the Massachusetts case of
Schwanbeck v. Federal Mogul Corp. (1992),
The obligation to negotiate in good faith a statement that: This Letter of Intent is
arises from either an express or implied not intended to create, nor do you or we
obligation in an agreement. When the presently have any binding legal obligation
obligation does not exist, the traditional whatever, but then went on to say:
theory of freedom of contract applies and however, it is our intention, and we
a party is free to walk away from a deal and understand, your intention immediately
break off negotiations for any reason. to proceed in good faith in the negotiation
of such binding definitive agreement,
Does a term sheet that expressly states was held to be a contractual obligation
its non-binding status, as in our example, independent of the prior disclaimer that the
nevertheless imply a binding obligation letter was non-binding.
to negotiate? The watershed case is
Teachers Insurance & Annuity Association of Itek and Schwanbeck are examples of how
America v. Tribune Co. (1987), in which the otherwise non-binding letters of intent may
applicable term sheet stated that it was impose a duty to negotiate in good faith.
non-binding but did not expressly contain But what does this duty entail?
any obligation of good faith. In this case
the court identified a type of preliminary Good faith is defined in the Uniform
agreement between parties that, although Commercial Code as honesty in fact in
not requiring that the final contract be the conduct or transaction concerned.
concluded, created an obligation on the However, the UCC deals with the
parties to negotiate in good faith, what performance of already concluded
the court called a binding preliminary contracts, and not with good faith
agreement. Although a number of cases obligations in the pre-contractual stage.
have followed in Tribunes footsteps, it is What constitutes pre-contractual good
rare that when the parties have expressly faith is an open issue. Clearly, certain
L+ L- 3 4 CONTENTS
actions such as fraud or duress, or other compensated for any loss resulting from
bad faith conduct, will violate any its reliance on the other partys agreement
good faith standard. Additionally, some to negotiate in good faith. The purpose
commentators suggest that under an of this measure is to put the party in the
agreement to negotiate, the good faith same position in would have been in had
standard ordinarily requires: (i) actual the agreement to negotiate in good faith
negotiations with no imposition of not been made. It is likely to cover out-of-
conditions that were not contemplated by pocket expenses, but not the lost profits
the parties; (ii) disclosure of enough about that the initial term sheet contemplated
parallel negotiations to give a reasonable or lost opportunity costs. That said, the
opportunity to match competing proposals; more advanced the negotiations towards
and (iii) continued negotiation until a definitive agreement, the more likely
impasse has been reached unless there is that an aggrieved party will seek to argue
another justification for breaking off the for lost opportunity costs or damages to
negotiations. its business that may have resulted from
the impact on employees, suppliers and
Commentators have also suggested customers of the failed negotiations.
conduct permitted by the good faith
standard. For example, an obligation to Conclusion
negotiate in good faith should not require
a party to negotiate exclusively, or for Cross-border deals are now the norm. The
any specific length of time, or to continue cavalier use of commonly used terms such
negotiations if its counterpart is not acting as good faith across different jurisdictions
in good faith, or if market conditions can have unexpected consequences. In
change, or indeed if the opportunity to the context of preliminary agreements,
conclude the deal with a third party comes particular attention should be paid to any
along. language that suggests that there is an
obligation to continue negotiations, or
Finally, in the event of a breach of an otherwise negotiate in good faith. Consider
obligation to negotiate in good faith, including explicit disclaimers reserving each
what are the likely consequences? The partys right to terminate negotiations at
US courts have a number of remedies any time and for any reason. Resist the
available. However, since it is not inclusion of a good faith obligation to
possible to determine whether good faith negotiate. Alternatively, spell out precisely
negotiations would have produced an what needs to be done to comply with this
agreement at all, or what the terms of obligation, or set forth the consequences
that agreement would have been, certain for breach of this obligation, such as a
remedies such as specific performance, termination fee.
or expectation damages, i.e., damages
based upon the expected profits that the
aggrieved party would have received from
the transaction, are inappropriate. The Robert Coyne is a director and co-chair of the
more likely result is for a court to award Cross Border Transactions Group, and Kevin
reliance damages. The aggrieved party is Evans is Counsel, at Gibbons P.C.
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g Auctions in the M&A process
by Justin Pettit
Despite the increased use of competitive auction necessarily equates to the best
auctions, the balance of power between price possible, and thus best meets the
financial sponsors and corporates in todays needs of their primary constituents.
environment is in flux. The balance of power However, this may not be the case. For
now has more to with the credit markets example, a business auctioned through
and the availability of capital the credit a tender offer with no representations
crunch has put strategic buyers back into or warranties will typically clear a lower
the drivers seat for now. Neither strategic premium than in a negotiated transaction.
buyers nor financial sponsors generally
prefer auctions. However, whether they And there is evidence to suggest that
were called and managed as a formal auctions deter strategic buyers and that
auction or not, the sell-side process has sellers are unable to extract the maximum
always at least feigned some element value from a financial buyer. Buyers are
of a book-building process designed to suspect both around the fundamentals
generate interest and enthusiasm in the of auctioned assets, as well as the likely
negotiation. What has changed are the clearing price that will need to be paid.
social norms around its visibility.
Auctions do seem to be a more familiar
Auction pros and cons process to the financial sponsors. Strategic
buyers prefer to look at opportunities
Sellers like auctions because the process is before they are formally auctioned. Banker
quick, efficient, and it gets things over with books are regarded with scepticism not
in one fell swoop. only because we know the ideas have been
shown to hundreds of others to bid up the
There can also be situations where price, but also because there is often a taint
companies are legally compelled to hold associated with businesses that are put up
an auction. Obtaining a fair and reasonable for sale. Ultimately, auctions can deter any
price is a fiduciary responsibility of the buyer that is especially price-sensitive.
directors in any public company this
may, or may not, be best achieved through Private negotiation is far less disruptive to
an auction process. Furthermore, there the business being sold the customers,
are many regulated companies, where employees, and vendors, need not be
regulators may have preferences. Finally, unnecessarily involved and worried with the
encumbered assets can require lender transaction. Thus, value can be preserved.
approval, which may also affect the method In many industries, the key players all
of disposition. know each other, and the natural owners
of different assets can be identified and
Regulators may believe that a formal approached through quieter channels.
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Formal auctions are not necessary, but Strategies can be deployed by the seller to
visibility and dialogue certainly are. A maximise the sale proceeds in an auction.
proactive out-reach to the close circle There are many degrees of freedom in
of natural buyers can be done quietly. the value proposition, and price is but one
All auctions are not created equal in of them. Timing, consideration and risk,
fact, there is a spectrum of tactics. There stapled financing, tax, governance, control,
are a number of auction methods that people and chemistry, are all equally
can be used. Managed book building, important issues. The maximisation of any
discriminatory auctions, and uniform price one of these elements, such as price, can
auctions are alternative approaches to be achieved through the careful calibration
dialogue with multiple potential bidders. of the other elements, based on your
The transparency of formal auction knowledge of what else matters to each of
methods can lead to more competitive the potential buyers.
pricing, but actually can work poorly in
cases vulnerable to inaccurate information. There are ways the buyer can increase odds
of being the successful bidder in an auction.
For example, where the number of There are many elements to the value
investors and the accuracy of investors proposition beyond price per se, though
information is endogenous, managed book that is an obvious starting point. The form
building controls investor access, allowing of consideration cash or stock and its
reduced time and risk for both buyers risk also matters. Even in comparing all
and sellers. It also controls spending on stock deals, risk can vary. M&A collars can
information acquisition, thereby limiting be used to tailor the risk profile of stock
underpricing. Interestingly, the US book deals to bridge differences in outlook
building method has become increasingly between buyers and sellers. Similarly,
popular for IPOs worldwide over the last deal structure also matters. Deals may be
decade, whereas sealed bid IPO auctions structured differently for advantageous
have been abandoned. tax treatment, alternative governance
structures, etc. Finally, deal terms around
Key success factors timing, board seats, control, management,
etc., are often more important issues than
There are many common mistakes made in deal price.
auctions. Many companies fail to prepare
adequately, often seeing the auction as Auctions of the future
the end rather than a simple means to an
end. In this preparation the development Sellers are increasingly attempting to
of a clear and compelling equity story clean-up the targets operations in
of about the business, strategy and right advance of conducting an auction, even
to win, markets, competitive dynamics, to the point of investing capital, making
advantages, risks and prospects is essential. changes to management, and revising
Advance planning is essential the seller strategies. They are also increasingly
should conduct their own in house due making sure that any contingent risks in the
diligence to surface the relevant issues and business are resolved or mitigated.
avoid any surprises.
In terms of the balance of power
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going forward if auctions will take and complexity reduction at each of the
precedence in future transactions, or if intersections of business segment and
privatelynegotiated deals ultimately value chain activity. Correlation between
are preferred, the answer is most likely portfolio coherence, and financial measures
some hybrid that falls between these of performance, growth, and valuation is
two extremes. A professionally managed typically strong.
process that quietly targets the (limited)
natural circle of interested parties, and For example, our initial estimate of Citi
combines the rolling disclosure of private coherence is roughly 45 percent, far below
negotiation with the competitive bidding of the level we expect was envisioned for
an auction mechanism. this portfolio. While Citi could improve
coherence through a streamlining of its
Fix versus sell: the portfolio coherence portfolio (e.g., auction assets), it could
perspective also achieve a much higher level of
coherence through operational means
When a stock languishes, delivering total while maintaining the existing portfolio
shareholder returns below the cost of composition. An improved articulation of
capital and trading at valuations below portfolio strategy, including a roadmap
publicly-traded comparables, buy-side for portfolio coherence, plus improved
and sell-side analysts call for bold change execution, manifesting in enhanced
to serve as a catalyst for the stock and a growth and returns on equity, can be
revision to investor expectations (in some even more effective routes to sustainable
cases, operating performance and business value creation than a change in portfolio
integration are more problematic than composition.
portfolio composition per se). We often see
opportunity for a much greater degree of Justin Pettit is a partner at Booz Allen
portfolio coherence greater integration Hamilton.
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g Domestic versus foreign acquirers: managing an

international sale process
by Darren Redmayne and Saurin Mehta
There is a rising level of cross-border US-based assets and vice versa.

acquisition activity occurring among
European and US companies and private Merits of domestic and foreign acquirers
equity firms. As these entities increase
their appetite for international targets, it When deciding whether to choose a foreign
is prompting business owners to scrutinise acquirer over a domestic acquirer, a seller
the advantages and commensurate will commonly ask Is it worth the hassle?
challenges of selling to a domestic versus This question is rooted in several complex
foreign acquirer. themes familiarity, transaction risk and
the long-term fit of the business within the
This article discusses the common issues new organisation. All are critical to ensuring
a seller must consider when marketing a successful sale.
a business that is likely to attract
international interest. A seller must be Human instinct gravitates towards
thoroughly prepared to ensure a smooth familiarity and cautiously approaches the
sale process. In particular, we will examine unknown. Domestic buyers are naturally
the following: (i) the relative merits of more familiar with targets in their
selling to a domestic versus foreign own country and the market dynamics
acquirer; (ii) how to manage a foreign buyer impacting those assets. The buyer and seller
during the sale process; (iii) recognising enjoy cultural similarities the business
localised issues; and (iv) understanding the customs are identical, people act in a
due diligence process. similar manner and there are no language
barriers. However, this same familiarity
Although it is virtually impossible these may also lead to seller trepidation when
days to discuss globalisation without some contacting domestic acquirers which are
reference to China or India, transatlantic deemed competitors. The prospect of
M&A activity between Europe and the disclosing critical information to the enemy
US still remains robust. In 2007, there often causes sellers to hesitate. Conversely,
were over 1500 transatlantic deals with sellers frequently see foreign competitors
a total disclosed value of nearly $625bn, as less threatening, partly, and due to the
according to Mergerstat. An October 2007 foreign acquirers lack of familiarity with,
Mergerstat survey found respondents and presence within, the local market.
optimistic that transatlantic M&A will
continue, with 77 percent believing the The second aspect sellers must consider
volume of deals will increase or remain the is transaction risk. Although risk is
same over the coming year. Recognising inherent with any buyer, there typically is
and appreciating these trends, this article heightened concern surrounding a foreign
revolves around European firms acquiring acquirers ability to secure financing and
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complete due diligence, both of which ensure maximum participation by foreign

directly impact certainty of closing. A acquirers (especially strategics). At the
foreign acquirer and its lender may require onset, a strategic buyer carefully weighs the
extra time to familiarise themselves with resources required to participate in any sale
local accounting principles and business process. This bar is even higher for a target
standards. In an effort to expedite the 3000 miles away, thus requiring additional
process of securing financing, the sellers time to garner the buyers blessing to
adviser may recommend the buyer work pursue the opportunity. By contacting
with the lenders local offices or affiliates. foreign acquirers a few weeks earlier than
If unavailable, the foreign acquirer may domestic buyers, a seller may level the
be best served teaming with a financier playing field and prevent domestic parties
in the targets country instead. Of course, from moving too far ahead and scaring off
financing is a non-issue if the buyer is a international interest. The adviser may also
strategic that can write a cheque from consider using its local offices to introduce
its cash-laden balance sheet or has pre- the target (in the local language) to
established credit lines dedicated to maximise marketing effectiveness. Once a
acquisitions. foreign party is engaged in the process, the
seller may contemplate additional actions
The third, and perhaps most important, to intensify interest, such as conducting a
merit to evaluate is the long-term fit mini road show on the potential buyers
of the selling business within the new home soil, which also gives them a chance
organisation. A domestic acquirer may fold to meet and evaluate several potential
the acquired asset into an existing division, owners early in the marketing process.
lessening managements independence and
control. Synergies tend to be focused on
cost cutting initiatives. A foreign acquirer,
on the other hand, is likely to view the
target as an entry vehicle into a particular
geographic market, and its valuation may A foreign acquirer is likely to view the target as an
reflect a market entry premium. The entry vehicle into a particular geographic market,
sellers management team is critical, as
they will be relied upon to run the business
and its valuation may reflect a market entry
post-acquisition while the parent company premium.
sits thousands of miles away. Further
empowering management is the potential
opportunity to play with a larger train
set, given the revenue synergies a foreign
owner may provide via international growth The strategies to maximise foreign acquirer
opportunities. participation continue into the latter
stages of a transaction. For instance, a
How to manage a foreign acquirer during dinner the evening before a site visit is
the sale process often an effective icebreaker, leading to
a more productive, informative meeting
A sellers adviser can take actions at the following day. The opportunity to
every stage of the marketing process to meet in a less formal setting may help
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overcome some of the uncertainties and as these advisers are typically not hired
cultural differences that exist between by the buyer until after entering into an
the buyer and seller. In due diligence, the exclusivity period with the seller. In Europe,
use of electronic data rooms is a must for the seller will often engage an independent
any target hoping to solicit international accounting firm to draft a due diligence
interest. The ability of a buyer and its report before starting the sale process.
vendors to access information online By having this report completed earlier,
anywhere in the world, at anytime, the seller mitigates the risk of a buyer
neutralises the inefficiencies and costs backing out of a transaction during the
that may make foreign buyer participation exclusivity period and the buyer is able to
otherwise prohibitive. more accurately assess the target prior to
investing substantial human and financial
Recognising localised issues resources. Once the exclusivity period
begins, the independent accounting firm
Just as every deal has its nuances, every ceases to work on behalf of the seller and
region has its unique hot buttons. For instead, provides additional services, as
example, in the UK, pension-related required, to the buyer.
matters are a top priority. Meanwhile,
environmental issues are a primary focus If a seller decides to move forward with a
in the US. Even more divergent are UK and foreign acquirer, the buyer is well advised
US perspectives on representations and to use locally-based legal counsel and due
warranties. In the US, a buyer and seller diligence vendors. Though a small nuance,
may engage in a bitter debate over the the use of professionals with domestic
reps, warranties, caps and indemnifications knowledge and experiences is critical to
provided in a purchase agreement. ensure a speedy diligence process with
Conversely, the only rep a UK financial minimal hurdles.
sponsor provides is that the group owns
the shares it is contemplating selling. A Conclusion
knowledgeable adviser, particularly one
with a local presence in key geographies, So what does this tell us when choosing
can quickly discern those issues on which a between domestic and foreign buyers?
foreign buyer will focus, allowing the seller Unfortunately, the most common answer
to proactively address such concerns before is It depends. Every deal has unique
they become an impediment to the sale. dynamics that impact which buyer is best
suited for a given target. The seller must sift
Understanding the due diligence process through these complexities to determine
whether and how to include financial buyers
A discussion of domestic and foreign in its sale process.
acquirers is incomplete without highlighting
that the due diligence process is notably One thing that is certain, however, is that
different in the US and Europe. In the corporations and private equity groups
US, independent vendors (primarily large in Europe and the US continue to remain
accounting firms) play a prominent role hungry for acquisitions. Financial sponsors
in finalising the due diligence process. have raised record equity capital over the
However, diligence is backend loaded, last few years and despite the recent credit
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crunch, moderate liquidity still exists for buyer participation in a sale process. The
debt cheques under $200m. Valuation vigilant execution of these techniques may
multiples and debt pricing for targets with enable a seller to capture the coveted entry
sound fundamentals remain reasonable premium a foreign buyer may place on a
and buoyed by competition among target designated as a market entry vehicle.
strategic and financial buyers. Perhaps
most importantly, many European firms are Here, we have covered issues related to
capitalising on the opportunity to acquire US and European buyers and sellers. As
US targets at bargain prices given the India, China and other developing regions
continued strengthening of the euro over continue to become more acquisitive and
the dollar. alter the M&A landscape, the domestic
versus foreign buyer debate is certain to
While possibly daunting at first, a seller evolve over the next several years.
is well advised to consider foreign buyers
in an effort to generate the highest value
and best terms for its asset. With the aid Darren N. Redmayne is a managing director
of an experienced adviser, a number of and UK CEO, and Saurin Y. Mehta is a vice
strategies are available to maximise foreign president, at Lincoln International, LLC.
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g Going global: successfully negotiating multi-

jurisdiction transactions
by Richard R. Willis, Chris G. Baugher and Anthony M. Balloon
With the continued development of similar to but simultaneously different

the global economy, more and more from any other domestic deal a company
businesses find themselves looking for undertakes. Failure to appreciate this
acquisitions, joint ventures and strategic critical tension can at best make a deal
alliances outside of their home country. more difficult and expensive than preferred.
As the world globalises, it is only natural At worst, it can either derail a deal prior to
that transactions themselves all take closing or create unnecessary post-closing
on an increasingly global character. For challenges.
example, the recent decline of the US
dollar relative to other major currencies has Note, however, that the below commentary
served to hasten this phenomenon as many is quite selective and is meant to include
outside enterprises look to invest in the among its audience not just dealmakers
United States. It is almost inevitable that who are accustomed to transactions in
transactions in a foreign jurisdiction, and many jurisdictions, but also those who are
potentially across multiple jurisdictions, are venturing into a foreign jurisdiction for the
increasingly on the horizon for companies first time.
that once only dealt within national
boundaries. Understand the legal system involved
While issues will vary not only from The jurisdiction in which the transaction
transaction to transaction, but also from occurs, and the structure and type of
jurisdiction to jurisdiction, there are certain the legal system, may have a significant
principles that, if followed, will facilitate impact on the transaction and transaction
the smooth operating of a transaction and documents. While this point may
considerably enhance the likelihood of a seem obvious, it bears emphasising as
successful deal for all involved. The general understanding the structure of the legal
principles in this article may serve as areas system involved in the transaction is key
of emphasis to inform the considerations to understanding both the structure of the
and preparations for a transaction, whether team (particularly local advisers), as well as
acquisition, divestiture, joint venture the universe of law potentially applicable to
or strategic alliance, or any of the other the transaction. For example, contrast the
myriad of deals that are being made, federal system in the US with the European
everyday, across borders all over the world. Union. A transaction in the US may involve
The goal is to provide a few select insights aspects of federal law (e.g., taxation,
that may be used in most any transaction antitrust filings, environmental regulations
context. or securities registration requirements),
together with state law (e.g., the body of
A deal in a foreign jurisdiction is both corporate law applicable to the transaction
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and state employment law) and local law intended deal. Accordingly, in a civil law
(e.g., zoning, commercial incentives). In jurisdiction, it is vital to talk specifically
contrast, a European transaction typically and frequently with local counsel about
focuses primarily on the law of the relevant the impact that civil code provisions may
member state or states. have on a transaction.
Further contrast can be drawn between Put together the right team
common law and civil law jurisdictions. A
dealmaker from a civil law jurisdiction, such Putting together the right deal team is
as a typical continental European country, fundamental. As a general principle, the
should be generally familiar with the length, more jurisdictions involved in a transaction,
detail and content of deal documents the larger and more complex the deal
from other civil law jurisdictions (even if team will be. While a single jurisdiction
some of the norms that operate within transaction may often involve substantive
that document are decidedly different). experts focusing on various substantive
But if that dealmaker moves to a common aspects of any given transaction (tax,
law jurisdiction such as the US, Ireland, real estate, employment, environmental,
the UK or Canada (excluding Quebec), the perhaps a litigation assessment, etc.), a
familiarity may wane. The basics will largely multi-jurisdiction transaction typically
be the same, but the detail and, frankly, will involve, at least incrementally, more
length at which concepts are expressed such experts and perhaps exponentially
will be decidedly different. A US deal will more. Contrast, for example, an acquisition
have a relatively long purchase agreement, confined in scope to the State of Georgia
and the impact of what is unwritten in the in the US and an effort to purchase a pan-
agreement, while not as overarching as European business that operates in each of
typical civil law principles, can be significant the UK, Germany, and Poland. The Georgia
(e.g., Delaware case law on fiduciary duties acquisition likely can be conducted by
and deal protection, obligations under the companys home country legal and
the Foreign Corrupt Practices Act, state tax advisers plus local counsel in Georgia,
employment law enforcement principles who should be familiar with both Georgia
such as the ability for a court to blue pencil corporate law as well as any federal
an otherwise unenforceable agreement). requirements (e.g., antitrust notifications).
The European transaction, however, likely
Appreciating these differences is critical. In will require local legal and tax advisers in no
civil law jurisdictions, the various civil codes less than three jurisdictions, and likely more
will inform the meaning and interpretation depending on whether a tax advantageous
of contractual relations, and contractual acquisition vehicle (e.g., a Benelux entity) is
provisions, to a much greater extent than involved.
in common law jurisdictions. Thus, the
agreements can be shorter because there When assessing and executing a multi-
are codes which help give meaning to what jurisdictional deal particularly when
the contracting parties have agreed. The entering a new or unfamiliar jurisdiction
unwritten hazard, however, is that civil it is important to rely on local counsel to
codes can, in certain instances, imperil assess both cultural and market issues, as
the ability of the unwary to affect their well as where local issues may be brought
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to bear. Understanding key notifications, suggests that communication or lack of

regulatory or government reviews, required effective communication is consistently a
approvals and their impact on a transaction challenge in multi-jurisdiction transactions.
is important. The reason is simple: the number of
participants and advisers is greater than
In the context of the deal team, strong those typically involved in a domestic
leadership is invaluable at the business transaction. Accordingly, it is essential
level and at the transaction negotiation that the entire team is well-informed and
and execution level. The legal and tax moving toward the shared goal. As new
advisory team must be well-organised. issues emerge, identifying them and their
In that regard, a party typically has three implications, and gathering necessary input
options: manage the team in-house (e.g., from the team, is essential. This fluidity
via the general counsel); look for a one- demands leadership and the accompanying
stop shop to manage resources within its accountability.
own geographic footprint (e.g., a Big Four
accounting firm or a global law firm) or While the above principles are not
rely on an experienced outside M&A adviser exhaustive, the tenets will serve parties well
(e.g., the outside law firm with whom the in any circumstance. The dealmaker who
business has a longstanding relationship) to understands the legal system, has a team
coordinate the team and assist in selecting of local experts, and leads the deal team
local counsel. through communication and coordination
should be equipped to meet the many
Process and communication matter challenges which will arise in transacting
business in new jurisdictions, multiple
The more jurisdictionally complex the jurisdictions and throughout the world.
transaction, the more the negotiation
process and deal team communication
become important. A deal team leader Richard R. Willis and Chris G. Baugher are
cannot coordinate the transaction unless partners, and Anthony M. Balloon is an
there is regular communication. Experience associate, at McKenna Long & Aldridge LLP.
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g Key issues in structuring and negotiating leasing

company acquisitions
by Drew S. Fine and Alexander M. Kaye
The past few years have seen heightened Among the advantages of structuring
M&A activity in the leasing company sector. the transaction in this manner is the
Successful bidders in leasing company mechanical simplicity of consummating
auctions have included strategic buyers, the acquisition. There is no need to go
private equity players and both US and non- through the sometimes cumbersome
US investors. The acquisition of a leasing process of re-registering the tangible
company involves many of the issues that assets in the purchasers name. In addition,
confront buyers and sellers in typical M&A because the company itself is being sold
transactions, as well as a number of leasing (as opposed to the underlying assets), it
and finance related matters that are specific will often not be necessary to obtain third
to acquisitions in this space. This article will party consents to the assignment of the
discuss certain material issues that need to companys contracts (although care should
be considered, as well as the key pitfalls to be taken to make sure that change of
avoid, when structuring, negotiating and control provisions, if any, are addressed
drafting an agreement for the acquisition of appropriately). This helps to shorten the
a leasing company. time period between signing and closing
and removes uncertainty from the deal, as
Structuring the transaction the occurrence of the closing does not need
to be made contingent on the receipt of
Although a leasing company acquisition such consents.
can take many forms, the most common
structures often involve one of the However, one of the key disadvantages
following three alternatives: (i) the of the Holdco-purchase structure is that,
purchase of the entire company (i.e., the by purchasing the equity of the entire
stock of the upper tier Holdco); (ii) the company, an acquirer will generally be
direct purchase of the underlying assets unable to leave behind any assets or
(e.g., a portfolio of aircraft); or (iii) the liabilities of the company being acquired,
purchase of the special purchase vehicles whether known or unknown. The reality
(SPVs) which hold the underlying assets. of taking on all of the acquired companys
known liabilities, and the possibility
Purchase of Holdco. In the first method of taking on unknown liabilities (such
of acquisition, the acquirer purchases as potential lawsuits, undiscovered
the entire leasing company. This is environmental claims and employment-
accomplished through the transfer to the related liabilities) necessitates a full,
purchaser of all of the outstanding shares traditional legal and financial diligence
of stock (or other equity interests in) the of the target company, along with its
upper-tier Holdco the entity which owns attendant costs.
all of the asset-owning subsidiaries.
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Purchase of assets. The second method definitive time and place of closing.
of acquisition, the direct purchase of the
actual underlying assets (e.g. the metal Purchase of SPVs. Many leasing companies
of the aircraft, ship, rail car, container, put their leased-assets into SPVs for a
etc.) addresses the major downside of the variety of reasons, including limiting the
first method. It is possible to structure an spread of potential liability and for ease of
asset purchase agreement so that only transfer. Another method of acquisition
the desired assets are acquired, thereby can be effected through the purchase of
significantly limiting the buyers exposure all of the outstanding equity interests
to the liabilities that would otherwise be in each asset-owning SPV. This form of
transferred with the purchase of an entire acquisition marries the simplicity of a stock
company. Of course, an acquirer who also transfer with the benefits of a direct asset
takes an assignment of the operating purchase. For example, SPVs often have no
leases will by contract law be assuming employees, are party to very few contracts
the obligations and liabilities arising under (other than the operating leases) and own
those leases. no real estate. Therefore, although the
liabilities of the SPV are not retained by the
However, despite its seeming conceptual seller (but remain with the SPV), it is likely
simplicity from a legal point of view, that the liabilities just relate to the assets
the direct purchase of transportation- being purchased, as most of the these
related assets is a complicated asset-owning entities were formed and
transaction in a mechanical sense. The structured solely for the purpose of holding
direct transfer often requires complying the relevant assets.
with government approvals or formal
registration with official registries, and However, care should be taken during due
may have incremental tax consequences diligence to confirm that the SPV did not
to both sellers and purchasers. As an take on additional liabilities since formation
example, aircraft are often registered in (and appropriate representations to that
the country where the lessee is located. If effect should be included in the definitive
a purchaser purchases a portfolio of 100 acquisition agreement). For example, an
aircraft on lease to 30 lessees located in 25 SPV may have guaranteed debt incurred
countries, then the seller and purchaser by the seller unrelated to the assets being
may need to make appropriate local filings acquired. Structured correctly, a transaction
and registrations in all 25 countries to involving the acquisition of special-purpose
consummate the purchase. Also, since entities will grant to the buyer ownership
the underlying leases will also need to of the assets in a manner which ideally
be transferred to the purchaser, there reduces the key concerns raised by the
may be a need to involve all 30 lessees other two methods: the mechanical and
in the transfer process. Planning for and timing considerations involved in a direct
accommodating these issues requires asset transfer, and the difficulty of leaving
in-depth knowledge of the nuances of liabilities behind in a Holdco acquisition.
the various laws which may come into
play. In addition, it is wise to consult with Diligence
local counsel in the various jurisdictions
where assets reside prior to scheduling a The possibility of any of these transaction
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structures yielding the expected trouble- physical inspections of each aircraft

free results depends in large part on the and the production of highly detailed
adequacy of the diligence performed prior lease summaries. Whereas the purchase
to and contemporaneous with the drafting of a large pool of standardised leased
of any purchase agreement. Thorough legal office equipment may merit no physical
and financial due diligence is the foundation inspection and shorter, less complicated
of any successful corporate acquisition. lease summaries, highly sophisticated deals
Among other things, a good due diligence may involve a mix of assets, including assets
investigation will help a savvy buyer: (i) which have yet to be produced or which
uncover contingent or hidden liabilities; may be acquired only upon occurrence of
(ii) better understand the day-to-day certain conditions (such as the conversion
operations of the business; (iii) determine of a passenger jet into a freighter jet). Such
the key areas of weakness in the business, deals require customised diligence which
as well as the areas having the most matches the sophistication of the deal.
potential for growth opportunities; and (iv)
determine whether its proposed purchase Lease and financing due diligence,
price is justified by the financial condition,
particularly of moveable assets, demands a
results of operations and prospects of the specific analysis of the terms and covenants
business. which govern the relationship between
the lessor and lessee. It is important to
In addition, a good diligence investigation understand at the outset of the diligence
will often uncover areas of concern that process that provisions which are fairly
a buyer may want to address through routine in other contracts can present a
seller representations (and accompanying costly, even insurmountable obstacle to the
indemnification obligations) in the purchase successful completion of a deal, if present
agreement. More importantly, a thorough in a lease or other financing document. For
diligence examination allows a buyer to example, the added expense of negotiating
discuss its concerns with the seller prior around a change-in-control provision may
to entering into the definitive acquisition make a deal prohibitively expensive for
agreement. both the seller, who must get a waiver of
the condition, and the buyer, who may not
In the context of leasing company be able to afford the risk of enforcement if
acquisitions, due diligence encompasses a waiver cannot be obtained. Even where
both corporate diligence (of the target added expense is not an issue, a deal
company or SPV) and the particularly may be delayed while experts assess the
specialised expertise required for asset and risks involved with moving forward with a
lease diligence. transaction.
Depending on the size and value of the Also, there are many complicated lease
assets involved in a particular deal, asset structures and provisions which contain
and lease diligence may be a long and traps for the unwary, such as: (i) the right of
exhaustive process or a relatively short a lessee to purchase the asset at a bargain
one. Deals involving large and expensive purchase price; (ii) the right of a lessee to
assets, such as the acquisition of dozens return the asset in a poor condition; (iii)
of aircraft then under lease, may require underinsured assets; (iv) the obligation of
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the lessor to make substantial contributions typically sold as is where is since the
to the maintenance or other costs related assets are typically in the possession of
to an asset; and (v) lease arrangements the lessee and the seller has no ability to
where a third party (which may or may not put the assets in any particular condition.
be creditworthy) holds title to the asset. Accordingly, it is expected that the buyer
Also, where the assets to be purchased will perform due diligence on the assets.
are located in many countries around Additionally, although the seller may
the world, it may be desirable to retain indemnify the buyer for breaches of general
local counsel in each jurisdiction who can representations, warranties and covenants,
advise the purchaser of the burdens of it will typically not provide indemnity
repossessing the assets in the particular protection for losses relating to the
jurisdiction should the lessee default. condition of these assets.
Approvals There are not many covenants unique

to the acquisition of leasing companies.
In addition to the standard approvals, Generally, a purchase agreement will
consents and government filings that must contain covenants: (i) restricting the
be obtained or addressed in an ordinary amendment of current leases; (ii)
acquisition (e.g., permit transfers, HSR prohibiting optional modifications to the
antitrust clearance), a leasing company assets; and (iii) prohibiting liens on the
acquisition may require additional assets (with exceptions for permitted
approvals and filings depending on the liens).
types of assets involved. Moveable assets
are often located in multiple jurisdictions; Indemnity clauses generally provide for
approvals (including anti-competition cross-indemnity, with the seller responsible
clearance) may therefore be required based for risks attributable to the period prior to
on the location of the asset, where the asset the sale and the buyer responsible for risks
(such as an aircraft or ship) is registered or attributable to the period after the sale.
flagged, and/or where the SPV which owns
the asset is incorporated. Acquirers must Another key consideration for an acquirer
also comply with any formal procedures is management. In a highly specialised
required to transfer title to the assets. field such as leasing, an acquirer will need
an experienced management team. If the
Other terms acquirer does not have this expertise, it
should condition its obligation to close
A definitive agreement for the acquisition on the entering into of satisfactory
of a leasing company will contain employment arrangements with key
customary representations and warranties members of management.
with respect to the company and its
business and operations. However, one Closings scheduling and structuring
notable exception to the rep package closings
normally found in a purchase and sale
agreement relates to the condition of the The closing of any deal implies timing
assets being sold. In connection with a concerns involving both the scheduling
sale of moveable assets, the assets are of individual availability and coordinating
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the distribution of documents and the (i) waiting to close until the assets are
delivery of the assets (if needed). There are located in a tax-friendly jurisdiction; or
particular concerns with moveable assets, (ii) structuring a staggered closing so that
especially transportation assets, which the transfer of any particular asset only
may not be evident to parties who do not occurs when such asset is located in such a
regularly conduct business in the field. jurisdiction.
These added concerns can impose both a
financial and time cost if not anticipated Conclusion
and properly coordinated.
When properly structured and conducted,
Transfer tax leasing company acquisitions can be
exciting and lucrative opportunities, but
When selling moveable assets, the location like all complex deals, such acquisitions can
of the asset at the time of the transfer also be an expensive trap for the unwary.
may determine whether a transfer tax Only investors who recognise the need for
needs to be paid. Transfer tax laws vary by industry expertise and have acquired or are
jurisdiction. For example, transfer taxes are willing to acquire that expertise can hope to
not consistently and uniformly imposed be rewarded.
within the US, let alone internationally.
In any event, tax counsel in the relevant
jurisdictions should carefully examine
this issue. Generally speaking, the parties
can best ensure that the transaction Drew S. Fine and Alexander M. Kaye are
will not trigger a transfer tax that could partners at Milbank, Tweed, Hadley & McCloy
have otherwise been avoided by either: LLP.
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g Drafting material adverse change clauses
by Jeffrey Rothschild, Nick Azis, Patrice Corbiau, Dennis White and Abigail Reed
Merger and acquisition contracts typically Delaware Court of Chancery did not regard
feature a material adverse change or this downturn as affecting IBP on a long-
material adverse effect (both abbreviated term basis. In the standard set by the court
here to MAC) clause, under which a buyer in IBP, a party seeking to invoke a MAC
may exit the deal or renegotiate terms if clause and terminating a deal faces the high
an unforeseen material adverse business burden of proving that the events claimed
or economic change affecting the target to be a MAC substantially threaten the
company occurs between executing the overall earnings potential of the target in
acquisition agreement and closing the a durationally-significant manner. A short-
transaction. A MAC clause also provides term hiccup in earnings should not suffice;
the seller with a means of qualifying certain rather the [MAC] should be material when
representations and warranties so that viewed from the longer-term perspective
immaterial breaches are ignored (at least of a reasonable acquirer. The court
for purposes of closing). MAC provisions determined that IBP had not suffered a
are heavily negotiated, with buyers seeking MAC, and, as a result, Tyson Foods was
broad MAC clauses for maximum flexibility forced to complete the purchase.
to exit the transaction. Not surprisingly,
sellers prefer narrow MAC clauses to ensure Frontier Oil Corp. v. Holly Corp,. C.A. No.
that the transaction closes at the agreed- 20502 (Del. Ch. Apr. 29, 2005), which
upon price. Understanding how courts view embraced the standard set forth in IBP
these MAC clauses, as well as recent trends as Delaware law, also demonstrated the
in their drafting, is essential in negotiating importance of carefully crafting MAC
M&A transactions. clauses. The court noted that the phrase
would have or would reasonably be
MAC clauses in the US expected to have a MAC, as used in the
agreement at issue, created an objective
Below are details of a few cases regarding test with a significantly higher threshold
MAC clauses which have been litigated and than the wording could or might. This
decided. standard requires a buyer to examine not
only current conditions but also the future,
In In Re: IBP, Inc. Shareholders Litigation, and to produce evidence of a long term
789 A.2d. 14 (Del. Ch. 2001), the merger downturn.
agreement contained a broad MAC clause
with no carve-outs. Tyson Foods asserted The MAC clauses at issue in Frontier Oil
that IBP, the target, had suffered a material and IBP were similar in that they both
adverse effect because its first quarter 2001 contained a qualifier that a given effect
earnings were 64 percent behind those would reasonably be expected to have
for the first quarter of 2000. However, the a MAC, requiring the seller to consider
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the impact of possible future events. The Calling a MAC as a basis to renegotiate
reasonably expected qualifier continues to
make frequent appearances in MAC clauses In several recent cases, the declaration
today. However, the MAC clause in Frontier of a MAC was the basis for busting a
Oil also excluded certain events, such as transaction without the dispute even
general economic, regulatory or political coming to trial. SLM Corporation v. J.C.
conditions or changes; financial market Flowers II L.P., et al, commonly referred
fluctuations; and general changes in the to as the Sallie Mae case, was a closely
petroleum industry. These carve-outs are watched and recently settled Delaware
also frequently seen. Court of Chancery case, which involved a
merger agreement for the $26bn sale of
Sallie Mae to a consortium of investors led
by J.C. Flowers II L.P. According to Flowers,
new federal legislation that reduced federal
subsidies to student lenders and impacted
In several recent cases, the declaration of a MAC on Sallie Maes earnings amounted to
was the basis for busting a transaction without the a MAC, and buyers should have been
allowed to terminate the deal without
dispute even coming to trial. paying the agreed-upon $900m break-up
fee. Sallie Mae disagreed and sued for a
declaration that no MAC had occurred and
that defendants had unlawfully repudiated
the merger agreement. The dispute never
went to trial. The parties settlement called
Recent litigation in Tennessee, in which for the defendants to refinance $30bn of
Genesco filed suit against the Finish Line Sallie Mae debt. Similarly, Kohlberg, Kravis,
Inc. and Headwind Inc. (collectively, Finish Roberts & Co. and Goldman Sachs pulled
Line) in the Tennessee Chancery Court, out of an $8bn buyout of stereo company
also demonstrated the importance of Harman International Industries, claiming
careful drafting. Genesco sought specific that Harmans financial condition was
performance of a merger agreement under unacceptable and a MAC had occurred.
which Finish Line was to acquire Genesco. However, the litigation was avoided and
In December 2007, the court granted the acquisition was terminated, when the
specific performance, ordering Finish Line former buyers agreed to buy $400m of
to complete the merger. Although the court Harman convertible debt securities.
found that a MAC had occurred with regard
to Genescos financial condition, the court MAC clauses under UK law
held that its financial decline fit within a
carve-out to the MAC clause contained in MAC clauses are frequently used in UK
the merger agreement, since it was due to M&A transactions, but their structure and
general economic conditions and was not content differ, depending on whether the
disproportionate to the financial decline of transaction is of private or public nature.
others in its industry.
In private company M&A, a MAC clause
may take the form of either a condition to
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completion or, more likely, a warranty that test requires an adverse change of very
no MAC has occurred since a specified date. considerable significance striking at the
The buyer will try to negotiate that the heart of the purpose of the transaction in
warranty is repeated at completion so as to question, analogous to something that
have a termination right exercisable if the would justify frustration of a legal contract.
warranty, when repeated at completion, is As a result, the Takeover Panel held WPP
not true. A typical private company MAC to its offer. More recently, the Panel has
clause will contain similar exceptions as in a stated that a bidder need not demonstrate
US transaction. legal frustration, but it must demonstrate
the events are of considerable significance,
In public company M&A, it is standard striking at the heart of the purpose of the
practice for a UK offer document to transaction.
contain a MAC clause (expressed as a
condition to the offer), the wording of MAC clauses under Belgian Law
which is largely standardised, as follows:
[save as publicly disclosed] no adverse Although MAC clauses were only recently
change or deterioration having occurred introduced in Belgium, their use has now
in the business, assets, financial or become quite common. It is premature to
trading position or profits or prospects or generalise any Belgian trends related to
operational performance of any member MAC clauses. However, it is interesting to
of the Group which in any case is material note that, in Belgium, as in the US, parties
in the context of the wider Group taken as will often claim a MAC as the basis for a
a whole. However, unlike in the private renegotiation of the contract, rather than
company context, there are no negotiated an immediate termination. If one of the
exceptions since the UK regulation parties to the transaction wishes to protect
prescribes the circumstances when a itself from a specific event, that should be
condition may or may not be invoked. provided in a separate contractual clause,
rather than relying on a general MAC
The most significant case law regarding a clause.
MAC clause in the public company context
was the Takeover Panels ruling on WPP Drafting MAC clauses in light of case law
plcs offer for Tempus Group plc. WPP and recent disputes
plcs offer had been announced in August
2001, and WPP argued that following the Following the IBP and Frontier Oil decisions,
events of September 11, 2001, a material in which buyers were unsuccessful in
adverse change had occurred. The Takeover invoking a MAC to exit a deal, M&A
Panel took the view that those events, practitioners began drafting agreements
although exceptional, unforeseeable where a material change was defined
and a contributor to the decline that had more precisely (for example, a material
already affected the advertising industry, change would occur if a targets revenues
did not undermine the rationale for the dropped 10 percent). The generally seller-
terms and the price of WPPs offer, which friendly environment of the last several
were Tempus long-term prospects. The years has seen more frequent utilisation of
Takeover Panel stated in this instance exceptions to MAC clauses. For example,
that to meet the material significance it was common for a buyer not be able to
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claim a MAC for changes resulting from either in a tailored MAC clause or as a
general economic, financial, regulatory or separately stated closing condition.
market conditions, so long as the changes
have not affected the target in a materially Regardless of the relative bargaining power
disproportionate manner as compared to of buyers and sellers in the marketplace
other similarly situated companies. generally, or in the context of a particular
deal, MAC clauses remain important
However, given the expected downturn mechanisms for terminating a transaction
in M&A activity and tightening of credit and special care should be taken drafting
markets, the trend in deal terms generally them with precision.
and MAC clauses specifically may be
starting to shift in favour of buyers as
they seek more flexibility in terminating Jeffrey Rothschild, Nick Azis, Patrice Corbiau
transactions. If a buyer has identified and Dennis White are partners, and Abigail
certain concerns regarding a target, those Reed is an associate, at McDermott Will &
concerns should be addressed specifically, Emery LLP.
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g Deal certainty and recent dislocations in the

credit and M&A markets
by Derek Stoldt
Deal certainty has always been a key signing of the transaction. IBP v. Tyson, the
component in mergers and acquisitions, but leading Delaware Chancery Court case on
the recent difficulties in closing transactions
the interpretation of MAC clauses, makes
have underscored its importance. This it clear that MAC clauses are a high bar to
article analyses trends in deal certainty and clear. In that case, the judge explained the
the impact of the recent dislocations in the purpose of MAC clauses as a backstop
credit and M&A markets. protecting the acquirer from the occurrence
of unknown events that substantially
In the context of M&A auction dynamics, threaten the overall earnings potential
the bidder with the highest price is of the target in a durationally significant
usually the favoured buyer, but a bid manner. The court elaborated that
with significant execution risk is not an durationally significant meant a period
appealing option regardless of whether measured in years rather than months.
that bid carries the highest price. Sellers In that opinion, the court admonished
are understandably concerned that a failed parties to purchase agreements to
sale process will leave the target being adopt closing standards specific to the
viewed as damaged goods. As a result, deal rather than to rely on generic MAC
sellers and their advisers carefully focus conditions. Notwithstanding the courts
on the closing conditions proposed by encouragement, our annual survey of key
bidders. Here, we examine three typical and LBO terms shows that MAC clauses remain
significant closing conditions: (i) material pervasive, with 94 percent of deals in the
adverse change (MAC) condition (taking survey utilising a MAC condition.
into account any carve-outs); (ii) bring-
down of representations; and (iii) financing MAC carve-outs
contingency.
While a MAC condition sets a high
MAC condition threshold, sellers have been able to raise
the bar even higher by introducing carve-
The typical MAC condition permits a outs to the MAC standard. MAC carve-outs
buyer to refuse to close the transaction if a are categories of changes that may not
material adverse change on the business, be taken into account when measuring
operations, assets or financial condition whether a MAC has occurred. Common
has occurred from a specified date or MAC carve-outs include changes due to
is reasonably likely to occur. Generally general economic downturns; changes
speaking, the purpose of the MAC clause in the industry of the target; changes
is to assure the buyer and its lenders that in law or GAAP; war or terrorism; and
at closing the target will look substantially announcements or pendency of the
as it had been represented to look at the proposed transaction. By adding carve-
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outs, sellers further shift the risk of adverse to compel closing. The purchase agreement
changes to buyers. included a MAC closing condition with a
series of carve-outs, including one that
Our survey shows that the use of MAC excused changes in the national or world
carve-outs has increased significantly in economy or financial markets as a whole
recent years. For example, carve-outs or changes in general economic conditions
based on changes in a targets industry that affect the industries in which the
increased from 50 percent in deals signed Company and the Company Subsidiaries
in 2002/2003 to 86 percent in 2006/2007. conduct their business. The court held that
The use of carve-outs based on changes in a MAC had in fact occurred but that the
laws was even more dramatic, increasing MAC was caused by a general decline in
from 10 percent to 79 percent over the the economy and the targets industry. This
same period. Similar increases can be seen transaction stands as a stark example of
in each of the other commonly-used carve- the importance of MAC carve-outs: without
outs. the carve-out, the buyer and its lender
would have been excused from closing the
The overall effect is to make it more and transaction, but with the carve-outs, the
more difficult to establish that a MAC has deal was compelled to move forward.
occurred, thereby increasing deal certainty
for the seller but putting the buyer and the
buyers lender at greater risk in the event
of unforeseen changes, regardless of their
cause. The lender in the leveraged buyout
can be placed in a particularly difficult
position when a MAC occurs that is excused Recent transactions have shown how important MAC
by a carve-out. The lender still needs to
make the loan (and try to sell a portion of
carve-outs can be.
the risk to other institutions) at closing
but the company may be in a substantially
worse condition than when the lender
signed its commitment letter.
Recent transactions have shown how Several other troubled deals moved
important MAC carve-outs can be. In forward based on similar fact patterns. In
June 2007, Finish Line, Inc. entered into light of these experiences, we would not
an agreement to acquire fellow footwear be surprised if buyers began to push back
seller, Genesco Inc. Shortly after the parties against the use of carve-outs. However,
signed the purchase agreement, the in the current market, there are still many
targets earnings slid significantly to a level buyers pursuing few high quality targets.
among its lowest in 10 years. Importantly, As a result, sellers negotiating power
the businesses of other companies in the continues to be high. We can expect
footwear industry and the general economy lenders to push to delete MAC carve-outs
similarly declined. At the same time, the both in the purchase agreement and their
credit markets dried up. The deal stalled commitment letters.
and the target sued the buyer and its lender
L+ L- 3 4 CONTENTS
Bring-down of representations offering or agreeing to the MAE bring-down

standard; we will watch to see if this trend
The concept of MAC and the corresponding levels off. We expect these points to be
phrase material adverse effect (MAE) are hard-fought and to test negotiating power
central to another key closing condition from deal to deal.
known as the bring-down condition.
Typically, the seller and target make a Financing contingencies and reverse
series of representations and warranties break-up fees
at the time of the signing of the purchase
agreement. The bring-down condition The financing contingency or financing
measures the extent to which those out permits the buyer to refuse to close
representations and warranties remain the transaction if it is unable to raise the
accurate at closing. The bring-down necessary third-party funds to pay for the
condition usually utilises one of two acquisition. In the typical leveraged buyout,
subjective standards. The more buyer- the targets own financial condition serves
friendly standard would excuse closing as the basis for the acquisition financing.
unless each representation is true and Therefore, if the condition of the target
correct at closing in all material respects. falters, the financing is that much more
The less stringent, more seller-friendly likely to fail.
standard would excuse closing only if the
inaccuracy of the representations and Our survey is based solely on private
warranties taken as a whole would result acquisitions that are funded by 144A debt
in an MAE. Not surprisingly, buyers prefer transactions, which can often take months
the materiality standard because it ensures to arrange, so it is not surprising that
that the business will look much like it did at the vast majority of transactions in the
signing. The MAE standard permits greater survey (78 percent overall and all deals in
changes in the business between signing 2006/2007) include a financing contingency.
and closing without permitting the buyer to
refuse to close the transaction. The pervasiveness of financing
contingencies has led to a common practice
Traditionally, the MAE bring-down was in public-to-private transactions in the
used in public company deals, while the US known as a reverse break-up fee. The
materiality standard was used in private reverse break-up fee provides that the
transactions. Our survey shows that the buyer must pay a fee to the target if the
MAE bring-down standard has become financing contingency is exercised and
more pervasive over time. In 2004, only 43 the deal does not close. However, as the
percent of the transactions in the survey recent credit crunch unfolded, we saw that
used a MAE standard and the remainder some buyers used the reverse break-up
used the stricter standard. Transactions fee to their advantage some buyers and
signed in 2006/2007 used the MAE standard their lenders believed it was economically
71 percent of the time, a two-fold increase advantageous to pay the reverse break-up
from 2004. fee and terminate the agreement rather
than to proceed with an acquisition they
In recent years of frenetic activity, buyers viewed as over-priced in light of troubled
have sought to stand out in auctions by market conditions. In other cases, the
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threat of termination of the agreement are likely to result in an increased focus

based on a combination of the financing on the entire package surrounding deal
contingency and a claimed MAC condition certainty. In the current environment, the
(whether or not such claim was justified) led main players are even farther apart than
to renegotiations of price and other deal ever. Sellers are seeking as much certainty
terms. to closing a deal as possible. Buyers are
still eager to do deals, but may be unwilling
Sellers have been fighting for removal of to take the risk of funding the entire
financing contingencies altogether, but transaction if the debt markets continue
may find buyers increasingly unwilling to their dislocation again or if earnings of
remove them. One alternative is to rely the target fall off. Lenders have more
on reverse break-up fees at levels that LBO loans on their books than they can
create significant incentives to close the syndicate and are reluctant to sign on to
transaction. new deals unless they can be assured the
debt can be syndicated at closing. We can
Effect on deal dynamics expect all three to fight their corners as
hard as possible.
The large number and high-profile nature of
transactions that have turned sour recently Derek Stoldt is a partner at Kaye Scholer LLP.
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g Drafting and negotiating purchase agreements to

anticipate challenges
by Marc C. DAnnunzio and Wayne N. Bradley
Nothing good can happen between agreement is signed. It is also customary to

signing and closing. This time-worn adage include a list of exceptions to events that
makes the point that the longer the period would otherwise constitute a MAC for
between the time a deal is signed and its instance, effects caused by force majeure
closing, the greater the likelihood that events or changes in generally accepted
some circumstance arises that gives a buyer accounting principles.
second thoughts or creates grounds for a
renegotiation of the price or other material A number of recent Delaware court
terms. decisions have addressed a buyers use of
a MAC clause to walk away from a signed
This saying has been amplified by recent deal. These decisions have solidified the
events. After the tightening in the credit notion that a MAC clause generally covers
markets that began in the summer of 2007, only those instances where (i) events were
buyers, financial sponsors and lenders unknown by the buyer at the time the
alike have scrutinised their agreements agreement was signed, (ii) those events
for ways to avoid or renegotiate deals that have a long-term, significant negative
looked less appetising in the new, uncertain impact on the targets business, and (iii) had
market. This reality makes the negotiation the buyer known of them, it would not have
and drafting of these agreements even agreed to the deal. As a result, most M&A
more important, so that parties can ensure practitioners agree that relying on a general
that these risks, and their consequences, MAC clause to cover known, specific risks
are appropriately addressed. is not the best approach, and advise that
where a buyer is aware of a specific risk,
This article will briefly identify and discuss that risk should be addressed and allocated
certain common issues and the ways in elsewhere in the contract.
which agreements can address them.
In recent years, the availability of affordable
The material adverse change condition credit and the boom in private equity
fundraising, coupled with a lack of quality
The material adverse change (MAC) acquisition targets, have resulted in an
clause is a fixture in acquisition agreements M&A market where sellers have enjoyed
and for the majority of its existence, considerable negotiating leverage. This
its basic recitation has been remarkably has manifested itself in the negotiation of
standardised. Conceptually, it provides several additional MAC carve-outs such
that a buyer is not obligated to close a as for changes in securities markets and
transaction if the target has experienced, or changes in the trading price or volume
is reasonably likely to experience, a material of targets stock which further limit
adverse change in its business after the instances where a skittish buyer can allege
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that a MAC has occurred. board of directors ability to consider and

take competing, and possibly superior,
In todays uncertain environment, buyers offers. Omnicare, coupled with the seller-
have attempted to walk away from signed friendly market conditions of the last few
deals, and a number of them have relied years, has greatly enhanced a targets
on the MAC clause as a basis for doing so. ability to negotiate more latitude to
Take, for instance, the proposed purchase consider competing offers.
of Genesco Inc. by Finish Line Inc. After
Genescos second quarter 2007 earnings A prime example of this leverage is the go-
announcement, which was well below shop provision. It enables a target, rather
expectations, Finish Line and its lender, than engaging in a traditional auction or
UBS Securities, alleged that a MAC had market check prior to signing a definitive
occurred and sought to use that as a reason agreement with a buyer, instead to conduct
to walk away from their obligations. In that market check after the definitive
response, Genesco sued Finish Line seeking agreement is signed. In effect, the target
to compel it to close the deal. In awarding takes its signed deal to the market for a
in favour of Genesco, a Tennessee judge predetermined period, using the buyer as
noted that the material adverse change in a stalking horse. While the legality of go-
Genescos earnings was part of an industry- shops have not been challenged to date,
wide slowdown in shoe sales and thus they represent an interesting response to
was carved out of the definition of a MAC. recent Delaware case law and the changing
While this dispute has not yet been finally market environment.
resolved, it illustrates the importance of the
MAC clause and its various exceptions. Break-up fees
Go-shop provisions In public company acquisitions, it is

common practice that a break-up fee
A related issue is the extent to which a is paid to the buyer if the deal does not
target usually a public company can close because of certain events most
agree to a locked up deal, where the target frequently, if a competing offer for the
is compelled to close the deal even where a target emerges from a third party, and
third party makes a superior offer to acquire the target terminates its agreement with
the target after the initial acquisition the buyer to enter into the new deal. After
agreement is signed. years of evaluation and scrutiny by courts,
it is commonly accepted that, in most
The Delaware Chancery Courts 2003 circumstances, these break-up fees will be
Omnicare decision injected much enforceable if they are in the range of 2-3
uncertainty into what had been a fairly percent of the total transaction value.
well-settled area of M&A practice. While
Omnicares facts were somewhat unique, Again, however, given the leverage that
and Delaware judges have narrowed its sellers have recently enjoyed, increasing
application in subsequent decisions, it numbers of targets have successfully
generally stands for the principle that negotiated the inclusion of a reverse break-
a public target cannot agree to deal up fee payable to the target if a deal does
protections that effectively preclude its not close. Initially, these fees applied only
L+ L- 3 4 CONTENTS
to terminations caused by the buyers weakness of the US dollar in world markets

failure to procure financing; however, they purchase price adjustments may be used
have since been broadened to include other to mitigate other risks, such as foreign
termination events as well. exchange risk. A US target, for instance,
could insist on a purchase price adjustment
Indeed, in 2008 a remarkable trend has to protect it from further devaluation in
occurred. Of the seven largest private the dollar after an acquisition agreement
equity deals announced in the first two is signed. Typically, these adjustments are
months of 2008, none provide for the not infinite, meaning that there is some
remedy of specific performance. Instead, in collar after which no further adjustment is
these transactions the reverse break-up fee made; however, they can provide additional
is the sole remedy of an aggrieved seller. protection to parties in an uncertain
In these circumstances, it can be argued market.
that the purchase agreement effectively
becomes an option, with the reverse break- In sum, while the above provisions of
up fee being the cost of that option. acquisition agreements have always been
important, their importance has been
Purchase price adjustments renewed and invigorated by the uncertain
market conditions that M&A players must
The effects of a choppy market can navigate. Careful drafting and negotiation
be mitigated through purchase price of these and other provisions can ensure
adjustments. A common example is a that companies protect against these risks
net working capital adjustment, which to the extent practical.
adjusts the final purchase price to be paid
up or down depending on the targets net
working capital as of the closing date.
Marc C. DAnnunzio and Wayne N. Bradley
However, given the current economic are partners at McKenna Long & Aldridge
environment and in particular, the marked LLP.
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g Effective earn-out provisions in sale & purchase

agreements
by Murray Landis and gregg mcconnell
Earn-out provisions are a powerful tool out is that it, and the manner in which it
when determining the purchase price is calculated, is sufficiently objective to
in the sale of a business or company. A provide a certain outcome for both parties.
successfully negotiated earn-out provision
will help to bridge the expectations gap The SPA should specify: (i) the mechanism,
between the positions of the buyer and defined with sufficient detail (for example,
seller and link the purchase price to the an earn-out measure based on a multiple of
future performance of the business. EBIT should define EBIT to avoid dispute);
An earn-out can be linked to any number (ii) any inclusions and/or exclusions from
of business performance indicators or the calculation which are unusual (for
measures (including EBIT, sales and example the treatment of non recurrent
total revenue). Where an earn-out is or extraordinary items). The seller may
linked to the earnings of a business more argue that certain expenditures associated
difficult considerations arise in relation to with long term planning by the buyer
determining the net profit which is more should be excluded from the calculation of
likely to be negatively impacted by factors EBIT; (iii) whether and if so how separate
within the control of the buyer. management accounts for the business
sold should be prepared to properly reflect
There are many reasons for the parties to its performance if the buyer acquires other
include an earn-out in a sale and purchase businesses or integrates the business
agreement (SPA). These reasons include: acquired into wider operations; and (iv) the
(i) creating an incentive for the seller procedure for calculating and verifying the
to remain involved in the business for a earn-out measure, including the dispute
period following the sale; (ii) creating an resolution procedure.
incentive for the seller to ensure transitional
arrangements, including maintenance of Parties often find it useful to annex to the
existing customer and supplier relationships, SPA an example calculation of the earn-
occur with minimal disruption; (iii) reducing out measure. In addition to assisting in the
the risk exposure of the buyer should the subsequent interpretation of the earn-out
business not meet the required performance provision, annexing an example calculation
indicators or measures; and (iv) increasing causes the parties to give due consideration
the benefit to the seller should the business to the earn-out procedure prior to
achieve or exceed required performance execution of the SPA, thereby minimising
indicators or measures. the potential for a dispute.
Certainty of the earn-out measure Balancing the interests of seller and buyer
An essential element of an effective earn- A common problem facing a seller in
L+ L- 3 4 CONTENTS
cases where the parties have agreed motivated to maximise the performance of
to a component of the purchase price the business after sale, the buyer is in the
comprising an earn-out payment is that better position to avoid paying the seller
the seller is likely to have no or limited what he expects if the calculation of the
control over the operations of the business earn-out is not adequately documented. In
following the sale. As such, the seller practice, negotiating the terms of an earn-
will not be in a position to maximise the out is a balance of the inherent risk tension
earn-out by controlling or influencing between a buyer and a seller.
the performance of the business. For this
reason, a seller should ensure that the SPA Commonly the fixed sale price will be lower
provides it with appropriate protections for where there is no earn-out mechanism.
the earn-out. Removing the risk of the upside or
downside also removes the cost/reward.
Typical protections take the following In some cases the opposite can be true
forms: (i) the seller or its nominee taking (for example a business sold with rising
a position on the board of the company performance expectations or in a hot
and/or continuing as a key manager; (ii) market).
the buyer agrees to conduct the business
in accordance with a business plan (which Earn-out provisions like other post
should be annexed to the SPA) at the time completion adjustments are one of the
of sale; and (iii) agreement on a list of more common areas for dispute between
decisions that must be approved by the buyers and sellers and appropriate dispute
seller before they are made by the buyer resolution mechanisms should always be
(for example, a change in the focus of the included in the sale agreement to deal with
business or an acquisition or divestment of these.
a major asset or investment).
The sellers desire for protection of the

earn-out is, in most cases, in conflict with Murray Landis is a partner and Greg
the buyers desire to control the business it McConnell is a senior associate at
has acquired. Although both parties may be Middletons.
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g Risk allocation driving force behind the M&A

process
by Walt Lemanski
Although the purchase and sale of a

business is a complex process driven by The first, and most obvious, tool for
many different, and often competing, allocating risk is the purchase price itself.
concerns of the buyer and seller, one of In the ideal world, the purchase price
the most important functions of the M&A agreed upon by the parties would take into
process is to allocate the risks inherent account all known risks associated with the
in any M&A transaction between the proposed transaction and the quantifiable
transaction parties. Depending on the exposure associated with those risks.
structure of the transaction in question and Certain types of unquantifiable exposure can
the circumstances surrounding it, M&A also be allocated by making some portion
practitioners have access to a number of the purchase price contingent on the
of different tools to assist the parties in occurrence of certain events. Contingent
risk allocation. Once specific risks have price mechanisms (often referred to as
been identified, creative combinations of earn-outs) are usually used to allocate
these tools can often be used to bypass business and financial risk and are often
negotiation deadlocks and create a risk tied to the targets quarterly or annual
allocation structure that permits the deal financial results (e.g., earnings, revenues,
to go forward in a manner acceptable to all etc.) for some period following the closing
parties. of the transaction. Often, the additional
purchase price paid in connection with an
In order to properly allocate risks, the earn-out is calculated using a formula based
parties, in particular the buyer, must have on the specific performance measures with
a common and detailed understanding of a minimum level of performance required
the various legal, financial and business for any payment and an overall cap on the
risks affecting the M&A transaction. The total payment amount. Earn-outs can also
primary source of this information is usually be tied to specific business goals such as the
the buyers due diligence of the seller. Other retention of certain employees or customers
important sources are often the buyers or meeting production targets during a
knowledge of the sellers industry and the defined period. In truth, an earn-out can be
associated legal and financial environments. tied to any risk factor associated with the
Once risks are identified, each party must target business as long as the results on
evaluate the potential exposure inherent in which it is based can be adequately defined
each identified risk and the impact of that and verified.
exposure on the overall value of the M&A
transaction from the point of view of that Another effective pricing tool is the post-
party. Risks can then be allocated among closing purchase price adjustment. These
the parties using the tools described in this adjustments are used to increase or decrease
article. the purchase price (via a true up payment
L+ L- 3 4 CONTENTS
from one party to another) at some point hybrid will, as a matter of law, affect whether
after the closing of the M&A transaction in the buyer acquires or the seller retains a
order to allocate risk associated with one number of risks. Asset acquisitions generally
or more matters, usually financial, that favour the buyer with regard to most risks
affect the value of the target and cannot while equity acquisitions are usually more
be precisely determined prior to closing. favourable to the seller. To a large extent,
Frequent uses include adjustment for risk allocation in mergers is defined by the
unexpected changes in the current assets applicable state statute. While in many
and/or liabilities of the target (often referred circumstances the structure of an M&A
to as a working capital adjustment), transaction may be predetermined by
valuation of inventory or even the costs overriding factors such as tax, regulatory
associated with certain events expected to or contractual considerations, the parties
occur after the closing, such as settlement of should nonetheless be mindful of the risk
litigation. allocation effect of the deal structure and,
where possible, adjust the structure to meet
While in theory adjustment of the purchase risk allocation considerations. Even where
price would seem to be the ideal way the overarching structure is predetermined,
of handling risk allocation in an M&A it may be possible to take advantage of a
transaction, in practice many factors affect multi-step or hybrid transaction to allocate
this tools utility. First, the purchase price is specific risks. As an example, it may be
often agreed upon early in the process (often possible to assign certain assets or liabilities
in a letter of intent) when a significant part of (and thereby allocate the attendant risks) to
the information necessary to determine risk a subsidiary of the target and subsequently
is not yet available to the buyer and, in some spin off the subsidiary or distribute the assets
cases, may not even be known by the seller. and/or liabilities directly to the targets
Once this information becomes available, owner.
sellers are usually reluctant to accept any
reduction in the agreed upon purchase If a risk cannot be allocated through either
price. Also, many risks may not be known a purchase price or structural tool, there are
at the time of the closing or the potential also a number of contractual tools available.
exposure may not be quantifiable in a way To the extent that allocation of a risk requires
that lends itself to a pre-closing purchase one or more parties to perform certain
price adjustment. Even contingent price actions after the closing of the transaction,
mechanisms and post-closing purchase price the transaction documents should contain
adjustments are inherently limited in the covenants specifying the actions to be taken
types of risks they can effectively allocate, and the associated timeline for compliance.
and can be very difficult to implement in Allocation of unknown or general risks
public company acquisitions. As a result, and confirmation of actions required to be
practitioners often need to look to other risk performed prior to closing can normally be
allocation tools. accomplished through appropriately devised
representations and warranties. To be most
Risk can also be allocated through the legal effective, representations and warranties
structure of the M&A transaction. Whether should not be generic but should be tailored
a transaction is structured as an equity or to the applicable industry, regulatory and
asset acquisition, merger or some type of financial environment and specifics of
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the target identified through buyer due percent of the costs to the buyer of such
diligence. litigation up to a fixed amount after which
the buyer will be liable for 50 percent of any
Contractual representations, warranties further costs. While certain studies suggest,
and covenants allocate risk by providing and some practitioners will assert, that
a contractual remedy to the injured party. certain combinations of indemnification
While a breach of contract claim is one terms and limitations are market for
way to enforce this remedy, a far more particular transactions, parties should
common approach in M&A transactions is resist relying on such a crutch and carefully
for the parties to provide indemnification in consider indemnification terms in the
the event of a breach. The indemnification context of the desired overall risk allocation.
tool is very flexible and can be tailored to
further allocate transaction risk. The intent As a practical matter, contractual
of indemnification is to make a party whole indemnification or similar remedies are only
for damages suffered in connection with as valuable as the ability of the obligated
the occurrence of a risk it did not assume. party to pay. In transactions where the
However, indemnification is generally obligated party will have deep pockets
subject to limitations on the minimum after the closing, satisfaction of a claim is
amount of damages required to make a not usually a problem. In situations where a
claim (usually referred to as a deductible partys ability to pay is less certain, various
or a basket depending on its structure), mechanics are available to protect the
the maximum liability of the paying party interests of the other parties including
in connection with the transaction or, less purchase price holdbacks (which provide a
commonly, each claim (usually referred source of remedy for a buyer) or escrows
to as a cap), and the period of time after (which can be used to protect a buyer or, less
the closing during which indemnification commonly, a seller). Terms for the release
claims can be made (usually referred to of funds from either of these payment
as the survival period). The values of the mechanisms are also very flexible and can be
deductible or basket, cap and the length of tailored to fit into the overall transaction risk
the survival period have an important effect allocation.
on the overall allocation of risk between the
parties and are usually the subject of heavy Risk allocation in an M&A transaction is
negotiation. Allocation of specific risks can one of the driving forces behind the M&A
be tailored with an individual deductible, process. Many tools are available to the
basket, cap and/or survival period or by practitioner to allocate transaction related
agreement that indemnification relating risk between the parties. The key is to
to a specific matter will not be subject to consider all of the tools available and to
any limitation at all. In addition, special carefully tailor them in the context of the
indemnification mechanics can be created entire transaction to achieve the desired
for known risks to handle a claim in a way result.
tailored to a partys exposure to the specific
risk. For example, a special indemnification
provision relating to an ongoing litigation Walt Lemanski is a partner and co-chair of the
matter of the target might provide that Securities and M&A practice at Patton Boggs
the seller will indemnify the buyer for 100 LLP.
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g Directors duties in M&A transactions
by Shardul S. Shroff
The Indian Companies Act is modelled or part of an undertaking of the company

on the Companies Act, 1948 of England. requires an ordinary resolution of the
The directors of a company, as natural shareholders in general meeting. The
persons, are entrusted duties, functions and law mandates that a complete disclosure
obligations to be discharged for the benefit is made in the Explanatory Statement
of the company and its shareholders. A accompanying the Notice for the meeting
director in modern company law has duties convened for approval of the proposed
of a fiduciary to the shareholders, but in transfer. This position also inures in relation
times of adversity or impending insolvency, to a Scheme of Amalgamation, demerger,
they have an obligation to act fairly slump sale or exchange through courts
and protect the interest of the secured or otherwise or when the undertaking is
creditors also. As directors, they have sold as a going concern. In the absence of
the duty to exercise reasonable skill and full and fair disclosure in the Explanatory
diligence expected of an ordinary person, Statement indicating all nature of interest
in the carriage of the duties and functions of the directors, an aggrieved shareholder
owed to the company, other directors and could petition the company court or the
shareholders. Company Law Board (expected to be
converted to a Company Law Tribunal) for
In an M&A transaction, which concerns action to set aside the decision and sue
either a sale of shares, or a sale of directors for misfeasance, malfeasance or
undertaking or a takeover bid, or a related nonfeasance, as the case may be.
party transaction or stock options in the
course of the M&A as consideration for Indian law does not recognise that a
directors, the duty of fairness, good faith shareholder is conflicted in casting his vote
and honesty is paramount. Indian law in support of a corporate decision carried
recognises that it is not merely pecuniary out through a vote. Thus though directors
interest which determines the contours may be entrusted with a fiduciary duty and
of conflicts of interest. Any angularity obligations of fairness, honesty and good
or skew brought to bear on matters of faith, a shareholder can vote in its own
interest whether of a pecuniary nature or interest.
of relationships are also abhorrent. The
directors have a duty to disclose their The law recognises that a director with an
interest, the degree of relationships and interest has to recluse himself from the
their financial shareholding and stake in the
process of decision making at the level
company and in any transaction or transfer. of the board or any committee of the
board. This also holds true when takeover
Under Indian law, any corporate transaction of management and control in a listed
involving the sale or transfer of the whole company is attempted and there are
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common directors of the transferor and nor can they tip such information to an
transferee entities. outsider. Any abuse of inside information
by a director would invite liability under
For independence in decision making, Securities Exchange Board of India
especially in listed company, a listing (Prohibition of Insider Trading) Regulations,
agreement has prescribed functions to be 1992.
undertaken by an independent committee
of directors or audit committee. Matters One of the ways around the sensitivities of
of valuation, post-merger concentration of sale of shares or a controlling interest is to
promoter control, augmentation of such offer the same amount of information to
control, unfair treatment to minority are qualified bidders who passed the financial
all matters to be considered by the audit and technical tests for a relevant buyer of
committee. The independent directors majority control in a listed company, but
have a duty to advise members of the that is not a universal solution.
public selling shares in a takeover offer
between competing parties, of the merits Requirements under the takeover code
or demerits of each proposal.
In case of takeover or acquisition of a listed
Insider trading and tipping of price company, SEBI (Acquisition of Shares &
sensitive information Takeovers) Regulation, 1997 or Code
lays down mandatory provisions governing
There are significant issues of concern for the role and responsibility of directors
a board of directors of a listed company, of the target and acquirer company. For
which is proposing to engage in mergers or instance, in relation to the directors of a
acquisitions. At the preparatory stage, any target company, the Code lays down that,
information of a listed company, which is from the date of public announcement
not in the public domain, and which has the of the offer, directors shall not enter into
effect of facilitating price discovery, could any material contract; shall ensure that
constitute insider information. The matters a director who is also a director of an
of business planning, pipeline discoveries acquirer company does not participate in
in pharma companies, confidential any matters in relation to the takeover;
information on risk management are not shall send their unbiased comments and
matters of public disclosure. recommendations on the offer to the
shareholders, keeping in mind the fiduciary
The directors of a company that is involved responsibility of the directors to the
in an M&A transaction owe a duty to curb shareholders and for the purpose of seeking
insider trading and should ensure that the opinion of an independent merchant
there is no abuse of inside information banker or a committee of independent
for any purpose not in the interest of the directors.
company and its shareholders. Further,
it flows from the fiduciary nature of the The Code also lists out the role and
obligations that a director should not responsibility of the directors of the
exploit corporate opportunities for his own acquirer company. Though the Code does
use. Therefore, directors cannot use price not expressly detail the responsibility
sensitive information for their own benefit, of a director of an acquirer company, it
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does expressly lays down the role of an directors are required to perform merely
acquirer and a person acting in concert to comply with the law. Clearly, there is
(defined to include directors of the absence of requirements which obligate
acquirer company). The responsibility directors to undertake affirmative action.
of a director in the instant case includes This is in stark contrast to the recent
director responsibility statement in amendment to the UK Companies Act,
relation to all offers, brochures, circular, 1985 wherein directors have been given
advertisement in relation to the offers; a positive duty to promote the success
in the event the director of acquirer of the company, exercise independent
company is a director on the board of judgement, exercise reasonable care, skill
the target company, abstention from and diligence, avoid conflicts of interest,
participation in any matters concerning the not accept benefits from third parties, etc.
offer including preparatory steps leading Further, in order to fortify the enforcement
to the offer; ensuring that firm financial of law to ensure compliance of the new
arrangements have been made for fulfilling set of duties, it has been made easy for
the obligations under the public offer and shareholders in the UK to sue directors on
suitable disclosure in this regard. behalf of the company for a much wider
range of deeds than are presently possible
Possible defences to a takeover under common law. Similarly, unlike the
UK Takeover Code, Indias Code does not
The duties of independent directors detail at length the precise role of directors
and interested directors in the case of a through every stage of the transaction i.e.,
hostile bid differ. A director nominated from inception, to execution and finally
or appointed with the support of the through integration. Even on the judicial
promoters, even without any shareholding, front it is seldom argued that the common
can work in tandem with an interested law principles of fiduciary duty and care
shareholder for developing defences such are inadequate as they do not clearly lay
as poison pills, selling the crown jewels, down the scope, level and the ambit of such
golden parachutes and the white knight fiduciary duty and care.
defence.
Given that the Indian economy is one
Conclusion of the fastest growing economies in the
world and in light of the increasing spate
In India, the duties of directors in relation to of M&A transactions in recent years, it is
M&A can be traced to the various provisions desirable to reconsider the present legal
of the Companies Act, Code and judicial framework to ensure that the duties of
pronouncements. Though the present legal directors involved in an M&A transaction
framework seems robust in relation to are enunciated clearly and the risks
role and responsibility of directors in M&A associated with directorship are adequately
transactions, law in India does require an appreciated.
in-depth scrutiny. For instance, directors
responsibilities are covered under various
sections of the Companies Act; however,
upon examination it is evident that all Shardul S. Shroff is a partner at Amarchand
are mostly in the nature of activities that & Mangaldas & Suresh A Shroff & Co.
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g M&A an insurable risk?
by Susanna Norelid and Christer A. Holm
Despite the risks associated with M&A, Insurance could be useful both on the seller-
the number of deals is increasing. The side and the buyer-side of a prospective
upturn in M&A activity has led to increased transaction. The premium cost could
competition and higher prices on the either be taken by one of the parties, or
market. Due diligence investigations split between both parties. The fact that
made prior to the presentation of final insurance is obtained could also simplify the
bids increase costs for bidders who may process questions might be settled easier
not complete a deal. Due to the high and the parties could reach a closing more
competition, sellers are sometimes able to quickly.
give away few or no warranties, which also
increases the risks. Some years ago, M&A insurance was
rare, at least in the Scandinavian market.
But is it possible to minimise financial Today the market has changed, due to
risk? Is it possible to pass on that risk to an the entrance of many foreign insurance
insurer? Is there an appropriate M&A-risk companies on the Scandinavian insurance
insurance product already available on the market, the increased competition between
market or is it an expensive, tailor-made those companies, and of course due to
solution only available at an unacceptably the increased number of transactions.
high premium? Insurance covering some or all parts of a
transaction are increasingly popular.
The market for M&A insurance
However, it all comes with a price, and it is
The term M&A insurance is not the formal up to the parties to the insurance contract
name for a particular insurance product. to agree upon the terms and conditions for
Instead the term could be used as a name specific insurance coverage. Furthermore,
for an insurance covering several different M&A insurance is not always trouble-free.
parts of a transaction. Insurance can be
agreed to cover all or some exposures and Different kinds of M&A insurance
risks that arise in the context of an M&A
transaction. It may include the sellers Representation and warranty insurance
representations and warranties concerning (RWI) is the most common type of
the corporate, environmental liabilities, insurance associated with M&A. The buyer
accrued balance-sheet liabilities and failure might need coverage in case the seller
of tax treatment of the transaction. It could does not provide any warranties, or fewer
also cover certain guarantees regarding warranties than desired. It is also useful
a minimum of income of a merger, or to when a buyer is uncertain about how to
cover the costs of a transaction which later reinforce an indemnity. On the seller-
fails. side, RWI could be used to compensate
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a buyer that is claiming reimbursement The advantages of M&A insurance

for an inaccuracy in the warranties and
indemnities made by the seller. This could The use of M&A insurance provides a
be helpful when the seller needs to free possibility to pass on the risk of an M&A
itself of any claims for a period after a transaction to an insurer, allowing the
transaction, or when the seller needs the parties to walk away after an agreement
profit from a transaction to pay a debt. At closes with no further entanglements.
the moment, buyers RWI is dominant in The seller has the possibility of a simple
the market. exit, and the buyer does not have to be
concerned about potential future costs.
In numerous transactions, tax treatment M&A insurance also provides the security to
is a deciding factor in whether a deal create partner confidence, since it transfers
is closed or not. Disputes concerning the unpredictable liabilities to a third
the responsibility of post-transaction party. For example, a company that buys
tax liability risks can be avoided with a producer of goods with a long lifetime
appropriate insurance. Tax insurance could might require M&A insurance because of
also cover unforeseen additional taxes the uncertainty of future liabilities.
owed after the transaction has completed.
Also, in situations where the parties are
Environmental liability issues can also get unable to agree on specific liability matters,
in the way of completing a deal. Insurance insurance companies offer coverage
can cover situations where the cost of targeted at facilitating the completion of
future cleanup procedures has not yet been the deal. Insurance companies might work
estimated, or when the buyer does not as a third party setting a fixed present price
want to be liable for pollution caused by a on the deal, which might otherwise result in
former owner. a large, unknown future cost for one of the
parties.
Less common is credit enhancement
insurance. This insurance guarantees a Some negative aspects to take into
certain minimum income as a result of an consideration
acquisition. The insurance might cover
situations in which a buyers forecasted Insurance is designed for a specific purpose.
income does not materialise, which is A provider of M&A insurance probably has
practical when there is a need for a security a greater knowledge about transactions
to loan money. and consequently of this special insurance
product than a traditional insurance
Furthermore, so-called aborted bid provider. Since not all insurance companies
insurance is available, intended to cover the offer this product, competition is not
costs of corporate transactions which fail. particularly high, which means premiums
Finally, there is also director and officers tend to be quite high.
liability insurance, frequently used to cover
claims made against the directors of a Another negative aspect is that the
company about the management of the insurance company might ask for a
corporate transaction. significant amount of information about
the parties and the transaction before it can
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issue the insurance. Sometimes the parties event of a dispute.

would prefer to keep this information
confidential. A buyer that has covered the risks with
M&A insurance might also be concerned
M&A insurance demands that employees of about the implied uncertainty surrounding
the insurance companies have knowledge the target, although this issue should
of the policyholders business, and since decrease as M&A insurance becomes more
M&A insurance is relatively new, this is widely accepted and dispersed.
quite rare. An inexperienced insurer will
need quite some time to underwrite this Conclusion
type of risk, so the underwriting process
might be time consuming and even delay The future of M&A insurance depends
the deal. on many factors, such as premiums, one
partys willingness to rely on warrants given
A further difficulty is the possibility by the other party, or the general trends
of misusing the insurance. It may be of the M&A market. Problems associated
exercised as a tool for manipulating and with this insurance are likely to lessen as
strengthening the policyholders balance the coverage becomes more frequently
sheet, resulting in misrepresentation of the underwritten, and insurance companies
corporations financial condition. Naturally develop better knowledge about the
this would not be appreciated by the market and are able to estimate the actual
investors and creditors. risks. Moreover, the high premiums should
be viewed in light of the high risk that M&A
Moreover, M&A insurance does not cover transactions entail.
all losses from a merger or acquisition, but
only those explicitly stated in the policy.
Therefore it could be difficult to foresee all
the situations that need to be insured, and Susanna Norelid and Christer A. Holm are
to interpret the insurance agreement in the partners at Advokatfirman NorelidHolm.
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g Exploring the potential of joint ventures to

create value as opposed to outright M&A
by Christoph Reimnitz
Whichever way you look at it, 2007 was cost-effective route to creating significant
a record year for M&A activity. While additional value for a business, particularly
transactions tailed off towards the end when compared to cost of M&A, they are
of the year, sponsor and institutional not entirely cost or risk free. Entering a JV
acquisitions still reached unparalleled is a major business decision. This point is
heights with nearly $5 trillion worth of as critical as avoiding irrational exuberance
M&A deals announced, almost a trillion when making acquisitions.
more than 2006. That is a huge level of
investment by anyones standards. Businesses of all sizes can use JVs as a
tool to create long-term relationships or
However, the outlook for 2008 paints a very deliver on short-term projects. Without
different picture. M&A activity is already exception, successful JVs make strategic
noticeably subdued by comparison to business sense for all parties. Partnering
last year. While LBO deals are still taking with another business, whatever the size,
place, the current market conditions can be time consuming and complex. It is
are challenging, forcing sponsors and important to have a complementary set
institutions to compete for a smaller pool of requirements, shared objectives and
of opportunities. Finding market depth shared benefits. However, while it may
for larger sponsor buyouts will be harder, seem counter-intuitive, it is as important to
paving the way for strategic M&A and as have clear ideas about the resolution and
an increasingly effective way of creating potential exit of the JV as the framework for
value strategic alliances, partnerships and a partnership is being created.
joint ventures.
Partnership should be built on shared
The case for joint ventures objectives and outcomes, while being
similarly complementary to both parties.
Like acquisitions, significant investment For example, a company may seek to widen
in planning, strategy and due diligence its distribution channels in an overseas
is required to maximise the chance of a market by partnering with a strong and
successful joint venture alliance. There are well-respected local company that is
many areas for consideration. The goal for looking to expand its range of products.
a potential JV, such as business expansion, A successful joint venture could allow the
access to new distribution channels, new company to grow strategically and cost
product development, technology sharing effectively, increase its market penetration,
or entering new geographies, must stay grow the client base and build its reputation
at the forefront of the management in a new market. At the same time, the local
teams mind throughout the whole start- company may increase customer retention,
up process. While joint ventures can be a gain new customers, generate increased
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profits from a new revenue stream, widen critical to success. Business cooperation in a
its product offering and have a joint stake limited and specific way can be an effective
in a growing product or area. Such criteria method for a small company with a new,
must be spelled out at the beginning unique product for example, that wants
of a relationship so that each party is to sell via a larger partners distribution
comfortable and confident of the outcome. network. In other circumstances, a separate
Fair sharing of the success, and risk, is JV business may be set up or even a new
essential to a joint venture. company formed where the partners own
shares in the company and confirm how it
should be managed.
Again, agreeing the structure, strategy,

Where parties have a common goal, a shared leadership, business plan and management
of the JV with legally-binding commitment
appetite for partnership with complementary from both parties, maximises the
capabilities and resources, this could be a promising effectiveness and success of the
partnership. Transparency and trust are
starting point for JV discussions. essential ingredients of a good marriage.
While benefits must be agreed in advance,
so too must the risks. It is important to
outline the key performance indicators
for the JV and set a clear process for
Joint ventures do not always have to be a dissolving the partnership, with defined
50:50 partnership or a typical JV format. roles and financial responsibilities, if results
Seeking a minority investment in an do not meet the JV performance criteria.
organisation, to create a mutually beneficial Establishing these parameters in advance
relationship, may also enable a business not only gives comfort to all parties, but
to achieve its objectives. For example, an also avoids potential confusion and unfair
established company from a mature market cost at the conclusion.
may take a minority stake in an emerging
market company. This gives it a significant Stay strategic
presence in a new and growing geography,
while the strategic direction and decision- As with all business ventures, success is in
making processes in the business continue the planning. Companies should explore
to be led by the local management team, all opportunities to evaluate the risk versus
which has proven market knowledge. benefits before making a commitment.
Both parties can share expertise and Joint ventures are not a cure all, nor do they
best practice, while being open for joint work in all circumstances. As discussed
investments in new product development, earlier, where parties have a common goal,
market entry and business growth. This is a a shared appetite for partnership with
win-win for both parties, as long as clearly complementary capabilities and resources,
defined benefits and risks are agreed at the this could be a promising starting point for
outset. JV discussions. Given the cost of customer
acquisition and customer retention, or
How a JV is structured and approached is launching into a new market or geography,
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JVs or white-label initiatives can provide a likely to remain challenging in 2008, JVs
cost-effective solution. could create new growth opportunities
for many businesses as long as they stay
M&A and JV opportunities are an important strategic.
method of supporting business growth.
They can allow a company to do business
with more customers and increase its Christoph Reimnitz is head of business
penetration in the market to achieve core development for the European corporate
business growth. With economic conditions finance unit of GE Commercial Finance.
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CHAPTER six:
Accounting and financial

challenges
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g Valuing assets in M&A under IFRS 3
by Phil Antoon
Paramount to many acquisitions is the must measure the cost of a business

reaction shareholders, and the markets combination as the aggregate of the fair
in general, have to the announcement values of the assets acquired, the liabilities
of a transaction and the corresponding assumed or incurred, any costs attributable
movement in the buyers stock price. In to the combination, and equity instruments
previous years the focus was typically placed issued by the acquirer; (v) specifies that
on the implied transaction multiple and the acquirer must recognise the acquired
the earnings per share effect. However, the companys identifiable assets, liabilities, and
implementation of International Financial contingent liabilities, regardless of whether
Reporting Standard (IFRS) 3 has significantly they had been previously recognised in the
increased the complexity of the projected acquired companys financial statements;
earnings per share calculation due to the (vi) requires that the identifiable assets,
requirement to value and amortise acquired liabilities, and contingent liabilities must be
intangible and tangible assets. The following measured initially by the acquirer at their
summarises IFRS 3 and outlines the various fair values at the acquisition date.
types of identifiable intangible assets and
valuation methodologies. It also discusses For many companies intangible assets
how companies are reacting to IFRS 3, and comprise the majority of the firms
the effect this standard can have on the value. A quick comparison of the market
acquisition decision making process. capitalisation of a company based on the
stock price value relative to the net tangible
IFRS 3 addresses financial reporting book value (tangible assets less liabilities)
requirements pursuant to a business provides insight into the proportion of the
combination. Very similar to SFAS 141, the value inherent in intangible assets. While
US GAAP standard addressing business many simply refer to this intangible asset
combinations, IFRS 3, among other things: value as goodwill, there are in fact any
(i) requires that all business combinations number of individual, identifiable intangible
be accounted for through the purchase assets included in the goodwill bucket.
method; (ii) prohibits the amortisation of
goodwill acquired in a business combination Intangible assets that are commonly found
and instead requires the goodwill to in companies, depending on the nature of
be tested for impairment annually, or the operations and industry in which the
more frequently if events or changes in company operates, may include: patented
circumstances indicate that the asset might and unpatented technology; trademarks
be impaired, in accordance with IAS 36 and trade names; trade secrets; customer
Impairment of Assets; (iii) requires that the relationships; proprietary know-how;
company obtaining control be identified as software; regulatory rights; in-process
the acquirer; (iv) specifies that the acquirer research and development; non-compete
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agreements; databases; core deposits; royalty) method, the value of an asset is

mortgage servicing rights; copyrights; reflected in the present value of after-tax
film, music libraries; licensing and royalty royalties the owner of the asset avoids
agreements; communications licenses; paying by owning the asset and not having
reserves; backlog; contracts; and leasehold to licence it from a third party.
Interests.
Market approach. This measures the value of
There are three generally accepted an asset through an analysis of recent sales
methodologies to estimate the value of or offerings of comparable assets. Sales and
intangible assets: the income approach, the offering prices are adjusted for differences in
market approach and the cost approach. location, time of sale, utility and the terms
and conditions of sale between the asset
Income approach. This is typically the most being valued and the comparable assets.
applicable approach when valuing income- Due to the general lack of publicly available
producing intangible assets, as value is sale or transaction data regarding individual
measured by calculating the present value intangible assets (with the exception of
of future economic benefits to be derived communication licences, where auctions
by the asset. The two most frequently used in Europe and individual licence sales and
variations of the income approach are the swaps in the US do provide some market
excess cash flow method and the royalty data), a market approach is often not
savings (or relief from royalty) approach. applicable in valuing intangible assets.
The principle behind the excess cash flow Cost approach. This measures the value of an
method is that the fair value of an income- intangible asset by the cost to replace it with
generating intangible asset is measured another of like utility. The cost approach
by the present value of its projected future recognises that a prudent investor would
cash flows, over its remaining useful life. not ordinarily pay more for an asset than the
To estimate excess cash flows, revenues cost to replace it new. The cost approach
attributable to the intangible asset are first is often most applicable when valuing
projected over the remaining useful life of intangible assets that are not income-
the asset. Next, expected costs, including generating, (e.g., internally developed
cost of sales, operating expenses and software that is used for internal purposes
income taxes, are deducted from projected and databases). For income-generating
revenues to arrive at after-tax cash flows. intangible assets, the cost approach is
From after-tax cash flows, depreciation often not utilised because even if the
is added back and after-tax contributory development effort associated with the
charges (for the use of tangible and asset was distinguishable, the cost approach
other intangible assets) are deducted to tends to understate the true value since the
arrive at the excess cash flows specifically costs involved in developing the asset are
attributable to the intangible asset. These typically not commensurate with the cash
excess cash flows are then discounted to flow it may generate for the business.
the present and summed to arrive at the fair
value of the intangible asset. The implementation of IFRS 3 can have
a dramatic impact on how companies
Under the royalty savings (or relief from execute their acquisition process, as well
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as affect day-to-day operations, even depreciate tangible assets) has a direct

post merger. Thus, all companies planning affect on the EPS of the deal. An acquisition
acquisitions should take steps to ensure that is EPS accretive before consideration
they are well versed in the requirements of intangible asset amortisation could
and implementation of IFRS 3, as it will in fact become EPS dilutive once the
consume resources on a variety of levels. amortisation is accounted for. Some
The acquirers management must be companies may actually decide not to
able to articulate in the announcement move forward with the transaction to avoid
of the transaction what the deal drivers dilution to their EPS.
are, with the understanding there will
be an expectation from the auditors and While the accounting treatment is
regulatory authorities that those drivers required and thus avoidance of valuing and
(e.g., strong brand name, customer amortising assets is not possible, many
relationship) will be identified and valued companies will have an analysis conducted
as part of the IFRS 3 analysis. The group prior to the announcement and/or the close
tasked with implementing the IFRS 3 of the transaction in order to ensure that the
accounting will likely need to identify and markets are well aware of the potential EPS
engage an independent valuation firm effect of the deal, including all intangible
specialising in IFRS 3 valuation analyses and tangible assets. While in many cases a
(a companys auditors are precluded from full IFRS 3 valuation may not be practical
providing this service to their audit clients on a pre-acquisition due to lack of available
due to independence restrictions), and access to information, confidentiality,
they will spend significant amount of time etc., it is possible to conduct a high level
complying with the required financial analysis. Although this approach will not
reporting. A number of individuals across allow for a formal opinion of the values of
the firm will likely be asked to participate the identifiable assets of the target, it can
in discussions with the valuation expert to provide important information regarding
better understand the nature, background, the potential range of EPS effects inclusive
outlook, and specific details of the various of the tangible and intangible assets.
intangible assets, all at a time when many
resources are focused on their day-to- Regardless of the size or complexity of a
day tasks as along with the post merger transaction, companies should ensure
integration. These are but a few of the early on in the acquisition process that
strains that will be placed on the acquirers they have a firm understanding of the
resources and which should be considered in technical accounting requirements of IFRS
advance. 3, and that they have allocated appropriate
resources, engaged an independent firm to
For companies that are sensitive to any execute the valuation, and can clearly and
potential negative movements in earnings readily articulate the value drivers of the
per share (EPS), IFRS 3 can also have a acquisition and relate those drivers to the
significant impact on the decision to execute IFRS 3 valuation and EPS effect.
a transaction. This is simply because the
requirement to identify, value and amortise
intangible assets over their respective Phil Antoon is global practice leader of the
remaining useful lives (not to mention Valuation Services Practice at Kroll.
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g Growing influence of IFRS in M&A: why

dealmakers should care
by Denise Cutrone, Richard Fuchs and Will Bryan
You are the CFO of a US company and are Canada, South Korea and China committed
managing the divestiture of a profitable to adopting IFRS, eventually all major
overseas operation. After months of due territories and capital markets will require
diligence, your prospective buyer backs or permit IFRS as early as 2011.
out, citing that the acquisition would
be dilutive to its earnings. How can that Of the top 10 global capital markets (US,
be? Your US GAAP (Generally Accepted Japan, UK, France, Canada, Germany, Hong
Accounting Principles) carve-out financial Kong, Spain, Switzerland and Australia)
statements show that the overseas the majority already use IFRS while
division is profitable. As you investigate Canada and Switzerland are in the process
the situation, you find that the prospective of converging to IFRS, according to the
buyer reports under International Financial Economist Intelligence Unit.
Reporting Standards (IFRS). At present,
you do not have the time, infrastructure or Even in the US, which uses US GAAP, the
knowledge in place to understand how a set Securities and Exchange Commission
of accounting standards brought down a (SEC) has recently eliminated the need for
multi-million dollar deal. foreign private issuers to reconcile to US
GAAP as long as they use IFRS as issued
With IFRS now in use in over 100 countries by the International Accounting Standards
and the increasing globalisation of markets, Board (IASB), the international standard
the likelihood that US GAAP and IFRS will setter. Many believe 2008 could bring an
come face-to-face in M&A is real. Although SEC proposal allowing the use of IFRS by
accounting standards alone do not US public companies. The SECs actions
frequently dictate business decisions, they have increased the urgency for companies
can be a key aspect of a prospective buyers to fully understand IFRS, the differences
list of considerations. By being proactive in between IFRS and US GAAP, and how IFRS
understanding the role IFRS could play in impacts their M&A endeavours.
M&A decision-making, CFOs can position
themselves to be better negotiators and Impact on M&A activity
avoid situations like the one described
above. IFRS has introduced a new set of challenges
for dealmakers. As companies expand
IFRS: the global financial reporting overseas through acquisitions or appeal to a
language broader group of buyers for a division they
are divesting, they are likely to encounter
Today, more than 12,000 public companies IFRS and need to assess its impact on their
around the world use IFRS as their primary transactions. The target may be located
reporting framework. With markets such as in a country that already embraces IFRS
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and, to get the highest price, sellers need parents may be required to report under
to expand their buyer pool to include those IFRS or maintain both IFRS and US GAAP
who report under IFRS. The impact of IFRS reporting. The conversion process may
is felt throughout the M&A cycle from pre- require expertise in legal, risk management,
to post-acquisition. Knowing how IFRS can treasury, sales, tax, IT, human resources and
potentially affect a transaction enables investor relations. New financial reporting
dealmakers to be both prepared acquirers principles could impact almost every aspect
and sellers. of a companys operations from customer
and vendor contracts and employee
Pre-deal considerations. Structuring a deal compensation arrangements to income tax
under IFRS can be quite different from structures. Furthermore, a change in GAAP
that under US GAAP. For example, certain may require new or upgraded systems and
items classified as equity under US GAAP controls and, often, multi-GAAP reporting
may be classified as debt under IFRS, with capability. Companies may need to add
associated payments treated as interest resources to understand IFRS. All these
rather than dividends. This can limit an issues make it complicated and costly
acquirers ability to meet debt covenants for companies to report their financial
and, in some jurisdictions, pay dividends. results and communicate the impact of
Failure to examine the potential impact the acquisition or divestiture to the market
of this accounting in the pre-acquisition and their stakeholders. Therefore, having
phase can jeopardise the success of a deal a good grasp of IFRS and the difference
particularly one that is cross-border. between it and US GAAP is essential for
Financial statements under IFRS will likely multinational companies.
be required. Early in the process, companies
should assess the impact IFRS will have IFRS versus US GAAP: key differences
on transaction multiples, hurdle rates and
investment benchmarks. Although a number of countries have
adopted IFRS as their local GAAP, the US
Diligence considerations. IFRS principles continues its path of convergence by the
may alter the timing of revenue and FASB (Financial Accounting Standards
expense recognition, which can affect not Board) and the IASB. Their joint efforts
only the price of a deal but also reported are to produce similar but not necessarily
results, key performance indicators (e.g., identical standards, addressing key
EBITDA), loan covenants and balance weaknesses in their respective accounting
sheet ratios. Companies well-versed in frameworks. The issuance of joint
IFRS will find it easier to analyse and standards takes an extensive amount of
compare sales, net income and balance time. As a result, in the six years since the
sheets of targets. The ability to adequately convergence program began, the only joint
compare transaction multiples and other standards issued to date revolve around
key benchmarking data will lead to a more business combinations the newly issued
effective diligence process. FAS 141R (FASB) and IFRS 3R (IASB).
Post-deal considerations. IFRS continues to Should the US continue with the

play an important role after the successful convergence program rather than adopting
closing of a deal. Companies with overseas IFRS, the differences between US GAAP
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and IFRS will likely take a number of years rather are expensed over an estimated
to eliminate. CFOs and dealmakers should life, typically as the associated revenues
familiarise themselves with some of the from the development activities are
key differences between US GAAP and IFRS earned. Under US GAAP, both research and
since they impact financial reporting and development costs other than software
M&A activity. development costs are generally expensed.
Asset write offs. Under IFRS, impairment Liability versus equity classification. Under
assessment of long-lived assets is a one- IFRS, classification of an instrument
step process based on discounted cash as equity versus a financial liability is
flows where no binding sale agreement stricter and based on the substance of
or active market exists and, under certain the instrument, rather than on its legal
circumstances, previously recognised form. Compound instruments generally
impairments are reversed. Under US GAAP, have to be bifurcated between the liability
impairment analysis is a two-step process and equity components. Under US GAAP,
based first on undiscounted cash flows for instruments with both liability and equity
long lived assets. Reversal of impairments characteristics can often qualify for
is prohibited under US GAAP. Impairment treatment as mezzanine equity and are not
charges may be recognised in different marked to fair value. The result of IFRS is
periods and for different amounts under an increase in interest expense and greater
IFRS. Combine those factors with the ability volatility in the income statement, and less
to reverse impairments and the result is equity on the balance sheet than under US
greater potential earnings volatility. GAAP.
Fair value accounting. Under IFRS, greater Conclusion

use of fair value, and certain assets such as
property, plant, and equipment; intangible IFRS is gaining global acceptance and it is
assets; and investment property can be only a matter of time before it becomes
carried and remeasured to fair value each the international reporting language. The
period. US GAAP, in contrast, requires prospect of IFRS impacting transactions
historical cost valuation of such assets. The is real and dealmakers need to be familiar
implications of this are different balance with and understand the difference
sheet amounts and depreciation, and a between IFRS and US GAAP to make
clearer view for investors of the unrealised informed business decisions. Not having a
appreciation in certain major asset full grasp of IFRS could lead to a scenario
categories under IFRS. described in the opening of the article
where IFRS spoiled a multi-million dollar
Development costs. Under IFRS, the transaction.
development portion of research and
development costs is capitalised if certain
criteria are met. Development costs do Denise Cutrone, Richard Fuchs and Will Bryan
not hit the bottom line immediately, but are partners at PricewaterhouseCoopers.
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g Valuation and solvency analysis in failing firm

claims
by Boris J. Steffen
For firms pursuing growth through failing division defence posits similarly that
M&A, regulatory constraints imposed by a merger is not likely to pose competitive
the antitrust laws may pose significant concerns if the division: (i) has negative
barriers. This is equally true for the operating cash flow after proper allocation
strategic buyer pursuing a horizontal or of costs; (ii) has been unable to attract an
vertical combination, a private equity offer from a competitively preferable buyer
firm executing an industry roll-up, or a at a price above liquidation value; and (iii)
control-oriented purchaser of the debt, would exit the relevant market if not sold.
or corporate assets, of a financially
distressed company, within, or outside of, Examining the Guidelines tests within the
a formal plan of reorganisation. In cross- bankruptcy context that a company be
border transactions, government policies unable to meet its financial obligations as
that differ with respect to consumer, they fall due is consistent with the notion
industrial, or trade considerations may of insolvency in the equity sense. Further,
also exacerbate the obstacle posed the requirements that the company be
by the concern that a transaction may unable to reorganise under Chapter 11,
have the potential to create or enhance and unable to attract an offer exceeding
market power. Notwithstanding, the US liquidation value, are together suggestive
Department of Justice and Federal Trade of insolvency in the bankruptcy sense
Commissions 1992 Merger Guidelines to the extent that they imply creditors
provide a means of potentially resolving would receive more if the company were
these obstacles using the tools of solvency liquidated than if it were restructured
and valuation analysis employed under the and valued as a going concern. Given
US Bankruptcy Code within the context these analogies, one possible approach
of what has become known under the to asserting a failing company defence
Guidelines as the failing company and in support of a merger is to employ the
failing division defence. framework used to establish a fraudulent
transfer under section 548 of the
The failing company defence argues that Bankruptcy Code.
a merger is not likely to create or enhance
market power if the company: (i) is unable Under section 548, a transfer of assets,
to meet its financial obligations when they or incurrence of an obligation, for less
fall due; (ii) is unable to reorganise under than equivalent value, may be deemed
Chapter 11 of the Bankruptcy Code; (iii) is fraudulent, if as a consequence, the debtor
unable to attract an offer at a price above (i) was or became insolvent, (ii) was left
liquidation value from a competitively with unreasonably small capital, and (iii)
preferable buyer; and (iv) will exit the incurred debts it could not pay at maturity.
relevant market absent the transaction. The In practice, these conditions are assessed
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using the balance sheet test, adequate purposes should only consider data and
capital test, and cash flow, or ability-to- information known or knowable as of a
pay test. The balance sheet test examines specific date. Consequently, the valuation
whether the fair value of a firms assets date directly impacts what data and
exceeds the face value of its liabilities; the information can be relied on, as well as the
adequate capital test looks at whether the related assumptions.
companys capital is adequate to support its
business activities; and the cash flow test In performing the balance sheet test, the
asks if the firm can expect to pay its debts value of a companys liabilities is taken
as they mature. directly from the undiscounted face value
of its debt, in recognition that insolvency
When adapting the balance sheet test to would never occur if a companys debts
a failing company claim, a firms balance were valued at market. In contrast, the
sheet is only the starting point for the fair market value of a companys assets
analysis as historical financial statements is determined from the present value
do not reflect fair market values, and of its expected future cash flows, using
may not include all assets and liabilities either an income (discounted cash flow,
properly considered in determining capitalisation), market (comparable
solvency. Beyond this recognition, the company or transaction), or cost
first step is to determine an appropriate (replacement, reproduction) approach.
premise of value, whether going concern If the face value of the companys debts
or liquidation. Generally, fair value as used exceeds the fair market value of its assets,
in the balance sheet test is interpreted to the company is deemed insolvent.
mean fair market value, and indicative of a
going concern premise. For an inoperative With respect to the ability-to-pay
company facing imminent demise, the requirement of the failing company
liquidation premise may be relevant, defence, a company will likely be able to
however. The essential structural difference pay its debts as they mature under the
is that the going concern premise assumes cash flow test if its capital is sufficient
the sale of an organised, functioning, to support its operations over a range
interactive group of income-producing of economic and financial conditions
assets over a reasonable time period, pursuant to the adequate capital test. As
while the liquidation premise assumes the might be expected given this symbiotic
debtors assets are sold in a piecemeal relationship, the steps required to perform
fashion, either in an orderly or forced the cash flow and adequate capital tests
manner. overlap. For example, both might start
with the projection of expected future
The valuation date selected in applying free cash flows as is used in a discounted
the balance sheet test to a failing firm cash flow valuation, with one scenario
should take into account as appropriate and assuming managements best estimate,
feasible the circumstances of the failure. a second, with no changes in revenue or
Changes in macroeconomic, firm-specific profitability variables, and a third, with
and industry conditions can alter the value adjustments to items that may affect and/
of a company over time. Further, as in any or include revenue growth, gross margins,
business valuation, a valuation for solvency operating profit margins, depreciation,
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and capital expenditures, as appropriate debt covenants. When using these tests
and reasonable given the facts and in combination with the balance sheet
circumstances. test, however, it should be noted that
the balance sheet test, being a valuation
To test the ability of the company to rather than a matching exercise, may
pay its debts as they mature, the firms suggest an alternative viewpoint due to
scheduled debt payments are matched its consideration of the time value and risk
with its balance of excess cash, free cash associated with a firms cash flows.
flow, and available credit under existing
facilities at each payment date per the In sum, though often used to assess
cash flow test. The process used to test the solvency in fraudulent conveyance and
adequacy of the firms capital then builds preferential transfer disputes under the
on the foundation of the cash flow test bankruptcy laws, the balance sheet, cash
with analyses that compare the companys flow and adequate capital tests in part
financial position and operating results over provide a relevant and reliable framework
time on a standalone basis and in relation for use in addressing failing firm claims,
to others in its industry, assessments of the the specifics of which are subject to
ability of the company to obtain additional interpretation under the Guidelines.
or new debt and equity financing, and Properly applied, the approach can assist
examination of the potential for the acquirers in achieving antitrust clearance
company to default under the provisions of for a transaction that may otherwise be
its debt covenants. blocked, and avoid the costs of a broken
transaction, which while likely significant
A firm will fail the cash flow test if its in any event, are particularly prohibitive in
scheduled debt payments exceed the todays environment of tightening credit
corresponding sum of its excess cash, markets, leveraged capital structures and
free cash flow, and available existing economic uncertainty.
credit. A firm will also fail the adequate
capital test if it can be demonstrated that
its capital structure cannot withstand
reasonable fluctuations in its business Boris J. Steffen is a partner at Bates White,
without triggering a default under its LLC.
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CHAPTER seven:
Due diligence and

integration
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g The evolution of diligence: how a multi-discipline

approach gives buyers a competitive edge
by Greg Peterson and Mike Burwell
Capturing value from a merger, operations of the target and its market
acquisition or divestiture continues to be strengths, weaknesses and risks will enable
one of the most significant challenges dealmakers to make informed business
dealmakers face. As companies become decisions.
increasingly global and regulations evolve,
diligence becomes more sophisticated Commercial diligence
and encompasses so much more than
financial performance. Seasoned deal Regardless if you are a buyer or seller or
practitioners can attest, there are many whether the transaction is domestic or
factors impacting deal value and not all foreign, early identification of potential
are attributable to financial statements. deal issues leads to informed decisions and
Financial diligence alone does not uncover better financial modelling. As companies
the wide range of risks associated with a venture outsides their borders or expand
transaction; especially if it is a cross-border into a new industry to drive growth, it
deal where foreign jurisdiction, culture, is crucial to understand the market, the
labour, transfer pricing, foreign market targets market position compared with
conditions and financial reporting come industry peers, potential opportunities
into play. and alignment of opportunities to their
business strategy. Commercial diligence
Many faces of diligence enables companies to address the
appropriate questions such as: What are
Today, diligence covers the deal continuum the risks inherent in a business strategy?
to include commercial diligence which What strategic and market-related value
accesses the size of the market and creating opportunities exist? How sound
critiques the targets business plan; total are customer and supplier relationships?
performance diligence which evaluates What is the sustainability of the companys
not only financial statements, accounting competitive advantage? How big is the
and tax but also operations, systems, market?
governance, vendor relations, internal
controls, management integrity, human Often transaction risk arises from
resources and insurance; and sell-side inaccurately assessing market growth
diligence which helps sellers present drivers, industry trends, competitive
the business to be sold from a buyers positioning and supplier relations. Deal
perspective. To maximise deal and value will diminish if the commercial
shareholder value, companies need to be viability of a deal cannot be supported.
aware of and anticipate deal risks while Commercial due diligence is best used
formulating an action plan to address when the buyer has reservations about
them. Performing diligence on the entire key business plan assumptions. For
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example, a company recently needed compensation plans, employment and

to assess whether a telecom targets union agreements, equity compensation
revenue and profit projections were programs (existing programs as well
achievable. Diligence revealed the targets as design and implementation of new
market share and margin growth were programs), local regulatory approval
unachievable since they implied the processes and any obligations an acquirer
company would thrive in a price-driven, will have once the deal closes can have a
slow-growth market where its competitors huge bearing on the deal.
enjoyed a competitive advantage.
Gaining insights on unfamiliar areas gives Tax and structure. Tax diligence has evolved
dealmakers the confidence to make better from the assessment of tax compliance
business decisions. issues to include the evaluation of
potential deal structures and movement
Total performance diligence of cash. Considering how to structure a
deal early in the process can often give
Although understanding the financial and buyers a competitive edge. For example,
tax position of the target is important, the benefits of acquiring the stock of a S
they are only two of the many factors Corporation by structuring the transaction
that could derail a transaction. Other as an asset deal through a Section 338(h)
factors impacting the value of a deal (10) election may add significant value
are often more important. Companies allowing the buyer to step up the tax
are increasingly becoming more global basis of the acquired assets to fair market
and diversified and have complex value, creating a benefit from higher tax
operational structures. When acquiring deductions in the future. Other areas of
a multinational company with multiple taxation which may have an impact on
businesses, it is beneficial for dealmakers deals include proposed restructurings
to expand their diligence to include other and valuation of goodwill, know-how and
areas of the business such as employee other intangibles. Also, different states
benefits, insurance, operations (including and countries have their own tax regime
information technology), internal controls, and understanding the tax implications
governance, tax structuring, valuation and on deals enables buyers to choose the
others. right tax structure and move cash to the
appropriate entity or territory to service
Employee benefits. Compensation and debt as well as provide a tax efficient return
retirement programs are getting more to investors. Furthermore, should a dispute
complex, and they become even more arise with the tax authorities, appropriate
complicated when unions or country documentation of diligence performed and
specific regulations are involved. Benefits valuation issues encountered will facilitate a
issues could prevent a deal from closing. swift resolution.
For example, a pension liability that is
significantly underfunded may reduce the Insurance. Companies face many risks,
expected value of the transaction or the having an adequate insurance program
deal may be abandoned. Therefore, having is important to limiting their exposures.
a full grasp of the risks associated with Dealmakers should expand their traditional
unfunded pension liabilities, management diligence to include insurance to ensure the
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target has adequate self insurance reserves Both commercial and total performance
and coverage, and access the impact on diligence continue to provide dealmakers
the buyers insurance programs in terms value after the deal closes. Acquirers can
of change in control, insurance program use the industry and market information
structure, collateral and cost allocation. to increase their market position. Also,
commercial diligence can provide
Operations. Whether you are a corporate additional insights and ammunition to help
buyer looking to understand the potential shape the acquirers business strategy.
operational synergies of a deal or a financial Findings from total performance diligence
buyer assessing the standalone costs of enable acquirers to develop an integration
a division of an entity, diligence on the plan to capture synergies by identifying
targets operations will yield invaluable and resolving issues early for a smoother
insights. Having insights on redundant transition.
functions and how the target fits into the
parent company (or portfolio) enables Sell-side diligence
acquirers to make swift decisions and
implement the appropriate integration Normally when we think of diligence, we
strategy to realise synergies sooner. think of buy-side. However, when a division
Information technology is the cornerstone or business is being divested, it is equally
of most operations and understanding the important for sellers to undertake a sell-
adequacy of the application environment side diligence on the unit being sold to
and expenditure required is vital. How maximise value. This is especially important
often have you heard of companies that are when the unit being divested is a carve-out
unable to bill effectively because of system of an existing business where no standalone
integration issues? financial information exists. It requires
considerable judgement to apportion
Valuation. Asset valuation and revenues and expenses to a specific unit or
methodologies used can have a significant division when it involves shared corporate
impact on deal value. The accounting services such as finance, legal, marketing,
principles used may also have a bearing pension, taxes, interest and insurance.
on the perception of value of a business
or an asset. In particular, identifying the Even if a standalone business is being
differences between US GAAP (Generally sold, it is necessary to adjust historical
Accepted Accounting Principles) and IFRS information to reflect the post-sale
(International Financial Reporting Standards) economics of the business which involves
is becoming more important as more eliminating charges the buyer will not
countries adopt IFRS. A buyer needs to incur. Also, potential buyers may be foreign
ensure its approach to valuation is the same acquirers who have a different accounting
as the sellers. If the approach differs, it is reporting standard than the seller. To
important to understand the differences and appeal to a wider pool of buyers, it is
the effect they will have on purchase price. important to understand the differences
IFRS requires a wider range of assets to be between US GAAP and IFRS. Reconciliation
valued and re-valued on an annual basis. If between the two standards may be
a buyer is not careful it can find itself paying required.
for assets it has not anticipated.
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Most importantly, supplying the to encompass other business areas such

information from a buyers perspective as benefits, insurance, operations and
limits the number of potential inquiries others. Additionally, diligence expands to
from acquirers so management can focus the commercial aspect when companies
on running the business. Sell-side diligence question the sustainability of a targets
enables sellers to identify and resolve growth and sell-side diligence when
information gaps as well as value detracting dealmakers are ready to harvest their
issues, and provides the right information investments or part with non-core assets as
to buyers for a smoother sales process. their business strategy changes. Diligence
enables dealmakers to make confident
Conclusion business decisions which may entail
substantial reworking of a transaction prior
As companies transaction needs evolve to close.
to capture global opportunities, diligence
also progresses to meet their growing
complex transaction needs. Diligence Greg Peterson and Mike Burwell are partners
has gone from solely financial diligence at PricewaterhouseCoopers LLP.
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g Commercial due diligence and the nine levers of

corporate growth
by Christopher Kit Lisle
Consistently successful corporate growth strategic or balancing tests include strategic

is not the result of being in the right place planning, wild cards and value proposition.
at the right time. Nor is it attributable Without pulling the internal levers, and
to the latest management craze. Some keeping them in balance, a company
CEOs, regardless of industry or timing, are may be ineffectively executing a chosen
able to achieve lasting growth. Ongoing strategy. Without pulling the external
processes are used for discovering growth levers, and keeping them in balance, a
opportunities. Internal competencies, company may be effectively executing the
systems, people, and capital are developed wrong strategy. The nine levers, or tests,
to take advantage of those opportunities. facilitate diagnostic indication of growth
And value propositions and brand promises potential and a quick understanding of
are created to convey unique capabilities to organisations weak links.
the customers who value them. The result is
predictable growth. External tests
The complexities and challenges of 1. Competitive analysis can serve three

international mergers and acquisitions distinct roles for buyers. First, assessing
raise the due diligence bar. Cross-border the capabilities and competencies of
commercial due diligence (also known as competitors. What are the competitors
business strategy due diligence) benefits strengths, relative to the acquisition target?
from a systematic test of nine simple Are they more efficient in production, do
predictors of corporate growth. they have access to more resources or
people skills, or do their competencies and
When used in a commercial due diligence brand promises better match customer
process, the nine levers of corporate needs, for example?
growth consist of nine assessments
of acquisition targets three tests of Second, understanding the intentions and
external strategic opportunities and future directions of competitors. Plotting
the companys positioning relative to the likely strategic paths of competitors
these opportunities, three tests of the against known customer needs and
companys internal capabilities to execute purchase decision criteria reveals that some
against these opportunities, and three competitors are heading in a very logical
tests of the acquisition targets strategic direction while others are driving off a cliff.
planning processes. The external tests The next step is to decide on the level of
involve competitor awareness, customer comfort with the strategic direction of
awareness, and market awareness. Internal the acquisition target, given the strategic
tests include operational competencies, direction of its competitors. Is it acceptable,
human capital and growth capital. The for example, to try to compete head-to-
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head against a larger competitor with more of the company. Market due diligence
resources and competencies? is focused on answering two questions.
First, how attractive is this market, from
Third, competitor due diligence can also the standpoint of growth, profit potential,
be used to assess the broader competitive customer needs, competitor positioning,
dynamics of the market. Michael Porter industry trends, opportunities and threats,
suggests evaluating the attractiveness of critical success factors, etc? Second, how
a market based partly on an assessment well positioned is the acquisition target in
of the risks of new entrants, substitutes, this market is it competing in the most
competition from competitors, competition attractive segments or the least attractive
from suppliers, and the internal rivalry of segments? Conducting market due
market participants. diligence in obscure, niche sectors means
conducting primary research of customers,
2. Customer awareness involves a competitors, and third party industry
disciplined, systematic process of gaining experts.
awareness of customer needs, interests,
purchase decision behaviours, perceptions Internal tests
of suppliers, and the current state of
relationships. Calls to customers may be 4. Core competencies and operational
the single most basic element of external efficiency reviews offer insight into
due diligence. The calls are relatively easy, potential competitive advantage (of an
quick, and they can provide tremendous operational, cost, or service nature, for
insights. Where most acquirers believe they example) that may bring incremental value
are maintaining control, learning first-hand to the customer. Here, the due diligence
insights and saving money by conducting focus is on identifying unique capabilities
these calls internally, they fail to understand and operational efficiencies. These core
that outsourcing has tremendous benefits. capabilities may involve any operation or
Using a research-based consulting firm that function of the business that contributes
makes the calls blind (without revealing to the efficacy of the business model.
thename of the acquisition target or the Operational examples include procurement
true purpose of the call) ensures that the efficiency, internal communications
insights are objective. Research firms between functional areas that contributes
are also efficient, and produce reports to operational efficiency, logistics and
which are not only full of quantitative distribution efficiency, inventory efficiency,
and qualitative insights, but also analysis, outsourcing utilisation and workflow
options and recommendations. A good process. The aim is to assess how unique
research firm will go well beyond the basics and differentiated a companys operational
of how the customer chooses a supplier processes are, relative to competitor
and how they rate and rank the various capabilities.
suppliers.
5. Human capital assessments explore
3. Market knowledge helps determine if the recruitment, selection, training and
acquisition target is in the most attractive development, leadership development,
segments that it could be, given core culture, systems for performance
competencies and the strategic direction management and feedback loops. In
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due diligence it is important to examine and core competencies. With the input of
the companys talent acquisition and external knowledge, decisions and choices
retention success, check out training are based on facts, not internal perceptions.
and development capabilities, look for Strategic planning is all about seeing
cultural and ethical consistency, try to options and then choosing a path which
find compensation systems that reward will most likely lead to accomplishment of
behaviours that connect to the strategy corporate goals.
and the corporate goal, and test for
performance feedback programs. The result 8. Wildcard analysis is about gaining an
is an understanding of the relative strengths awareness of the potential for disruptive,
and weaknesses of the acquisition target, disintermediating, playing-field-altering
from a human capital perspective. opportunities and threats. Technology,
operational efficiencies, global supply
6. Growth capital analysis does not chain management and channel strategy
involve looking in the rear view mirror improvements, for example, have enabled
at financial performance. Financials are some companies to fundamentally change
merely symptoms, not the core strength traditional business models. Rapidly
or weakness of the business. Due diligence growing companies keep a constant
should be used to investigate whether the lookout for ways to influence markets.
company has the resources it needs to Opportunities for growth are created that
achieve the goals, objectives, strategies and may not be visible to the casual participant
tactics it has laid out for itself. capitalising on inefficiencies many players
assume to be givens. It is a good idea to
Strategic tests investigate the wildcards that may exist,
and assess the companys ability to plan for
7. Strategic planning assessments involve the possible realisation of these wildcard
investigations into the direction the events. Wild card analysis is partially
company is heading, the process utilised to dependant on external knowledge, but the
arrive at this direction, and the companys ability to react to potential opportunities
perceived value of strategic planning as is a direct function of executing on the
an ongoing process. Too many executives internal levers.
rely simply on an annual strategic planning
meeting to make choices. They are 9. Value proposition and brand strategy
destined to miss opportunities and unlikely assessments are used to determine if a
to account for internal competencies, company has a unique selling point, if that
relative to their competitors. Conducting uniqueness is valued by target customers,
strategic planning as an event relies on and if those target customers are actually
the perceptions of managers, rather than receiving the message that the company
on the facts and realities of the market, has the ability to offer that unique value.
including the positioning of a company Brand strategy serves as the bridge that
within the market. A never-ending connects internal and external levers of
planning process, on the other hand, forces corporate growth. Specifically, it connects
executives to maintain an awareness of internal competencies to awareness of
external opportunities and an appreciation customer opportunities through a discreet
of relative internal strengths, weaknesses promise of value.
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Without an effective brand strategy, the that should be pursued in the first few
carefully developed core competency months. Companies are more likely to see
does not necessarily translate into the appropriate opportunities to focus on
growth because target customers may for strategic planning. They will be more
not believe, understand or realise this likely to have the requisite skills needed to
competency exists. And without a thorough execute their chosen strategy. Finally, their
understanding of customer needs, the strategy should be continuously course-
communication may be promoting corrected, given the changing realities of
awareness of a service or product that is their own company and their marketplace.
irrelevant to the target customer. Balancing internal realities and external
opportunities not only facilitates improved
Conclusion strategic planning, it improves the odds of
consistent revenue growth in the near term
Every one of the nine levers tests has by focusing managements attention on the
the potential to kill a deal, so they are weakest link.
all quite important. Utilising this model
also helps management of the company
determine where the weak links are post-
closing, so that management and the Christopher Kit Lisle is managing partner at
new owners can agree on the initiatives Acclaro Growth Partners.
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g Sell-side online datarooms
by Angus Bradley
Online datarooms are finally being constructed. All paper documents will need
recognised as the best way to increase to be labelled meaningfully to make sure
deal speed and reach more bidders, while they can be scanned. Some documents may
saving money and travel time. Many large need to be redacted. This preparation phase
firms refuse to work any other way. Perhaps is the most time consuming and error prone
the days of paper-strewn rooms, coffee element of the process. The team should
stained documents and flying a team to resist temptation to start and add content
Frankfurt to visit a dataroom are drawing as it goes; far better to prepare well, and
to a close. This article addresses issues launch the room with most materials ready
around set up and choosing security levels, for review.
and also introduces important concepts like
metadata cleansing and long term storage. Scanning in-house or outsourcing? Most
firms have some in-house scanning
More paper, higher cost. Dataroom capability, so they may consider this is
providers costs vary, but they rise the best option to reduce costs. For cases
depending on the amount of data and involving a handful of documents, the in-
number of reviewers. If most of the house option is usually preferable, and an
information required for due diligence is easy way to add new documents as the deal
already available electronically (soft copy), progresses. But when the pages number in
then setting up an online dataroom is much the thousands, and time is tight, it may be
easier. Documents can be uploaded directly wise to engage professionals to scan and
and bidders invited to review them, with index the documents. Of course, there is a
relatively low set up cost. On the other risk that the originals may be lost in transit,
hand, if there are boxes of paper to be so the vendor should send copies to be
scanned, the costs of going online could scanned, if possible.
be considerable. In cases involving large
amounts of paperwork, and only a few To print or not to print? Reviewing
reviewers, a conventional dataroom may be documents on screen is tedious. Most
much cheaper. reviewers will request print privileges. But
the vendor should be aware that when
Preparation is key. A better dataroom it allows someone to print, that person
means a better transaction. Even though can choose print to PDF and make an
the dataroom is online, all the usual electronic copy of the document. Even if
preparation work must still be done. The the printout is watermarked, the vendor
vendor should prioritise the collection loses control and cannot later revoke
of electronic and paper documents, and this permission. It is prudent to allow
ensure its team understands exactly print access to non-sensitive documents,
how the master index document will be restrict other documents to read onscreen
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only and withhold extremely sensitive should remain undisclosed, vendors should
documents until later stages in the deal, strip documents of metadata by either
when the vendor is more comfortable with printing them out or using a cleaner before
a bidders intentions. handing them over.
For security, passwords may not be enough. Excel documents are hard to secure. There
Traditionally, reviewers use a username and are several document types that can be
password to access the dataroom. There is difficult to secure online, Excel is the
reliance on the terms of the deal, as well as most common. Most datarooms protect
ethics, to prevent the password from being documents by converting them to an
shared with friends. Recently, stories have image type format, which resembles a
emerged of dataroom passwords being printout. Most financial Excel documents
sent to competitors for their review. Even if will secure easily, but some sheets, such as
ethics is not the issue, there have also been complex engineering sheets or those with
reports of keylogging on major deals, which interactive features, cannot be secured
means hackers log every key stroke from online if their function is to be maintained.
a computer and can obtain a password. There are options to resolve this, but a
Vendors should explore all available options vendor should be prepared in some cases
for extra security, such as location-based to share certain files without copy and print
restrictions in which users can only review protection.
from one office, or secure tokens.
Storing closing bibles on CDs or DVDs may
Metadata cleaning handwriting from be unreliable. Post-deal, many people keep
documents. When the British government copies of the dataroom and audit trail on
published a report on Iraqs non compliance CD or DVD. Estimates for the lifespan of
with weapons inspectors, hidden metadata a DVD range widely from 30 to 100 years
in the document revealed that the report but it is quite likely that someone will
was plagiarised, and had been written three scratch or damage the disk when checking
years previously by a US student. When files. In either case, the dataroom master
SCO Group filed against Daimler Chrysler disk may become unreadable. It is highly
in 2004, a Microsoft Word copy of the suit recommended that disc-based closing
had metadata which showed that the bibles are distributed to IT staff who can
company had originally targeted Bank Of store them on servers rather than kept
America instead. So how does this impact exclusively on CD or DVD in a filing cabinet.
a deal? Upon completion, it is common to
deliver the closing bible electronically, often
with documents in formats like Microsoft
Word. So to protect details like the author, Angus Bradley is managing director at
version history, and other information that Projectfusion.
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g Utilising the extended customer chain to

enhance due diligence
by David Soley and Michael Sarlitto
Investment professionals recognise and methodical and repeatable technique

appreciate the legal practicality and designed to improve an acquirers ability
protections offered by the safe harbour to quantify and qualify the future value of
warning: past performance does not a targets products and services, markets,
guarantee future results. Likewise, the and revenue streams. This article introduces
universally time-honoured buyer beware dealmakers to the ECC perspective in
dogma embraced by both financial conducting due diligence and supplies
and corporate strategic acquirers is of a basic understanding of ECC methods
instructional value to new entrants and a and techniques used to analyse customer
useful reminder to even the most seasoned information, technologies, select business
of dealmakers operating in an increasingly and work processes, key industry data,
competitive M&A market. These generally and internal and external resources in a
accepted operating tenets are of particular way that cultivates discovery of previously
interest to those dealmakers conducting undetected business value. When
transactions in high risk, rapidly changing employed in conjunction with routine due
or operationally complex industries, diligence techniques, acquirers emerge
technologies and company frameworks. better prepared to execute their deals
with confidence, particularly those deals
How does a dealmaker, operating in todays that are not simply exercises in financial
fiercely competitive environment, conduct reengineering and whose very success
investment or M&A due diligence in a depends on the ability to create genuine
way that adapts and adjusts to a rapidly business value. The practicality and value
changing marketplace fraught with risk? of ECC in shaping business transaction
Are there any enhanced due diligence decision-making is demonstrated in
methods or techniques better suited to a relevant case study based upon an
quantify and qualify new and unanalysed application of the model and results
transactional risks deemed material achieved.
to a proposed transaction? What value
would an acquirer place on an analysis What is ECC?
technique capable of identifying and
quantifying latent, heretofore undiscovered Simply stated, ECC is a repeatable,
opportunity to create business value predictable pre-deal analysis and
associated with a pending investment or, modelling technique capable of exploring,
as a minimum, result in a more competitive leveraging, realigning and optimising the
purchase offer / terms and conditions? customer chain in which a target company
operates. This analysis oftentimes yields
Extended Customer Chain (ECC) Analysis is undiscovered, sustainable, adaptable and
rapidly emerging as an extremely efficient, incremental business value. While typical
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investment assessment analysis focuses to optimism in the firms ability to realise value
a great extent on identifying value chain from market development opportunities.
improvements intended to deliver better In certain circumstances, ECC can help
margins or scouring revenue projections to avoid wasted time and effort in pursuing
come up with ideas designed to spur top permanently sub-optimised investment
line growth, ECC zeros in on the companys opportunities while in other instances, it
capability and capacity to service can unearth previously undetected, less
unique and rapidly changing customer obvious, dealmaking value that turns a
requirements whether direct or indirect, walk-away deal into a portfolio maker.
primary, secondary or tertiary.
The building blocks of ECC
Most traditional due diligence relies on a
financial assessment and valuation of a There are five building blocks comprising
targets management processes and the the economic instrument of the ECC model:
resources controlled by these processes market insights, data, process, relational
(i.e., labour, material, machinery) in capital and technology. While these key
order to establish an initial company components, taken independently, are
value. This exercise in number crunching not and should not be new to dealmakers,
is immediately followed by generous their integrated use in analysing both
adjustments for yet-to-be-realised, the target and the targets direct and
self-identified business development indirect customers is core to the ECC
opportunities, investment thesis analysis technique. This simultaneous
conjecture, and non-repeatable artfully examination of the target, in conjunction
calculated synergistic benefits. ECC with the targets customers, provides the
picks up where this financial and SWOT core market structure context necessary
analysis leaves off in analysing sources to assess opportunity and to exploit new
of incremental business value. Its unique economic growth models.
perspective views the target companys
value proposition in the context of broader, Market insights give a transaction team
interrelated customer relationships; a broader view into the trends, value
relationships that when focused through a drivers, market forces and industry
lens of change, innovation and integration, dynamics necessary to formulate
creates opportunities for new, unanalysed strategic solutions to a targets critical
and previously undetected accretive challenges, each of which constitutes a
company growth. value creation opportunity. However, by
also conducting a market assessment
In addition, ECC applied during the early from a targets customers perspective,
stages of transaction processing provides the transaction team may discover
investment practitioners with critical, new business opportunities, alternative
time-sensitive insight into the rationale for commercial agreements, different business
a targets claims to prospective revenue transaction models, and buying and
growth potential; validity of purported consumption behaviours more indicative
underlying root causes for a growing, of the constantly changing and evolving
stagnant or declining customer value marketplace.
proposition; and justification for continued
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These insights are a critical component and cumulative trends, and descriptions
of an ECC model and typically include of qualitative and quantitative changes
the following six impact variables: (i) occurring within a targets extended
emerging technologies: understanding environment.
new technologies, their applications and
how to effectively utilise them to increase Process frameworks internal to the
the value of existing products or services; company can provide useful information
(ii) emerging markets: identifying new into understanding how well the company
markets to sustain the core business has defined, architected, managed and
or create an opportunity to offer new positioned existing products and services
services to customers; (iii) industry in the market-wide value chain. However,
challenges: recognising the issues that an acquirers understanding of the as-
may impact future revenue performance found strategic thinking displayed by
and competitive position; those who can company leadership may also provide
not identify trends, risk losing customers valuable insight into how well they have, or
to firms that can adapt to dynamic will, embrace exploration into the broader
environments; (iv) regulatory implications: customer environment to mine additional
government regulations and legislation opportunities for supplying its products
often impact a targets efforts to conduct and services. In the context of ECC, the
business and protect its competitive term process collectively represents
position; (v) industry event analysis: the steps involved in performing work,
effectively identifying the competitive and specifically, how people, machines
landscape and precipitating events are and resources are utilised in performing
essential for effective business strategy production tasks. ECC also provides a
formulation and execution; and (vi) regional framework for examining how a targets
focus: recognising local market activity core business and its products and services
and events, and micro-market variations interface with customers and partners.
in customer behaviour may provide
practitioners with insights on which new Relational capital represents current and
markets to enter and how to do so. potential capital resources (i.e., financial,
human, intellectual) embedded within
Data is crucial to developing a meaningful existing or future relationships with
understanding of a companys value business partners and customers. Relational
proposition. In order to be useful in capital is categorised and aligned by
conducting valid ECC analysis, high quality company product or service in order to
data can be characterised as relevant, gain maximum leverage in the companys
historically accurate, updated, retrievable, aggregate value proposition. Relational
source-traceable and accessible. ECC capital may also include indirect sources,
data sources may include key information such as ongoing collegial relationships
concerning all company inputs and outputs, with consultants and publishers who
selected processes and operations, and in turn possess significant business
is particularly exhaustive in the areas relationships with key contacts within a
of the companys products and services certain companys target market. These
and end users or customers served. Data relationships oftentimes yield valuable
forms include referenced facts, individual influence in sourcing new business and can
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also contribute to successfully entering new markets are defined, the results realised
markets. will quickly demonstrate a return on the
assessment effort.
Technology can be a key enabler to
innovatively enhancing the value of a Case study: consumer goods
companys product and service offering, manufacturer
naturally broadening its value proposition.
Technology is often used to effectively A financial sponsor was performing due
expand the relevancy of a given product or diligence as part of a plan to determine
service resulting in a more comprehensive if continued investment or extension of
connection to adjacent products, processes, an existing product/service was viable.
people and organisations. Technology plays The target had recently introduced a new
a critical part in achieving scale objectives wireless communication product to the
by enabling simultaneous delivery of value consumer market place. The products
added services for multiple customers, original platform was designed to allow
whether part of the same customer or its customers to contact a centralised call
value chain or not. Finally, advancements in centre to alert service representatives
technology-enabled processes can provide of particular issues concerning product
a rapid and responsive means for managing applications. Customer Service would direct
and executing new product and service immediate and geographically dispersed
development initiatives. responders to correct the customers
situation. Though the customer problem
In the context of M&A due diligence, the resolution function was of particular
ECC perspective extends conventional importance to its customers, there was
due diligence beyond a targets core a sense that new market applications
business and into its customers customers were not being pursued and as a result,
and consumers. This broader, holistic the company was interested in taking
approach into understanding a companys action to pre-empt entrance of potential
position in the extended customer chain competitors.
helps to cast a wider relationship-driven
net across organisations that may offer Facing continued pressure to reduce
product, services, IP, or relational capital competition and increase market share,
resources that would otherwise remain off the financial sponsor was also searching
an investors radar. The inclusion of an ECC for opportunities to increase business
perspective in conducting due diligence value, rationalise a higher valuation and
may be the first time an organisation is multiple, and differentiate the companys
exposed to this broader perspective. In product within a crowded asset class. To
these cases, the acquirer would be well better understand and develop actionable
advised to pay particular attention to solutions and define a new product or
results that, when properly bundled, create services model, the transaction team
considerable negotiation leverage. While utilised ECC.
implementation of ECC may challenge
the companys basic assumptions and In defining the market context for applying
conventions about how business value is ECC, external industry and customer
created, customers are serviced and new analysis was conducted and revealed
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market gaps, new market segments, the financial sponsor was able to commit the
linkage opportunities between unique significant capital investment necessary
market segments, market incongruities, to continue market expansion and
revenue streams, and unmet market needs. systematically implemented the ECC due
Customer and product application data diligence recommendations. The company
was abstracted from this analysis and enjoyed rapid market growth acceleration
then broken down into key components with product sales increasing over 800
using system analysis methodologies. percent during the five year investment
These components derived from analysis horizon time period. As a result, ECC
were then utilised to build new product meaningfully contributed to creating a
models and identify related external market product to market success story enabling
entities and technologies, adding a further for better than average investor return.
dimension to a qualified and quantified
strategic plan for a more expansive product Conclusion
platform.
ECC provides financial and strategic
The improved product platform productised acquirers with a means for defining and
information, captured and modelled establishing new market positions, business
customer information, and functioned as models and strategies. Due diligence that
a wireless platform model for enabling utilises ECC is enabling more insightful and
customers to acquire new products and competitive decision-making. The value
services in near real time from remote that ECC delivers to investors is becoming
locations. The wireless communication of critical importance as growing volatility
model created new market space, services, in the economic and national political
business intelligence and integration climates, increasing competitive dynamics,
opportunities with retail, services, media, weakening capital and liquidity markets,
and hospitality markets. The new product and tighter valuations continues to impact
platform would also be linked to other deals of all sizes and across all industry
business models, allowing the products sectors.
vendor to analyse customer behaviour in
near real time.
Based on the ECC analysis, previously David Soley is a senior consultant and
unknown and undetected business value Michael Sarlitto is managing partner at
was discovered and quantified. The SummitPoint Management.
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g Due diligence trends in Europe commercial,

operational and cultural twists
by C. Schindler
Subprimes tightening of credit markets and gathering the data that leads to sound
has ushered in a new phase of European conclusions.
M&A. Gone are the days of quick, financial
investor-led deal flow with ever-rising In such cases the due diligence team must
multiples. Process and scrutiny have be highly effective in managing hypotheses
replaced arbitrage in driving transactions. testing starting from a broader, less
As value creation becomes the new transparent base. Missing the key message
buzzword, due diligence methods need to or getting off on the wrong tangent leads to
respond. inaccurate assessment of the opportunity
and to a flawed transaction.
The primary focus for change resides in
commercial, operational and cultural due European due diligence teams, therefore,
diligence, as these are the areas of value have to be creative, disciplined and focused
creation and not just risk assessment. to drive toward the right results. Experience
Knowing what can be done and how to is more important than following a
go about it separates the men from the cookbook, and the right message
boys in this roll-up-your-sleeves market capsulated in 10 pages is far superior to a
environment. Forget defining the equity 100-page fact cemetery.
story. Its now all about managing the
value equation, which in Europe means Operational do as I do, not just as I say
taking a professional look at commercial,
operational and cultural issues prior to the It is harder to drive ROI these days just
transaction. on market growth and buy-and-build
strategies. Even healthy targets can be
Commercial becomes the band leader optimised, while weaker candidates
need restructuring. The substance in a
With private equity retrenching and transaction, therefore, is often found on
strategic buyer coffers filled with recent the shop floor. If an acquirer wants to find
profit gains, European buyers are taking the value prior to purchase, they need to
a harder look at their targets, thereby do more than just kick the tires on a few
softening once rigid auction processes. machines. They need an expert, in-depth
This means more access to the company look into the risks and opportunities.
and a heightened awareness of commercial
issues. In Europe, where management Whether healthy or distressed, most
controls and systems are often less European targets today are in the midst
advanced than in the Anglo-Saxon world, of some growth, market, technology, or
commercial due diligence needs to be more regional transition that, depending on how
creative in identifying key value drivers it is managed, will either make or break
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future performance. Modern operational a two-tiered management structure, the

methods such as Value Stream Mapping, managing director of a mid-sized company
Six Sigma, 5S or Lean have a lot to offer in will think very differently than his Anglo-
creating success stories. For due diligence, Saxon counterpart. As an example, one
the team needs to have experience with should not assume that a German manager
such tools and how they are applied. Many is looking to do an MBO, which is still seen
times, the effectiveness of these measures by many as a minor form of blasphemy
is determined by not only how the methods in the church of shareholder loyalty. Of
are deployed but also how effectively course, some do cosy up to the idea of
organisational and cultural nuances are sweet equity over time, but only if the
addressed. This is a key factor in Europe, concept is introduced with proper timing
where each country has its own language, and discretion. The better short term hook
culture and mindset. to get a manager on board is to appeal to
his need for continuity and new challenges.
Automotive is one of the most challenging Devotion to duty and company will lead
manufacturing environments around. most managers to talking about the many
It is important to recognise causes and strengths and weaknesses they see
effects early in a due diligence and make invaluable in due diligence.
experience-based assessments of what can
be accomplished at what expense. During Shareholders in Europe think differently
the evaluation phase, this often requires too. On the surface, many are less
mapping to industry benchmarks and infatuated with the prospect of cashing out
calculating the resulting ROIs in financial than one might expect, a by-product of less
terms that can flow into a valuation model. value other cultures place on conspicuous
consumption. In order to open the doors for
Correct identification and assessment of a transparent transaction, the initial appeal
improvement areas are not enough though. needs to be to other values assuring
They need to be implemented to be worth the continuity of the legacy through new
something. Words need to turn into actions. (wise) ownership, recognition of the moral
A common flaw in operational due diligence obligation to employees, etc. Playing
procedures is that the team assessing the the human piano well can make all the
potential is no longer available or desired in difference between getting comfortable
post-acquisition implementation. This may with a deal and not having one at all.
result from an organisational lapse or, as
is often the case, from the fact that many Shifting markets imply increased emphasis
consultants like to write reports but dont on commercial, operational and cultural
want to get their hands dirty. elements of due diligence. Winning the race
is all about knowing where the currents are
At the end its all cultural and applying the right strokes especially
in Europe.
The backbone of Continental Europes
corporate infrastructure is represented
by privately held, technocratic family
businesses. In Germany, for instance, a Christoph M. Schindler is a managing director
country whose commercial law prescribes and European Practice lead at BBK.
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g Due diligence and integration planning in cross-

border transactions
by Mark Thompson
Due diligence is undoubtedly one of regulations are increasingly expanded to

the most critical steps in the acquisition include successor liability in areas such as
process. Used properly, diligence is an environmental, employment / benefits,
effective tool to enable decision makers money laundering, and international trade
to evaluate the risks and benefits of a issues, acquisitive companies have been
potential transaction. The advantages forced to examine their targets more
of a properly constructed due diligence closely.
process, however, do not end simply at
the completion of a transaction. The due The dominance of private equity funds as
diligence process and integration planning both buyers and sellers has also created a
should go hand in hand to ensure a larger role for the due diligence process.
successful acquisition. As a buyer, a private equity fund needs
to be aware of every issue that can affect
The rise of due diligence cash flow in order to be able to service any
acquisition financing and provide a return
Due diligence has grown in importance in to their investors. Since the liquidity of a
recent years. Although some would argue fund is limited, when making an acquisition,
this is due to the influence of the US style there is scarce room for costly liabilities.
of transactions, there are, in fact, several Further, as a seller, private equity funds
more important contributing factors. As frequently provide very limited claims
evidence has shown, many acquisitions protection to potential buyers. Funds often
have had a negative impact on the financial try to structure their sell-side transactions
position of an acquiring company. There to mimic a public transaction where there
is concern by several constituencies are no surviving warranties or indemnities.
about companies making hasty decisions Consequently, buyers must seek protection
to grow in size or prestige without truly through diligence, as claims protection will
understanding exactly what it is that be limited.
they are buying. Consequently, increased
scrutiny on companies making acquisitions Team coordination
by shareholders, governmental entities and
creditors is a major factor in the importance A thorough diligence investigation requires
of due diligence. input from a number of different sources.
Due diligence is typically divided by
This issue is magnified by the ever business function usually financial, legal,
increasing liabilities associated with accounting and tax and shared between
acquisitions. In many cases, the target the advisers and the acquiring company.
companys past problems can result On large cross-border transactions, and
in significant ongoing liabilities. As even on smaller deals, dozens of people
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and a handful of different outside firms integration process and create costs or
and sub-specialists can become involved. liabilities for the combined companies
Coordination of these functions is therefore further down the line.
crucial from the outset, particularly in terms
of putting together a due diligence plan Once the goals and objectives of the
and protocols that establish the working due diligence investigation have been
relationships among participants. established, it is equally important to be
sure that there is an organised chain of
The first step in creating such a plan is command when it comes to reporting the
to determine the goals and objectives findings. If the results of the diligence do
of the investigation essentially, what not reach the appropriate decision makers,
information will help the decision makers the entire effort will have been wasted. A
determine whether to proceed with the protocol must be devised from the outset
transaction and at what value? Each which establishes not only the reporting
acquirer will have different sensitivities chain, but also the timing and format of the
about this for example, some companies reports. In addition, a process should be set
are particularly concerned with up to flag significant issues to the decision
employment issues, while others may focus makers immediately.
more on potential environmental liabilities.
It is important to sit down with the decision It is also useful to work closely with the
makers from the beginning to develop a integration team leaders to create a
plan focused on their concerns. Surprisingly, product that can be used for integration
this step is often overlooked as advisers planning pre- and post-completion. If the
frequently charge forward with a so-called diligence and integration are not done
standard due diligence investigation hand in hand, the diligence frequently will
without taking into consideration what the be duplicated later and valuable time will
acquirer really needs. be lost. Of course, this sounds easier than
it actually is in practice, and while some
As a general matter, one of the most companies are very good at integration on
important things to recognise is the their own, the vast majority will or should
difference in approach to due diligence look to their advisers for assistance.
between strategic buyers and private
equity funds. The short term approach to Indemnity protection and warranties
an investment typically taken by funds
(generally three to five years) means their It is often asked whether the need for due
financial models may not tolerate much diligence can be eliminated by protecting
of a cushion to cover potential liabilities, the acquirer with warranties or indemnity
even if they are ultimately indemnified protection. While there is great appeal
down the road. Therefore, it is important in taking that approach as it saves the
that they are aware before execution of an upfront diligence costs, it is a very risky
agreement of any issues that could impact alternative. Fundamentally, due diligence
cash flow. Although strategic buyers are could turn up potential liabilities or business
also concerned with immediate financial issues that would cause the acquirer to
returns, they are typically more focused walk away from the deal, or at least adjust
on identifying issues that may stall the the pricing. Furthermore, often the most
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important representations, warranties and get the business running more quickly.
indemnities in a transaction are specifically
crafted to deal with issues identified during It is frequently debated whether warranty
the due diligence. Simply stated, if a insurance can be useful in mitigating these
company does not know what is out there, types of risks. In many cases, insurance is
it is hard to protect itself adequately. extremely helpful, particularly if there is
a gap between the acquirer and vendor in
In addition, there are certain liabilities the cap on claims protection. Insurance,
where indemnification cannot provide however, is not a substitute for due
adequate remedies, particularly if common diligence. In fact, the insurer will review
caps and limitations are applied. For the acquirers diligence report and often
example, when a US company is the will want to conduct its own diligence
acquirer, liabilities raised due to violations investigation. Furthermore, it is important
of the Foreign Corrupt Practices Act by the when using insurance in a transaction to
target company, or parties contracting with review the exclusions to the policy very
the target company, may pass through carefully as key risks will often be excluded
to the acquiring company, even if post from the policy. In practice, insurance is
completion such illegal activities are halted. most effective when purchased in order to
In addition, liabilities relating to issues such bring a transaction together when it covers
as environmental, money laundering, and specific risks uncovered in due diligence.
employment / pensions raise significant
successor liability issues that should be Whether the acquirer is gaining protection
identified in diligence pre-completion. through representations, warranties,
indemnities or insurance it is important
A further risk is the credit-worthiness of the that the decision makers know the results
party providing the coverage. Frequently, of the diligence investigation and all
protections gained in a purchase agreement of the data provided by the vendor has
are neutralised because the party providing been thoroughly analysed. Contractual
the protection is effectively judgement protections in a purchase agreement can
proof, particularly if the vendor in the be voided if the acquiring company learns
transaction is an individual. In addition, about a problem or a breach of a warranty
even if the acquirer is able to obtain a before the execution of the purchase
judgement, resolution of such matters can agreement or, in some cases, before
take significant time and expense. completion. Further, in some jurisdictions,
courts will not allow a recovery for damages
Simply stated, diligence provides the if the acquirer should have known about
acquirer with the opportunity to learn a breach or a problem based on the
everything there is to know about the information provided by the other side.
targets business before being bound to Consequently, it is important for acquirers
the transaction. That way, whether the to include language in the purchase
target is a stand alone acquisition or will be agreement that limits its knowledge in
integrated into a larger organisation, the some manner or identifies the universe
acquirer can determine whether it wants to of information about which it will be
proceed and at what price and knows what accountable.
to expect post completion, allowing it to
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At one end of the spectrum, the purchase knowledge of a potential liability prior to
agreement can contain a provision that all execution of the purchase agreement can
information learned during diligence is held prevent a successful claim if such liability
against the acquirer. Often referred to as an turns out to be a breach of a warranty.
anti-sandbagging provision, such provision Consequently, it is important for the
provides that anything the acquirer learned diligence team to be in contact with the
prior to signing cannot be used as the negotiating team to be sure there is a
subject of a claim or to prevent completion. proper understanding of the consequences
At the other end of the spectrum, some of the diligence investigation and how it
purchase agreements state that the only relates to the overall agreement.
knowledge an acquirer is deemed to have
is included in the purchase agreement Due diligence is an integral component of
itself and its schedules. A compromise the acquisition and integration process.
position often seen limits the universe of Although often complicated, expensive and
information about which the acquirer is time-consuming, it is extremely important
accountable, but also requires the acquirer for acquirers to conduct an organised and
to state that it has no knowledge of facts thorough investigation in order to complete
that amount to a breach of warranty or transactions successfully and ultimately
create a claim. integrate the target efficiently.
Even when the purchase agreement

is crafted appropriately, unless known
problems are specifically addressed in an Mark Thompson is a partner at King &
indemnity, many courts have held that Spalding International LLP.
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g Breakthrough value creation in M&A
by Vikram Chakravarty and Navin Nathani
Mergers and acquisitions often fail. Studies days plans, value-extraction plans, synergy
have shown that close to half of all mergers calculation plans and so on. However, these
failed to create any value and perhaps plans remain relatively high level, partly due
only a few of them outperformed their to legal barriers but mostly since there is
industry benchmarks. However this has not uncertainty about whether the deal will go
diminished the appetite for M&A. Indeed through.
with private equity funds in the mix, the
quantum of merger activity has hit record A bulk of activities in the pre-deal phase
highs. With astronomical prices the onus on remains linked to getting the deal through.
generating value is even higher than before. Anyone who has been in the midst of a
negotiation process can testify to the
Studies often point to the poor process highly charged atmosphere and the driving
of bringing the firms together and rationale that without the deal there really
organisation disruption as the root causes would be no ability to create value. So it
of failure. We believe that the typical is not surprising that the task of thinking
process of merger integration which through how the deal will create value
merely drives towards standardising is often neglected and the plans remain
processes and practices is inadequate. It rudimentary.
is important for firms to use the event as a
catalyst for step change and to embark on a Our experience suggests that typical
program of significant transformation. management objectives after the merger
process focus on: (i) getting a budget done
Background and ensuring decent allocation of resources
(capital, labour, research, training); (ii) a
M&A deals are complex undertakings desire to stabilise the firm; (iii) reducing
that take centre-stage in the lives of the disruption; (iv) imposing a consistent firm
parties involved for a significant period culture; (v) ensuring that the right people
of time, well before the actual deal. This are in the right roles; and (vi) starting the
pre-deal phase can range from months to value creating process by activating some
years, during which the parties engage in initiatives (typically the low hanging fruit).
planning for the deal selecting a viable
target, running strategic, commercial, The trouble is that this is a relatively timid
operational and legal due diligence, approach focused on incremental changes.
developing a valuation range, and starting A merger offers the chance to change the
the negotiation process. rules of the game. The merged entity is
encouraged to re-think its strategy and
In some well planned mergers there is positioning based upon its new position,
growing emphasis on chalking up 100- and should implement a process of
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transforming its organisation to best in opportunities (low prices or cheap debt)

class. are often the triggers for initiating a
takeover bid. But true value creation lies
Value creation planning the post-deal in the mundane world of improving the
phase early organisation and its operations. Therefore
the merger event is a time to push through
Since there are very few good bargains significant change that will set the merged
around to justify a deal on the back of entity on a significantly different course.
simple financial reengineering, acquiring This is equally true for strategic buyers as
or merging entities are clearly forced to well as buyout funds.
focus on post-deal value creation.
Lessons from successful merger
Synergy extraction is often spoken about transformations
but not typically understood or planned for.
Most mergers have synergy calculations During merger activities it is prudent to
done at a very high level in the pre-deal spend a lot of time getting the basics right.
phase with little emphasis on exactly Standard hygiene factors for planning a
how they plan to extract the value. The merger integration include: (i) establishing
realisation of this synergy will likely occur clear goals, managing expectations and
after stabilisation of the new entity, but communicating openly; (ii) selecting
often the extraction rate slows down after the leadership quickly; (iii) focusing on
a while or disappears altogether. Our customers; (iv) establishing a strong
research shows that mergers generate a integration structure; (v) proactively
certain momentum, and unless synergies addressing cultural issues; and (vi) creating
are extracted within the first 12 months an internal sense of urgency. But companies
they are unlikely to be extracted at all. are also urged to consider radical solutions
to the age old problem of value creation
The pre-deal phase is usually passive with through M&A, as outlined below.
primary objectives such as assessment,
identification and planning. Couple this Setting new ambitions. Shift the mindset of
with access hurdles for regulatory or the senior management from attempting
confidentiality reasons, and the value- to just get the best of the two firms, with
creation opportunities that arise out minimal disruptions, to attempting to shift
of this stage are neither concrete nor to a higher level of productivity. In general,
easily realised. In comparison, after the this notion is met with scepticism as the
completion of the deal, the single emerging merger process is cumbersome and there is
entity will be able to make plans from a a fear of biting off more that we can chew.
better vantage point, as well as make plans However M&A events tend to loosen age
that are likely to yield tangible benefits. old corporate thinking and make radical
But pre-deal planning is still important and change possible. In recent mergers we have
must be attempted as much as possible seen firms shaken out of their standard
within existing limitations. ways of doing things and setting new goals
to become the best player in their industry.
In summary, we have found that industry The stock market has rewarded these
consolidation trends and financial efforts and the companies are on their way
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to becoming global industry champions. of transformation. Although cost cutting is

necessary, if the objectives of the merger
Jump-start the clean room. For too long become a transformation drive, then
the clean room has become a dumping the areas of cost cutting migrate from
ground for data with managers rarely SG&A toward marginal plants, improving
having good access to it to ensure detailed procurement and logistics improvement,
study. Data must be kept confidential but complexity reduction, manufacturing
consultants also need to have access to optimisation and the like.
both data and people to start the planning
process. Multiple teams may need to work Carrots and sticks. Detailed planning
on multiple functions simultaneously, to and responsibility allocation needs to
plan for the merger in great detail before be reinforced with a clear performance
the actual closing of the deal, including management system. This sharply allocates
joint studies. The planning stages should responsibilities, sets measurable KPIs and
be carefully calibrated with the approval tracks performance. The system should
process, with more detail and access have a strong incentive structure to ensure
provided after each acquisition hurdle is that individuals and teams are motivated.
crossed. There should also be some headline
punishment events to let the employees
Detailed planning / responsibility allocation. know that slack will not be tolerated.
Ensure that there are detailed execution
plans with people allocations and KPIs Discrete value creation opportunities exist
completed and ready for execution on Day at every juncture. Mastering the integration
1. Short term plans, like 100-days plans, are process is a critical success factor in
critical for setting a sense of urgency and capturing merger value, as most mergers
demonstrating the possibility of working and acquisitions typically fail due to a
together to generate positive results. few consistent factors that relate to poor
execution rather than strategic rationale.
Selecting / moving to best practice. For Fundamentally, mergers are a useful and
processes and practices, be open about valuable option for improving the fortunes
challenging the current status quo and of a firm. But the root cause of failure
pick a path to achieve the best in class. of M&A goes beyond weak execution of
Benchmarking, all too often an ignored plans often companies are not aggressive
aspect of setting strategy, can be a enough in their ambitions. Indeed, firms
powerful tool for forcing a re-think or fail because they set their sights too low
encouraging out of the box thinking. on incremental improvements and not on
jumping the queue to best in class.
Avoid short termism. It is sometimes
imperative to produce short term gains
to show immediate results in order to Vikram Chakravarty is a principal and Navin
pacify the investing public, creditors to Nathani is a consultant at A.T. Kearney. The
the deal, regulators and others. Sadly, authors would also like to thank Phil Dunne,
this is often achieved by cost cutting key a partner at A.T. Kearney, for his support and
functions which might hinder later stages advice.
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g Cross-border M&A: downstream implications
by David Eaton
Mergers and acquisitions have dominated from Bucharest, he thought about his
the global stage for many years, cycling latest meeting with the local team that had
up and down based on market conditions, been assigned to him by the Integration
yet always serving as an accelerant of Management Office (IMO) to integrate
profitable growth, and ultimately, enabling the manufacturing process. No one could
globalisation. Worldwide M&A reached explain why scrap rate and slow cycle times
record levels in 2007, with $4.83 trillion on the production line continued to escalate;
worth of announced deals, according to customer deliveries were now a significant
Dealogic. worry, and the sales team was climbing all
over his back for delays in order delivery.
But, as previous statistical summaries have The merit-based incentive system which was
indicated, the M&A failure rate continues used successfully for years in Europe and
to range between 60 and 75 percent. Why North America was having little or no effect
do three-quarters of all M&A deals fail to with these new employees in Romania.
deliver the intended benefits? The following Hans ability to gather high quality data on
example illustrates some underlying issues. this last trip was limited; every question
he asked seemed to generate confusion
For global executive Hans Kommer, trying and mountains of excuses for why that
to focus his EMEA manufacturing team on information was not available. There seemed
getting this international acquisition back to be so many layers added to the decision
on track was proving to be more challenging making process, with a hierarchical, power
than he had anticipated. Based on early hungry reaction from some folks, while
scope and due diligence assessment, it others hung back and seemed to avoid the
appeared fairly straightforward. The deal conversation. It also seemed to be difficult
made sense; bolting on a mid-market for some members of the new management
manufacturing operation in Eastern Europe to accept their fate, to understand they
to his companys global manufacturing needed to join the European manufacturing
footprint should have mapped beautifully. team and demonstrate ownership of the
The target was already on board with the integration strategy laid out by senior
principles of Lean Manufacturing and Six leadership at headquarters in Europe.
Sigma, based on a previous joint venture
with another competitor of Hans firm. Even Hans has the challenging task of successfully
geographical synergy should have been easy, integrating this acquisition into his global
since the company was less than a 1000km functional responsibilities, while achieving
from its headquarters in The Netherlands. So the ROI predicted and communicated to
why was everything falling apart? shareholders and the board. Cost savings
and supply chain synergies based on
As Hans sat on the two-hour flight back supposed geographical advantage would not
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pan out as the corporate development team Fourth, manufacturing and supply chain
had expected unless he got his act together integration. Closing redundant plants
quickly. and merging supply chains into one robust
system will be a relatively straightforward
Its all about integration consolidation exercise. In many regions
of the world, personal ties to employees
There are five misconceptions that continue and long time suppliers, along with deep-
to plague cross-border deals in particular, rooted organisational systems, can lead to
even those consummated by the most highly charged debates that make supply
brilliant officers of corporate development chain rationalisation surprisingly difficult to
or M&A, and talented integration teams achieve.
assembled from some of the strongest talent
within each function of both companies. Finally, human integration. Our corporate
cultures seem to be pretty compatible.
First, functional integration. Manufacturing Acquiring companies consistently
is manufacturing, IT is IT, and finance is underestimate the challenges of post-
finance. While some functions do share merger integration of human capital. Often
common terminology and professional the most critical success factor in making
training around the globe, in the post- a deal work is not the financial projections,
acquisition period standard practices for the strategic plan, or the organisation
developing prototypes or deploying the IT chart, but the ability of the principals to
function may not be so compatible. mesh as a new team. Different personal
styles, thought processes and informal
Second, geographical integration. patterns of communication shaped by both
Geographies will meld together. My organisational and national cultures can all
Western European headquarters will have make human integration a challenge.
no issues of compatibility with its new
Eastern European colleagues. Even in an Building a third culture
era of transnational management, many
employees are still very much culturally Come on, were all smart people, weve
conditioned by their national backgrounds, read the articles, we know we need
and may leave a post-integration entity if to concentrate on these issues as we
their legacy culture is not incorporated into contemplate a joint venture, a merger or the
the new operating environment. acquisition of another organisation. So why
do these issues continue to challenge us?
Third, customer integration. Customers Why cant we anticipate these challenges
who previously used one supplier from and develop a plan to minimise the noise in
their home market will be fine receiving the system?
shipments from the other side of EMEA. Our
customer support centre now based in North It is quite common for employees from an
Africa will serve our EMEA customers just as acquiring organisation or a new partner to
well. Customers tend to have their own way think For years we have been successful
of looking at the world, and may not see the with our methods of manufacturing,
new set-up as a plus from their standpoint. financial reporting, and staff training. If the
other organisations ways were so superior,
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wouldnt they be in better financial shape? place where they can successfully navigate
stylistic differences.
The challenge lies not so much in whether
one way is more right than the other. The Follow the rapids
challenge is creating a mutually-respectful
environment where exchanging ideas and To minimise the costs inherent in
explaining processes creates the opportunity unsuccessful cross-border M&A and
to build an even better post-M&A culture joint venture activity (longer cycle times,
without giving up the asset value of opportunity costs, and even business failure),
the target or the non-negotiables of the Hans could consider the following seven
acquiring company. steps to successfully navigate the rapids
and resolve his current predicament in the
Experience suggests that one good way downstream integration phase.
out of this perpetual hurricane is to build a
third culture, or a third way of operating, Scope the activity. Hans needs to be very
which rises above either partys traditional focused on the problem he is trying to
methods. solve. For example, what will be the key
initiatives he needs to implement to get
It has been said many times that the the manufacturing streamlined and realise
whole is greater than the sum of its parts. the savings for the region promised by the
But the whole is not simply gathering all acquisition, what systems need to be built
components to make a big heap in the or installed, or which components need to
center of the warehouse floor. The whole be integrated? In other words, how does
is actually the cumulative effect of the best this acquisition impact his overall strategy
ideas derived from the individuals, teams in EMEA, and the roll-up to the companys
and organisations involved, as well as the global requirements?
contribution of new, innovative thinking
arising from the synergies of the acquisition. Metrics that move. If he achieves a
successful outcome as a result of bringing
In other words, the best success stories begin key individuals or teams together, what
when a topic is placed in the centre of the metrics will move as a result? Examples
table. All the best minds available gather of ROI include improved cycle times, cost
to discuss and brainstorm great ideas and reductions, increased sales, customer or
innovative solutions, and if an element from employee retention, one fully integrated key
a previous system or organisation should account or reward system moving forward,
contribute to the final solution mix, fantastic. and so on.
Building a third culture requires humility, Human interaction touch points. Who needs
open mindedness, flexibility, creativity and to be invited to the party? Hans must
comfort with risk. It also depends on the identify key stakeholders per category,
ability of group members to value other and involve them in the process by which
opinions, fresh thinking and the potential a creative, innovative solution will be
to create something original. But most of developed to achieve the desired state. This
all, the team, or pair of individuals, can only could be called a human interaction across
achieve third way solutions if they are in a cultures audit. In essence, it means looking
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for the places within the newly combined internal or external facilitator who can not
organisation where two or more people only guide the team through the process
will interact across multiple definitions of of developing an innovative solution to
culture company, national, functional, the business challenge, but also serve as
geographical, industry, headquarters versus a process coach. The facilitator helps to
subsidiary, etc. in a way that impacts the enforce, and reinforce, the newly-created
challenges, and the expected synergies. team culture, ensuring that team members
stick to their agreements and utilise shared
Personal styles inventory. Each individual processes to drive problem resolution.
arrives at the incubator table with his or
her own styles of human interaction. It is Loop back around. All good processes contain
vital to understand their pile of styles, the an element of self-reflection and evaluation.
hard wiring they have received that shapes Companies should undertake a process of
their behaviours. Team members must review against the previously mentioned
achieve a level of acceptance/respect, to metrics that move. Measuring progress
gain awareness of each others styles, and to toward stated goals and experiencing
understand the why behind their behaviour, improved results is a powerful elixir with
so they can appreciate each individuals which to motivate any individual, team or
starting point. organisation.
Building team systems. Before it is possible Summary

to navigate the business issues that need
to be solved, we must create a human Successful mergers, acquisitions and joint
operating system that will drive a teams ventures depend on the eventual integration
interaction going forward. The team must of two or more organisations. The net
define a shared vision of what goals it seeks deliverable of the seven steps described
to achieve, the key business problems it above is nothing less than the creation of
must address, and individual roles and a third culture within the newly combined
responsibilities. In addition, the team organisation. An acquirer is ultimately
needs to co-author a number of key shared judged on how well it achieves the stated
systems, the components of which tend objective: to buy, merge or collaborate with
to vary widely according to national and another entity sooner, faster, cheaper,
organisational cultural norms: decision- better. When bringing together diverse
making system; project management; colleagues and cultures, and merging
communications (virtual and face-to-face); systems, processes and procedures into one
meeting management; conflict resolution; organisation, specific steps can be taken
and other group norms (email, conference to enable these teams to rise above their
calls, agenda setting, relationship building, competing styles and develop a third culture
etc.). Out of the array of individual styles one that can fuel integration and superior
present at the table, team members need to business performance.
create the most appropriate team culture to
achieve a successful outcome.
Solve the problem. A business work-out can David Eaton is a managing director and
be accelerated in the initial stages by an founder of Aperian Global.
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g Integration the key to a successful merger
No buyer acquires another company success of the transaction, buyers should

anticipating the transaction will fail. commence integration preparations as far
Nevertheless, a surprising number of in advance of the transaction as possible.
mergers and acquisitions yield results Many purchasers delay integration
far below projections. Many acquired planning until just before the closing, to
companies are later resold to new buyers save effort and expense. Their limited staff
or spun-off within a few years, allegedly resources are often otherwise engaged.
because the new business was not a Confidentiality considerations may limit the
strategic fit. Regardless of the reasons ability to introduce necessary personnel to
given, many of those transactions the potential transaction. Similar reasons
underperform because the buyer did are offered for why the integration efforts
not devote sufficient attention to the are postponed.
integration of the businesses.
Delay, though, can exacerbate the
Ideally, a successful integration permits difficulties in achieving a smooth and
the combined enterprise to operate as prompt synthesis of the companies.
a synthesised unit on the closing date, Frustration caused by the disruption in
with minimal disruption to customers, the integration can result in loss of key
personnel, productivity and operations. employees, customers and good will.
Employees are motivated and cross- Failure to properly assess the impact of
trained on the products and services of disparate methods of operation could
the combined enterprise. Employees can result in delays in production or delivery of
communicate with each other, customers services. Ignoring the impact of foreign laws
and vendors through compatible systems could result in false starts in implementing
in the appropriate languages. Policies and new procedures or wasteful litigation,
procedures are synthesised and incorporate leading to further delay and expense.
best practices. Compensation and benefit
programs recognise and reward retained Buyers can commence integration planning
personnel in effective ways. Disruptions early, without undue expense, and focus
from the elimination of redundant positions additional resources as the transaction
are minimised and consummated promptly. progresses. Purchasers should seek relevant
Service levels to customers equal or exceed information during negotiation and due
prior levels. Financial results improve and diligence to assess integration aspects
continue over a sustained period. needing attention. A cohesive acquisition
and integration plan should be seamless.
The danger of delay Buyers that have never acquired another
company should commence the process
Due to its critical importance to the earlier than those who have completed the
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process multiple times, to provide sufficient programs available to the combined

time to develop an approach to each issue. enterprise. Additional integration planning
Nevertheless, every transaction will have is appropriate for transactions between
its own particular aspects that warrant companies in different industries or with
attention, even for experienced buyers. foreign operations.
The integration team Employees. Perhaps the hardest but most

important aspect of integration planning is
The integration team should have the determining the compatibility of employee
capacity to effectively identify and cultures. Some employers have prospered
develop solutions to the integration with results-oriented survival of the
issues. Often, the acquisition team will fittest systems, while others foster more
contain many of the personnel qualified collaborative, nurturing environment.
to analyse those aspects: executives, Buyers may mistakenly assume that the
attorneys, human resources, accountants same incentives for their employees
and tax professionals, operations experts, will also motivate the new workforce.
information technology personnel, and Compensation works for some, while
others. If in-house expertise does not recognition and intellectual challenge are
exist, or confidentiality or other reasons necessary components for others. Proper
prevent including those personnel in the assessment of employee cultures can help
early analysis, outside consultants can be buyers implement effective programs.
engaged on a confidential basis. Employee training will also help to educate
new workers on accepted methods of
Care should be taken to be sure that the operation and expected performance levels.
integration team evaluates the ability to
achieve projected results on the anticipated Compensation and benefit programs of
timetable. The acquisition team may the target company should be evaluated to
have incorporated assumptions into the determine which model should survive and
projections that are not achievable due to for how long. Buyers should not assume
delays caused by the integration process. that their existing programs are necessarily
the best, and should consider adopting the
As noted below, if the acquisition team best practices of each group.
will be diverted to other transactions
shortly following the closing, buyers might Buyers should also evaluate the impact
consider designating one or more persons of the transaction structure and terms on
responsible for the integration who will executive and employee motivation. For
continue to focus on those efforts after the example, if earn-out performance targets
closing. are difficult to achieve, the sellers may have
little incentive to help drive performance
Aspects of integration as planned. Buyers may achieve better
long term results by offering the sellers
Proper integration planning should review executives a significant incentive to help
all aspects of the business, focusing achieve maximum performance, rather
on implementing the best employee, than trying to keep the purchase price to a
administrative, operational, and marketing minimum.
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Administration and operations. answers to as many of the anticipated

Communication, accounting and questions as possible. Similarly, they may
information technology systems will need want to develop a small team prepared to
to sync as soon and seamlessly as possible. respond to unanticipated issues, to help
Those issues may be particularly difficult maintain consistency in approach.
to achieve if the companies operate
in different countries and in different Sustained efforts help generate success
languages. Converting the accounting, tax
and information technology systems into Integration efforts should continue
a cohesive, technologically compatible well beyond the consummation of the
system may involve significant time and transaction, to help assure that the two
expense. Meanwhile, an effective interim companies are merged in more than name
solution will need to function before a more and financial results. The integration
permanent solution can be implemented. of employees and cultures takes time.
Too often, companies focus on the next
Policies and procedures of the enterprise transaction and fail to complete integration
should be introduced to the employees with of prior deals. Executives may leave
proper training. If the business combination integration to their operations personnel,
brings the enterprise into a new jurisdiction, who may have different incentives in
the new policies and procedures should making integration decisions. For example,
be reviewed for legal compliance as well administrators may make personnel
as their conformity to local customs and decisions favouring co-workers whose
methods of operation. Personnel from skills are known to them, rather than to
the sellers operations can help identify thoroughly evaluate all qualified candidates
potential roadblocks and solutions. from both organisations.
Significant time may be required to obtain

required licences and permits necessary for
the purchaser to operate the business. The
parties can often structure the transaction Integration efforts should continue well beyond the
to minimise the impact of the delay.
consummation of the transaction, to help assure
Customer and vendor relations. Proper that the two companies are merged in more than
integration planning will enable the
company to communicate with its
name and financial results.
customers and critical vendors promptly
following the first public announcement
of the transaction. Customers should be
educated on new products and services
available to them. Vendors will seek Companies can facilitate the integration
assurance that their receivables will be paid process in a variety of ways. They might
and will want to know the impact of the designate a liaison who offices at the sellers
transaction on their relationship with the location. The liaison could be responsible
company. Although many issues may not be for the successful integration of the two
known, buyers are well advised to prepare businesses and be given appropriate
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authority to help facilitate the combination. Regardless of the methods undertaken,

He or she can serve as a resource for the buyers who devote attention to integration
employees of the acquired business and early in the process, and who sustain a
help instil in them the new cultural values focused effort on it, can greatly enhance the
of the buyer, while advocating for the new prospects for success in their acquisitions.
employees and their needs, as appropriate. Moreover, the efforts expended should
result in improved results and more
Devoting time and resources to allow satisfied customers and employees.
key executives and employees to meet
personally and to see the operations of the
other can help strengthen intercompany
relationships. Buyers have often met with
success by conducting strategic meetings Richard Lieberman is chairman of the
with the sellers personnel at all levels of the Corporate, Securities and Finance
organisation, listening to their suggestions, Department of Jennings, Strouss & Salmon,
concerns and aspirations. PLC.
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g Protecting your cultural assets through an

integration
by Kate Lye
If you are looking for clues to the tried and tested solutions, there are six
likely success of a particular merger questions any integration plan needs
or acquisition, then take a look at the to answer if it is to address the cultural
integration plan. Research has shown integration conundrum, as outlined below.
time and time again that the quality of the
integration planning, particularly around 1. What is the strategic value we believe we
the softer cultural issues, is a reliable can create through this deal? Few mergers
predictor of future shareholder value. or acquisitions are undertaken without
a clear vision of business outcomes that
Ironically the M&A process tends to be become possible through a deal but that
weighted towards the front end; think neither party could achieve independently.
of all the energy and attention that goes These may be to deliver new products or
into target identification, due diligence services, to benefit from economies of
and the actual deal negotiations. Post- scale, to rejuvenate a mature company by
deal planning; by contrast, can seem like a injecting new thinking or talent, to increase
secondary consideration. market share or rapidly access foreign
markets. Whatever the original strategic
Certainly, organisations are quick to rationale for the deal, this needs to be the
execute the basic operational, financial, focal point for all subsequent integration
people or market changes that are decisions and plans. M&A stalwarts rightly
necessary to unite two once separate judge that 60-80 percent of a deals value
businesses. But many seem content to rely is won or lost in the first 12 months. In the
on unsupported assurances of cultural fit many cases where the shareholder return
or hope they can deal reactively with the is a loss, businesses have often lost sight of
thornier questions of cultural integration. the underlying strategic rationale in all the
This is foolhardy given the wealth of data upheaval and discord of the integration.
that highlights the integration period as the
point at which shareholder value is most 2. What are the true measures of success
likely to be destroyed. The soft integration for this integration? So be sure you have a
issues are where merging organisations are clear statement of the ultimate strategic
most likely flounder. This failure to manage value that the merged organisation needs
cultural contention can transform a once to deliver and make this the bottom line for
market focused business into one that the integration team and executive team.
becomes internally obsessed and on a slide
towards mediocrity. Another recommendation is to determine
some distinct operational, customer,
Leaving aside the technical integration people, cultural and financial metrics to
issues, for which there tend to be more focus the integration plan. It is possible
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to track many integration aspects such When full integration is the appropriate
as operating efficiencies, productivity, option, be clear about who is leading the
customer retention, service disruption, process and who is integrating into whom.
talent retention, employee trust, speed of For the sake of appearances, leaders can
implementation and brand loyalty. The key fall into the trap of giving false assurances
is to identify those that are most closely about the integration being an opportunity
tied to the strategic rationale and devise an to co-create entirely new working practices
integration scorecard that keeps the new and take the best from both. In practice,
organisation on track. it is hard to dispassionately judge whose
processes or people are best. The reality is
3. What form of integration approach will often that the acquiring companys norms
best deliver these outcomes? Integration and practices will be the blueprint for the
can be compared to organisational surgery; new organisation. While the organisation
painful, unpredictable and not to be should take the opportunity to learn and
undertaken unless absolutely necessary. improve from their new colleagues, few
Integration teams must draw distinct businesses want to start again with a blank
boundaries around how and where the two piece of paper.
organisations need to come together and
where there is benefit in remaining apart. 4. What cultural assets and risks do you
Integrate only where it serves to add value need to manage to safeguard the post-deal
or reduce friction. The assumption that strategic value? The due diligence process
the full integration (i.e., integrating all the can be woefully deficient in identifying
processes, teams, locations cultures and those softer assets the buyer hopes to
structures is always better) is a common acquire or create through the deal. This
mistake. A more studied approach is to is a serious oversight. Integration teams
consider the different forms and levels of need to be rigorous in assessing what
integration possible, the pros and cons cultural, people or reputational assets they
of each and how they support the deal must preserve, sustain and build into the
rationale. It is more helpful to think of new organisation. Many an acquirer has
integration choices in terms of a gradient discovered to their cost that cultural assets
and the varying integration activities they believed to be integral to the value of
required for each level: (i) minimal the target organisation can quickly diminish
integration; (ii) partial integration; (iii) full if not identified and managed from the
integration into the acquiring business; and start. This is especially true when large
(iv) co-creation of a new business. mature organisations use their financial
muscle to buy an edgier market brand or an
There may be real benefit, for example, in alternative talent pool. Once again, being
maintaining a standalone entity and brand, clear about the strategic rationale for the
if the acquiring partner is unknown in the deal helps an integration team to focus
targets market. In this the integration on the cultural assets or risks they need to
may be limited to joint financial and legal manage from day one.
reporting structures. Other situations
can call for a partial integration around a 5. What plans and resources do we have
particular function or operating process. for shaping the culture the new business
needs? There will be cultural surprises at
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many points in the integration process. is also possible to track cultural alignment
Experienced integration teams recognise over time and pinpoint problem areas that
this, but also know the importance of going need more support.
into play with a clear point of view about
the type of culture the new business needs 6. Where does the buck stop for making our
to thrive and a working plan to put this into culture work for the business, its employees
place. Being ready and able to move quickly and shareholders? The best laid integration
on cultural issues is important because an plan will not be effective if it is working
organisation, like nature, abhors a vacuum. without the full support and cooperation
In the absence of the new cultural direction of the senior leaders in the business.
a de facto culture can emerge. This may Leadership behaviour is the single most
have been shaped by early integration powerful and visible force for shaping the
decisions, unplanned events, key individuals culture of a business. In the heightened
or third parties and can prove difficult to environment that follows a deal, what
override. leaders pay attention to, reward and role
model is disproportionately important, as
There are any number of models and well as how they react to critical decisions
tools on the market for assessing the or events.
current cultures and helping create some
shared expectations and language about One misplaced comment or action from
the cultural differences. However, there a leader can send a contradictory cultural
is no silver bullet cultural methodology. message that will reverberate around the
The real value is in how the integration business. Senior leaders must recognise
team uses the data to plan and manage that they are a key ingredient to the future
the softer integration issues. Even using culture and be guided by their integration
a straightforward model such as Johnson team on how they can support the cultural
and Scholes, to map the current and future integration process.
culture, provides integration teams with a
framework for understanding where the Conclusion
two existing cultures are naturally aligned
and where there is likely to be conflict. Anyone who doubts whether culture exists
or matters need only take a ring-side seat
The team can then develop a systemic at a poorly orchestrated integration to see
approach that combines hard tactics the cost cultural problems can inflict on a
(organisation structure, compensation business. Culture can work as an asset or
incentives, and a shared decision-making liability for any organisation, but during
system) and soft tactics (symbolic actions, integration, managing softer business
leadership communication, employee assets is critical to delivering the strategic
involvement, people development) to rationale and enhanced shareholder value.
demonstrate to employees what the
expected behaviours, assumptions and
values are of the joint organisation and then Kate Lye is an independent integration
to reinforce and embed them over time. It consultant.
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g Human resources a fundamental part of the

planning phase
by Sean Wells and Samantha Barklam
Although recent surveys show an external branding, caused by weak

encouraging trend towards HR involvement messages coming from employees of the
at an early stage in M&A there is still more merged entity; slower communication and
to do. Some businesses do not involve HR consultation processes; and employees
quickly enough perhaps due to a heavy remaining mentally tied to their pre-deal
focus on commercials or a low regard for company, rather than working together for
HRs capability. A strong HR presence at the merged organisation.
board level helps, but is not the panacea.
Successful M&A transactions use HR to A company can take steps to mitigate these
help shape some of the major decisions issues. It should invest time to understand
and ensure big cost items can be budgeted, both companies views of the world,
such as pensions and restructuring. But measure culture at the start, analyse where
these are not the only factors to consider. the merged company needs to be and how
to get there, implement regular cultural
Culture. Culture can be viewed as the temperature checks, respond quickly to
internal brand of an organisation; how any concerns raised, and set clear links
people feel about the company and the to the return on investment (which really
principles used to address issues. Culture is possible). It is hard to imagine an area
is such an integral (albeit subtle) part of an within M&A that is not affected by culture,
organisation that common sense suggests so it is crucial to address this early on.
it should be a fundamental consideration.
So why is it often overlooked? Among the Communication and buy-in. Human nature
reasons cited are that culture is too difficult
can lean towards voicing negative, rather
to analyse and there is no tangible return on
than positive thoughts. It is therefore
investment for doing so. Neither of these imperative that communication with
assumptions is correct. employees is not left to chance, to avoid
unhelpful messaging. The aim should be to
Cultural differences can arise in many take employees through the engagement
areas, including: companies placing greater steps of awareness, understanding, buy-
emphasis on employees than shareholders; in and then ownership of the changes. At
retaining control rather than delegating the start of discussions, a clear, structured
autonomy; operating a lean, rather than communication plan should be in place
large employee-driven operational centre; which covers identification of stakeholder
or being cost, rather than employee-driven. groups, positive communication
The risks associated with these differences ambassadors, appropriate communication
include: different interpretations of channels and estimated communication
company strategy from board-level dates. Getting business buy-in is vital,
downwards, dividing leadership; poor particularly given the sensitive nature
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of HR changes. Aside from employee performance and a focus on resignations

communication, roles and responsibilities surreptitiously geared to pay-out dates.
across the integration team should be All in all, this is not a sure-fire way to
clearly defined, to eliminate cross-over or improve morale, and definitely not a time
gaps. to take a broad-brush approach. The
company should ask itself what the new
Linked to culture again, two merging entity wants from its employees. It should
companies can place different levels decide whether its employees are central
of importance on communication. For or peripheral to the organisations goals. If
example, one may have 90 percent of its the former, an employee retention strategy
communications focused externally while is a must. Even if the latter is the case, the
the other has 90 percent focused internally. company should make a conscious decision
This indicates opposing views of the to let employees resign, rather than leave
importance of employees versus market attrition to chance. Finally, the company
views, and appreciating such differences is should identify the major concerns
key. employees have and how it can help to
resolve them.
To harmonise or not? Some terms lend
themselves easily to harmonisation while Other issues. There are too many additional
others do not, so a hybrid of the two HR issues to detail here, but three
approaches is often sought. However, others are worth noting. Legal issues:
companies may have the required systems it is important to ensure both parties
to enable them to take on a large number have a common understanding of legal
of different terms without the need for implications and timeframes, and that HR
change. It depends on the business model. is used to provide a balanced, rather than
Considerations include the financial costs purely legal, view. A common viewpoint
of harmonisation; whether current HR should be sought. Change fatigue: a
Information Systems (HRIS) are able to company should be mindful of peoples
handle a variety of legacy terms; whether workloads and know when to bring in
current processes lend themselves easily external support to ease the strain. If
to harmonisation; and whether employees people strategies are at the heart of the
are used to change or likely to have an business, the warning signs are more
adverse reaction that outweighs any gains apparent. Project management skills: this
of harmonisation. includes understanding costs, benefits,
milestones, risks, issues, dependencies,
Reward / retention. A common mistake resource planning and stakeholder buy-in.
when devising retention strategies is to The same rigorous standards should be
focus solely on financial rewards. This can applied regardless of whether the company
backfire, with employees viewing bonuses is being acquired or vice versa.
as a given rather than something that
really addresses their concerns, such as Are people strategies the responsibility of
recognition from management, better HR or the business?
communication or personal development.
A poorly considered retention plan can The answer is both most companies
result in greediness, little improvement in speak about the need for HR to act as a
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business partner. The reality is that few about all parties thinking commercially
organisations achieve this, either because enough to actively support the business
the HR team is not ready to take on this strategy. By thinking in these terms, the
role, or the business has not bought into the implementation of people strategies
concept. While time is spent debating this becomes a combined effort between the
model, is the business receiving the support business and HR, rather than a painful
it really needs? afterthought.
Putting the HR business partner model Although the financials may be the primary
to one side, the key questions for HR are drivers for mergers and acquisitions, the
quite simple. Are you close enough to the people are the fuel. By forgetting to address
business to understand its drivers, peaks people-related issues at an early stage, a
and troughs? Are you helping the business company is forgetting to fill the tank up
achieve its goals? Are your business with petrol before it starts a long, and often
relationships formed out of a defined arduous, journey.
structure, or an ability to proactively
engage with people, regardless of a
prescribed role?
Sean Wells is a partner and Samantha
A good HR approach is about more Barklam is HR M&A lead in the Financial
than dealing with legal issues. It is Services Practice at Atos Consulting.
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g Maximising deal value through the human side of

M&A integration
by Timothy Galpin
After the downsizing and cutbacks of 2002 Among the most critical, but under-
and early 2003, M&A activity now rivals managed aspects of integration,
the dealmaking pace of the late 1990s. are: (i) development of an effective
Executives who were part of that earlier Newco culture based on the integrated
M&A period may believe they know how to companys strategy; (ii) the retention and
execute a successful merger or acquisition, re-recruitment of key talent; and (iii)
but M&A deals often do not achieve the communication about integration progress.
strategic objectives trumpeted in their
initial announcements. Indeed, numerous A vivid example of culture issues hindering
deals result in a net loss of value, from deal performance is the 2000 AOL-Time
Quakers ill-fated acquisition of Snapple Warner merger, which has yet to add
to the failed DaimlerChrysler merger that shareholder value in large part because
dominated recent headlines. But why? of a culture clash between the two
companies. Given the key role cultural
Although subpar M&A results can be integration plays in the overall success of
attributed to several factors, from too high an M&A deal, executives must achieve
an acquisition price to a bad strategic fit, better performance in this critical area.
the central problem is poor integration, The merging of two cultures depends first
particularly on the organisation and and foremost on a clear articulation of
people aspects of the deal. Integrating one the Newcos strategic goals. Once those
business with another is highly complex, goals are set, they provide the foundation
even for the most experienced acquirers, for the Newco culture. For instance, a
and companies must manage the process company with a strategy focused on service
exceedingly well to succeed. Unfortunately, excellence will want its employee and
in the University of Dallas Graduate School management behaviours to consistently
Of Managements recent M&A survey reinforce that commitment.
(including 124 executives and managers
from 21 different industries), 63 percent Shaping organisational culture, however,
of the respondents rated their companys can seem like a frustratingly vague task. To
integration efforts average or below reshape culture in order to serve a Newcos
average. Equally troubling, two-thirds of strategic goals, management can employ
the executives said their newly merged an operational description of culture
company took at least one year and in that segments it into 10 key elements:
some cases three to five years or longer to organisational structure, staffing and
achieve full integration, during which time selection, communications, training, goals
employee anxieties and misaligned cultures and measures, rewards and recognition,
damaged productivity, performance, and rules and policies, ceremonies and
customer relationships. events, decision making, and the physical
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environment. A focus on integrating these on during integration. To maintain their

10 cultural components, as well as on the engagement, the company should keep
more informal aspects of culture (e.g., key people in the loop by involving them
executive teaming and social networks), in the integration process. Moreover,
provides management with a tangible and employers make a big mistake when they
comprehensive approach to moulding the do not share information just because some
culture of the Newco. integration decisions have not yet been
made. Accordingly, frequent updates on
In addition to the cultural issues that are the integration process and progress can
created by mergers and acquisitions, when go a long way toward retaining and re-
a company announces a deal, the ensuing recruiting key talent. Finally, people need
turmoil leads managers and employees to feel both pride in their day-to-day work
alike to turn inward. They focus far less on and satisfaction in playing an important
their job responsibilities and customers role in the Newcos success, making it
than on their me issues (Will I have a critical to recognise significant employee
job? What about my pay and benefits? contributions to tough integration tasks.
Who will my boss be? What about my
location?). In this uncertain environment, An excellent example of retention and re-
headhunters seize the opportunity recruitment results that can be achieved
to lure away key talent. And even if comes from the integration of two major
good performers stay, their emotional software firms. Silicon Valley-based
commitment to the organisation often Macrovision set a target of 80 percent for
fades, which can be as devastating on employee retention during its acquisition
Newco performance as actual departures. of Chicago-based InstallShield. Using the
Therefore, management needs to make retention and re-recruitment approach,
retention and re-recruitment (emotional Macrovision actually achieved a retention
re-engagement) of top performers a central rate of over 95 percent a remarkable
priority during mergers or acquisitions. figure that accelerated integration
A five-part retention and rerecruitment and saved the company considerable
approach is critical: (i) identify key people; expenditures.
(ii) quantify what the impact of their
departure would mean (e.g., a loss of key Finally, when it comes to deal
clients or knowledge about a core product); communications, management must first
(iii) identify their needs; (iv) develop and act be aware of the killer phrases frequently
on a plan to meet those needs; and (v) draft used during M&A. Unfortunately, these
a contingency plan in case key people do phrases are voiced time and again from
leave. management about the deals they are
doing. The most common killer phrases
Too often the easy answer to retention and the realities behind them are
and re-recruitment is a stay bonus. But identified below. Any of these statements
the process cannot end there, as key talent alone can be a value killer. Two or more of
have other needs that may go overlooked, these statements together are a quick and
leading to frustration and resentment. powerful route to destroying deal value.
Beyond stay bonuses, key people want As soon as one or more of these phrases is
to feel included and know what is going uttered by anyone who has a direct impact
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on the success of a deal, a caution flag progress provides people with a sense that
should go up: management has the integration effort
under control.
(i) This is a merger of equals. There is no
such thing. In order to get the most value out of deals,
(ii) It is too early in the deal to begin the mandate is successful integration of a
planning for integration. It is never too targets operations, systems and people.
early. The key risk is that the organisations fall
(iii) We dont need to tell the employees apart rather than join together destroying
anything until there is something to tell. value. And, the market is unforgiving.
There is always something to tell, if not Given the resurgence of M&A activity
decisions, at least integration progress today and the high volume of deal activity
along the way. expected in the future, organisations
(iv) Well freeze the organisation for at must reassess both their existing M&A
least a year, and once things settle down integration capabilities and future plans
well start integrating. Or, Well ease to include the people matters. Companies
the changes in. Slow integration only deal processes cannot simply be limited
elongates the inevitable productivity drop. to assessing and integrating the financial,
(v) Now that the transaction is complete, operational and technological aspects of
the deal is done. Nothing is further targets. Companies must also be able to
from the truth. In fact, the real deal is just conduct thorough cultural due diligence
beginning. and integration. Likewise, companies must
possess the ability to quickly and effectively
In any merger or acquisition, it is virtually develop and execute M&A retention and re-
impossible to be seen by everyone involved recruitment plans that fully account for the
as being totally fair. The difficult issues needs and concerns of key talent, enabling
that must be dealt with during integration them to keep the best people on board.
include making and communicating key Moreover, management must frequently
decisions about: organisational structure, communicate integration progress or risk
reporting channels, spans of control, roles the rumour mill taking over and distorting
and responsibilities, as well as the selection the information that employees, customers
of people, processes, and systems. There and shareholders receive. Building strength
are hardly ever straightforward answers in these areas paves the way for faster,
to these and other integration decisions. more effective integration, and better
But senior management must make overall Newco performance, ultimately
decisions quickly (with prudent speed), maximising deal value.
communicate those decisions, and stand
behind them. Otherwise, employees,
investors and customers get the message
that top management is disorganised Timothy Galpin is an associate professor at
and indecisive, and that the merger lacks the University of Dallas Graduate School
leadership. Even if key decisions have of Management and a senior fellow at
not yet been made, communicating Katzenbach Partners, LCC.
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g Post-deal soft skills in emerging markets
by Nick Hood
Contemplating a knock out acquisition in in the new location. First, the acquirer must
a gloriously tempting market in a growth question the ability of its IT department
economy in Eastern Europe, Asia or or support function to carry out this task.
Africa? Salivating at a non-price sensitive It needs to be honest about their skills,
commercial environment, where there if there are any doubts, turn to outside
is no pressure on margins and where the specialists who can demonstrate a track
competition is either non-existent or totally record.
disorganised? Dreaming of a world where
there is no ridiculously employee-friendly Most of all, the acquirer should be gentle
legislation and where money-laundering or with the staff in its new acquisition, who
antitrust rules are not even a twinkle in the may not be comfortable in cyberspace
eye of the local politicians? or even Excel. Not everyone checks their
emails constantly and understands why
Doing the due diligence and closing deals their acquiring firm might be impatient at
in emerging markets can be tough but the slightest delay in replying to questions.
the upside is the endless high returns and They are also highly unlikely to understand
interesting places to make business trips. the intricate politics and protocols of email
Isnt it? circulation lists and blind copying.
Actually, the most important and really IT is only the start of the communications
challenging part is: making it work. And the agenda. How will the acquirer keep in
questions are endless. touch with the management of its far-flung
acquisition? The one absolute rule is that
How far should the foreign acquirer try to somebody has to go somewhere, because a
integrate its new toy? Imposing its standard strategy of video- or tele-conferencing can
of financial and commercial reporting is one only send one message: that the acquirer
thing (and not an easy one), but what about does not believe its new colleagues are
IT, HR and all the other elements of how the sufficiently important to see face to face,
mothership is run? or their market isnt worth keeping in touch
with first hand.
IT and communications dominate business
life in all developed jurisdictions, but even The next issue is whether the acquirer will
in these sophisticated days, replicating the go there regularly or decide to disrupt
instant access and hyper-speed interaction local management by asking them to visit
we all take for granted will be difficult. The instead. Psychological common sense
more complex or modern an acquirers suggests that the constructive thing is to
systems are, the greater the risk they give the subsidiary the advantage of home
cannot be introduced easily or effectively turf, if only because it will be more at ease
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and the acquirer will gain huge insight uncomfortable acquirer should facilitate
from seeing them operate in their own open discussion with local management
environment. It is also extremely important and try to find another way of preserving
to avoid the seagull management key relationships, or toning down the worst
technique: flying in briefly and dumping excesses. Sometimes local management
toxic management waste from a great share these concerns and may welcome
height. assistance in changing things.
Language is a key issue. Using English as Management structures can be puzzling.

an example, even if local staff can speak it The tendency is for quite flat hierarchies,
well, there will be subtle differences in the with many people apparently reporting to
use and meaning of words, which takes one or a small number of decision makers.
time to understand and may cause major Simplistic reviews of job specifications can
misunderstandings. No one likes using be wildly misleading. An acquirer must not
interpreters, but there are times when it accept what it is told initially at face value;
is more sensible than forcing local staff it must dig deeper and find out what is
to struggle along in their third or fourth really going on. There will be community
language. and family considerations, many of them
unstated. In one example, the key individual
in a vital section of a textile mill was not the
foreman, but the cleaner, who was more
senior in the relevant religious community.
Many such acquisitions falter because

Corporate governance norms need to be reviewed in buyers fail to transfer their skills. In
the context of local best practice. emerging markets, this is a strange
oversight, which condemns the local
management to frustration and the
acquirer to endless disappointment at
ongoing underperformance. So creating
a workable program for training and
upgrading local staff is a must. This does
Corporate governance norms need to not require the involvement of a large
be reviewed in the context of local best number of people if key individuals are
practice. An acquirer may not like what it identified who can pass on what they
sees especially how the wheels of business learn, preferably down through a number
relationships are lubricated but a knee- of management generations. Short or
jerk rejection of commission arrangements medium term staff secondments back to
will be highly counter-productive. The the buyers home base can be particularly
acquirer should try to understand the true effective.
nature of these practices and judge them
against the market in which they operate. An acquirer has a serious decision to make
Are they out of line? How they would about whether it is going to deploy a spy
be perceived if they reached the public in the cab, possibly by sending one of its
domain in a media-unfriendly way? An own people to work in the local structure.
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Alternatively, it can hire an independent if local management feel a genuine part

local. If it decides to use this technique, the of the process, their active and positive
individual will have to be a special animal participation is much more likely.
with an unusually well-developed ability
to empathise with local concerns while The motivation and behaviour of staff are
remaining objective. at the root of all business success. If this
is true, then how much more important
If the acquirer opts for an outsider, it should it must be to get the human side of an
think twice about choosing a classic ex pat acquisition right in the emerging market
who originates from its home jurisdiction. context.
Some are very good and provide the ideal
mix of understanding both environments The first concern that local staff will have
and acting as mediator over the inevitable is whether their jobs are safe and if their
disputes. But far more are past their sell-by pay will change. Next come the usual
dates and have a distinctly short shelf life rush of questions about changes in the
on any particular assignment. Far better to management and reporting structures,
use a good, independent local executive. whether they will be expected to learn
another language, and so on. These are the
The pace of integration needs careful easy issues.
consideration. Two instincts predominate.
The first is to throw all the balls in the
air at once, like some sort of demented
management juggler. Dictats and policy
pronouncements rain down indiscriminately Many emerging jurisdictions have delicate
from head office, usually causing panic and community and family structures, entrenched
confusion.
concepts of honour and face, fundamental
Other acquirers seem dazzled by the thrill religious principles and impenetrable local political
of the chase and paralysed at the moment
of capture. The gruelling due diligence considerations.
process and interminable price and contract
negotiations are followed by very little.
Days stretch into weeks and then months,
with local management wondering what Much more complex is what the acquirer
to expect and not knowing whether they is not asked or told. Many emerging
should be doing something different. jurisdictions have delicate community and
family structures, entrenched concepts of
The sensible strategy lies somewhere honour and face, fundamental religious
in the middle. A pre-deal dialogue is principles and impenetrable local political
necessary to explore what needs to be done considerations. These are just as important
quickly, what is a medium term objective in business as they are in local micro-
and what is pie-in-the-sky fantasy. They economies in the developed world, where
may not agree with everything that an a major enterprise can dominate a village
acquirer wants to do, and these objections or a small town, or indeed a major city like
should not be accepted at face value, but Detroit with its auto industry culture.
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These considerations are why using implementation is a phase which never

experienced but independent local ends, it just changes as familiarity with the
business people and professionals as acquisition increases.
intermediaries can be essential and why
rushing into decisions affecting local staff An acquirer should remember that it is not
is often so unwise. Time must be invested just buying a business and a bag of assets
in understanding these aspects and being and liabilities. It is investing in people and
seen to respect cultural imperatives, while the success or failure of the deal will depend
still making sensible decisions. But be firm on how it treats them. It will also dictate
as well as reasonable, because weakness how stressful the stewardship will be.
will not be respected. Investing time and quality resource in pre-
planning and implementation, will allow
The final recommendation to buyers is to the acquirer to earn a considerable return,
start the planning for the implementation not just in financial terms but by avoiding
phase as early as possible and to take it damaging management distraction.
seriously. Experienced players say that
they allocate as much time to planning
the post-deal phase as they do to the
due diligence and contract negotiation Nick Hood is executive chairman at Begbies
processes combined. They also believe that Global Network.
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g IT integration challenges in M&A
by Graham Smith
In 2007 over US$4 trillion was spent on and quality expectations therefore weigh
M&A activity across the EMEA region heavily from the top down.
and the US alone, according to Dealogic.
Alongside the expertise, synergies and M&A is often highly visible and failures are
economies of scale driving M&A deals, well documented. This holds both positives
hidden risks lie just beneath the surface. and negatives for the implementation of IT
Failure to address these risks before systems. Making sure IT systems go live at
committing to a merger can see companies the date stipulated is vital to avoid media
waving business benefits goodbye and criticism. However, this can mean that time
being left holding a poisoned chalice. allocated for testing is reduced, which may
lead to the deployment of systems that are
Business reports estimate that between fraught with problems. The negative impact
50-70 percent of transactions fail, with of failure can be catastrophic. This prospect
two problems cited most frequently. First, is usually enough to deter companies from
cultural disparities and an inability to allowing such an outcome and, more often
integrate different working styles. Second, than not, testing is undertaken. But what
the post-merger integration of IT systems. are the key areas to address?
The integration of IT systems is a tough Organisations often encounter problems

challenge; three-quarters of companies maintaining business continuity and
involved in M&A report problems. IT is reducing disruption throughout the
central to the business function, supporting transition period. Irreparable reputation
both operational and ancillary activities. damage can be done as customers
Lost revenue resulting from a poorly suffer from using unsteady, inefficient
executed IT integration strategy and applications that are the result of poor
subsequent non-functioning systems integration.
can be huge up to $10m a day for some
organisations. Industries solely reliant The situation is exacerbated by the fact that
on IT businesses can come to a complete new users may be using unfamiliar systems
standstill. and further slowing down transactions.
Sufficient staff training is required to
The main issues that organisations face overcome this and manage consumer
when merging their IT systems include delays. Having new users on a system
maintaining continuity, data migration and that is under the strain of redevelopment
compliance (including the related security must be managed in a structured way
and political implications). Merger ROI is of or the business will suffer. This can be
the utmost importance, so the integration compounded by additional defects being
simply has to succeed; pressure deadlines reported that are, in fact, modifications to
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the systems. Furthermore, additional staff achieve this, security testing must be a key
put an increased load on systems, which component of the testing phase.
may cause them to crash under the weight.
Sufficient load and performance testing Protecting consumer data goes further than
ensures that systems are equipped to cope retaining customer satisfaction it is also a
with unexpected numbers of users. Without legal requirement. Adhering to mandatory
it, hidden problems may be uncovered regulations is becoming increasingly
when it is too late. important as more domestic, European
and global legislature must be adhered
The operational change that must occur to. The Markets in Financial Instruments
during or after an acquisition involves Directive (MiFID) and Sarbanes-Oxley
significant data migration, whether are just two financial examples, while
to an existing or entirely new system. the Payment Card Industry Data Security
The information will consist of sensitive Standard (PCI DSS) is central to retail
corporate and customer details, the payment security. Management must also
integrity of which is of the utmost be aware of laws in place which govern
importance. When integrating systems any markets it may be acquiring in. It is
there is potential to lose data upon transfer the organisations responsibility to enforce
and organisations should do everything in these regulations by having systems
their power to ensure this does not happen which enable compliance. The integration
to avoid negative repercussions. process must therefore take into account
mandatory legal requirements and build
Loss of data can occur due to them into development or modification of
incompatibilities in the way in which the systems.
different systems store information. Data
must be converted into a format which will
be recognised by both systems and usable
when necessary. Ensuring the systems
are capable of achieving this requires
careful definition of requirements and a Protecting consumer data goes further than
structured data migration process. Testing
at each stage of the program highlights
retaining customer satisfaction it is also a legal
problems and helps to protect against data requirement.
corruption and subsequent loss of crucial
information.
Another concern in migration projects

is the security vulnerabilities that can be
created when developing new systems. This The desired result of an integration
is especially pertinent to financial service program is to have an IT operation that
organisations due to their copious amounts is effective for both internal users and
of sensitive personal information. Migration external customers. Usability, functionality
of data must therefore be carefully and providing the required data output are
executed in order to maintain integrity and vital elements of the IT systems. Assuring
ensure security weaknesses do not occur. To quality is essential to meeting this target
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and must be conducted continually, and it is communicated efficiently.

lest problems go undetected and cost
substantially more to rectify at a later date. Top-level management of a merger or
acquisition is very stressful, involving due
Involving the Chief Information Officer as diligence, integrating corporate cultures
early as possible in M&A deals ensures that and defining the future direction the new
decision makers are fully informed about company. Outsourcing the IT integration
technological requirements. is one way of alleviating the pressure
and providing objectivity. Whatever the
In past mergers, up to 50 percent of decision, acquirers should take time to
integration costs have been incurred by IT, fully consider what is required from an IT
massively impacting returns generated by standpoint, as this can mean the difference
the deal. As such, the realisation of benefits between success and failure.
post-merger can largely be attributed
to the successful management of IT
integration. Companies need a thorough
implementation plan to ensure that IT is a Graham Smith is European head of client
central consideration in the M&A process engagement at AppLabs.
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CHAPTER eight:
Environmental issues
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g Climate change and the cost of carbon:

incorporation into M&A deals
by William Butterworth and Jaideep Das
While global markets remain uncertain, new emissions trading regimes in Europe
there seems little doubt that the need for and in the US.
long term carbon reductions and a more
robust management of climate change Inevitably this conjecture, alongside
issues in general is now firmly entrenched existing carbon constraints, is starting to
on political agendas. This was evidenced have an impact. In our experience, climate
by the run up to the United National change is a material issue in around one in
Climate Change Conference in Bali and in five deals. A variety of approaches can be
the constraints which emissions trading used to address climate change risk, not
schemes and other measures are starting to only in the most energy intensive sectors
impose on different business sectors. such as power generation, metal and
cement manufacturing but across a whole
A key question for investors is how might swathe of other businesses, which both
new, post Bali carbon reduction measures, consume large amounts of energy and have
impact on target businesses. This is most a pronounced carbon footprint. Questions
notable in the US, where the political may cover anything from the potential
climate looks certain to change on this cost of emissions trading for US power
issue, but in other parts of the world the generators to the impact of flooding from
pressure to take action also continues to storm events in China.
grow. It has been estimated that, globally,
it would cost about US$1.6 trillion a year to A growing number of deals now include
reduce carbon emissions by 50 percent by at least an element of carbon and climate
2050. change risk screening. Initially this
screening revolves around asking questions
Perhaps not surprisingly, given the above, to determine the importance of energy use
the due diligence process surrounding and carbon emissions as well as evaluating
M&A can be an important catalyst for the wider potential physical impacts of
screening the potential impact and cost of climate on the business. Flood, sea level
climate change issues on different facilities rises and drought, for example, are all
as well as the scope for achieving new relevant in this context. Where issues look
efficiencies going forward. Purchasers and material a more detailed analysis with
vendors will increasingly find themselves projected costings is likely to follow.
taking account of energy and climate
change risks which were previously The initial screening will depend on the
deemed either not relevant or material in nature of the business and will consider
the context of a successful transaction. As energy and climate change risks alongside
such, they may have to make assumptions a range of others. In the case of a power
about the impact, for example, of tough utility or energy intensive manufacturing
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company, for example, the introduction or introduced going forward.

tightening of emissions trading could have
a significant impact on the business plan. Insurance costs may also become an issue
If a company is not currently subject to a as part of this climate change screening
trading scheme this may become the case process. Premiums may be affected not
in the future, for example with the UKs only by serious climate risks for example
carbon reduction commitment and similar a facilitys location in or near a flood plain
schemes in other countries. but also by the risk of serious business
interruption. Another recent M&A project
The cost of carbon regulation takes on related to an oil refinery which relied
an even greater significance in the face on its local river as a primary means of
of rising energy costs. A business which transporting raw materials and products.
effectively manages the former is likely After two consecutive summers of very low
to have an influence on the latter with a water levels in the river, the business was
growing number of companies asking for facing material additional distribution costs
advice in this direction as part of the M&A and potential delays using alternative road
process. In one example, an energy price and rail links. These issues were factored in
trend analysis recently looked at what a as part of the transaction.
companys current annual energy bill of
approximately US$50m would look like in In summary, climate change issues are
the face of projected increases over the now relevant to the M&A process across a
next few years. The analysis was relevant range of business sectors. If political intent
not only to the transaction value of the is turned into genuine action there will
business but also to the consideration of inevitably be a cost to business as well as
future investment decisions to achieve opportunities for those who plan for, and
greater energy efficiency and carbon where appropriate invest in, a future carbon
compliance. Where energy may once have constrained economy.
simply been a line item on the balance
sheet, there is now a fundamental need
to understand where it is coming from,
future costs and sources, how it is being William Butterworth is a partner and Jaideep
used and what alternatives and new Das is a senior consultant in the Corporate
risk mitigation approaches could be Risk Team at ERM.
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g Identifying opportunity in the carbon era
by Tim Clare
As recent renewable energy acquisitions investment opportunity as shown by,

show, there is opportunity and not just for example, Montagu Private Equitys
liability in the challenge of tackling climateinvolvement in Cory Environmental and
change and implementing strict new waste now in Biffa. The waste management
and chemicals legislation. Environmental industry has the enviable position of being
due diligence in the future will extend to able to capitalise on increasing strictly
become part of the target selection and levels of legislation that are forcing both
business plan appraisal process. households and businesses to recycle
more. However, whereas with waste the
Scottish & Southern Energy plcs legislation is currently forcing greater
acquisitions last year of the Irish wind farm levels of recycling than public or business
developer Airtricity and Segros Slough Heat participation would do on its own, the
& Power, made it the British Isles biggest explosion of interest in carbon over the
renewables generator. It demonstrated the last two years as individuals and business
increasing value seen in the green power seek to reduce or neutralise their carbon
sector and the fact that it now forms a key footprints has fuelled the market for
part of the strategies of the tradition power renewable energy beyond the level which
generating companies. Indeed it was a sign current legislation or policy would trigger
of it now being mainstream. alone.
Prior to this, Terra Firmas development of The above, and the development of
the Infinis business for example, showed specific energy saving equipment, are
that many foresaw a significant area of among some of the more obvious areas
opportunity. In 2003 it acquired the Waste of opportunity. The investor will still find
Recycling Group and a year later Shanks opportunities here, ranging from lower risk
landfill and power generating arm. To investment in the ever increasing number
many this appeared to be primarily the of specialist funds (although some have
creation of a significant waste management recently experienced some falls) to higher
business, but the sale of the waste recycling risk provision of venture capital to new,
operations to Spanish construction untested technologies. With the latter some
company FCC for 1.4bn, showed that in are drawing parallels with the dotcom era
fact Terra Firma had created a renewables as more opportunities are being sold at the
business just as market demand was idea or concept phase. The green pound
growing. Flotation is now likely to reveal will provide many strategic opportunities
the true value of the investment. over the next decade. But spotting them
requires a clear framework and also a great
This is not to say that waste management understanding of both sustainability and
does not still represent an attractive the market as well.
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Do not think carbon is gone. Maybe some who can eliminate likely substances of very
of the opportunities for renewables seem high concern from the supply chain today
less attractive today. But low carbon and tell customers about it.
products provide a great opportunity
and the opportunities for innovation and Perhaps the optimum scenario is spotting
different brand proposition are huge. an existing business with existing products
Reducing carbon emissions by 60 percent that have the potential to see significantly
in the UK by 2050 is so radical that many increased demand due to climate change.
struggle to conceive what this will require. Again the greatest rewards should go to
But those who can think differently those who react quickest, be it to modify
and beyond the immediate day to day their product or simply communicate its
pressures will create strategic value environmental credentials. Suppliers of
in spades. In the commercial property heating, ventilation and air conditioning
sector, Energy Performance Certificates equipment who have been quick to market
will provide a consistent rating scheme more efficient products are currently seeing
across the industry. How long before dividends as legislation and market demand
rateable values are based on the EPC? In (what you might call the Marks & Spencer
the electronics sector, creating innovative (M&S) factor) have together forced the
end to end carbon stories for products design of increasingly efficient commercial
will demonstrate real leadership and new buildings. Those who have invested in LED
markets. And how much opportunity exists lighting systems are enjoying a particularly
for the firms to commercialise robust positive period. The technology is now in
carbon capture, zero emission vehicles, and vogue as suppliers extol the twin benefits
the next generation of IT that reduces the of low energy demand and low production
need for travel. of latent heat, meaning that less cooling is
also required in those buildings in which it is
Carbon is the game in town today, but installed.
there will be other drivers. The UK launched
its water strategy in March. The Code In searching for the next areas of
for Sustainable Homes which all new opportunity, investors also need to
developments will need to follow will consider which businesses will benefit
require radical low water products as well from the environmental and societal
as low carbon. With the UK forecast to changes that climate change will bring,
become much drier in summer, how will rather than simply focusing on the
this provide opportunities for low water technologies being developed to reduce
consuming equipment and for companies carbon, waste and other pollutants. At
that can produce products using low water the extremes, dependant on geographical
techniques? location, flooding or water shortages (or
both) will require major expenditure on
In chemicals, the EUs REACh regulations infrastructure. At a general level, milder and
provide the most substantial changes to shorter winters in temperate climates may,
chemicals legislation seen in the last 50 for example, increase productive time for
years. REACh creates opportunities for the the construction industry but reduce the
manufacturers of safer chemicals. It also need for specialist winter equipment. The
provides strategic opportunities for firms possible individual results and opportunities
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of climate change are potentially endless issues, usually occurs at a late stage of
and will require a significant amount of the transaction and only rarely extends
future gazing. Crucially, it will be essential into an assessment of the business
to ensure that good science forms the strategy. Environmental due diligence in
basis of that analysis to ensure that only the future will also form an element of the
viable opportunities are pursued. initial appraisal of a business and focus
on strategy rather than facilities. In the
Beyond the specific search for direct last 18 months a number of household
carbon related opportunities, the analysis names, most notably M&S, have seemed
of any target business should now involve to seize and driven forward the agenda.
an assessment of its vulnerability to and But there are vast differences between the
awareness of environmental issues, and ground occupied by the likes of Marks &
carbon in particular, at the earliest stage. Spencer, who have developed a proactive
While the legislative drivers, although strategy based on good science and the
spreading in coverage, are not yet directly chasing pack for which many buying carbon
affecting significant elements of the neutrality via offsets has effectively been
economy, the potential impacts on demand done as a defensive strategy. Not every
caused by the changing environmental company can or indeed should embrace
conditions described above, have the environmental issues in the way that M&S
potential to affect all. A truly forward has; but it will be crucial that an investor
thinking management team should have becomes comfortable that a target has
looked at climate change and asked the undertaken that risk analysis and that the
question as to whether it provides an area value judgements it has ultimately made
of opportunity or more crucially, a threat are robust and leaves the company fit for
to its current markets and therefore its the future.
business plan.
Traditional environmental due diligence, Tim Clare is technical director, Environmental

primarily focused on site based Due Diligence, at WSP Environment &
contamination and end-of-pipe compliance Energy.
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g The affect of market turmoil on the treatment

of environmental liabilities in transactions
by John Simonson
Although private equity deals may have which support compliance not to mention
slowed down given the recent credit the staff and resources that may be needed
squeeze, corporates have remained now and in the future. This is true for
remarkably active; not only as acquirers in facilities in a whole range of sectors, from
current transactions but also as would-be power generation to food manufacture.
vendors which are preparing for a return to
normal business in 2008. New players are coming into the market,
notably from BRIC countries (Brazil, Russia,
While the market is clearly more cautious, India and China) and from the Middle East.
there is little sign of stagnation. Rather, in Companies from these countries, including
certain areas there is a change in emphasis those backed by state-owned sovereign
and new concentrations of activity. Mega funds, are well financed but need to
private equity deals, for example, may have address EHS regulatory and reputational
disappeared, but clients are retaining a pressures in different parts of the world.
sharp mid cap focus and paying attention Understanding the timing of EHS costs and
to key issues which will ultimately provide the assurance systems which need to be put
them with a successful exit when the time is in place has become an important part of
ripe. the process.
Trade buyers are doing deals in a less In our experience, around one in five deals
competitive environment. There is a now have material climate change issues
growing trend among corporates, most and this trend is expected to continue
notably in Europe, to seek advice on issues whatever the fluctuations of the market.
prior to a sale, in expectation of a market Issues can range from energy use and
upturn in 2008. By ensuring that facilities tighter emissions regulations to the
are compliant, and making themselves location of facilities. The challenge for
aware of EHS and climate change issues investors is to factor in climate change as
that could become material, vendors are part of the overall investment. A company
seeking to ensure full control of a future may need to look at holistic regional or
sale once the process is underway. country climate change risks, particularly
companies in extractive industries which
Focus on assurance are under pressure to meet the demand
for scarce resources. New approaches and
Companies are taking a longer, harder look screening tools are being developed to
at environmental issues. Rather than simply mitigate these risks. As markets tighten
ticking off compliance items, there is a there is a greater onus on cash flows with
growing desire to look behind the scenes EHS costs and future requirements are
at EHS assurance systems and processes receiving more scrutiny.
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Another upshot of the credit squeeze is that or too little) water, are helping, for example,
some private equity houses are feel more to bring the last of these issues sharply into
exposed on EHS liabilities because they are focus.
investing more of their own money. This
in turn is starting to have an impact on the In short, the market as a whole is taking
way they look at EHS issues again with stock and buyers are paying close attention
attention to the timing of individual cost to the timing of individual costs and
items and assurance issues. assurance issues in a whole range of areas.
Furthermore, new players are coming into
In fact, the market slowdown offers the market, all of whom must at least take
the opportunity to look in more detail EHS and climate change issues on board as
at how a business could benefit from a part of the dealmaking process.
more strategic EHS focus. This can cover
resource-related issues such as energy use,
waste and emissions to wider, areas such as
trading carbon credits and the geographical
location of key facilities. Concern over John Simonson is the global director of M&A
climate change and particularly (too much at ERM.
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CHAPTER nine:
Sector analysis
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g Trends in independent oil company M&A
by Terry A. Newendorp and nicole Weygandt
Following a strong year for oil and gas of 40 percent, the $19.6bn Kerr-McGee
M&A in 2006, last year saw the aggregate acquisition was notable for being financed
value of deals remain steady, rising only in part by concomitant divestitures of
0.4 percent to reach US$292.2bn, while the Anadarko assets in Canada for $4bn. Upon
number of deals dropped by 2 percent to completion of the deals, Anadarko not
893, according to PricewaterhouseCoopers only increased its proved oil reserves by 32
Oil & Gas Deals Annual Review 2007. percent and its proved natural gas reserves
Although these figures suggest little by 45 percent, but also more than tripled its
change in the industry over the past year, undeveloped acreage. The company is now
the dynamics in the oil and gas sub-sectors a leading producer in the Rockies and the
have changed significantly. deepwater Gulf of Mexico, with share prices
reportedly rising nearly $10 to over $60
In 2007, the refining and marketing or since the acquisition was announced.
downstream sector witnessed average
deal values grow by 120 percent, led Developments on AIM
by the largest M&A deal of 2007, the
$20.1bn leveraged buyout of Lyondell In contrast to Anadarko, the 109 oil and
Chemical Company by Basell. In contrast, gas producers listed on the Alternative
the average deal value in the exploration Investment Market (AIM) of the London
& production (E&P) or upstream Stock Exchange are exclusively small- and
segment fell by 27 percent, according to mid-cap independents operating early
PricewaterhouseCoopers. Although this stage upstream assets, with an average
difference can be partially attributed to market capitalisation of 94m ($184m).
the lack of mega deals on the scale of the This places these companies squarely into
$32.2bn Statoil-Hydro merger in 2006, the the range of the fastest-growing segment
overall decline in deal value in 2007 also of the oil and gas M&A market the deal
reflects a shift away from industry majors range below $250m accounts for nearly 80
towards greater M&A activity among percent of all oil and gas M&A deals, with
independents non-integrated oil and gas 25 percent year-on-year growth in the value
companies that receive nearly all of their of deals. M&A among these companies is
revenues from production at the wellhead. motivated both by financing needs and the
desire to develop economies of scale.
Even among high-priced deals,
independents are playing a significant role. With upstream development costs having
Anadarkos acquisitions of Kerr-McGee nearly doubled since 2005, according to
and Western Gas Resources each ranked the IHS/CERA Upstream Capital Cost Index,
among the 10 largest oil and gas M&A deals the smaller independents with limited
of 2006, totalling $25bn. With a premium cash reserves are having greater difficulty
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developing their acreage and establishing number of exploration blocks it holds in the
positive cash flow. The global credit crunch UK offshore, according to Reuters. Encore
has greatly reduced access to capital Oil has already expressed is intention to
from debt markets, while poor shares continue to expand via both corporate and
performance of the AIM-listed oil and gas asset M&A in 2008.
companies makes it difficult to raise capital
from new issuances. Ernst & Young reports Market opportunity for NOCs
that, as of the third quarter of 2007, nearly
50 percent of AIM-listed E&P companies In addition to the growing number of M&A
are trading below their initial listing price. transactions between independents, both
Combined with the fact that, at the same corporates and assets are also proving
time, nearly 65 percent of AIM-listed E&P to be attractive acquisition targets for
companies hold less than 10m ($19.4m) in national oil companies (NOCs) oil and
cash, the small- and mid-cap independents gas companies fully or majority owned by
particularly those with low capitalisation state governments. Although NOC activity
and no producing assets are highly dropped off somewhat in 2007, NOCs spent
vulnerable to takeover. over $55bn in 2006, or nearly 35 percent of
global oil and gas M&A spending.
Demonstrating this vulnerability, Wham
Energy was acquired within two years This drive to acquire particularly
of listing on the AIM after share prices among Asian NOCs reflects the
dropped to half of their initial listing price strategic advantages M&A can provide
after the companys first well came up dry. to less efficient or inexperienced NOC
With insufficient capitalisation to absorb buyers. Apart from enabling geographic
this loss, the company was purchased diversification and entry into new asset
by Venture Production PLC, a better- classes such as unconventional oil and
capitalised firm with its own production, in gas, corporate acquisitions allow NOCs to
August 2007. Tristone Capital Ltd. predicts bring in experienced personnel and gain
that nearly two-thirds of AIM-listed oil and access to new technologies. Additionally,
gas companies will disappear from the the acquisition of existing assets can allow
market over the next two years as a result NOCs to develop international operating
of their financial weakness. experience, enabling them to compete
effectively in bids for exploration blocks.
Not only are AIM-listed companies Finally, by taking over existing assets,
potential targets of larger independents particularly in the downstream sector,
and integrated companies, but there NOCs can gain access to infrastructure and
have also been a number of corporate potential customers, allowing them to more
acquisitions within the AIM, with AIM-listed rapidly expand in new markets.
companies acting as aggressive buyers. In
early 2007, for instance, Encore Oil acquired Despite the reduced level of overall NOC
four E&P companies (AIM-listed subsidiary M&A spending, some state-owned energy
of Grove Energy, privately held Virgo Oil investors remained highly active in 2007.
& Gas and Virgo Energy Ltd., and the UK TAQA, an energy investment company
subsidiary of Nido Petroleum) for a total of that is majority-owned by the government
8.6m ($16.9m), thereby quadrupling the of Abu Dhabi, spent over $10bn on seven
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transactions in 2007. These deals expanded high prices, independents and NOCs are
the companys presence internationally taking the opportunity to integrate their
into Canada, Germany, India, Morocco, operations.
Saudi Arabia, Ghana, and the UK, while
also increasing the companys role in The urge to integrate appears particularly
conventional upstream oil and gas, strong in North America, where operators
Canadian oil sands, and power generation. of Canadian oil sands projects are seeking
The company has indicated that it intends to secure capacity in complex refineries
to increase its assets to $60bn by 2012, up capable of processing their crude. These
from $21bn at present, as part of its long- transactions take the form not only of
term growth strategy. outright acquisition of refineries, but
can also involve capacity purchases or
Most notable among TAQAs deals are the exchanges of shares. In the case of Husky
Canadian corporate acquisitions, which not Energy, the company not only made a full
only introduced the company into Canadian acquisition of a 165,000 barrels-per-day
oil sands a source of unconventional oil refinery for $1.9bn plus net working capital,
production but also brought with it the but also purchased a half-share in a BP
technology and experienced personnel refinery while granting BP a stake in its
to operate these types of projects. As a Canadian upstream operations.
result, TAQA has become a leading player
in Canadian oil sands, becoming one of
the top 10 companies in Canada in terms
of proven natural gas reserves and one of
the top 12 companies in terms of oil and
gas production. It has also enabled the
M&A in oil refining and marketing is undergoing
company to pursue an aggressive reserve rapid expansion in the wake of strong refining
replacement level of approximately 140 margins, supported by a tight capacity-demand
percent well above the levels many
majors have been able to achieve. balance, and escalating capital costs.
Refining sector opportunities
M&A in oil refining and marketing is

undergoing rapid expansion in the wake In Western Europe, independent refiners
of strong refining margins, supported have been taking advantage of integrated
by a tight capacity-demand balance and oil companies divestures to increase
escalating capital costs, which reached their scale and geographic diversification.
record highs in the third quarter of 2007, Petroplus Holdings AG, for example,
according to the IHS/CERA Downstream has purchased 521,000 barrels per day
Capital Cost Index. As a result of these of additional refining capacity from
dynamics, purchasing and upgrading ExxonMobil, BP, and Shell over the past
existing plants has in many cases become year, becoming the largest independent
cheaper than greenfield development. refiner in Europe with total nameplate
As majors divest of their refining assets capacity of 864,000 barrels per day, as
and optimise their portfolios at a time of reported by Fitch Ratings. In contrast,
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Central European refining M&A has been John S. Herold Inc. show that activity in
led primarily by large regional players 2006 reached new records, with asset
such as Austrias OMV and Hungarys transactions topping $60bn along with
MOL, which seek opportunities in the less corporate transactions of approximately
competitive Eastern markets. Apart from $100bn. Although aggregate M&A figures
lower competition, these markets have the have not changed significantly, there has
additional advantage of offering higher been a dramatic shift towards lower-value
profits from price differentials between transactions involving independent oil
Brent and Urals crude oil. Privatisations and companies both as buyers and targets as
westward expansion of Russian and Kazakh global credit markets and escalating capital
oil and gas firms are adding additional costs push the industry towards greater
momentum to the European M&A markets. consolidation.
Conclusions
M&A in the oil and gas industry entered

a growth phase in 2005, when upstream Terry A. Newendorp is chairman and CEO,
transaction value more than doubled and Nicole Weygandt is an analyst at Taylor-
from the previous year. Figures from DeJongh.
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g European airline industry: value creation

through M&A
by Dr. Jrgen Ringbeck
With long term market growth forecasted acquisitions by Air France, which took
at 5 to 6 percent and benefits accrued from over KLM, and Lufthansa, which acquired
globalisation, it seems that the European Swiss, were not significant enough to
airline industry should be highly profitable. change the overall picture: M&A activity
However, the intra-European airline market in the European airline industry has been
deregulation in the early 1990s brought relatively weak during the last 10 years.
a wave of competition, and even with an
infusion of private capital, the sectors However, over the coming years, that
financial results are not up to par. Over picture might change. With further
the past decade, the European airline liberalisation and deregulation of the
association (AEA) members (mainly flag European airline industry we might soon
carriers) have seen net losses on average, face a significant wave of consolidation.
and thereby have been unable to recoup In this article, we highlight the major
their expenditure. Even in 2007, which was industry trends and drivers of a potential
very successful, all AEA members will not consolidation scenario and take a deeper
earn more than an estimated operating look at how value might be created by M&A
profit of 3bn, which is only about 4 percent in the European airline market. For this
of revenues (on average) and far below the purpose, we will use the Lufthansa / Swiss
7 to 8 percent typically required to cover merger to highlight the key factors that
the cost of capital. This is too little to satisfy drive the success of cross-country airline
future investors. mergers in Europe.
In any other sector, market consolidation Clearing the way for further consolidation
would have occurred long ago. In the
European aviation industry, however, the There are three major trends that could
number of airlines grew steadily between be the driving factors of a wave of
the time the intra-European market opened consolidation in the European airline
for EC carriers in the 1990s until 2002. market.
Despite the fact that low-cost carriers, such
as Ryanair, have entered the European The next downturn of the industry cycle.
market successfully and captured more It is becoming more apparent that such a
than 30 percent market share on intra- downturn is on the horizon. IATA, the global
European routes, only some consolidation airline association, corrected its profitability
has occurred. Due to ongoing heavy outlook for its members three times
regulation (e.g., intercontinental traffic between June 2007 and December 2007,
rights) and state subsidies, weak carriers for a total decrease of around 50 percent.
(e.g., Alitalia and Olympic Airlines) have The credit crisis in the US and increased fuel
been prevented from exiting. The recent prices also drive up the risk of an industry
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downturn after a strong 2007. The major On top of these market shifts, regulatory
flag carriers might be the potential winners issues are coming into play: competitive
in such a downturn, thanks to their long- dynamics on transatlantic routes are
term development of economies of scale fuelled by a new Open Skies Agreement
and marketing in hub-and-spoke systems. between the US and the European Union
By shaping their global alliances in the that will come into effect in April through
1990s and making more recent acquisitions, June, 2008. This agreement allows every
the three leading European airlines British EU and US carrier to fly to any destination
Airways, AirFrance/KLM and Lufthansa/ in either region. The upcoming opening of
Swiss have captured a market share of 47 the EU-US air market will kick start a new
percent of passengers carried by European game making transatlantic cross-border
flag carriers. deals even more compelling. For example,
European carriers might consider opening
New emerging competitive dynamics in the up their own US feeder service in a major
intercontinental business. This business US hub. Lufthansa has just bought a 19
has traditionally been a goldmine for the percent ownership in the New York-based
European network airlines. Fuelled by carrier JetBlue Airways, which has a strong
globalisation and resulting increased travel, intra-US network out of John F. Kennedy
especially in Asia, these markets have Airport, which may serve as feeder system
experienced high growth rates. Regulation, for Lufthansa in that market. As airlines
including restricted traffic and ownership introduce the Airbus A380, they will need
rights, has also benefited European flag to ensure that they have sufficient hub
carriers, as has the comparative weakness feeds to keep aircraft seat load factors high.
of players in the emerging markets and Moreover, Air France/KLM now has strong
the US, whose carriers even today are still incentives to build up an intercontinental
suffering from the effects of September business out of London Heathrow in joint
11. However, we expect that European flag partnership with Delta. They have even
carriers dominant position in this sector will signed a specific joint venture agreement
change soon. to share revenues and costs on their
transatlantic routes. A consolidation of the
The major US flag carriers are currently US carriers might give these types of JVs a
seriously discussing how to consolidate the larger role; it could even result in minority
intra-US industry, driven by early merger ownerships of European carriers in the
negotiations between Delta and Northwest emerging US mega carriers.
or United and Continental, and thereby
strengthen their competitive position in Continued growth from European low-
the transatlantic business. In addition to cost carriers. We expect LCCs to continue
this development, strong new players are expanding their role in the intra-European
emerging in Asia and the Middle East: market and thereby drive up further
Emirates is desperately trying to get more competition. Realistically, LCCs could
traffic rights in Europe, and even Air China gain around 40 percent market share
is planning to expand its European network in continental passengers by 2012.
quickly, seeking 12 new connections to the These private carriers have a significant
US and Europe in 2008 and 2009. opportunity if they quickly consolidate their
own market segment and thereby capture
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economies of scales in their business to However, the upcoming consolidation

strengthen their competitive positioning game might become even more complex
against the major flag carriers. These and allow convergence of the two European
economies will be increasingly necessary: industry segments: the intercontinental
Fuel price, even today, constitutes more network carriers and the low cost carriers.
than 30 percent of the total costs; price The current talks between TUI and
elasticity is high; and there is almost no Lufthansa about a merger of their LCC/
room left to drive down margins through charter businesses (Hapag-Lloyd and
operational cost improvements alone. German Wings, respectively) might result
in a fourth significant low cost player under
The shape of whats to come Lufthansas leadership. Air Berlin has
acquired the long haul charter carrier LTU
All three of these trends will clearly create and is in the process of acquiring Condor,
a difficult burden for the many smaller with the hope of creating an international
players in the European airline market. network out of Germany that combines its
strong European network with a growing
Several of the European LCC niche players, number of intercontinental destinations.
such as SkyEurope, are at risk of becoming Finally, other private carriers like AirOne
takeover candidates or being washed in Italy or Ryanair, which took shares in
out of the market. Moreover, most of the Air Lingus are amenable to looking
smaller European flag carriers, which are beyond their narrow business segment.
mostly unprofitable and undercapitalised, The upcoming wave of consolidation may
are burdened by suboptimal networks and therefore not only drive consolidation in the
the legacy cost structures of a traditional old business segment; it might stimulate
flag carrier. Therefore, they too are clear the emergence of innovative hybrid
candidates for further intra-European business models with an even higher rate of
consolidation; these include Alitalia, Iberia, return.
and LOT. Many of these carriers and their
owners are considering privatisation now The face of successful European
and are looking for private investors. consolidation: Lufthansa/Swiss
The three major flag carriers are the What are the drivers of a successful cross-
obvious candidates to drive this next border merger? How can the synergies be
consolidation round of smaller flag carriers. captured best? What are the real levers
Air France is interested in acquiring Alitalia, of value creation for cross-border M&A
British Airways may expand its minority deals in the airline industry? The best way
stake in Iberia, and Lufthansa would most to study these questions is to take a closer
likely be open for discussions with its STAR look at perhaps the most successful cross-
members. border merger to date: the Lufthansa-Swiss
merger.
Likewise, the three major LCCs Ryanair,
Easyjet and Air Berlin will probably One of the prerequisites for its success was
drive consolidation in their sector, as they a great cultural fit between the players;
currently offer more than 60 percent of the another was the positive motivation of
seats available in the European market. the Swiss management and employees
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to cooperate in the takeover: Swiss had to an estimated CHF 4.4bn in 2007. It also
always considered itself a premium carrier transformed its losses of CHF 140m in 2004
in Europe, with several customer awards to an estimated profit of more than CHF
thanks to its extreme customer focus and 500m in 2007.
commitment. But after the bankruptcy of
Swissair at the end of 2001, the company
went through a deep painful restructuring
in its battle for survival as newly founded
Swiss. This difficult period opened
the company to the idea of a win-win As a result of this deal, Lufthansa and Swiss have
opportunity through a merger with a larger
player. Former emotional and political significantly extended their market and customer
doubts became less and less important coverage.
when Lufthansa started the negotiations
again in 2005.
At the beginning, the deal did not focus

on expanding the airlines network, rather
than on operational integration and As of September 2007, Lufthansa and
cost synergies. However, it was clearly Swiss have realised more than 420m in
crafted around win-win opportunities, as financial synergies thanks to this merger;
Stephan Gemkow, the CFO of Lufthansa more than 230m of these savings were
Group, emphasised in a discussion with realised in the first 18 months after the
us. It allowed Swiss to keep its brand deal. More than 60 percent of the synergies
and its intercontinental hub in Zurich, are based on revenues. Nearly 60 percent
and expand its business as part of a of the synergies have been realised at Swiss
comprehensive Lufthansa multi-hub and therefore directly contributed to its
network. The continental traffic as well as financial turnaround.
intercontinental traffic has been aligned
carefully and Swiss customers quickly took As a result of this deal, Lufthansa and Swiss
advantage of their broader choices in flying have significantly extended their market
with Swiss or Lufthansa to international and customer coverage. However, while a
destinations (via Zurich, Frankfurt, or lot of value has been created in the short
Munich). Customers also enjoyed the term by integrated network planning and
rapid improvement of ground services sales and marketing, there are significant
and the investment in a new three-class other levers that have not been exploited
intercontinental product with modern fully until now. The merger clearly offers
equipment. The fact that the airline now the opportunity for further functional
has one of the worlds largest frequent-flyer consolidation in areas including aircraft
programs (miles and more) is another maintenance or IT. If the time is right to
compelling benefit to the customer. pull these levers in the interest of both
companies, these areas will be addressed as
As a consequence, Swiss was able to well.
expand its revenues from CHF 3.6bn in 2004
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Conclusion the Lufthansa-Swiss case shows that even

a merger with an international partner
The consolidation wave in the European can be a real win-win opportunity for
airline landscape has just started, and everyone. A merger may create value for
the urge to merge will probably become all stakeholders: the financial shareholders,
stronger. With market power and scale the employees, and the customers.
being the major drivers of future survival, There is no longer any reason to dismiss
M&A will be an important weapon in consolidation as the next move for a
winning the battle for profitability and number of European carriers.
growth in the European airline industry.
In an industry in which organic growth
is difficult to achieve, acquisitions and
financial stakes in smaller industry players Dr. Jrgen Ringbeck is a senior vice president
including smart integration strategies at Booz Allen Hamilton. The author would
will differentiate the winners and losers of like to thank Mr. Stephan Gemkow, CFO
tomorrow. of the Lufthansa Group, for his willingness
to share his personal insights on the value
In the highly political flag carrier drivers of the LufthansaSwiss merger.
environment, public pride about a countrys Many thanks to Dr. Stephan Gross, Senior
flag carrier and government interest in Associate at Booz Allen Hamilton, for
controlling air capacity and air service have supporting the author with research and
created large hurdles to takeovers. But insights on the European airline market.
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g M&A boom in the CEE telecommunications

market
by Dr. Karim Taga, Oliver Lux, Christian Niegel and Evgeny Shibanov
Strategic and financial acquirers have their empires further in 2007, Telekom
driven intense M&A activity in Central & Austria/mobilkom was active. It already
Eastern European telecommunications held operations in Slovenia, Croatia,
markets. We have observed 10 major Serbia, Macedonia and Bulgaria. To expand
transactions with a total value of 3.9bn. that footprint further, Telekom Austria/
Strategic investors were buyers in four of mobilkom secured the second largest CEE
these transactions with a total value of telecom deal by acquiring 70 percent in
1.9bn while financial investors dominated Cypriot SB Telecom Limited. CB Telecom
slightly with six acquisitions totalling 2bn. owns Belarus mobile operator MDC which
operates under the Velcom brand in
Transactions are driven by growth Belorussia.
perspectives and a desire for ongoing
empire building by strategic buyers. The acquisition market is further fuelled
Financial investors seek short to mid term by CEE and Middle Eastern operators. In
value creation potential. Three trends early 2007, the Serbian incumbent Telekom
should lead to increased M&A activity in Srbija snatched 65 percent of the shares of
CEE in the mid to long term. Telekom Srpske for 646m. A consortium
including Turk Telekom acquired a
Strategic buyers controlling stake in the Albanian incumbent
Albtelecom for 145m. Hungarys
Strategic buyers from Western Europe Telephone and Cable Corp. bought 100
are heading east in search of growth. percent of the Hungarian fixed line operator
For example, Vodafones CEE footprint Invitel from Mid Europa Partners for 470m,
includes operations in Hungary, Albania, with multiples of 1.4x revenue and 3.9x
Czech Republic, Romania and Turkey. EBITDA. Saudi Oger, based in the United
France Telecom has subsidiaries in Poland, Arab Emirates, also moved into CEE when
Moldova, Romania and Slovakia. Telefonica/ it bought Turk Telekom for 5.5bn in 2005
O2 has a presence in Czech Republic and and a 45.8 percent stake in Romanian
Slovakia, while Deutsche Telekom holds specialised mobile operator Zapp for an
subsidiaries in Hungary, Slovakia, Croatia, undisclosed amount.
Macedonia and Montenegro. Telenor has
expanded its Nordic roots by moving into Financial buyers
Hungary, Montenegro and Ukraine and it
holds a significant stake in one of Russias The largest telecommunications
mobile operators. transaction in 2007 was conducted by AIG
Capital, which acquired 65 percent of the
While Vodafone, France Telecom, Bulgarian incumbent BTC for 1.1bn, taking
Telefonica/O2 and Telenor did not expand it over from another financial investor. AIG
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also acquired SC Digital Cable systems in long awaited exemplary transactions

Romania for 45m. Mid Europa Partners which should take place in 2008. First, the
acquired the Baltic mobile operator Bite sale of 49.13 percent of Telekom Slovenije
for 450m from TDC and also acquired to either of two remaining bidders in the
the leading Serbian cable and broadband bid process: Iceland telecom incumbent
provider SBB for 200m. Providence Skipti or the private equity consortium led
Equity Partners took over the Ukrainian by Bain Capital even though the process
cable company Volia Cable for 200m. was recently halted by the Slovenian
GML has announced its intention to sell government and therefore will be
100 percent of the shares in GTS CE to a delayed. This project is at risk as recently
consortium of private equity funds, led by the Slovenian government threatened
Columbia Capital. GTS CE operates a group to withdraw the process. Second, the
of alternative telecom service providers in privatisation or IPO of Lattlecom in Latvia.
Czech Republic, Poland, Hungary, Romania Third, the potential sale of a share in the
and Slovakia. Ukrainian incumbent Ukrtelecom.
The activity of financial investors Licence issuance. Investors acquiring new

proves they expect to be able to create licenses will set-up businesses which may
substantial value through a future be involved in future M&A activity. CEE
exit. Their focus is no longer solely on regulators continue to issue a number of
telecommunications operators but also licences. For example, a number of CDMA
includes cable operators. licences have been awarded, some of which
led to the establishment of new, specialised
Future trends operators. Recent examples include the
fourth mobile licence in Bulgaria which has
The slowing growth rate in many CEE been awarded to CDMA-Operator RCE. In
markets suggests saturation. The Czech Republic, Mobilkom, a startup set-up
number of obvious acquisition targets is by Czech based private equity house Penta
declining, which may lead to a slowdown Investments and not related to mobilkom
in M&A activities by strategic investors. Austria, launched a CDMA network
The financial crisis, which has made branded U:fon. Also, in Poland, Nordisk
financing for financial acquirers more mobiltelefon, a Finish mobile operator,
difficult, may also reduce their activity. recently received a CDMA licence. Warsaw
However, the potential for value creation based Sferia also owns a nationwide CDMA
through consolidation prospects, licence.
operating cost reductions and remaining
growth areas should continue to drive In mid-March, Romanias national
the interest of financial investors in CEE regulatory authority launched a draft
telecommunications assets. decision on the procedure for granting a
licence allowing the provision of mobile
Overall, three fundamental trends should services in the 410-415/420-25MHz bands.
drive mid-term M&A aspects in the The tender will only be open to bidders that
telecommunications sector in CEE: do not currently hold an GSM, UMTS or
CDMA license in the country. This might be
Privatisation. Privatisation is driving three quite attractive for investors searching for
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greenfield operations in the region and will We expect M&A activity in the CEE
further increase competition. telecommunications markets to continue
in 2008 and 2009. But the merger and
Greenfield opportunities. Companies do acquisition process has become more
not require a huge excess of cash in order challenging. As the number of obvious
to swim with the big fish. There are vast opportunities has declined, competition
opportunities for those with a smaller for high-value transactions, such as in
pocket and an innovative spirit. Companies privatisations, is particularly intense. A
can team up with other small players and buyer therefore needs to be fast, well-
create broadband accesses either in new prepared and take into account the
buildings or to cover whole city districts. dynamics of competing bids to determine
In the Czech Republic, for example, there the amount it is prepared to pay. Bids for
were 800 Wi-Fi ISPs offering services to future licences may also decline since the
over 350,000 subscribers in early 2007. We markets are relatively saturated and future
expect to see some consolidation among licences will mainly address niche areas
these ISPs. There is a similar situation in such as CDMA. Acquisitions of specialised
Bulgaria, where many small LAN operators greenfield start-ups certainly require a
have emerged and successfully attracted 60 thorough technology understanding. The
percent of the fixed line broadband market. transaction process is further complicated
by the current situation in global financial
New businesses addressing these markets, which are certainly affecting
broadband opportunities as greenfield financial buyers.
start-ups are likely to become the object of
future M&A activity. Airbites, a Swisscom-
backed ISP, is one strategic investor waiting
to pick up successful start-ups. It specialises
in acquiring local ISP operations in CEE Dr. Karim Taga, Oliver Lux, Christian Niegel
countries, especially small, LAN/Ethernet and Evgeny Shibanov are consultants at
based neighbourhood networks. Arthur D. Little.
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CHAPTER ten:
Regional view
The Americas
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g The M&A world comes to the United States
by John Brantley and Martin Hunt
The United States has become a focus Security Act of 2007 adds a new element
of merger and acquisition activity for of political exposure to foreign direct
companies and investors from around investment transactions. While the
the world. Of the $1.5 trillion in US M&A American economy remains largely
transactions during 2007, as measured open to foreign investment, the new law
by Thomson Financial, non-US acquirers increases the risk that domestic political
made nearly one-quarter of the total a considerations will influence the approval
percentage double that of 2006. Sovereign or rejection of a foreign bid to acquire an
wealth funds in Southeast Asia and American company. The Act revises the
especially in the Middle East (the latter process by which the Committee on Foreign
with investment assets estimated at Investment in the United States (CFIUS),
more than $2 trillion) received the biggest an executive branch body, reviews foreign
headlines in this buy American boom, direct investment in the US for national
but European based companies drove the security concerns. In so doing it allows
majority of inbound business purchases members of Congress, competing bidders
and combinations. These companies were for targets, labour unions and advocacy
spurred by solid business fundamentals: groups to shape, delay or prevent proposed
favourable exchange rates from the falling acquisitions.
dollar, favourable company valuations
from lower equity prices, and favourable The increased role of politics in the
opportunities in a country with the best CFIUS process is apparent from the
growth opportunity in markets as varied as expanded number of ways that a review
technology, energy and consumer goods. or investigation may be triggered. The
Act requires a CFIUS review of any
The inbound acquisition surge is not without foreign government-controlled covered
its concerns for offshore purchasers. From transaction. Parties to a covered transaction
the litigious nature of doing business in the must certify that the information they
US, to a variety of heightened regulatory provide is correct, and CFIUS may negotiate
concerns, investment in the US can involve a any provision or even create new terms of
wide range of special considerations. Non- a covered transaction in order to mitigate
US companies need proper due diligence a national security threat. A covered
and planning when structuring their deals, to transaction may not be exempted from
help ensure that a potentially profitable deal further review and investigation until the
does not turn into a costly mistake. report and findings are approved by a
majority of CFIUS members and signed
CFIUS national security review by the secretaries of Treasury, Homeland
Security, and Commerce. Most importantly,
The Foreign Investment and National the results of CFIUS standard and national
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security reviews must be provided to the Foreign Corrupt Practices Act

appropriate House and Senate committees
for their own review and assessment. The That US companies must comply with
likely result will be public hearings at whichthe Foreign Corrupt Practices Act of
any economic or political interests can 1977 (FCPA) is sometimes overlooked
oppose a given acquisition. by inbound acquirers. US regulators and
prosecutors are aggressively enforcing
Recognising the importance of foreign FCPA financial reporting requirements
investment in the US, Congress and the and prohibitions on payments to foreign
Administration have emphasised that their officials, but many other countries have also
intent is not to allow the new law to disrupt stepped up anti-bribery enforcement on
or block routine foreign investments and their corporate nationals. Anti-corruption
acquisitions. The new law will, however, compliance programs are now a virtually
raise the cost and lower the chance for global requirement for multinationals, and
approval of some acquisitions by foreign compliance officials in most OECD countries
investors and could discourage or defeat share both a similar understanding of what
some investments. Foreign investors should constitutes corporate criminal conduct and
exercise all necessary caution regarding the the legal infrastructure to detect, report
political ramifications of their proposed US and prosecute it. Rigorous anti-corruption
acquisitions. Although a CFIUS application due diligence (particularly on offshore
for review remains mostly voluntary, distribution arrangements and financial
failure to seek a CFIUS review may leave reporting) can reveal problems early in the
a transaction open to future scrutiny and acquisition process so that remedial action
even to dissolution. The decision to seek a can be taken prior to closing.
review should be part of transactional due
diligence, particularly in industries with Litigation risk
national security implications. However,
the serious nature of the remedies available FCPA compliance and the possibility of
under the law will cause most foreign regulatory action and shareholder lawsuits
acquirers to file, even for transactions over noncompliance is just one form of US
with only tangential national security litigation risk that inbound acquirers often
implications. Acquirers also should build find troubling. US companies and their
legal strategies and structures to support officers and directors have much greater
the deal such as management techniques liability in both federal and state courts
to minimise the effect of foreign ownership, than foreign acquirers are accustomed
control and influence. Proactive strategic to in their own countries. For example,
communications to educate stakeholders, a director of a Delaware company living
frame debate and influence policymakers is anywhere in the world can be sued in
crucial in major acquisitions. Taking these Delaware, and the CEO of a corporate
steps and developing a general appreciation entity based offshore can be subpoenaed
of the heightened US sensitivities to foreign to appear in any state court hearing a
direct investment transactions are practical product liability or negligence lawsuit (a
ways to facilitate successful approval and risk that BPs chairman faced in litigation
consummation of inbound investment over that companys Texas refinery fire).
deals under the new CFIUS rules. Enforceability of non-compete and
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confidentiality agreements is also a major transaction, the SEC and other regulatory
concern for non-US acquirers. There is no bodies may give the report considerable
overall solution to litigation risk acquirers weight in approving the transaction. Such
must rely on due diligence and advice of US an innovative advocacy strategy shows
counsel to manage it. the preparation that future major inbound
acquisitions may need.
Competition enforcement
Despite increased public and political

concern over foreign acquisitions of US
businesses, national security concerns Despite increased public and political concern over
are largely separate from competition
enforcement as a regulatory factor for foreign acquisitions of US businesses, national
inbound acquisitions. Although acquisitions security concerns are largely separate from
that meet certain thresholds are subject to competition enforcement as a regulatory factor for
antitrust reporting requirements under the
Hart-Scott-Rodino Act, the vast majority inbound acquisitions.
of reportable transactions faces no hurdles
after the parties report the transaction. The
FTC and DOJ do not typically take steps
to stop non-US acquirers from acquiring Unique financial and operating concerns
US companies unless there is some
significant evidence that the transaction Beyond the courts, Congress and the
will have a substantial negative impact on regulators, inbound acquirers face a
competition. Similarly, informal and non- variety of unique financial and operating
reportable business combinations generally concerns when they acquire US companies.
are not challenged by the US government None of these are typically dealbreakers,
without some evidence of an illegal purpose but all should be considered as part of
or conspiracy. due diligence review: (i) the heightened
government scrutiny of immigration and
Public policy advocacy expatriate employment, particularly in light
of complex visa restrictions for expatriate
Acquirers must often combine regulatory executives and their families; (ii) the
insight with public policy advocacy to prevalence of employee stock ownership
gain approval for complex investment plans and equity incentive compensation
and business combination transactions. plans for executives, and how an acquirer
For example, if a foreign company faces not traded on a US exchange must
shareholder, regulatory and political deal with them; (iii) the more extensive
opposition in the US over a proposed regulation (from the SEC to the Sarbanes-
major investment, it may be prudent to Oxley Act) and shareholder rights issues
commission an independent assessment that publicly owned US companies must
of its proposed transaction. If the report contend with; a complication that leads
concludes that the parties have fully many foreign acquirers to rely more heavily
and completely complied with all laws, on debt rather than equity financing; (iv)
rules and regulations applicable to the compliance with the double tax treaty
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network that the US has with many inflows of offshore capital, and the
countries, thereby ensuring efficient recognition of that fact means that there
cross-border flow of capital, earnings and is no substantial public policy bias against
dividends; and (v) the importance of local foreign investors. With proper due diligence
economic and political considerations on each transaction, adequate preparation
as they translate into extensive media to deal with potential problems, and a
attention that could delay or derail a deal close working relationship with US counsel
(as in the concerns of the 12,000 Hershey, to navigate the legal and regulatory
Pennsylvania residents over the companys complexities, acquiring companies based
potential purchase by Cadbury). outside the US have every reason to
continue and expand their efforts to exploit
Final thoughts market opportunities and capital market
advantages through the purchase of US
Despite all the cautions and potential business assets.
problems, inbound acquirers should
continue to find in the US an open and
accepting environment for business
purchases. The countrys balance of John Brantley and Martin Hunt are partners
payments situation virtually requires at Bracewell & Giuliani.
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g Taking advantage of the weak US dollar
by Gary W. Marsh, Michael J. Cochran and Ann-Marie McGaughey
America is on sale is a common sentiment terms or may require significant monetary

expressed by bankers, investors and or other assurances to continue supply;
commentators these days. The relative and (iii) employees distressed businesses
weakness of the US dollar undoubtedly will risk losing key employees because of the
attract the capital of not only US buyers, pressure surrounding a troubled company.
but also non-US buyers in search of possible Business culture also may be damaged due
investment opportunities in the US. One to attempts to achieve short term liquidity
such area of opportunity, particularly with at the expense of good business practices.
the current state of US credit markets, is
the market for distressed companies. Buying assets from a US company in
bankruptcy
The acquisition of distressed companies
in the US involves aspects that are unique Both buyers and sellers may prefer for
from transactions involving financially the sale of business to occur in a court-
healthy businesses. Below are some of supervised bankruptcy process (as opposed
those issues and the ways in which a buyer to outside of the bankruptcy process,
may resolve them. discussed below). Typically, asset sales
under Section 363 of the US Bankruptcy
The value of rigorous due diligence Code involve a Chapter 11 debtor-seller
and a prospective buyer presenting a fully
A critical component of any transaction negotiated asset purchase agreement to
is the need for comprehensive due the Bankruptcy Court for approval. The
diligence on the business, even more so drawback being that Section 363 sales are
when evaluating a distressed business. then subject to a court-supervised auction
Determining the underlying causes of the process where additional buyers may bid
insolvency is vital to understanding the for the business. Other potential acquisition
viability of the business going forward. A methods include a friendly foreclosure, a
potential buyer should focus its attention sale by a state court appointed receiver, an
on the sellers key consituents: (i) customers assignment for the benefit of creditors and
distressed businesses may have delivery a Chapter 7 Trustee liquidation sale.
or quality problems in their product
areas. Key customers may find alternative There are several benefits to purchasing
suppliers and the sellers business may a distressed business in a bankruptcy
be substantially eroded; (ii) vendors context. First, a buyer of assets from a
distressed businesses may create short seller in bankruptcy eliminates fraudulent
term financing by stretching the terms of conveyance risk that might otherwise exist
their trade payables. Following the sale, in a purchase prior to bankruptcy. Second,
existing vendors may be unwilling to extend the transfer of assets through a Section
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363 sale is typically free and clear of all and warranties or to negotiate a purchase
liens, claims and interests and eliminates price based, in part, upon post-acquisition
successor liability. The ability to be relieved metrics. These mechanisms must be
of all future claims is more uncertain and approved by the Bankruptcy Court.
depends upon the facts and circumstances.
Third, the sale of assets pursuant to Buying distressed assets in a non-
Section 363 to a good faith purchaser bankruptcy context
for value cannot be set aside, modified
or reversed. Fourth, a seller is required Buyers of troubled companies outside of
to file, under penalty of perjury, detailed the bankruptcy process face two major
schedules of all of its assets and liabilities, risks: successor liability and fraudulent
a detailed statement of its financial affairs conveyance.
and periodic monthly detailed operating
reports. Finally, a seller may reject Successor liability
burdensome contracts and may assign
contracts and leases to a buyer without the Most buyers of troubled businesses
consent of the non-debtor party to such structure their transaction as an asset
agreement and notwithstanding anti- purchase, thereby attempting to avoid
assignment provisions. assuming liabilities of the troubled
business. However, there are some
However, there are two principal important exceptions to consider. First,
disadvantages to a buyer in a bankruptcy the buyer will have successor liability if it
context. First, the Bankruptcy Court will expressly or implicitly agrees to assume the
require an auction sale of the debtor sellers liabilities of a seller. The purchase and sale
assets to ensure that the seller is realising agreement should establish excluded and
the highest price possible. Thus, the buyer assumed liabilities. Second, a buyer has
has the unavoidable risk that it might be successor liability if the buyer is deemed to
outbid in the auction process. Second, the have engaged in a de facto merger with
assets usually will be sold as is, where is the seller. While this doctrine is a creature
with few representations and warranties, of state law, the risk is generally the highest
leaving the buyer with minimal recourse. if there is a continuity of shareholders
such that the shareholders of the seller
With respect to the auction issue, the initial become shareholders of the buyer. Third,
buyer can attempt to negotiate a break-up a bulk transfer generally involves a sale,
fee (usually 1-5 percent of the purchase not in the ordinary course of business, of
price) as compensation in the event that a substantial portion of the inventory of
it is not the high bidder and can request the seller. Compliance with these statutes
expense reimbursement up to a cap. The requires notice to all of the sellers creditors
Bankruptcy Court does not have to allow and other specified procedures. Failure
these protections. to comply with these statutes generally
permits the sellers creditors to sue the
As for the condition of the business, the buyer for a period of up to 6-12 months
buyer can attempt to negotiate a hold following the transaction. Finally, certain
back of a portion of the purchase price federal and state statutes may create
to secure certain limited representations successor liability, including federal labour
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and employment claims, environmental conveyance risk. Care must be taken

claims and/or product liability tort to ensure that the surviving entity has
claims. These claims may have their own reasonable expectations of meeting its
successor standard to which a buyer may fixed obligations following the transaction.
become subject. Generally, transactions will not be
fraudulent conveyances if some of the
Fraudulent conveyance following elements are present: (i) no
prejudice to existing creditors; (ii) the seller
The doctrine of fraudulent conveyance was solvent following the transaction and
may be applied to impose liability on had adequate capital; or (iii) the transaction
buyers. Generally, there are two types of involved adequate consideration. Good
fraudulent transactions: (i) actual fraud, in faith also may be a defence.
which there is an actual intent to hinder,
delay and defraud creditors; and (ii) failure In sum, those buyers seeking to take
of due consideration, in which the buyer advantage of the current market conditions
does not receive fair consideration from in the US will have an advantage if they
the insolvent seller. A successful fraudulent understand and appreciate the dynamics of
transfer claimant may, among other things, acquiring a business in financial trouble.
set aside the transfer or obligation to the
extent necessary to satisfy such creditors
claims.
Gary W. Marsh, Michael J. Cochran and Ann-
There are several ways of structuring Marie McGaughey are partners at McKenna
transactions to mitigate fraudulent Long & Aldridge LLP.
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g Deal or no deal
by Frank A. McGrew IV and Dunn Mileham
As investment bankers focused on the pursued by strategic buyers. Where have all
middle market, this past year provided the good times gone?
plenty of drama both here in the US and
around the world. The stock market entered After three strong years, the US economy
2007 a bit sluggish, but by March all three has clearly slowed, and there is an
primary stock indices seemed to hit all-time overriding fear of a recession due to
high levels on a weekly basis. Following housing and mortgage turmoil, rising
on the heels of what was then the largest oil prices and overall anxiety by both
leveraged buyout in history (Blackstone consumers and businesses. The impact
Groups $39bn buyout of real estate of a series of interest rate cuts by the Fed
investment trust Equity Office Properties and a falling dollar have proved to be
in early February), the first half of 2007 only somewhat effective in strengthening
included the announcement of several consumer confidence and boosting exports.
notable M&A transactions: a consortium All this uncertainty on the eve of one of
of financial buyers purchased TXU Corp. the most important presidential elections
for $44.5bn in the largest LBO in history, in recent history. Financial markets hate
First Data Corp. was purchased by KKR for uncertainty, and nothing appears certain
nearly $29bn and a Goldman Sachs-led today.
group purchased Alltel Corp. for $28bn.
As the second quarter ended, it appeared Market pundits argue that Wall Street runs
that 2007 would be a record breaking year in cycles and this period is no different than
by all standpoints the stock market was past bubbles with the pendulum having
up 7 percent, ample capital (both equity swung toward fear rather than greed.
and debt) was available to consummate Robust fundraising efforts by private equity
transactions at increasingly higher funds over the past five years led to over
valuations and the economy appeared to $500bn being raised due to large alternative
be on solid footing. Private equity firms investment allocations by pension funds
were even talking about the prospects of a and other wealthy investors. The insatiable
$100bn buyout transaction. deal appetite displayed by financial buyers
led to an explosion of liquidity in the
However, the balance of the year was quite leverage finance markets low default rates
different, beginning with the mortgage and confidence that equity sponsors could
and related credit turmoil in July that write cheques to support disproportionately
put the brakes on a rising stock market, high leverage caused traditional diligence
reduced transactions by financial buyers and underwriting practices to fall by the
and lowered overall acquisition multiples. wayside.
Numerous M&A transactions have been
shelved or delayed, including those being Owners of both public and closely held
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businesses who witnessed peak valuations emerge as victors in competitive auctions.

being paid for competing companies After years of strong financial performance,
now wonder if liquidity options still exist. cash-rich strategic buyers can use cash
Large banks (and investment banks) on hand or public stock (which allows
have been forced to lay off employees in sellers to participate in future upside) as
the wake of ill-fated trading and fixed- currency. Sellers will be appreciative of
income operations and deteriorating more conservative leverage multiples and
profits. The consumer has shown initial a greater certainty of closure due to less
stages of hibernation given continued reliance on finicky debt markets.
uncertainty surrounding the economy,
falling consumer confidence related to the Private equity transactions will slow but
subprime mortgage debacle and curtailed not cease in 2008 there is just too much
discretionary spending. Furthermore, the money to be invested and managers run
continued erosion of the US dollar, renewed the risk of forfeiting management and
concerns regarding budget and trade transaction fees. After years of strong
deficits and the upcoming election loom returns, pension funds, endowments and
large. other institutional investors have allocated
large portions of their capital to alternative
investments, such as private equity. Until
the returns on this asset class experience a
significant fall, managers will continue to
Private equity transactions will slow but not cease in allocate funds. Sound deals will continue
to get done; however, leverage to finance
2008 there is just too much money to be invested these transactions will be based upon how
and managers run the risk of forfeiting management much debt a company can reasonably
handle, not how much an underwriter can
and transaction fees. sell in syndication.
Competing with financial buyers for

deals will be Special Purpose Acquisition
Companies (SPACs), which are public shells
If there is a bright spot, the middle market, of blind pool capital designed to acquire
defined as transactions less than $1bn, or merge with an operating business.
has been somewhat more resilient due to SPACs currently have over $18bn of capital
typically lower leverage and transactions at available for acquisition deployment with
relatively reasonable multiples. an additional $12bn in registration. Similar
to private equity funds, these pools of
What might this wave of uncertainty mean capital have a set time horizon in which
for the transaction environment in 2008 a transaction must be consummated,
and beyond? otherwise, funds held in trust are returned
to the investors.
As private equity buyers will be forced
to contribute more equity and rely less Foreign investors will be able to use their
on excessive leverage, strategic buyers stronger currencies to make aggressive and
(particularly those outside the US) will re- opportunistic acquisitions in the US market
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particularly related to divestitures of non- Strategic options should be evaluated,

core or underperforming assets by public and regulatory and governance affairs
companies. Against a basket of foreign (SEC filings) should be current in order to
currencies (including the euro, the Japanese quickly raise capital to take advantage of
yen, the British pound, the Canadian dollar transaction opportunities. Importantly,
and others), the US dollar is down in excess companies should raise funds when market
of 20 percent versus five years ago. conditions permit, not when funds are
needed. Lastly, companies and executives
The market will remain active although should exercise discipline and patience, as
highly volatile in the days and months transactions will take longer to negotiate,
ahead. Both buyers and sellers will be finance and close.
forced to demonstrate their skills in a
competitive international environment.
Corporate boards and management
teams should review the state of their Frank A. McGrew IV is a managing director
M&A preparedness and should attempt and Dunn Mileham is a vice president at
to capitalise on M&A opportunistically. Morgan Joseph & Co. Inc.
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g A brief glossary of US M&A terms
Mergers and acquisitions involve complex Break Fees. Corporate laws in many
business and legal transactions, which carry jurisdictions may impose a duty on the
an entire lexicon that may be unfamiliar board of directors to consider a superior
to buyers and sellers, particularly parties offer, notwithstanding a contractual
from other jurisdictions. The following prohibition on negotiating with other
glossary includes terms commonly potential bidders. Some agreements
used in US acquisition transactions. The provide for the payment of a fee to the
descriptions are intended to be descriptive, proposed buyer if the seller accepts a better
rather than to constitute legal definitions. offer from another bidder. That fee is often
Because similar terms may carry different called a break fee.
connotations in other countries, it is
advisable to check with experienced Data Rooms / Virtual Data Rooms. A
professionals on proper usage in the data room is a place where a companys
relevant jurisdictions. records and other due diligence materials
are placed for inspection by prospective
Accretion / Dilution. An accretive buyers. Data rooms can be a physical
acquisition increases earnings per share. location. Alternatively, companies may scan
Conversely, a dilutive one decreases those documents into a website, called
earnings. a virtual data room to permit inspection
from a distance through secure internet
Baskets and Caps. In negotiating indemnity connections.
provisions, the parties sometimes agree
that a party need not indemnify the other Defensive Measures / Shark Repellant.
unless the damages exceed a minimum Companies may implement defensive
amount, called a basket. Sometimes measures (sometimes called shark
baskets are a true basket, where a seller repellant) to help resist being acquired by
is not liable for damages below that another company, or to permit a greater
amount. Other times, the basket is merely opportunity to negotiate better price and
a threshold or tipping basket, in which terms with the bidder. Common defensive
case once that level of damages has been measures include poison pills, which often
reached, the buyer can seek indemnity permit the target companys shareholders
for all of its damages, including for those to purchase additional equity to dilute the
below the threshold. The parties may bidder, staggered boards, which provide for
agree that certain liabilities (often for the the election of directors in annual tranches,
breach of some of the representations and making it more difficult for the bidder to
warranties) will not exceed a maximum replace a majority of entire board quickly,
level, called a cap. and supra-majority voting requirements.
Business entity and securities laws may
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govern the adoption of defensive measures. proposed transaction. The filing fees can
Companies should consider their duties to be quite steep and are payable by the seller
equity holders and others in determining unless the parties agree otherwise.
whether these measures are in the
companys best interests. Investors often Holdbacks. Buyers may withhold payment
resist defensive measures, due to their of a portion of the purchase price (or
impact on potential sale transactions. that portion is placed into escrow with
an escrow agent) to provide security for
Dilution. See Accretion / Dilution above. the sellers indemnity obligations. The
withheld amounts are often referred to as a
Disclosure Statements. See Proxy holdback.
Statements / Disclosure Statements below.
Hostile Takeovers / Hostile Tender Offers.
Earn-Outs. Buyers sometimes agree to only A process whereby a bidder attempts to
pay a portion of the purchase price if the acquire a target company when the targets
business performs at specified levels over management does not wish the company
time. The deferred portion of the purchase to be acquired on those terms. In a hostile
price is referred to as an earnout. Earn- transaction, the bidder will seek to acquire
outs are often measured on sales, revenue ownership of the company directly from its
or net income targets. Earn-outs can be equity owners. A tender offer is a process
used to help bridge disagreements over in which shareholders tender their shares
a target companys value, as well as to to a bidder in exchange for an offered
motivate the sellers to help contribute to amount of consideration. Tender offers are
the future success of the business. regulated by business entity and securities
laws, especially for public companies.
Fairness Opinions. A fairness opinion is
issued by an independent valuation firm Lock Up Provisions. Buyers attempt to
to provide comfort to the equity owners of prevent target companies from selling
a seller that the consideration offered for to another prospective buyer through
their shares is fair. contractual restrictions sometimes known
as lock up provisions. Lock ups can include
Greenmail. Some bidders for a company use of voting agreements by significant
will acquire a large block of the targets equity owners, no-shop provisions
equity and then threaten to launch a discussed below and other methods.
hostile tender offer for more shares unless
the target purchases that block of stock Management Agreements. See Transition
at a premium. That tactic is often called Services Agreements / Management
greenmail. Agreements below.
Hart-Scott-Rodino Approval. The Hart- Mini WARN Acts. See WARN Act / Mini-
Scott-Rodino Antitrust Improvements Act WARN Acts below.
requires larger companies to provide the
US government with advance notice of a No Shop Provisions. Contractual
pending acquisition, so the government can restrictions on engaging in negotiations
review the anti-competitive impact of the with other bidders are called no shop
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provisions. If the sellers have a fiduciary 338(h)(10) Elections. This section of the US
obligation to consider unsolicited offers Internal Revenue Code of 1986 allows the
and eventually accept another, they may parties to treat a sale of stock as if it were a
be required to pay a break fee, discussed sale of assets, which may be beneficial for
above. tax purposes.
Poison Pills. See Defensive Measures Transition Services Agreements /

above. Management Agreements. Transition
services or management agreements
Proxy Statements / Disclosure are frequently used to enable a seller to
Statements. A proxy statement is a provide services to the buyer for an interim
disclosure document describing the period until the buyer is able to assume
material features of a transaction to be those duties. The agreements set forth
voted on by the equity owners when they the rights, obligations and terms under
are asked to give a voting proxy to another. which those services will be performed.
If the equity owners are not being asked to Transition services agreements are often
approve the matter, applicable law often used while buyers obtain necessary licences
requires that they be furnished with similar and permits, or implement technological
information through a disclosure statement. conversions necessary to operate the newly
Proxy solicitations and disclosure acquired company.
statements are regulated by business entity
and securities laws. Virtual Data Rooms. See Data Rooms /
Virtual Data Rooms above.
Reverse Mergers. A reverse merger is a
process in which an active, non-public WARN Act and Mini-WARN Acts.
company merges into a shell company The Worker Adjustment and Retraining
with no significant operations but has a Notification Act requires that companies
class of equity securities registered with provide the employees and the US
the securities administrators (such as the government with advance notice of mass
US Securities and Exchange Commission). layoffs before those employees may be
In that manner, the private company can terminated. Many states have similar laws
rapidly become a public one. (called Mini-WARN Acts), but the thresholds
for when the notices are required may differ.
Shark Repellent. See Defensive Measures
above. Richard Lieberman is chairman of the
Corporate, Securities and Finance
Staggered Boards. See Defensive Department of Jennings, Strouss & Salmon,
Measures above. PLC.
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g Recent developments in Canadian M&A
by Frank P. Arnone
In recent years merger activity in Canada Recent changes to tax legislation

has reached record highs. Growth in M&A
transactions has been most significant On 31 October 2006 the Canadian federal
in the energy and mining sectors with government announced proposed changes
Canadian proven oil reserves, dominated to Canadian tax laws that will significantly
by the oil sands in Alberta, providing a reduce or eliminate the tax advantages
major source of M&A activity. In spite of the previously enjoyed by Canadian income
recent tightening of credit availability, there trusts. Prior to the announcement, income
is optimism about the outlook for M&A funds could be structured in such a manner
activity in Canada. as to avoid paying entity level tax (unlike
corporations) as long as they paid out all
Current state of the M&A market in their income by way of distributions to
Canada their unit holders. The new proposals,
when implemented, will create a tax
Several trends have emerged in regime for most publicly-traded trusts
this historic period of growth and and partnerships and their investors that
consolidation. Private equity continues will, in effect, be similar to that for public
to play a significant role in Canadian corporations and their shareholders. For
transactions with both foreign and income trusts with units listed on a stock
domestic private equity dealmakers active exchange before 1 November2006, the tax
in Canada. The majority of foreign private changes will commence beginning in the
equity firms have been based in the US, 2011 taxation year, providing a four-year
while at home, Canadian institutional grandfathering period.
investors have been allocating greater
portions of their assets to Canadian private Until these legislative changes were
equity funds, both internally managed, announced, income trusts had served as a
and those managed by others through liquidity vehicle; including as an exit vehicle
investment in other funds. There is also for private equity funds, and an attractive
an increasing prevalence of companies vehicle into which certain corporations
from countries such as Brazil, Russia, India could convert. But, with income trusts
and China as buyers in Canadian M&A set to lose their tax advantage over
transactions and income trusts continue corporations in 2011, the Canadian M&A
to play a significant role as both buyers marketplace has seen an upswing in income
and targets. Going forward, developments trust M&A activity, largely spurred by
in the regulatory environment impacting financial sponsors looking for stable income
Canadian M&A should have a positive buyout opportunities.
effect on the volume of transactions in
Canada. A recent study we commissioned in
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association with mergermarket identified and potential purchasers want to make

stable and predictable cash flows and a bids with as few conditions as possible).
capital structure that is designed to pay out The Labatt decision means that the
dividends on a regular basis as the most Competition Act restrictions should not
attractive characteristics of income trust hamper these mergers with undue delay
businesses. and unnecessary bureaucratic obstacles.
In fact merger review in Canada will, as a
Developments in competition regulation result of this decision, increase certainty
and reflect market realities.
On 22 January 2008, the Federal Court
of Appeal released its decision in
Commissioner of Competition v. Labatt
Breweries Limited. The significance of this
decision is in its affirmation, with appellate Deal certainty in the current credit environment
authority, of the Competition Tribunals has become very important, as evidenced by the
earlier decision to allow Labatt to conclude
its takeover bid for rival Lakeport Breweries emphasis on material adverse change clauses in
on its original timeframe. acquisition agreements and on reverse break fee
The Competition Tribunal, in making provisions.
its decision, held that extensions of the
42-day statutory review period for M&A
transactions are not to be granted lightly.
Indeed, extensions (with consequent The impact of private equity on deal
delays in closing) should only be granted activity in Canada
in situations where the Commissioner can
show that closing will substantially impair Canadian private equity has seen record
the Tribunals ability to remedy the merger buyout activity in the past two years. This
at a later point. has been fuelled by Canadian and US based
institutional investors allocating greater
As a result of the Labatt decision, it is more percentages of their portfolios to private
likely that parties to a merger that raises equity funds.
competition issues may be able to close
on the basis of a negotiated hold-separate The recent tightening of financial markets
arrangement some time shortly after the has, however, dampened activity in
initial 42-day waiting period. In this manner, leveraged buyout transactions especially
it is clear that the Canadian Courts are in the consumer products, industrial
mindful and facilitative of M&A market manufacturing and financial services
realities: timing and certainty of closing sectors. Deal certainty in the current credit
are critically important features in certain environment has become very important,
transactions (e.g., transactions involving as evidenced by the emphasis on material
public companies, in deals involving foreign adverse change clauses in acquisition
jurisdictions where only part of the deal agreements and on reverse break fee
involves Canada, and in corporate auctions, provisions. The mid-market nature of
where vendors seek an expeditious closing the Canadian marketplace has, however,
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placed Canada in a position well suited of 2007 and into 2008, it is expected that
for the year ahead. Although the decline growth in private equity transactions will
in large M&A transactions is predicted outpace growth in M&A activity in Canada
to continue, transactions in the mid- generally. In light of the recent dramatic
market are expected to present the most appreciation of the Canadian dollar against
opportunities. the US currency, in particular, increased
outbound investment and acquisitions by
Canadians is also likely.
Controlled auctions in Canadian M&A
It is expected that growth in private equity In recent years the Canadian M&A market
has seen a significant increase in the use
transactions will outpace growth in M&A activity in of controlled auctions by sellers. The
Canada generally. prevalence of this auction process was
the result of numerous factors, not least
of which, was the existence of a sellers
market.
Although there are various permutations in

The year ahead will likely also see the the process, generally controlled auctions
continued widespread participation of in Canada involve the following elements.
Canadian pension plans; a relatively unique At the outset a Confidential Information
characteristic of the Canadian private Memorandum (CIM) describing the business
equity M&A marketplace. Private equity for sale is prepared. Potential buyers are
investments by these plans cover a wide then identified and contacted. Bidders then
spectrum, including LP investments, co- sign confidentiality agreements with the
investments with private equity funds and seller before they review the CIM. At this
direct and co-sponsored buyouts. These point bidders are generally given access to
are expected to continue in the mid- additional due diligence materials. Non-
market. Canadian pension plans have also binding expressions of interest are then
diversified their private equity investments submitted from which the seller narrows
to include a number of different sectors, the field to create a short list of bidders.
including infrastructure. Due to foreign Further access to more detailed due
ownership restrictions in certain industries diligence material is usually granted to the
in Canada, Canadas pension plans have short list at this stage. Bidders then submit
proven to be valuable strategic partners. an offer. Consideration and clarification of
Canadian pension plans are well positioned offers results in the selection of one bidder
to continue this trend of active investment, (or more than one) and the parties entering
with many allocating an increased amount into negotiations (which can be exclusive),
of capital to private equity investment with the hope of concluding a binding
strategies over the coming years. agreement.
Although the credit environment has Throughout the process the seller may
dampened M&A activity in the latter part maintain control and the flexibility to
L+ L- 3 4 CONTENTS
negotiate with one or more bidders and recent Labatt ruling indicates that there
accept any offer, regardless of price or is a favourable antitrust environment
terms. The predominance of sophisticated for M&A activity in Canada. With these
parties in the process and emerging developments, a new face has been placed
technology have come together to create on the deal landscape in Canada. For non-
a positive climate for controlled auctions Canadian buyers, this landscape has made
in Canada. This is a trend that will likely the Canadian market an attractive place
continue in the Canadian M&A marketplace to shop for businesses; particularly those
where circumstances warrant. businesses in the mid-market.
Conclusion
FrankP. Arnone is a partner and co-chair of
The announced income trust taxation the Private Equity Group at Blake, Cassels &
changes have brought about M&A Graydon LLP. The author would like to thank
opportunities in the form of business Caroline McGrath (Student-at-Law, Blake,
with stable cash flows that are designed Cassels & Graydon LLP), who assisted in the
to pay regular dividends. In addition, the preparation of this article.
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g New rules of the game in Canadian antitrust
by Subrata Bhattacharjee
A recent ruling of the Canadian Federal guidance as to the length of time it will
Court of Appeal suggests that the antitrust require to perform its substantive analysis
review of mergers in Canada may be subject of a transaction, notwithstanding the
to new rules of the game, in which parties in waiting periods. Notifiable transactions
some cases may seek to close transactions are classified by the Bureau as being non-
more aggressively than in the past. The complex, complex or very complex, with
decision in Commissioner of Competition maximum service standard for completion
v. Labatt Brewing Company Limited (2007 of its substantive analysis of 14 days, 10
Comp. Trib 9; affd 2008 FCA 22.) may weeks and five months, respectively. As
make it more difficult for the Canadian can be seen, other than for non-complex
Competition Bureau to seek temporary transactions the service standard is much
orders to stop parties from proceeding longer than the statutory waiting period.
with a merger after the expiration of
waiting period contained in the Canadian This disconnect between the statutory
Competition Act. waiting period and the service standard
period leads to situations where the parties
Canadian merger review are permitted to close by statute but the
Bureau has not completed its review.
The Canadian merger review regime Notwithstanding that the parties in such a
requires parties to transactions that exceed situation are legally entitled to close (and
certain financial thresholds to notify the be subject to any post-closing remedies
Bureau prior to completing the transaction. the Bureau deems necessary) many parties
Following notification, the parties must choose to wait for the Bureaus review
observe statutory waiting periods. It is before they complete a transaction. This
a criminal offence to close a transaction is largely because the Commissioner of
prior to the expiration of the applicable Competition has the power to ask the
waiting period. These waiting periods are Competition Tribunal to issue an interim
dependent on the form of filing chosen by order under section 100 of the Act,
the parties, being either 14 days for short- preventing the parties from closing until
form filings, or 42 days for long-form the review is complete. It was customarily
filings. thought that the standard for securing such
relief was relatively low. However, the result
The Bureau has taken the position that in Labatt may have altered this belief.
in some cases (in particular, complex and
very complex cases), it requires more The Tribunals decision in Labatt
time to review mergers than provided
in the waiting periods. The Bureau has In early 2007, Labatt Brewing Company, one
issued service standards which provide of Canadas largest brewers, announced its
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proposed acquisition of Lakeport Brewing, until after its substantive review was
a smaller niche brewer. The parties complete and refused to agree to Labatts
expected the transaction to close at the end proposal.
of March, 2007.
The Bureau classified the transaction as

very complex, subjecting it to a service
standard of five months. However, the
Bureau had a statutory obligation to
complete the review in 42 days (as the In Canada, merger remedies only have to restore
parties used a long form notification) failing competition to the point there is no substantial
which the parties were entitled to close lessening of competition as a result of the merger.
the transaction unless the Tribunal issued a
section 100 Order.
Initially, Labatt planned to close the

transaction after the expiration of the
42 waiting period. Labatt apparently With the Commissioner firm in her stance
feared that if the deal was not closed in that a hold separate arrangement would
a timely manner, other competing bids not be consented to, and with Labatt
could have been made for Lakeport, uninterested in allowing the transaction
with the possibility that Labatt would to remain outstanding for the five-month
lose the acquisition. Court filings suggest service standard period for very complex
that Labatt had lost a target in an earlier transactions, Labatt and Lakeport decided
transaction, when, during a lengthy review to exercise their statutory right to close the
by the Bureau, Sleeman Breweries was transaction at the end of the 42 day waiting
snatched away by a rival. period. They were met with an application
from the Commissioner seeking a section
It became clear in its review of the Labatt/ 100 Order from the Tribunal to prevent the
Lakeport deal, however, that the Bureau brewers from closing or taking steps to
would not be able to complete its review close the deal for 30 days.
within the 42 day period. Labatt offered to
enter into a consent agreement with the The Tribunal surprised observers by
Commissioner, allowing the transaction to dismissing the Commissioners application.
close into a hold separate arrangement in The Tribunal noted that any merger remedy
which Labatt and Lakeport would be kept ordered by the Tribunal (in the event of
under different management and run as a contested transaction) did not need to
two separate corporations until the Bureau restore the pre-merger situation (as in the
completed its review. US). Rather, in Canada, merger remedies
only have to restore competition to the
While the Bureau historically permitted point there is no substantial lessening
parties to close into hold-separate of competition as a result of the merger.
arrangements, just prior to the Labatt This result is typically obtained through
transaction the Bureau issued guidelines structural remedies such as divestiture. The
stating it would not consider hold separates Tribunal found that the Commissioner had
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failed to address how these post-merger a section 100 Order as a rubber stamp,
remedies could not be implemented as a thereby emboldening merging parties to
result of closing. insist that review be conducted closer to
the statutory waiting periods. Though this
The Commissioner appealed the Tribunals may not be as significant in the context
ruling, but the Federal Court of Appeal of multi-jurisdictional deals, where other
dismissed the appeal without even hearing jurisdictional waiting periods may be
the argument of the brewers, delivering longer, for purely domestic deals, Labatt
its judgement after submissions by the sets the stage for a more aggressive
Commissioners counsel. approach to merger review.
Implications
The decision in Labatt confirms that the Subrata Bhattacharjee is a partner at

Bureau cannot look at the issuance of Heenan Blaikie LLP.
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g Canadas foreign investment review process
by Subrata Bhattacharjee
Recent developments suggest that none of which explicitly refer to the state
the landscape for foreign investment affiliation of the investor or to national
review in Canada is changing in a manner security. The Guidelines do not alter these
consistent with trends in other G8 nations. factors, or amend the ICA; however, they
Responding, perhaps, to a number of clarify what the Minister should consider
high-profile transactions, some of which when applying the factors in reviews of
involved state-owned enterprises (SOEs), investments by SOEs.
the Federal Government has now: (i) issued
new guidelines for foreign investments In particular, the Guidelines suggest the
by SOEs; (ii) announced its intention to following as being relevant. First, the SOEs
institute a national security screening adherence to Canadian laws, practices,
mechanism for foreign investments; and and standards of corporate governance,
(iii) asked a blue-ribbon Competition Policy including commitments to transparency
Review Panel to review federal policies and disclosure, independent members of
relating to competitiveness, including the board of directors, independent audit
foreign investment regulation. committees and equitable treatment of
shareholders. Second, the nature of and
Guidelines for foreign investments by extent to which the SOE is controlled by
state-owned entities a foreign government. Third, whether
the acquired Canadian business will
On 7 December 2007, the Minister of continue to operate on a commercial basis
Industry announced new guidelines regarding: where to export; where to
applicable to foreign investments by process; how Canadians participate in its
SOEs. The Guidelines were issued under operations; how ongoing innovation and
the Investment Canada Act, R.S.C. 1985, R&D is supported; and what level of capital
I-21.8 (ICA), which is the statute containing expenditures is appropriate to ensure global
Canadas foreign investment review regime. competitiveness.
Pursuant to the ICA, if a foreign investor
proposes to acquire control of a Canadian The Guidelines suggest that foreign
business, and the asset value of the businesses should submit specific
Canadian business exceeds certain financial undertakings to IRB in support of a
thresholds, the investment is subject to proposed transaction. Examples of possible
review by the Investment Review Branch undertakings include: (i) appointing
(IRB) and the Minister must determine that Canadians as independent directors on the
the investment is of net benefit to Canada board of directors; (ii) employing Canadians
before it can proceed. In assessing whether in senior management positions; (iii)
an investment is of net benefit to Canada, incorporating the new business in Canada;
the Minister examines six economic factors, and (iv) listing the shares of the acquiring
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company or the Canadian business on a continue to attract foreign investment that

Canadian stock exchange. benefits Canada.
The Guidelines essentially confirm the The Guidelines will likely be based on
approach taken under the ICA in previous the tests currently in place in other
reviews involving investments by SOEs. G8 countries, such as France, which
Although SOEs will have to satisfy the requires foreign investments in specific
Ministers concerns regarding corporate sectors (defence, security, weapons
governance, commercial objectives and and ammunition) to be formally
the extent and nature of state control, the approved by the French Treasury prior to
Guidelines do not otherwise restrict the implementation. As well, they will likely
scope of possible investments. be sufficiently narrow in scope to prevent
against protectionist pressures, since the
previous national security test proposed by
the government was met with significant
opposition due to its vague definition of
national security and the resulting amount
The government has established a committee of discretion granted to the Cabinet with
to develop guidelines for a national security test respect to allowing transactions subject to
such review to proceed.
that will apply to foreign investors, and plans to
announce the guidelines by mid-2008. The competition policy review panel
The Panels mandate is, in part, to

recommend changes to the ICA in order to
ensure that Canada will continue to attract
National security test foreign investment and that Canadian
businesses will invest both domestically
On 9 October 2007, the Minister and internationally. To this end, on 30
announced that the government would October 2007, the Panel produced a
consider how best to respond to national consultation paper, Sharpening Canadas
security concerns in the context of Competitive Edge, which poses a number
investments by foreign investors. The of questions. The Panel invited interested
government has established a committee parties to provide written submissions on
to develop guidelines for a national the questions, which would help inform the
security test that will apply to foreign recommendations that it aims to present by
investors, and plans to announce the 30 June 2008.
guidelines by mid-2008. In a January 2008
article in The Globe and Mail, the Minister The Panel is considering two issues
stated that [t]hese new guidelines will particularly relevant for foreign investors
in no way create obstacles or signal any contemplating acquisitions in Canada,
change in the governments openness though much of its mandate in this regard
to foreign investment in CanadaTheir has been superseded by the release of the
intention is in fact to provide clarity to Guidelines and the announcement of the
investors around the world so that we can intention to institute a national security
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screening mechanism. First, the Panel for a proposed transaction to be viewed

is examining the question of whether as a net benefit to Canada. It also seeks
a purported increase in acquisitions of to ensure that foreign investors fulfill any
Canadian businesses by foreign companies undertakings that they make. Finally, it
has resulted in what the media has intends to examine the issue of reciprocity
commonly described as a hollowing in connection with acquisitions of Canadian
out of Corporate Canada. In particular, it enterprises by foreign businesses based in
has asked interested parties to consider jurisdictions in which a Canadian enterprise
the importance of the following factors cannot make a corresponding acquisition.
on Canadas economic prospects and
ability to create jobs and opportunities The Panels recommendations will likely
for Canadians: (i) domestic control and introduce practical and constructive
ownership of Canadian business activities; changes to the ICA that will increase the
and (ii) company headquarters and global clarity of the Investment Canada review
divisional head offices. process and the net benefit test, as well as
increase the degree of certainty with which
Second, the Panel is also examining the foreign investors can approach the process.
net benefit test under the ICA. It intends
to address concerns regarding the lack of
predictability in how the test is applied and Subrata Bhattacharjee is a partner at
what combination of factors is required Heenan Blaikie LLP.
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g New developments spur M&A growth in Latin

America
by Amauri Costa
For the past few years, Latin American economic stability. These initiatives,
countries have seen a high level of M&A coupled with improvements in their legal
activity. According to some statistics, the systems, have helped raise the confidence
value of Latin American M&A transactions of business investors, particularly those
approached $110bn in 2007, with more than from other parts of the world. Peru
40 percent of acquiring companies based and Mexico, for example, are pursuing
outside the region. Acquisition targets responsible fiscal policies and economic
range from small family owned businesses liberalisation efforts, and even Argentina,
to major corporations, all in a wide range of which had many problems early in the
industry sectors with industrial, energy, decade, has a much improved business
transportation and logistics, technology climate. Brazil has stayed the course of
and telecommunications being among the the last decades economic advances since
business areas with most activity. controlling its rampant inflation, and the
country hopes to achieve investment
Although the global tightening of liquidity grade status soon.
can be expected to slow M&A activity
somewhat, Latin America appears well Improvements in legal systems
positioned for cross-border and domestic
market business combinations to continue As companies seek market expansion
expanding because of several fundamental beyond their original borders, they also
factors. Many countries in the region have help influence developments in the local
established a perception of political and legal systems. This phenomenon has not
economic stability that provides a strong been different in Latin America, where
foundation for investment. These countries the influence of the common law systems
have also taken steps to modernise their (particularly from the US) is very strong.
legal systems, seeking to create additional This influence has been greatest in the
confidence in local institutions and reduce areas of corporate governance laws and
the burden on foreign investors. In addition, commercial finance regulations.
some of the challenges still presented to
countries in the region (e.g., shortage of Corporate governance. As part of their
natural gas) may offer opportunities to spur effort to attract and maintain foreign
investment activity. investments, many Latin American
countries including the two largest
Economic advancement economies in the region, Mexico and Brazil
have updated or are in the process of
With a few notable exceptions, the updating their corporate laws and have
countries of Latin America have largely implemented other rules to modernise and
made the commitment to political and strengthen their capital markets.
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Brazils Novo Mercado Program, and perfection of security interests. Those

implemented by the countrys securities innovations include a more frequent use
regulatory agency CVM has created of trusts, express permission to create
more transparency and professionalism in floating charges, or other mechanisms
corporate governance for publicly-traded allowing more effective pledges of accounts
companies in Brazil. Companies following receivables. Most of these secured
its rules benefit from improved treatment transaction concepts, or their different
of their minority shareholders and enjoy applications, are not typical for countries
better overall market acceptance. As with a civil law tradition.
a consequence of this strengthening
of Brazils capital markets, the country Laws in Mexico, for example, now validate
witnessed an explosive growth in the the concept of floating liens. In addition,
volume of IPOs in 2006, followed by both Mexico and Honduras have instituted
healthy numbers in 2007. These publicly legal reforms that make possible the
traded companies have used a large creation of trust estates to secure a loan,
portion of the proceeds of such IPOs and this alternative is used in long term
to fuel expansion, either organically or and/or large transactions (e.g., aircraft
through acquisitions. In some cases, the finance). Brazil has not yet adopted the
M&A activity has also crossed borders to trust concept, but its new Civil Code has
other countries in the region or even in the made it easier to create floating liens
Northern hemisphere, a trend that should on accounts receivable without the
continue in the near future. Keeping pace burdensome requirements of the previous
with the need for continued improvement, law.
Brazil has recently introduced additional
updates to its corporate laws, bringing It is important to note that Latin American
reporting requirements more in line with countries are not abandoning fundamental
internationally adopted standards. civil law concepts. Rather, they are
modifying them to incorporate some
Mexico is currently studying changes to its concepts existing in the legal systems
corporate laws also addressing corporate of other countries. While some of the
governance pitfalls still encountered in the modifications have not been fully tested
countrys laws. Mexico is also seeking to in court, they have helped boost lending
strengthen its domestic capital markets, activity in countries like Mexico, Brazil,
currently the second largest in Latin and those in Central America and present
America. good opportunities for additional cross-
border credit facilities. This is particularly
Credit transactions. Along with an true for transactions involving international
improved environment for capital markets commercial banks, giving acquiring
activity, countries in Latin America have companies access to a much wider range of
strengthened and modernised laws credit facilities.
affecting commercial lending activity. In
recent years, a number of jurisdictions in Brazil has also revised its bankruptcy code
Latin America have provided enhanced with the goal of improving the chance of
support for commercial lending by recovery for insolvent companies seeking
updating their lawsgoverning creation court protection. In this case as well, Brazil
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looked to other countries experience competition laws or regulated industries)

when preparing its new bankruptcy code, for the licence-holders change of control
although it is still too early to feel confident is mandatory. Acquisitions that involve real
about the application of the law by Brazilian estate can pose a different set of issues;
courts. countries such as Guatemala prohibit
foreign investor ownership of land, while in
Remaining challenges Brazil, foreign land ownership may require
prior government approval or a carefully
Despite advances in the legal systems considered structure.
in Latin America, a foreign investor will
still face many challenges. This often
means that acquiring companies should
spend additional time structuring the
transaction and negotiating agreements
to ensure that all parties are in accord. For Despite advances in the legal systems in Latin
instance, representations and warranties
and legal opinions relied upon in common America, a foreign investor will still face many
law countries can cause a great deal challenges.
of confusion in Latin America. As the
enforceability of representations and
warranties has not been extensively tested
in local courts in Latin America, it is safer
for the acquirer to rely on a thorough
due diligence rather than contractual Potential opportunities
representations and warranties.
Looking ahead, it is likely that the regional
In addition, acquiring companies can still energy sector will continue to be a primary
expect some level of bureaucracy to obtain focus of M&A deals. One example is
the necessary regulatory approvals for renewable energy in Brazil. In the past
acquisitions in Latin America. While the few years, the government has sponsored
degree of transparency in the application various incentives and policy initiatives
process, the sophistication of the regulator to spur the growth of alternative energy
and procedural complexity may vary from sources. The increased oil prices and the
one country to another, the approval worlds search for alternative energy
process throughout Latin America can pose sources has also created a favourable
a considerable challenge, and delays are environment for the unprecedented
common. development of the ethanol industry,
attracting acquisition capital from both
The energy sector provides a good foreign and domestic investors (including
example. Many developers have sought as a result of the increased IPO activity
to acquire interests in energy companies mentioned above). In 2007, Brazil saw
already holding licenses and permits. an intense level of M&A activity that is
However, in countries such as Brazil, prior anticipated to continue in 2008. Other
approval from one or more governmental countries, such as Peru, are considering
agencies (such as those that regulate their own incentive programs to foster
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growth of their renewable energy sector. direction of the region is toward fuller
integration in the global economic system,
Ironically, the recent announcement of and greater political and economic
record-breaking oil and gas reserves in liberalisation (with a few exceptions).
Brazil and last years shortage of natural gas Today, Latin America represents an
in Argentina and Chile may also contribute excellent example of how a developing
to growth of M&A activity in the region. region can transform itself to make possible
a level of business expansion that is poised
Challenge and potential to take full advantage of its vast potential.
Latin American economies are highly

diverse, and each country faces many Amauri Costa is a partner at Bracewell &
economic challenges. But the overall Giuliani.
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g New incentives for investing in private equity in

Chile
by Eduardo de la Maza
After publication of the so called Second There is also a tax benefit for those that
Capital Market Reform on 5 July 2007, have previously been shareholders of
investors and investment managers have companies in which the abovementioned
good reason to celebrate. The reform funds have acquired shares for an amount
amended the banking law, the insurance greater than 25 percent of the total capital,
law and the securities market law. It also permitting these other shareholders to
addressed the subordination of debts and consider as the cost of their shares for
the custody of securities and pledges. taxation purposes the highest price paid
Further, it introduced significant measures by one of these funds in the most recent
to promote investment in private equity placement of shares of the respective
by way of investment funds, an area which company, in order to reduce the taxable
currently represents only 3.6 percent of capital gain.
the total portfolio of Chiles investment
funds, with investments that amounted to New forms of finance
US$167m in 2006.
The capital markets reform also
Tax benefits contemplates other promotion measures,
such as authorising banks to invest up to
One of the main incentives is tax exempt 1 percent of their assets in venture capital
income received by contributors to and private equity. This could inject more
investment funds registered before the than $1.5bn into the asset class.
securities market regulatory authority. This
benefit only applies to income obtained In addition, the reform introduced
by the fund through the sale of shares of measures aimed at enhancing the role of
companies that do not trade on a stock the state agency CORFO, an organisation
exchange. To access this benefit, the created in 1939 to contribute to economic
total assets of the fund must be destined development and growth. It currently
exclusively to investment in stock portfolios concentrates on the promotion of
and debt issued by companies that comply competitiveness and innovation of private
with a number of requirements, including: companies, especially small and medium
(i) it has been constituted within seven size companies, which annually receive
years prior to the investment; (ii) it carries from CORFO close to $127m in loans placed
out its activities mainly in Chile; (iii) it has a through the private banking system and
net annual income of less than $17m; and close to $81m in financial assistance.
(iv) it is not involved in the real estate or
investment markets, utilities, roads or other Currently CORFO performs an important
concessions. role in private equity, providing lines
of finance to funds that make capital
L+ L- 3 4 CONTENTS
contributions or grant loans to small and in companies whose shares will be

medium size companies that are in their acquired by the funds, the program will
creation or expansion phases, and whose establish the obligation to agree upon
equity is less than $4.2m at the time of the shareholder agreements that consider
first fund investment. These credit lines an active participation of the fund in the
are bullet loans, with up to 15 year terms, financial, administrative and commercial
and may be expressed in local currency management of such companies, in
or US dollars, for an amount between addition to mechanisms of takeover by the
$1.5m and $17m. They generally permit fund in certain critical situations.
leverage of up to two times the amount of
the contributions paid and committed to As CORFO authorities have indicated, the
the respective fund. The interest rates are program will contemplate call options
favourable: 2 percent as the base rate in in favour of private contributors of the
local currency (the current interest rate of funds in which the institution invests.
notes issued by the Chilean Central Bank It will permit them to purchase, from a
being 2.6 percent) and LIBOR as the base determined term, the funds shares owned
rate for loans in dollars, considering in by CORFO, at a price that includes an
both cases an additional interest rate of 3 implied interest rate dependant upon the
percent if the earnings obtained from the focus of the fund, which may even reach
financed fund exceeds this figure. zero in the case of specific areas that are
being incentivised.
The reform establishes a new system that
will permit CORFO to be a contributor in In this way, the private contributors of
private equity funds, through a program funds may receive the full benefit of upside
that is scheduled to be implemented in earnings, ultimately transforming the
March 2008. The program will consider a contribution of CORFO into a type of loan.
total amount of up to $150m that may be
increased by the Ministry of Finance up to a We are certain that the existence of this
total of $260m. tool will constitute a strong incentive
for the participation of private investors
The contributions of CORFO may be made in these types of funds, as for them it
in funds that invest in shares of closed distributes the value created by the fund in
corporations that comply with same an optimal manner.
requirements referred to above in respect
of the tax benefit and may represent up to
40 percent of the total capital of the fund.
Eduardo de la Maza is an associate at Grasty
To strengthen the effect of investments Quintana Majlis & Ca.
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CHAPTER eleven:
Regional view
Europe
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g Managing pan-European transactions for US

buyers
by Robin Johnson
In May 2007 the world of M&A was such strong, the actual role of the lawyer was
that credit was cheap and financial becoming almost meaningless.
engineering had gone beyond the furthest
imagined process. In one deal, no interest But today, strategics are back in town.
at all was payable on debt it was all rolled Financial buyers now have to compete
up in PIK (payment in kind) instruments against synergistic benefits and cannot
for five years. Leverage was at all time simply rely on cheap credit. Deals that
highs, synergies counted for little and every closed as recently as the summer are
day secondary, tertiary or even quarterly already being renegotiated. A number
institutional buyouts were taking place. of financial buyers, however, had agreed
such limited covenants that some deals
A seller could dictate all the deal terms, can only be renegotiated in the case of
as well as impose ridiculous timetables. a major event of default due to the lack
Acting for the seller, a legal representative of financial covenants that were put into
could insist upon limited due diligence, deals. Banks and financial institutions, as
general disclosure and limited warranties. well as strategic buyers, are insisting upon
For example, in one deal, two financial focused due diligence. The role of vendor
buyers were happy to sign the first draft of due diligence remains important, as vendor
a vendor friendly auction process sale and financial due diligence reports, as well as
purchase agreement provided they were updates, are being sought, and detailed
given exclusivity. One financial institution reviews are taking place. A proper balance
said they felt they could do away with between risk for the purchaser and reward
external lawyers and could just have an for the seller is being put in place and deals
internal lawyer to double check the drafts now have realistic timetables. This does
that had been produced by banks lawyers, not mean that lawyers can simply go back
sellers lawyers, etc. The same institution to increasing fees but it does mean that
said it was happy to rely upon vendor the role of a lawyer in deals is now being
financial due diligence; a vendor having recognised again.
commissioned an accountant to produce
a longform report on the business, even It seems there were a number of deals
though typically an accountant limits their done in the early part of 2007 which could
liability to a buyer. cost general partners a significant amount
of money and which bankers would be
The role of the M&A lawyer both on the embarrassed about by mid 2008. While
sell-side and the buy-side seemed to be there will be a role for PIK deals, these will
limited to doing the basic commoditised only now become more appropriate on
formalisation of a stock transfer form or lower leverage; quasi equity instruments
transfer of assets. While deal flow was deals. The following top ten issues are
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arguably the most important to be Third, process and timetable. Scoping

addressed on a European transaction if the due diligence is vital. Europeans hate
purchaser is based in the US. duplication of due diligence from different
vendors. Agreeing and scoping upfront
First, culture, culture, culture. Can an and spending some time with each
acquisition be managed from 4000 miles provider is key. Having a central point
away? Do not underestimate the difference of contact at the buyer who coordinates
in lifestyle approach, social protection and everything and avoids duplication is a
history. Job security is often key in Europe vital role. The seller needs to have control,
and the entrepreneurial spirit is not as proper communication, proper reporting
live as it is in the US. A number of Eastern structures and time must be built in to
European assets have been acquired from reflect the distance between travel and
state-owned businesses as recently as 10 time zones involved. The need for physical
years ago. The culture of social protection meetings must not be underestimated, as
the culture of the state providing for all this could take three days out of a week,
remains alive in a number of key European and the disproportionate amount of time
territories. and energy that will be expended compared
to a domestic deal. Dealing with other
Second, while more typical US style jobs could become difficult and there are
agreements are getting more recognised higher costs associated with travel and
in Europe the difference in transactional management compared to a domestic deal.
documentation approaches must be
understood. There is a lack of litigation Fourth, in a structured way, do not be
post-deal. This does not mean due diligence afraid to due diligence to death to replace
was done better, but it means that settling contractual comfort. Use due diligence
matters out of court and in a handshake as part of the integration plan. Do not
way is more prevalent in Europe. Escrows underestimate the value of vendor financial
or holdbacks have become commonly or legal due diligence. Rely upon it, use it,
accepted to deal with issues that arise out update it, comment on it. Use due diligence
of due diligence but unlimited indemnities as part of integration. Integration together,
are rare. Most European deals have closing with cultural issues, is key to the success of
balance accounts dealing with net working a European M&A deal from a US buyer.
capital and debt, and a lot of Europeans
see this as a way of settling warranty Fifth, antitrust is a big issue in Europe.
and indemnity claims such as through Build enough time into the project plan
completion accounts mechanism. There to assess antitrust. Each EU jurisdiction
are too many deals which completed more has different rules on antitrust, so do not
than a year ago where completion accounts assume that a one-stop shop in Brussels
have not been settled. Finally, the approach is an easy solution. Most Europeans do not
to disclosure is very different. While specific understand the need for good compliance
disclosures are included there is a general going forward. If they have not been
acceptance in Europe that the buyer exposed to a US purchaser before, their
has to acknowledge general disclosure compliance policies, particularly in relation
of information provided to it during the to antitrust and FCPA, will be completely
disclosure process. inadequate for a US buyers purposes.
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Sixth, taxation. Buyers should look at early uncommon to discover six months down
structuring of deals to create a tax efficient the line that a key integration cost has
basis. There is no equivalent of the 338 in been underestimated. Businesses that are
Europe. A mixture of asset deals and stock required to become standalone upon sale
deals should be considered. In addition, leaving behind a group and its licences,
transaction costs associated with the permits, consents, real estate, IT and
deal, notary fees and stamp duty should share of pension costs should address
not be underestimated; these often come long term structural issues upfront as they
as a surprise to a US purchaser. How are cannot be dealt with through the S&PA.
future profits repatriated? This may not
be straightforward as there may be local Ninth, taking security on a leveraged deal
withholding taxes. In Europe, transfer is not as straightforward as it is in the US.
pricing has become a hot topic when selling There are rules against targets granting
businesses out of a group. Also, do not security, often called financial assistance.
underestimate the tax cost of stock options, There are registration costs associated with
which may be terminated on a sale. taking security and other tax and there are
antiquated processes about registering
Seventh, most US buyers do not security, which often take time to put in
understand labour and social law place.
protections that are in place. Europe has
wide social legislation and most companies Tenth, establishing compliance processes
will have works counsels or unions. There is post-deal needs to be worked on
no single European law. On the whole, this immediately. Preventative and proactive
issue needs to be addressed on a country legal care is the only way an acquisition
by country basis. Compliance programs can be properly managed. Getting
in relation to labour law should not be immediate buy-in to a compliance ethos
underestimated. This could be in relation to from a cultural perspective is key. Few
data privacy, whistle blowing and a general European organisations with a US arm have
need to ensure that what is trying to be compliance structures that are as robust as
imposed through US exterritorial reach can a US company.
work in Europe.
Eighth, separation issues need to be Robin Johnson is a corporate partner at

planned early in the sale process. It is not Eversheds.
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g Glimmers of optimism: better times ahead for

the UK M&A market
by Matthew Middleditch
Unlike liquidity, bad news about the M&A raising financing, even though its bid came
market is in plentiful supply. Deal volumes in July as the markets were beginning to
sank to their lowest level in four years experience extensive volatility. It raised
during the first quarter of 2008 as the credit a record breaking $40bn to fund the
squeeze slammed the brakes on private takeover: the largest loan raised by a UK-
equity and corporate chief executives kept listed company, according to Dealogic,
potential deals in check. and a bold move that created the largest
aluminium producer in the world.
A year ago it was a different story. During
the first half of 2007 a deal boom, fuelled by Material changes
easy credit, was in full-swing. This came to
an end in late June and during the second So what has changed in the M&A market?
half of the year credit came at a premium There is still no consensus on whether we
following the rapid constriction in the debt will see a hard or soft landing for leveraged
markets. M&A, but there are signs that the price
expectations of corporate sellers are lower
One year on from the peak, it is clear that than they were before the credit markets
tight credit conditions are continuing experienced difficulties and that debt
to constrict the M&A market. With US multiples are lower.
economic woes spreading across the globe,
and credit markets showing little sign of In the US market there are some high
a recovery, headline-grabbing deals seem profile examples of investors pulling away
likely to stay muted throughout 2008. from deals. KKR and Goldman walked
The conditions that have provoked a rapid away from their $8bn deal to buy audio
slowdown in UK M&A deal volume are and electronics manufacturer Harman
unlikely to improve significantly before the International, claiming that a material
third quarter of 2008. adverse change (MAC) gave them a
contractual excuse not to buy the company.
While the big ticket line has gone quiet, This scenario remains exceptional outside
there have been exceptions in the last the US, largely because UK sellers expect
six months. RBS sold Southern Water in to see certain funds commitments on
October 2007 for 4.2bn to a consortium their buyers financing and have been
of JPM Asset Management and Australias reluctant to agree MAC wording in their
Challenger Fund. Furthermore, Rio Tintos sale contracts.
bid for Canadian aluminium producer Alcan
proved that the credit squeeze will not However, we foresee that this situation
prevent mega-deals, as long as conditions might change for two reasons. First, as the
are right. Rio Tinto did not have problems sellers market disappears, buyers will look
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for more outs in their purchase contracts. regard this as a buyers market where
Second, banks are now looking more they can unlock opportunities previously
closely at any conditionality in the sales unavailable to them at reasonable terms.
contracts to allow them to get out.
There are plenty of cash-rich FTSE
However, there is plenty of motivation companies that are eyeing potential
aside from hefty break fees to see deals acquisitions at the moment while prices
through, including the need to put money are affordable. Many of their targets share
to work, guarding hard-won reputations prices are depressed, so this year is likely to
and the danger of legal action if parties pull see some knockdown bidding.
out.
Terms of deals
The terms of M&A deals remain broadly the

same now as before the credit squeeze. But There are plenty of cash-rich FTSE companies who
for acquirers needing leveraged finance, the
covenants and terms are stricter. are eyeing potential acquisitions at the moment
while prices are affordable.
The days of ready access to private equitys
favourite investment tools such as cov-lites,
equity bridges and PIK notes are over. In
this sense, we have shifted from sponsor-
friendly terms to a renewal of tensions
between sponsors and lending banks. This Sovereign wealth funds are also starting
looks set to continue for some time. to pick up some of the slack in the market.
These funds began to make inroads into the
Another significant shift is that we are M&A space and established themselves as a
seeing more equity inserted into deals. major market force during the first quarter
of 2007 with investments that, at a total of
Picking up the slack $25bn globally, reached nearly half the size
of the global volume registered by private
Although the honeymoon is over for easy equity investors. SWFs are still expected to
liquidity, this does not mean that M&A will play a key role in UK deals this year.
dry up. While private equity dominated the
market in 2006 and the first two quarters The number of infrastructure funds in the
of 2007, there is now more appetite from UK market has also expanded and they are
trade buyers who face less competition playing a stronger role in M&A. Over the
from the large buyout houses. last few years, funds entering the UK and
European market have raised in excess of
Thus, a tricky market for some creates 16bn in new equity capital, according to
advantages for others. We should see Deloitte.
corporates looking to maximise these
opportunities in the coming year. Big-cap Where else should we expect activity?
companies are still eager to invest and Many predict consolidation in the banking
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sector, particularly among the second and is what will follow the correction of 2007/08.
third tier. The drivers for this are greater
difficulties in accessing capital and the Smaller deals are still being done in the UK
ongoing effects of Basel II requirements, and the bankers and lawyers are still very
which impose rigorous risk and capital busy, particularly with deals in the media
management requirements on lending and and infrastructure sectors. Stable cash flow
investment practices. The rules mean that businesses such as these remain attractive
some banks need greater sums of capital to targets and there is no shortage of
safeguard their solvency, making mergers corporates, or even private equity houses,
attractive. with war chests of cash to invest. It is access
to debt that poses the problem.
Cautiously optimistic
Deals are still out there and innovative deal
The full effects of the crunch remain unclear doers will ensure that the credit crunch
but we are optimistic for 2008 and beyond. does not kill the M&A market.
The world economy remains essentially
strong and many opportunities for
dealmakers remain. The correction in 1998
was followed by very strong M&A activity in Matthew Middleditch is a global co-head of
the following two years, and we believe this M&A at Linklaters.
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g The German M&A and private equity market
by Frank Becker and Dr. Jrn Schnigula
2007 was not a homogeneous year in the and Macquaries acquisition of Techem
German M&A and private equity market. for1.5bn. This compared to eight buyouts
During the first half, it looked like another in the first half of 2007 and eight in the
record breaker with a total value of second half of 2006.
disclosed buyout transactions of 20.7bn,
according to an Ernst & Young study. The Though it seemed that small and mid cap
first multibillion takeover of a listed German deals were less affected by this market
company, foreshadowed by rumours of a break, statistics published by Ernst & Young
bid from a consortium led by Bain Capital, showed a decrease in the number of buyout
did not seem far away. deals in the second half 2007 compared
to the first half for all categories except
Some 1bn-plus transactions took for deal values between 500m and 1bn.
place, such as Siemens sale of its VDO Interestingly, the value of M&A transactions
division to Continental for 11.4bn, the actually increased in the second half of 2007
largest German transaction in 2007, the to more than 35bn, and reached its highest
acquisition of Depfa Bank by Hypo Real peak compared to previous years, partly
Estate for 5.7bn, Blackstones purchase driven by the huge VDO deal. There were
of Klckner Pentaplast for 1.3bn and the 686 M&A transactions involving a German
sale of ProSiebenSat.1 to KKR and Permira company in the second half of 2007,
for 3.1bn. Such transactions were also compared to 428 in the first half of the year,
facilitated by the average debt to EBITDA according to figures from VC-facts.
ratio for leveraged buyouts rising from 4.2
in 2002 to a record high of 5.7 in the first The emphasis among industry sectors
quarter 2007, as shown in the Ernst & Young did not change much. The highest buyout
study. activity took place in real estate, industrial,
services and consumer, with the first two
But in August 2007, the credit crunch, defending their places from 2006.
initiated by the subprime-mortgage market
crisis in the US, hit Germany. Suddenly, Shortly before the subprime crisis spread to
obtaining bank financing became much Germany, financing conditions for financial
more difficult. Some banks even closed investors were arguably more favourable
books for the rest of the year and debt to than ever before. Debt to EBITDA multiples
EBITDA ratios declined. Consequently, in reached record levels. Banks had sufficient
the second half of 2007, the total value of liquidity, were highly competitive and able
buyouts fell to its lowest level since 2003. to quickly syndicate loans. Covenant-lite
Only two additional buyouts over 1bn agreements developed, limiting or even
took place in Germany: CVCs acquisition excluding lenders rights to accelerate
of Dywidag Systems International for 1bn debt as a result of a borrowers default.
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Such provisions disappeared immediately sector, including the potential sale or

when the crisis broke debt to EBITDA mergers of Deutsche Postbank, Dresdner
multiples were cut back by 1-2 points to Bank and Commerzbank. Furthermore, due
match 2006 levels, and syndication became to lower purchase prices, strategic buyers
more difficult if not impossible, resulting are expected to increase their presence
in huge loan backlogs which strained in the M&A market. Also, private equity
banks balance sheets. The psychological players willing to invest more equity in
effects were probably greater, as market their deals and work with lower leverage
uncertainty made banks reluctant to grant levels are likely to find interesting targets
financing even on moderate terms. This at an attractive price. In addition, foreign
primarily concerned mega transactions, but state funds are predicted to invest further
also increasingly affected mid-cap deals. in the German market, following on from
previous deals such as Dubai International
This downswing continued in the beginning Capitals buyout of Mauser-Werke. One of
of 2008, with the volume of M&A the industry sectors expected to be active
transactions in Germany reaching an eight- in 2008 is real estate in particular, listed
year low of 4.1bn during the first quarter, real estate. One reason is that shares of
compared to 15bn in 2007, according to companies like IVG are traded at a discount
Thomson Financial. EBITDA multiples the compared to their net asset value. Another
most common method used to calculate reason is that rents are expected to rise in
enterprise values in buyout transactions Germany during this year and next.
are widely expected to fall further due to
lower debt to EBITDA multiples. Moreover, it is widely assumed (in the
absence of concrete data) that the number
Nevertheless, the outlook for 2008 of distressed or nearly-distressed situations
in Germany is more ambiguous than will increase, especially of buyout targets.
pessimistic. The biggest problems seem According to market rumours, even the
to be the banks financial situation, as senior debt of larger buyouts often trades
nobody seems able to assess which risks far below 100 percent. Of course, not all of
are still hidden in their balance sheets, and these companies will become insolvent, but
the general economy, which is about to financial restructurings, sales of distressed
weaken on fears of a recession (although companies or their debt, or the need to
in March, the German business cycle index, inject further equity may occur more
Ifo climate, reached its highest level since frequently. This is particularly likely given
August 2007). Apart from buyout investors the pessimistic prospects for the buyout
facing difficulties on the financing side, and market. The trend is underlined by the fact
sellers facing lower sale prices, public M&A that around 24bn is currently being raised
transactions will struggle in the wake of for distressed debt funds, according to
lower share prices and fears of a decreasing Private Equity Intelligence. Many private
stock market. Despite this, fewer financing equity sponsors such as Texas Pacific Group
opportunities will make it difficult for and JC Flowers are reportedly building such
buyout firms to realise large takeovers of funds, which up to now have been mostly
public companies or even (strong) minority smaller, more specialised funds.
investments. On the other hand, we may
see consolidation in the German banking From a regulatory perspective, there
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are two predominant issues that may regulatory uncertainties surrounding the
affect the German transaction market. buyout industry. However, the current
First, Germany has lowered its aggregate draft laws only deal with narrowly defined
tax rate for corporations (corporation venture capital funds and would be of little
income tax and trade tax) from about 40 relevance to the industry as a whole. Due
percent to about 30 percent. The positive to criticism, the legislative process has now
effect of this is, however, partly offset by been delayed and the final outcome, as well
the introduction of a so-called interest as its timing, is unclear.
barrier rule, which limits, in general, the
amount of interest expenses that are tax Given these conditions, 2008 continues to
deductible to 30 percent of the borrowers be an interesting and rather unpredictable
tax adjusted EBITDA. Whether these time for the German M&A and private
changes will have a significant effect on equity market. Though it may be far from
the German buyout market remains to be a record year, it will definitely not be a
seen. In any case, the interest barrier rule standstill period.
has made it considerably more difficult to
structure highly leveraged transactions in
a tax efficient manner. Second, the current
government announced quite some time Frank Becker is a partner and Dr Jrn
ago its intention to pass a private equity Schnigula is a senior associate at Kirkland &
law to deal with many tax and other Ellis International LLP.
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g The Spanish M&A market: entering a tunnel?
by Fernando Vives
The past 12 months have seen a significant the legislation governing public tender
level of activity in the Spanish M&A market, offers (Law 6/2007, of 12 April 2007 and
continuing the trend set in recent years. Royal Decree 1066/2007, of 27 July 2007)
Nevertheless, a line can be drawn between transposing the thirteenth EU Directive into
two periods, marking a turning point and Spanish law. The new regime replaced the
coinciding, approximately, with the period prior regime based on intentional tender
between March and September 2007, offers with a system based on mandatory
and the period from late summer 2007 and total tender offers launched after
to the present date. The first period was control is taken up. For such purposes,
characterised by intense activity in the control has been defined as 30 percent of
M&A market, with standout deals such as the voting rights of the target company.
Imperial Tobaccos 14bn tender offer for The new legislation ought to work to the
Altadis. advantage of the tender offers market, with
the introduction of mechanisms such as the
Although the M&A market remained active, possibility of agreeing on a break-up fee of
largely due to the closing of deals started up to 1 percent of the total offer value for
before the summer, the second period the first offeror, the obligation to disclose
reflected a shift in the trend. The subprime equal information to all offerors and the
crisis and its spread to the so-called possibility that the first offeror can bring
real economy brought about significant the tender offer process to a close provided
changes in the M&A market. Rather than the existing blind bidding process results
to generalise this as a sharp downturn, in a tie. Moreover, the interplay between
it is more accurate to look at some of mandatory tender offers and voluntary
the markets distinguishing features. For tender offers opens the way for fresh
example, there was a fall in the number of planning alternatives for deals of this type.
highly leveraged, large scale private equity
deals, whereas smaller Spanish private Another legislative development was the
equity transactions, usually with a debt to introduction the new Antitrust Law (Law
equity ratio of less than 50 percent, enjoyed 15/2007, of 3 July 2007), which, among
something of a boom. Real estate deals also other changes, revamps the legislation
experienced a decline in volume. Volatile applicable to merger control by widening
stock market conditions led to a dramatic the concept of concentration, establishes
drop in the number of public offerings, and a simplified procedure for deals less
virtually all the transactions planned for the likely to affect competition, and relaxes
first quarter of 2008 have ground to a halt. the rules on mandatory notification with
suspended effects until the authorities
On the legislative front, new legislation was give their clearance. Moreover, the role
introduced on 13 August 2007 to amend of the body created under this law, the
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National Antitrust Commission, is further As for the banking industry, crises at a

strengthened in scrutinising and overseeing significant number of US and Eurozone
these types of transactions. financial institutions will give rise to new
opportunities for consolidation and leave
Transparency requirements for listed many with no choice but to sell off their
companies have also been tackled in industrial investments.
greater depth, with the threshold triggering
the obligation to notify significant The real estate industry crisis, on the other
holdings being lowered to 3 percent from hand, will see a flurry of deals to refinance
5 percent under previous legislation, the debt taken on by groups in recent years.
and comprehensive provisions being Sometimes these deals will go hand in hand
established to govern the requirements to with mergers, spin-offs and asset sell-
provide a breakdown of derivatives which offs. Taking place against the backdrop of
can be settled in kind, the underlying insolvency or pre-insolvency proceedings,
assets of which are voting shares in listed these deals will undoubtedly become
companies. There is little doubt that the a particularly prominent feature in the
rationale behind these amendments can coming months.
be found, at least in part, in the experience
resulting from the procedure followed in On another note, the fall in the share prices
the tender offer for Endesa. of many companies will make them a target
for tender offers. It should not be forgotten
The outlook for the market has been that many hedge funds and private equity
considerably affected by a credit crisis that firms had raised their funds just before the
looks set to lead to ever harsher credit subprime crisis hit. Such funds will have to
conditions and availability. It appears that, be put to use, and the current situation is
as things stand, we are still at the mouth of little more than an interlude before prices
the tunnel. Nevertheless, we believe this adapt to dearer credit conditions.
tunnel will not be as gloomy for the M&A
market as some are predicting. Indeed, It does not, therefore, appear that M&A
the market will be affected not so much in activity in Spain is set to undergo a drastic
terms of the number of transactions but decrease. Rather, cyclical change will
rather in the changes to the behaviour of affect the type of deals that are done and
the market players and to the nature of the the behavioural patterns of operators.
deals. Nonetheless, it will be necessary to wait
and see how the financial crisis the
On the one hand, LBO transactions will effects of which we are only just beginning
continue to take place, albeit characterised to detect eventually plays out, before
by their smaller average size, lower reaching any conclusions on future trends in
leverage ratio and the safe-haven M&A activity.
industries in which they are carried out,
such as food, security or other industries Fernando Vives is a partner at Garrigues,
which provide basic goods and services. Abogados y Asesores Tributarios.
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g Trends and prospects for the Spanish M&A legal

market
by Christian Hoedl and Javier Ruiz-Cmara
As in other areas of the world, M&A circumstances, decisions were adopted by

activity continued to boom in Spain a simple majority of syndicate banks. As a
during the first half of 2007. The market further factor, consent was presumed by
was dominated during this period by the the lapse of time, yank-the-bank provisions
sell-side and its advisers. The result was were increasingly common and mortgages
that most, if not all, of the Anglo-Saxon and other liens were replaced by the
inventions that favoured the seller in an borrower undertaking to create the security
M&A transaction continued to be used interest at a future, potential-default-
in Spain. These transactions included related event. As a result, the enforceability
auctions that replaced buyer-driven of these undertakings is arguable. This
proprietary deals, vendor due diligence is particularly true for insolvencies or
exercises aimed at substituting the sellers bankruptcies.
representations and warranties with the
liability of the advisers and locked-box After the credit crunch that began in the
rather than traditional post-closing net summer of 2007 (which paved the way
debt / EBITDA adjustments. for the severe crisis of the Spanish real
estate sector), the situation changed
As a result of the favourable market rapidly and Spanish involvement in M&A
conditions, the first half of 2007 was also activity slowed significantly. Private equity
another record year for M&A financing. buyouts have almost entirely vanished.
In such a highly competitive market, Large private equity exits have also dried
banks were willing to finance an ever up as IPOs and secondary LBOs have
increasing multiple of the target EBITDA. been postponed until market conditions
In contrast, bank covenants were either improve. Regardless, expectations in the
reduced or their enforcement was made mid-market and below remain relatively
more difficult. As in most other European sanguine. Market conditions could also
jurisdictions, financing became more affect the type of businesses sold as
and more stratified. This resulted in an owners hold their top performers for
increasing number of senior, mezzanine, later in the business cycle. Acquisition
second lien, profit sharing and other finance activities are also much lower as
tranches and facilities. Certainty of funds compared to the same period a year ago.
was imposed by borrowers and sellers even The mood in the market has changed
in private transactions and ratio defaults noticeably in recent months: even the
could be cured during the course of several most competitive banks (RBS, HBOS, ING
consecutive periods. Representations and and Banesto among others) have become
warranties in respect of the target were more cautions about acquisition financings
subject to increasingly generous clean-up due to either specific targets or to more
periods. Except in particularly exceptional general industry concerns.
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The industry that has arguably suffered that has fundamentally modified Spanish
the most severely from the credit crunch in takeover rules. The key developments relate
Spain has been real estate and industries to the thresholds, timing and scope of the
closely related to it. Following several years takeover offer. Now, the offer becomes
of a robust and liquid market and the rapid mandatory, and at an equitable price, once
rises of property prices, the industry is the investor has acquired control of the
now facing an uncertain future. Although target, which is considered to exist whenever
Spanish banks have not been directly the investor reaches 30 percent of the voting
affected by the subprime mortgages crisis, rights of the target or, in the event that
the worlds adverse financial situation the investor appoints half plus one of the
coupled with the rise in interest rates and directors of the target within 24 months
excessive mortgage backed indebtedness from the offer. The new Takeover Regulation
have brought an abrupt end to the therefore replaces the (exclusively Spanish)
industrys golden age. compulsory ex ante, in whole or in part,
takeover bids by ex post bids which must
be made toward 100 percent of the shares
and certain other securities. Nevertheless,
voluntary (either in whole or in part) offers
remain possible. For the first time in Spain,
The legal framework governing capital markets in the new Takeover Regulations include
squeeze-out and sell-out rights provided
Spain underwent a significant transformation during that: (i) as a consequence of the offer, the
the course of the previous year. offeror holds at least 90 percent of the
capital-carrying voting rights; and (ii) the
offer has been accepted by at least 90
percent of its addressees.
Competition law. Spain has implemented

Legal developments a new competition law which, among
other things, provides for a higher filing
Corporate and takeover law. The legal threshold linked to market share (increased
framework governing capital markets from 25 to 30 percent) while the turnover
in Spain underwent a significant threshold remains unchanged gives the
transformation during the course of the ultimate decision on merger control to the
previous year. The Stock Market Law of competition authorities rather than the
1988 was amended in crucial areas such as government, established a simplified form
market abuse, official listings and public for the filing of concentrations unlikely to
offerings, the information to be disclosed cause competition concerns and aligns
by listed companies and their shareholders, the Spanish merger control rules with the
the clearing and settlement of market EU merger regulation in respect to joint
transactions, other regulated markets and ventures.
investment services firms, among others.
Prospects for the coming months
More importantly, however, Spain
introduced a new takeover regime in 2007 The impact of the credit crunch will
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probably have a more marked effect on in which the bidder cannot raise enough
the value of M&A deals rather than the debt to acquire 100 percent of the target
actual number of transactions in Spain. company. Investors may therefore
The difficulties for raising bank financing explore other alternatives (less common
will most likely lead to deals characterised in the recent golden years) such as co-
by lower leverage but not necessarily to a investment schemes with other bidders and
dramatic reduction of midcap deals. acquisition of minority / majority stakes to
the sellers (retaining a significant stake in
Some private equity houses may suffer the target).
from excessive prices driven by auctions
and the obscurity in the debt market in
recent years.
Christian Hoedl is a partner and Javier
Finally, the reduction in the availability Ruiz-Cmara is a senior associate at Ura
of financing may also lead to scenarios Menndez.
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g Developments in the Netherlands corporate and

takeover law
by willem calkoen
Before 2000 the average Netherlands companies and foreign institutions invested
listed company had quite a few legal heavily in Dutch companies. At present 80
defence mechanisms. Many companies did percent of Dutch shareholders are foreign.
not list shares but depository receipts. A Gradually, companies voluntarily dropped
foundation friendly to the board owned the some of their defence mechanisms, partly
shares which had the voting rights. There due to substantial pressure from the
were mechanisms for the company to Amsterdam Stock Exchange.
issue preference shares at a low price to a
friendly foundation, which could then vote In 2004 the Corporate Governance Code
on these preference shares. There were Tabaksblat was issued. It emphasised
also stipulations in articles of association responsibility of supervisory directors to
such as co-optation of supervisory directors shareholders, more power of shareholders,
and managing directors. Sometimes mandatory proxies to depository receipt
special priority shares owned by a friendly holders so that they can vote on the shares
foundation were the only shares that could that they held beneficially and ideas to
nominate new directors. In addition, most eliminate defence mechanisms. In addition,
large companies were subjected to the two- it was made possible to have one-tier
tier board regime, where the supervisory boards in the UK style.
directors by mandatory law co-opted
themselves. On 1 October 2004 an important
change to the Dutch corporate law was
In short, there was a very defensive and introduced with the following items.
protected situation for the managing and First, in companies with the two-tier
supervisory boards. Shareholders meetings board regime (large companies) the
were characterised by absenteeism; supervisory board no longer co-opts itself.
on average about 15-20 percent of The shareholders meeting appoints and
shareholders came to shareholders dismisses the supervisory directors. There
meetings. There was little communication is still a situation where the supervisory
between boards and shareholders. Large directors nominate their successors with
Dutch pension funds held many shares in some influence for the works councils in
Dutch companies, but did not want to try to these nominations, but the shareholders
influence directors. Shareholdings in Dutch may refuse to follow the nomination.
companies were mainly owned by Dutch The fact that shareholders may dismiss
institutions and Dutch individuals. the complete supervisory board was an
important shareholder power in the Stork
Over the years, the percentage of foreign deal in 2008.
shareholders has grown drastically.
Dutch pension funds invested in foreign Second, shareholders who own 1 percent,
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or in very large companies, shareholders important decisions. The Dutch Supreme

who hold at least 50m, may force the Court overturned this decision, because
board to put certain points on the agenda article 2:107a of the Civil Code provides
of a shareholders meeting. This also proved an exact threshold on when to request
to be an important shareholder power in shareholder consent, which is one-third of
the Stork deal, and the VNU deal of 2007. A the value and not less. The Supreme Court
draft law proposes to raise this threshold to therefore decided that the article should be
3 percent. interpreted restrictively, to provide clarity
of law for boards and companies.
Third, shareholders have the power to
consent to the policy for payment of As mentioned, foreign shareholdings of
salary and fringe benefits and share option Dutch listed companies have increased
schemes for executive directors and tremendously in recent years. At present
supervisory directors. This proved to be 80 percent of the shares in Dutch listed
important in the Ahold case. There is much companies are owned by foreigners.
debate about high CEO incomes.
About 10 years ago the majority of
Fourth, Article 2:107a of the Civil Code managing directors and supervisory
obliges the board to request consent at the directors of Dutch companies were Dutch.
shareholders meeting for decisions which There has been a substantial change
change the character of the company, here too. Many CEOs and CFOs of Dutch
such as: (i) the disposal of nearly the companies are now foreigners. Interestingly
complete enterprise (which was already many CEOs of the largest companies are
applied as a rule of practice in the merger still Dutch, such as Shell, AKZO and Philips,
of P&O and Nedlloyd); (ii) a joint venture but the CFOs are often foreign. At present
of high importance; (iii) and the disposal the CEO of Fortis, ING and Unilever are
or acquisition of a subsidiary which has foreign. There are many supervisory board
or would have a value of one-third of the members who are foreign as well, such as
company. However, if this consent is not the chairman of the supervisory board of
given, it does not block the power of the ABN AMRO.
board to represent the company towards
third parties in such matters. In addition to the legal changes of 1
October 2004 which favoured shareholders,
Article 2.107a of the Civil Code was a central the trend of foreign shareholdings has
aspect in the case of ABN Amro selling also increased shareholder activism. A
LaSalle Bank. LaSalle Bank had a lower shareholder activist argued that Shell
value than one-third of the total value of should review its board structure, which
ABN Amro, but nonetheless the Enterprise led to the merger of Royal Dutch and Shell
Court of Amsterdam decided that ABN UK into a UK public company with its head
Amro should have asked the shareholders office in the Netherlands. The advantage
consent to sell LaSalle because ABN of a UK public company is a better trading
Amro was in that period for sale. The platform in London. There are substantial
Enterprise Court used arguments of English tax advantages of keeping the head office
and US law where a company that is up in the Netherlands.
for sale has to request consent for any
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Shareholder activism forced the boards are special committees and foundations
of VNU and Stork to seek acquisitions by in the Netherlands to promote the quality
private equity. Other companies were of services and infrastructure, so the
forced to undertake necessary disposals Netherlands can maintain its position in the
by shareholder activists, and also sell to financial and service areas.
private equity, such as the sale by Philips of
its chips division to KKR. Notwithstanding all of the above, the
Netherlands remains an open economy.
There is debate in the Netherlands about It has always realised that it is more
the sell out of Dutch companies, which important that the work of highly qualified
gained impetus from the Stork and ABN specialists is done in the Netherlands than
AMRO deals. The Minister of Finance has the owners of a company remain Dutch.
been in favour of an open economy and
wishes to promote acquisitions by foreign
entities of Dutch companies, provided the Willem Calkoen is a partner in the Mergers &
work is still done in the Netherlands. There Acquisitions Group at NautaDutilh N.V.
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g Forced unbundling of Dutch energy companies
by Harm Kerstholt and Miriam van Ee
On 3 August 2007 a Royal Decree was vertically integrated energy companies in

published in the Netherlands to implement the Netherlands are (once again) publicly
the so-called group ban as laid down in owned by municipal and provincial
an amendment to the Dutch Electricity Act shareholders. This will not change in the
and Gas Act. Although no other European foreseeable future as the Electricity Act and
country introduced similar legislation Gas Act do not allow the sale of network
with regard to the unbundling of energy businesses outside the current circle of
companies, as from 1 July 2008 Dutch (public) shareholders.
energy companies must fully separate their
networks business from their commercial No later than 1 January 2011, commercial
activities. After an extensive legislative and network companies can no longer be
history the forced unbundling of the part of the same group or hold shares in the
Netherlands energy companies is a fact and capital of each others group companies.
goes beyond the unbundling requirements This means that from the commencement
currently under debate in the European date of the Act the integrated energy
Union for vertically integrated energy companies have two and a half years to
companies. The European debate focuses finalise the separation.
on the separation of transmission network
companies only and does not extend to The procedure for a legal split of the
distribution networks. business starts with the preparation by the
management of a split-off proposal. This
In this article we focus on the consequences proposal defines, among other things, which
of the separation of the energy companies assets and liabilities will be acquired by
in the Netherlands, because it will increase the respective companies. In other words,
M&A in the Netherlands energy market. which assets and liabilities are related to
network activities and which are related to
Timeframe the commercial business. The proposal has
to be approved by the Minister of Economic
The Act requires the separation of Affairs, after advice of the Netherlands
integrated energy companies such as Competition Authority has been obtained.
Nuon, Essent, ENECO and Delta into Approval has to be granted before 1 July
separate companies: (i) a commercial 2009. After approval the companies can start
company which engages in the sale, the split in conformity with the proposal.
distribution and/or production of energy
and (ii) a network-company operating Europe
gas and/or electricity networks. Since
RWE sold its network business last year One of the main reasons for the forced
to the Municipality of Eindhoven, all unbundling is to create a level playing
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field in the energy consumer market widened, so that from now on all regional
in the Netherlands. Separation should and local authorities can hold shares in
safeguard that it becomes impossible network managers. An enumeration of all
to cross-subsidise commercial activities public legal entities that can hold shares in a
through (monopoly) network activities. network manager is recently laid down in a
The Act has been and still is controversial. ministerial regulation.
Several integrated energy companies
have instituted legal proceedings or have The debate about the possibility to sell
announced their intention to seriously a minority of the shares in the network
consider doing so. Furthermore, the two operator to private parties (i.e., outside the
biggest incumbent players, Nuon and circle of the authorities) did not make it
Essent, attempted a merger last year to to a legislative proposal due to resistance
create a national champion. The merger in the House of Representatives. The
was not completed because public public shareholders might however seek
shareholders could not agree on the terms. opportunities to refinance the network
business to free cash, which creates
In the midst of this turmoil, large utility opportunities for banks.
companies appear to be very interested
in the Dutch commercial parts and it is Exit commercial activities
expected that these parts will become
subject to takeovers after unbundling The separation of energy companies
within the next couple of years. implies that shareholders can freely transfer
their shares in the commercial companies
Public shareholders to third parties. Many shareholders
indicate that indeed they are planning to
At the moment, public shareholders sell or investigating the possibility to sell
are examining their options concerning these shares. Often heard reasons for the
the possible sale of their shares in decision to sell the shares in the commercial
commercial energy companies. Until the companies are that: (i) share ownership is
full implementation of the separation is a no longer the obvious means to secure the
fact, the shareholders cannot freely transfer public interest involved with the trade and
their shares in the integrated energy supply of energy; (ii) the local authorities
companies because these companies do not have enough expertise to give
include the network business. After substance in a good manner to their share
separation, the sale of the commercial ownership; (iii) the financial risk of the
business is expected as the rationale for participation in the commercial company
public shareholders to keep their shares in will strongly increase due to the separation;
the commercial business disappears. The and (iv) the sale of the shares will release a
sale of the network business will, however, considerable sum of money at once.
still require the consent of the Minister of
Economic Affairs. Such consent will only It will be interesting to see how the sales, if
be given if the alteration in the ownership any, are being structured. The expectation
of the network or the shares in a network is that the commercial businesses will be
manager remains within the current circle offered in controlled auctions not long
of shareholders. This circle has recently after the separation is implemented. This
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is, however, by no means certain. In the in the European energy market with
last two years, smaller companies that competitors such as RWE, E.ON, Suez and
voluntarily split up were sold without EdF.
auctions. Minority shareholders could
also decide to sell their shares while other The developments in the Dutch energy
shareholders retain their shareholdings. The market will inevitably influence the
province of Gelderland (a major shareholder European unbundling discussion, as did
of Nuon) recently indicated that it will E.ONs recent decision to voluntarily
retain its shareholding in the commercial separate its transmission network business.
business for several years. None of The coming period will be important for
the current shareholders has strongly shareholders, management and those
indicated interest to actually increase their companies looking to buy commercial
shareholding, but this cannot be ruled out. positions, as they each have a part to play
in the unbundling process. Since various
Our expectation is that the commercial stakeholders have different interests,
business will be sold sooner rather than the period leading up to the actual
later. This is mainly because public implementation of the unbundling will be
shareholders will not want to bear challenging for everyone involved.
responsibility for the enormous risks
involved with the commercial energy
business. Moreover, after separation the Harm Kerstholt is head of the Energy &
commercial energy companies may lack Utilities Industry Group and Miriam van Ee is
the size and power to effectively compete a senior associate at NautaDutilh N.V.
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g Private equity and public takeovers in

Switzerland: finally a happy marriage?
by Frank Gerhard
Last year, the first leveraged public have long been reluctant to operate in the
takeover was successfully closed in public M&A market because the typical
Switzerland. Unilabs, listed on the SWX financing structures often conflicted with
Swiss Exchange, was acquired by the the interests of minority shareholders of the
Swedish-based and private equity-backed target. Indeed, for purposes of the public
healthcare provider Capio, creating a takeover offer, the private equity investor
leading laboratory services group in will set up an acquisition vehicle to be
Europe. Approximately 40 percent of the funded by a mix of equity, senior debt and
offer was financed through equity, while subordinated debt. As the debt portion will
approximately 60 percent was financed trigger interest payments, proceeds need to
through a syndicated credit facility. be generated in order to enable the acquirer
This transaction followed a series of to service such interest and amortisation
unsuccessful attempts by private equity payments. Furthermore, in order to
investors to take private Swiss listed achieve tax savings, the acquirer will want
companies (e.g., CVC / Forbo in 2004/05 or to allocate interest payment obligations
CVC / SIG in 2006/07). on the level of a fully-taxed subsidiary
company. In other words, the acquirer will
This successful LBO of a public company want to balance the acquisition debt with
has raised the interest level of various the operating profits in order to (re-)finance
private equity investors for Swiss listed the debt with minimal corporate and tax
targets. This interest has been enhanced consequences.
by share prices coming down in the last six
months. In addition, while it appears that Swiss legal particularities
the credit crunch has resulted only in the
private equity deals in the CHF 1bn-plus Swiss law has three particularities which are
bracket struggling to find any acceptable important to understand when structuring
finance, deals worth less than CHF 1bn efficient acquisition financing.
seem still to be flowing. Finally, LBOs in
Switzerland benefit from changes in the First, Switzerland knows no group tax
legal and tax framework which came into consolidation, except for VAT. Each
force in 2007 and 2008. The conjunction company is tax-assessed on a standalone
of these elements should open new basis. Therefore, a tax-efficient structuring
opportunities in the mid-market segment in of acquisition financing usually involves
Switzerland for private equity investors. some kind of an upstreaming of profits
or assets from the target group to the
Challenges of LBO financing acquisition vehicle (financial assistance) or a
pushing down of the acquisition debt from
In Switzerland, private equity investors the acquisition vehicle to the target group
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(debt push down). Particularly if not at public offer, such cooperation is in fact
arms length, such transactions can trigger rarely given for retail shareholders.
adverse tax consequences on the level of
the Swiss assisting or benefiting company. Upstream loans as financial assistance
Second, Swiss corporate and bankruptcy Arms length principles and corporate law
law does not recognise the overall implications
legal concept of an integrated group of
companies. This explains why the law Usually, a target would upstream profits
protects assisting companies against or assets to the acquisition vehicle by
distributions and financial assistance that way of a formal distribution of dividend
could harm the creditors of the assisting or by a capital decrease. Both necessitate
company by unduly decreasing assets or shareholder approval and include minority
increasing debt. Consequently, the board shareholders in the distribution. Another
of directors of a Swiss target may not take way of financial assistance by the target
a consolidated view and fulfil its fiduciary would be to grant an upstream loan to
duty by merely considering the overall its parent. The funds for making this loan
interests of the entire group. can come from existing undistributed
cash or from dividend proceeds by the
Third, the capital gain realised in a sale by operational subsidiaries. Besides making an
Swiss residents of shares held as private upstream loan, the target can also provide
assets, is, in principle, tax free. However, financial assistance by other means, such
this favourable tax treatment is only as providing security for the obligations of
upheld if the restrictions emanating from the parent vis--vis third parties. If there are
the concept of indirect partial liquidation minority shareholders, the granting of an
are respected. Under the indirect partial upstream loan to the majority shareholder
liquidation concept a tax free capital gain is subject to the protection of the interests
is re-classified into taxable income in three of the minority shareholders.
situations. First, a sale of a participation
of a least 20 percent of a companys In any event, such loan must meet arms
share capital from the private assets of length conditions, as they would be
an individual investor to the business requested by an unrelated third party
assets of an individual or a company takes when granting the same loan to the same
place. Second, if within five years after the borrower. In addition, an upstream loan
acquisition, the acquirer distributes funds by a Swiss lender must be examined in
from the target which, when the sale took the light of the restrictions and conditions
place, were contained in the target, were imposed by certain general principles of
not needed for operational purposes and corporate and tax law. This is particularly
were distributable from a corporate law important where there are reasonable
standpoint. In this context, a merger of the doubts as to whether the terms of an
target and the acquirer, as well as financial- upstream loan are at arms length. First,
assistance transactions entered into by the if the loan is not entirely at arms length
target, are considered as a distribution of it is advisable for the Swiss lender to
such funds. Finally, if the seller and buyer extend the purpose clause of its articles
cooperate in the financing. In case of a of incorporation to provide explicitly for
L+ L- 3 4 CONTENTS
the granting of financial assistance to minimal interest rate requirement not met
group companies. Second, the upstream or even the total loan amount if the loan
loan must comply with the principles of was fictitious) may be subject to dividend
adequate risk diversification and diligent withholding tax of 35 percent of the fair
liquidity management of the lender (duty market value of the gross distribution.
of care). Third, unless the upstream loan Second, the withholding tax is in general
clearly meets the arms length test, the fully recoverable if the borrower is a Swiss
upstream loan must be limited to the company. Foreign recipients can fully or
freely disposable equity of the lender. An partially recover the withholding tax based
upstream loan exceeding such amount on double taxation treaties, including
could be deemed to be an unlawful return the agreement between Switzerland and
of the shareholders capital contributions the EU on the taxation of saving income
and to violate the statutory limitations which also covers dividends to EU parent
on the use of the companys reserves, in corporations. Third, the distribution
particular if the upstream loan has been received by a Swiss company or target is
fictitious or where it was clear from the largely exempt from corporate income
beginning that the borrower will not be tax if the benefiting company is a major
in a position to repay the loan when due. shareholder in the assisting company.
Fourth, an upstream loan which does not
clearly have arms length terms could be Debt push down
deemed a constructive dividend. As a
consequence, the board of directors of By way of merger
the lender would be forced to demand
immediate repayment of the loan. In If the acquisition company and the target
this context, it has become customary to effect a statutory merger, their assets and
require formal approval of the upstream liabilities are combined in one legal entity,
loan not only by the board of directors, with the effect that the targets assets can
but also by the shareholders of the Swiss be used to repay or service the acquisition
lender. debt. Such a merger requires at least two-
thirds of the capital and the votes of the
Non-compliance with the preceding may shareholders of both companies. If the
lead to the invalidity of the upstream loan acquisition company controls 90 percent or
as well as to directors and officers personal more of the targets votes, it can squeeze
liability. Furthermore, non-compliance may out minorities against payment of cash.
qualify as a criminal offence or as fraudulent
conveyance under bankruptcy laws. A statutory merger is usually not accepted
by the Swiss tax authorities. Hence, the
Tax implications for assisting and benefiting interest expenses cannot be deducted
companies from the taxable income for a period of
usually five years. In addition, it may lead
From a tax perspective, should the to a reclassification of the formerly tax free
conditions of the upstream loan not be capital gain of Swiss retail shareholders
at arms length, the loan will be treated into taxable income based on the theory of
as a constructive dividend. This has three indirect (total) liquidation.
implications. First, the distribution (e.g.,
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By way of dividend neither triggers Swiss withholding tax

nor corporate income tax. In addition,
Dividends may be a straightforward way such a reduction is exempt from income
to refinance the acquisition vehicle or to taxation for Swiss private investors. As a
push down debt (by assumption of certain consequence, the theory of indirect partial
loans). Dividends require shareholder liquidation should not apply.
approval and can only be made from freely
disposable reserves as evidenced in audited Sale of activities within the target group
financial statements. Remaining minority or to third parties
shareholders are entitled to a proportional
dividend and may challenge the resolution. Upstreaming revenues or assets up to the
acquisition vehicle can also be achieved by
A dividend paid by the target to a non-Swiss the sale of assets, which can be structured
acquisition vehicle triggers withholding in various ways. For example, the target
tax of 35 percent unless a treaty provides can be split with the effect that parts
for relief or refund. A Swiss acquisition of the targets business activities will
vehicle receiving the dividend may benefit be transferred to a new sister company
from the participation exemption largely (Newco). The acquisition vehicle would
exempting dividend from corporate income then sell Newco either to a third party
tax. As dividends may be seen as an indirect (if the activities are no longer desired) or
partial liquidation, the targets Swiss retail to a profitable operating subsidiary. The
shareholders tax free capital gain may purchase price may be used to repay the
to that extent be reclassified as taxable acquisition debt or, if sold to a subsidiary,
income. remain unpaid for the moment, thus
resulting in an interest-bearing loan of the
By way of capital reduction acquisition company to the subsidiary.
After the takeover offer, the targets Conclusion

share capital can be reduced in order to
distribute the corresponding amount to Leveraged takeover offers including
the acquisition vehicle to repay the debt. financial assistance and debt push down
The capital reduction requires a resolution are possible in Switzerland, provided
of the shareholders meeting, creditor they are carefully prepared and structured.
notification and an auditors certificate. A Additional transactions in the near future
capital reduction is likely to require three to will demonstrate the proof of concept.
six months.
A reduction of nominal share capital Frank Gerhard is a partner at Homburger.
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g Current state of the Nordic M&A market
by Peter Sarkia, Erik Swartling and Philip Heilbrunn
In recent years, the Nordic M&A market lot of activity since it is still possible to find
has boomed, mostly due to the active reasonable financing.
private equity houses and the availability of
attractive financing. However, the subprime Another trend is the increased activity of
fallout has in some respects affected the trade buyers, possibly as a consequence of
financing options for financial acquirers, lower valuations and the fact that the trade
and there has been some impact on the buyers are generally less dependant on
Nordic market as a consequence. highly leveraged financing.
Trends in the Swedish M&A market During 2007 there was a lot of attention on
the top individuals at leading private equity
Prior to the subprime fallout, we saw the houses, and their salaries. This attention
following trends, especially in private equity seems to have subdued lately. The extent
related transactions. Opportunities for of negative publicity in Sweden has not
thorough due diligence were very limited. reached the levels seen in the UK during
Especially in secondary buyouts, private 2007. To the contrary, the general opinion
equity to private equity, very few reps and seems to be more favourable towards
warranties were provided by vendors and private equity at present.
in some cases the representations and
warranties would not survive a closing of As indicated above, deal activity in the
the transaction. Acquisition financing was mid-market seems to have declined
highly leveraged and controlled auctions only slightly. How much of this decline is
were very competitive, which led to high attributable to the credit crunch is difficult
purchase prices. to say. It has definitely not been as severely
impacted as international leveraged mega
During 2007, several of the major Swedish deals.
private equity houses raised substantial
funds. Our impression is that there is a lot In Sweden, investors have shown interest
of capital available for investments. When it in a wide range of sectors. In recent years,
comes to financing larger buyouts and other there has been a lot of focus on the real
investments, private equity players have estate market, but this seems to have
stated that whereas previously they could decreased slightly. Further, financial
talk to only one or two banks, today several institutions and media related companies
banks have to be approached. Consequently, appear to be in focus at present. Interest for
there are increased difficulties for primarily investments has been shown from many
private equity houses to find attractive jurisdictions, but chiefly from investors
high leverage acquisition financing. At the domiciled in the US, Norway, Iceland and
mid-market level, however, there is still a Germany.
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Competition between strategic and is the level of liability taken on by the seller.
financial acquirers in the M&A market Private equity sellers do not retain much
of the purchase price consideration. Funds
In the Nordic region, there are currently need to be closed and proceeds distributed
few deals that do not have a private equity as soon as possible following an exit. On
component. However, the presence of the other hand, the trade buyer needs to
trade buyers has definitely increased and be able to recover on a warranty claim. An
private equity houses seem to prefer trade escrow arrangement in which private equity
sales to initial public offerings. sellers accept to hold back approximately
10 percent of the purchase price is not an
Due diligence. Private equity houses unusual solution to the problem.
generally acquire businesses on a
standalone basis, as opposed to trade Purchase price adjustments. The purchase
buyers, and therefore their concerns in price adjustment mechanism typically
acquisitions usually involve a narrower falls into two main categories: the locked
assessment of liabilities and financial box which is normally what private equity
performance. Consequently, the different houses prefer as sellers, and post-closing
approaches compared to trade buyers can pricing adjustments in the form of, for
lead to some frustration on the private example, completion accounts.
equity side at the pace of a trade buyers
review. The purchase price when using the
completion account mechanism is
Private equity sellers normally prepare calculated as the agreed headline price
vendor due diligence reports, drafted by (enterprise value), adjusted for actual net
accountants and lawyers covering financial debt at completion and for the excess
and legal aspects of the targets business. or shortfall of actual working capital at
This speeds up the due diligence process. completion, in comparison to target
working capital or the target net asset
Representations and warranties. In value. This method is usually preferred by
secondary buyouts, private equity to trade buyers, since if any adjustment is
private equity, it was previously common needed, it is normally to the detriment of
to see warranty cover limited to the the seller in the form of a reduction of the
ability to transact, title to shares and no purchase price.
encumbrances. In extreme circumstances,
the warranties provided have not even On the other hand, the locked box
survived closing. This trend has recently mechanism entails a fixed equity price
subsided. At least basic business warranties calculated on the basis of an agreed
now seem to be the main trend. Private balance sheet, accompanied by locked box
equity sellers seem to acknowledge that protection for the buyer to prevent loss of
the internal compliance rules of trade value (leakage) from the target business in
buyers necessitate at least limited business the period from the reference balance sheet
warranties. date to completion. Completion accounts
are thus not required in this solution.
Another issue always discussed, once the
scope of warranty cover has been agreed,
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Prospects for 2008 the state owned distributor of i.a. Absolut

Vodka.
Due to the present volatility of the market,
the prospects for 2008 are difficult to Clearly, adoption of the euro as the lawful
predict. However, as regards mid-market currency in Sweden would facilitate cross-
deals, we do not foresee any major impact border acquisitions into Sweden. However,
from the international credit crunch. Deal this does not seem to be likely in the near
structures and the level of leverage in the future. Further, it would naturally facilitate
financing of private equity acquisitions may acquisitions into Sweden if Swedish
be affected, but at present deal activity accounting principles fully corresponded to
does not seem to have declined. The international accounting standards.
ongoing privatisations of large companies
owned or controlled by the state will
probably contribute to some PE activity. For
example, Swedens largest PE house EQT Peter Sarkia, Erik Swartling and Philip
has expressed an interest in participating Heilbrunn are partners at Advokatfirman
in the controlled auction of Vin & Sprit AB, Hammarskild & Co.
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g Financing options and capital structures
by Peter Sarkia, Erik Swartling and Philip Heilbrunn
Up until June 2007, when the credit crunch used to govern acquisition finance
started to affect global markets, including documentation but this depends on various
Sweden, there had been a constant growth circumstances, mainly the size of the
in the number of private equity investments transaction, the original lenders origin and
in Sweden. The increasing expertise the targeted syndication market. In any
and sophistication, and the increasingly event, leveraged transactions not governed
aggressive approach of sponsors active by Swedish law require significant input
in the Nordic market, contributed to this from Swedish lawyers in many areas, when
steady rise and development of a borrower- a Swedish SPV is involved.
friendly leveraged finance environment.
Even though the credit crunch has had Standard structure
some affect on liquidity and leveraged
finance in Swedien, interest from European The standard starting place is a draft
buyout houses has remained high, even tax structure paper prepared by the
when it seems to have waned in other sponsors tax accountants. As tax advisers,
regions of Europe. the accountants will have prepared the
structure to maximise tax efficiencies.
As in other jurisdictions, leveraged However, they often do not consider
transactions in Sweden involve the lending corporate and financial law issues and the
of funds to a SPV controlled by an equity impact of the structure on the borrowers
sponsor (often a private equity sponsor and lenders legal position.
and, in some cases, the management of the
purchased company) to acquire the target Generally, investors set up a newly
company and refinance its existing debt. incorporated SPV, irrespective of the
The acquisition facility is paid with the cash nationality of its shareholders. In the basic
flows generated by the target company, structure, the SPV tends to be a company
which are upstreamed to the purchase resident in Sweden and subject to Swedish
vehicle through dividend payments or other corporate income tax. In this structure,
available methods. the SPV raises the finance to purchase the
stock of the target company. The SPV is
Swedish based leveraged transaction usually a private limited liability company,
structures are similar to those in the UK which limits the shareholders liability
and certain parts of Europe (in particular to the capital invested and requires few
the Nordic countries), although some formalities to be set up. An asset deal as
particularities in Swedish law may require opposed to a share deal is rarely used in
tailoring the structure of the transaction Sweden by private equity sponsors.
and the finance documents to be in
compliance. Swedish law is sometimes The acquisition is usually funded by a
L+ L- 3 4 CONTENTS
mix of senior and mezzanine bank debt terms and solutions has ceased. The credit
(or independent mezzanine debt) and crunch has provided the banks and other
shareholder funds, both pure equity lenders on the European leveraged buyout
and unsecured shareholder loans. The market with an opportunity to reconsider
shareholder loans are treated as equity certain terms upon which pre-credit crunch
between the lenders and the shareholders. acquisition deals were made and to take
In the vast majority of cases, banking a new look at certain terms on which
facilities are used. Most private equity lenders have committed funds to mergers
acquisitions have been financed with credit and acquisitions. Lenders and their legal
facilities provided by banks, combined advisers seem to take the opportunity to
with mezzanine provided by banks or by reconsider some of the borrower-driven
specific independent debt providers. Unlike terms found in the most aggressive
certain other jurisdictions, debt security leveraged acquisition deals before the
instruments are not commonly used to credit crunch.
finance acquisitions.
Security
In UK and US based leveraged transactions,

the lenders from a Swedish legal
In Sweden, limitations on the security available perspective seem to expect to obtain as
close to full security from the target group
to the lenders arise due to, among other things, as possible. In Sweden, limitations on the
financial assistance and dividend restrictions. security available to the lenders arise due
to, among other things, financial assistance
and dividend restrictions, corporate benefit
requirements, and other Swedish specific
requirements, such as Swedish perfection
requirements under Swedish law imposing
inter alia difficulties to obtain security over
Trends following the credit crunch assets which are used in the day to day
business. Security is normally granted on
Much has been said and written about a cost / benefit analysis and there is no
the impact of the credit crunch on the Swedish equivalent of the UK whitewash
European leveraged lending market. In procedure. In UK based leveraged
the Swedish market, certain trends are transactions, we have noticed the lenders
identifiable in recently negotiated deals, increased requests for additional or other
but it is in our view too early to conclude security. Due to the aforementioned
whether any significant changes in the limitations to provide certain types of
previously borrower-friendly environment security under Swedish law, it does not
have occurred. Prior to the credit crunch, presently appear as if the credit crunch
leveraged lending was, and has for a few will have any long term effects on security
years been, characterised by borrower- provided by Swedish entities in leveraged
friendly terms. There is however no doubt transactions. The effect experienced so
that the recent years development towards far has been that the lenders previous
even more sophisticated borrower-friendly occasional acceptance of share pledges as
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the sole security when providing financing with other equity sweeteners seem to have
has decreased substantially, at least if increased significantly during the last six
alternative security is available and can be months. Specialist mezzanine lenders and
justified based on a cost / benefit analysis.other mezzanine and debt / equity hybrid
financing providers have returned with an
Capital structure interest in taking a larger portion of the
pure equity as well as quasi equity of the
The capital structures in recent deals are SPV. The reawakened interest of specialised
reverting to traditional senior / mezzanine mezzanine providers in the Nordic region
arrangements. Furthermore, we have noted has also led to the return of certain
that that pricing and leverage levels have intercreditor discussions which usually are
clearly been affected. The credit crunch not relevant in acquisition deals without
has resulted in decreased levels of leverage equity sweeteners, since the mezzanine
which in turn has affected the pricing lenders will more frequently be acting both
negatively. as lender and investor.
Warrants / equity sweeteners
Independent warranted mezzanine has in

recent years more or less disappeared from
the Swedish leveraged buyout market. Peter Sarkia, Erik Swartling and Philip
The demand for warranted mezzanine and Heilbrunn are partners at Advokatfirman
also for mezzanine financing combined Hammarskild & Co.
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g Directors and officers duties according to

Swedish law
by Susanna Norelid and Christer A. Holm
M&A is a difficult and sometimes the right company body.

unsuccessful undertaking. There are many
risks, some of which are quite difficult As of today, D&O insurance is common in
to foresee. Statistics show that failure Sweden. D&Os are facing high demands
rates are high. Yet directors and officers from owners, shareholders, competitors
(D&Os) of companies carrying out M&A are and consumers, not least in M&A
willing to take the risk, even though they transactions. The relatively new possibility
personally face potentially costly lawsuits of bringing a class action in Sweden has
for actions taken while performing their also contributed to the sharpened business
duties. environment. Moreover, courts have
recently shifted towards a stricter view on
D&O liability insurance in Sweden liability issues for D&Os.
D&O liability insurance protects D&Os The scope of the liability of D&Os
from legal responsibility for wrongful
acts connected with their positions. A The Swedish regulation on the liability of
standard D&O insurance product may D&Os consists primarily of the Companies
cover damages and defence costs in the Act and a Code of Conduct compiled by
event that D&Os are sued by stockholders, major companies on the Swedish stock
employees, clients or competitors. Without market. The purpose of the Companies
such insurance cover, a director or officer Act is primarily to encourage business in
may be held personally liable for acts of general by allowing limited liability for the
the company and thereby put his or her owners. Other purposes are the protection
personal assets at risk. D&O insurance of creditors and minority shareholders of
cover provides economic security for the the company. The regulation covering the
directors, and facilitates the recruitment personal liability of D&Os aims to prevent
of skilled directors. The sufferer would also D&Os from causing financial harm to the
be more certain to receive reimbursement, company, its shareholders or any other
since an individual director or officer may third party, and to compensate the legal
be incapable of paying large amounts of entities who suffer loss in the event of non-
damages, whereas an insurance company compliance with the rules.
can.
The general rule in the Swedish Companies
Usually D&O insurance is purchased Act (which is the same as liability in tort) is
and paid for by the company/employer, that a managing director, member of the
although it is for the benefit of the D&Os. board, founder, auditor, shareholder or
This is permitted in Sweden as long as the other individual is liable for damages that
decision to buy insurance cover is taken by he or she intentionally or negligently causes
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while fulfilling his or her duties for the with some exceptions, be granted discharge
company. from liability through a shareholders
meeting. The decision is made for each
The board or the directors may be held individual director, and not for the group as
personally liable if they fail to fulfil duties to a whole. If it is decided that the directors
take action if the share capital is less than shall be granted discharge from liability, it
one-half of the registered capital, if they constitutes a waiver from the company, but
fail to pay the companys taxes in time or if only to the extent that the discharge was
they provide incorrect information to the based on full and complete information.
tax authority. However, D&Os are not held Should that not be the case, the decision
personally responsible for any violation of to grant discharge from liability is just an
the employment legislation. This liability empty formality without providing any
rests on the company. legal protection.
Liability for damages can also be based If D&Os are not granted discharge from
on crimes according to the Swedish liability and thus could be exposed to
Penal Code. According to Swedish law, liability claims, D&O insurance cover will be
a legal entity cannot commit a crime. brought into force.
Therefore, there is always a natural person
that will be held responsible if a crime is Who and what is covered by D&O liability
committed. Possible crimes in the Penal insurance?
Code that a director or officer might be
guilty of, relating to his or her position in D&O liability insurance is governed by the
the company, are fraud, embezzlement, Swedish Insurance Contract Act (2005:104).
disloyalty and diverse kinds of economic The Act sets minimum standards that
crime. may be deviated from only if it is to the
benefit of the insured, but it also contains
As a general rule, D&Os are expected to act several parts that can be set aside through
in the best interest of the company. There is consensus by the parties. The Act is
of course room for risk taking while making applicable if the damage occurs in Sweden,
business decisions, and for all practical since the principle of lex loci delicti is
purposes Sweden applies the business applicable to such claims.
judgement rule. Again, D&Os may be held
liable to pay damages to the company if In Swedish law, the only D&Os that are
they cause financial loss to the company regulated are the board of directors and the
intentionally or as a result of negligence managing director, including the deputy
falling outside the scope of normal business managing director. The companys auditors
risk taking. If the company is obliged to and other executives (e.g., the CFO) are not
pay damages to the shareholders and legally defined as D&Os in Sweden, and
other third parties as a result of a directors are therefore not covered by a D&O policy.
negligence, it could in turn make claims Coverage for other persons, such as a CFO
against the director for the loss suffered. who is neither a member of the board
nor a managing director, can of course
According to the Companies Act, the board be achieved by way of specifically adding
members and the managing director can, him or her to the policy. The auditors must
L+ L- 3 4 CONTENTS
follow their own rules and have their own to claim damages from its D&Os due to
liability insurance. negligence. Such liability should be covered
by D&O insurance.
If damage is caused intentionally by the
insured director or officer, the insurer is In relation to this, the Swedish Supreme
normally not liable since a D&O insurance Court, in a new procedure in 2006, held
does not provide cover for intentional that flawed annual reports duly signed by
acts. There is no legislation regulating the the board of directors normally falls within
formalities of claims handling, therefore it the liability scope of the D&Os (with the
is the policy wording that will govern this possibility of joint liability with its auditors).
area. In a typical M&A transaction the buyer
normally relies on a number of annual
M&A transactions related liabilities reports to scrutinise the profitability of
the target company, its sustainable profit
In Sweden, as well as in most other generating level, and so on. Needless to
European countries, M&A transactions say, the liability exposure for the contents
have increased substantially in recent years. of the annual reports is increased in M&A
This has opened up a new field of liability transactions and also increases the need for
for D&Os. Increasingly M&A transactions a D&O insurance cover for D&Os.
include a due diligence investigation by the
potential buyer. It normally ends up with Conclusion
a report stating the shape of the target
company. The D&Os of the seller that Being a director or an officer is risky, due to
participates in providing information to the increasingly tougher business climate
representatives of the buyer must do so in a in Sweden, the relatively new possibility to
truthful and comprehensive way. In the final bring class action against D&Os, and the
agreement there is, of course, possibility for courts stricter view on the responsibilities
the seller to limit its liability for information of D&Os. It is thus increasingly common
provided, but normally the seller is forced that companies buy D&O insurance. In
to issue certain guarantees regarding the addition to the steadily rising volume of
status of the target company. Deviations M&A transactions, involving new scopes of
from the guarantee above a certain amount liability for the sellers, the market for D&O
normally entitles the buyer to reclaim part insurance should expand further.
of the purchase sum in some way (e.g., tax
related claims, labour or law related extra
costs, environmental liabilities discovered
after the purchase, etc.). The seller could, Susanna Norelid and Christer A. Holm are
in such a situation, find that it is entitled partners at Advokatfirman NorelidHolm.
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g Takeovers of Norwegian listed companies
by Terje Gulbrandsen
As party to the European Economic Area foreign investors 41 percent; private

Agreement, Norway has implemented citizens 4 percent; and funds 4 percent.
the MiFID, the Takeover Directive and the Of the foreign investors, US and UK based
Transparency Directive in a new Securities investors accounted for close to 60 percent.
Trading Act (STA), which came into force
in two steps on 1 November 2007 and 1 Due diligence. A target company may give
January 2008. Consequently, the Norwegian a bidder access to non-public information
takeover rules to a large extent correspond for the purpose of conducting due
to the rules within the EU. Notwithstanding diligence investigations, as long as the
this, there is some local variation within the target company deems this to be in the
EU and EEA. Further, there are always some best interest of the company. A target
cultural differences, as well as differences company would normally not accept giving
in market practice. Below is an outline of a bidder access to detailed information
certain key topics in a typical process of about its operations unless there is a high
acquiring a company listed on the Oslo probability that an offer will be successful.
Stock Exchange. Consequently, the most common approach
is for a bidder to conduct its due diligence
There are two regulated markets in after the offer has been made.
Norway, the Oslo Stock Exchange and the
Oslo Axess. There are 218 companies listed Disclosure to a bidder is subject to
on the Oslo Stock Exchange, of which 178 procedural rules and strict insider trading
are Norwegian companies, 12 are based in provisions. To the extent the bidder
the EU and 28 are based outside the EU. On receives inside information (i.e., precise
the Oslo Axess 29 companies are listed, of information about the company or other
which 22 are Norwegian companies, four circumstances that may noticeably
are based in the EU and three are based influence the pricing of the financial
outside the EU. The Norwegian takeover instruments), this would prevent the
regulations also apply to foreign companies bidder from trading until the information is
listed on one of the Norwegian regulated made public. The disclosure requirements
markets (exceptions may apply if such for listed companies refer to the same
company is also listed on another regulated definition, i.e., a listed company shall
market). immediately disclose to the market any
inside information related to the company
At the end of January 2008, the ownership as soon as it receives such information,
of the companies listed on the Oslo unless the rules on delayed publication may
Stock Exchange was split as follows: the be applied. In theory this should mean that
Norwegian State and municipalities 30 due diligence should not uncover any inside
percent; private companies 22 percent; information. In reality, this is not necessarily
L+ L- 3 4 CONTENTS
the case. Finding positive information In the Norwegian market, a bidder will
about the company, which is regarded normally contact major shareholders
as inside information, would prevent the with the intention of obtaining hard
bidder from trading until the information (unusual) or soft (fairly usual) irrevocable
has been shared with the market. pre-acceptances, and will also inform
Therefore, the scope and structure of due the company on a more general basis of
diligence investigation varies. The bidder its intention to make an offer. In some
will usually require the target to disclose to instances, the bidder enters into a dialogue
the market, or permit the bidder to disclose with board members of the target company
in the offer document, any finding, thereby to explore the possibilities for a successful
eliminating the bidders position as an offer and seek the boards backing of the
insider in relation to the company. contemplated offer. Such processes involve
complex considerations as to what time
the target companys disclosure obligation,
with respect to inside information, is
triggered. The target may have a different
view on this than the bidder, and should
Such processes involve complex considerations always act with caution. The company
as to what time the target companys disclosure may delay disclosure if disclosure would
obligation, with respect to inside information, is prejudice its legitimate interests, provided
that a delay is unlikely to mislead the public,
triggered. and provided that the company is able to
ensure confidentiality. The target would
need to immediately inform the Oslo Stock
Exchange of the delayed publication and
the reason for it. The Oslo Stock Exchange
Stake building or voluntary offer. A bidder may, at least in theory, choose to disclose
may choose to acquire shares in the the information if it does not agree with
market up to a certain level. The bidder the decision of the target. In friendly
will need to comply with the disclosure takeover processes, the bidder and target
requirements, giving the market notice will generally have ongoing discussions
when its ownership reaches or passes either on these disclosure issues. The company
of the relevant thresholds (5, 10, 15, 20, has an ongoing obligation to maintain lists
25, 33, 50, 66 and 90 percent). Further, of all persons that have access to inside
a mandatory offer obligation is triggered information about the company.
at one-third of the voting shares. Most
takeovers, however, start with a voluntary Pursuant to the STA, the Ministry of
offer. Voluntary offers may be conditional, Finance may provide further regulations
and usual conditions include two-thirds or on mandatory offers, to regulate if and to
90 percent acceptance (usually 90 percent what extent interests in and rights to shares
to allow for a subsequent squeeze-out of may trigger a mandatory offer obligation.
the remaining minority shareholders), MAC, The current regulations state that where a
due diligence and regulatory approvals. The persons acquisition of rights to shares has
offer period in a voluntary offer shall be no to be regarded as an effective acquisition of
less than two and no more than 10 weeks. shares, the regulated market may impose
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a mandatory offer obligation if such person are considered equal to a shareholders

would pass the threshold by exercising said own shares. A mandatory offer obligation
rights. will apply whether it is the shareholder
or a close associate that acquires shares,
However, a green paper has been provided resulting in the mandatory offer threshold
by the Oslo Stock Exchange with a proposal being passed.
for new regulations, and the process to
amend the regulations is still ongoing.
Pursuant to the proposal from the Oslo
Stock Exchange, an acquisition of certain
interests in and rights to shares may trigger
a mandatory offer obligation, irrespective A green paper has been provided by the Oslo Stock
of whether it must be deemed an effective
acquisition of shares or not. The green Exchange with a proposal for new regulations, and
paper explicitly states that pre-acceptances the process to amend the regulations is still ongoing.
with respect to offers that are not subject
to public approvals will represent a right to
shares that may trigger a mandatory offer
obligation. This means that if the bidder
obtains irrevocable undertakings from
shareholders for shares that, together with The mandatory offer must be made without
any shares held by the bidder, represent undue delay and no later than four weeks
more than one-third of the voting shares after the obligation was triggered. The
in the target, a mandatory offer obligation offer shall be for all outstanding shares and
is triggered, and the bidder may come in cannot be made conditional in any respect.
a position where it is required to make a The offer price must be at least equal to
mandatory offer even before the voluntary the highest price paid or agreed to be paid
offer is completed. by the bidder during the six month period
prior to the obligation being triggered.
Mandatory offer obligations. Any person Protection clauses given to selling
who through an acquisition becomes shareholders having given irrevocables may
the owner of shares representing more raise pricing issues. The offer shall be cash
than one-third of the voting rights in a settled, however, alternative consideration
Norwegian company whose shares are may be offered, as long as there is a cash
listed on a Norwegian regulated market is alternative. The offer period must be no
obliged to make an offer for the remaining less than four weeks and no longer than six
shares in the company, or to dispose of weeks.
a sufficient number of shares so that the
person owns one-third or less of the voting Public approvals. Approval from the
rights. The offer shall be made or shares Norwegian Competition Authority is usually
disposed of within four weeks after the required. The threshold to trigger such
obligation was triggered. requirement is very low, and generally it
should be expected that it will be triggered
Under the mandatory offer rules, shares unless the bidder has no operations in
owned or acquired by close associates, Norway. Further, there may be a need for a
L+ L- 3 4 CONTENTS
competition filing with the EU Commission. the remaining shares through a squeeze-
If this is in fact required, there is no need to out. If the price offered for the shares
seek the Norwegian competition clearance. is not accepted by all shareholders, an
With respect to financial institutions and independent valuation may be required,
investments firms, further approval from and this shall in the outset be conducted
the Ministry of Finance/The Financial at the bidders expense. Provided that the
Supervisory Authority of Norway will bidder initiates the squeeze-out within four
be required, if the bidder will reach the weeks after the completion of the voluntary
relevant thresholds (10, 20, 25 (financial offer resulting in the 90 percent threshold
institutions only), 33 and 50 percent) of the being passed, the bidder may (on certain
capital or votes. further conditions) do so without first
making a mandatory offer.
Squeeze-out. If a bidder acquires more
than 90 percent of the share capital and
voting rights of a Norwegian limited Terje Gulbrandsen is a senior lawyerat
liability company, the bidder may acquire Advokatfirmaet Steenstrup Stordrange DA.
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g M&A in Finland
by Andreas Doepel
In September 2006 Finland took a major de-merger or split will also be introduced by
step towards liberalising company law the same amendment.
along freedom of contract principles with
its adoption of a new Companies Act. Amendments to the Finnish Companies
The new law also impacts merger and Act
acquisition activity and its effects were
gradually seen in the Finnish marketplace in The new Finnish Companies Act entered
2007. into force on 1 September 2006, increasing
the operating freedom of limited liability
More than a year after the introduction companies by removing different
of the 2006 Companies Act, amendments restrictions and formal requirements and by
to the Finnish Tax Code have not yet been introducing new operating methods. At the
implemented, effectively preventing the same time, provisions aimed at protecting
use of many innovations provided by the creditors and minority shareholders were
Companies Act. Unfortunately, the much enhanced.
awaited changes will not be implemented
before 2008. The most fundamental change, by far,
introduced by the 2006 Companies Act
In July 2007, the Finnish Accounting Act was is the elimination of the requirement
amended, introducing a requirement that to stipulate a par value for each share.
limited liability companies must appoint Although the previous Companies Act
only chartered accountants (or accounting recognised shares without par value,
firms) for financial statement accounting. the shares were nevertheless assigned
Smaller businesses are released from the a counter-value (the total share capital
requirement to appoint an accountant divided with the number of registered
altogether. shares).
Another major development affecting The new act abolishes the counter value
M&A activity in Finland will be the of shares, allowing companies to sever
implementation of EU cross-border the connection between shares and share
rules (Directive 2005/56/EEC) through an capital. This reform enables companies to
amendment of the 2006 Companies Act, amend the share capital and issue shares
which is expected to come into force by 15 independently. Bonus issues are possible
December 2007. The changes will enable without having to increase the share capital
Finnish limited liability companies to merge and, for example, a share split can be put to
with companies situated within the EU effect simply by issuing new shares for free.
and vice versa. As a Finnish peculiarity, the
possibility to implement a cross-border The previous prohibition on issuing shares
L+ L- 3 4 CONTENTS
for a consideration less than the par value assistance to the extent it would be used to
(or counter-value) of the shares was also finance the acquisition of that company or
abolished. The positions of creditors or any of its parent companies.
minority shareholders are safeguarded by
the rules concerning full payment for the The rule is based on Article 23 of the EU
share capital and the permanent nature of Capital Directive and, compared to the
the capital. previous rules, its field of application is
more restricted. The Financial Assistance
Investments made in the unrestricted prohibition only applies to acquisitions of
equity of the company are separately the providing companys own shares and
regulated. Such investments are held those of its parent (the previous prohibition
separate from the profit fund, clarifying applied to acquisitions of shares in any
the somewhat unclear application of the group company).
previous act on investments into the free
equity. This means that a Finnish Ltd. can
participate in financing the acquisition of,
Even directed bonus issues of shares, for example, its subsidiary, provided the
without observing other shareholders pre- general corporate interest requirements are
emption rights are possible, provided that met (e.g., that the transaction is compatible
there is an exceptionally weighty reason for with the purpose of the company and
the issue, e.g., incentive systems directed that the transaction does not breach the
at key employees or situations where principle of equality).
shareholders of a more valuable class of
shares (e.g., due to a greater number of Furthermore, the financial assistance
votes per share) need to be compensated prohibition does not, as a rule, apply to
when combining different classes of shares. earlier acquisitions. In a management
buyout scenario, it is possible to merge
The 2006 Companies Act introduced a the acquiring company with the target
new requirement that no funds may be company.
distributed if, when making the decision
on the distribution, the persons knew or Breach of the Financial Assistance
should have known that the company was prohibition will not, generally, lead to
insolvent or that it would become insolvent an obligation to return the funds or be
as a result of the fund distribution. deemed as a Corporate Law Offence as
the acquisition does not usually constitute
Furthermore, a limited liability company distribution of funds. If the intent of the
cannot give financial assistance in the form arrangement has been to distribute funds
of loans or other securities for the purposes from the company, the arrangement may,
of a person acquiring shares in the company in such exceptional cases, be deemed to be
or a parent company (the Financial an illegal distribution of funds.
Assistance prohibition). The prohibition
covers the acquisition of issued and In connection with the upcoming
outstanding shares as well as new shares amendment due to EU cross-border rules,
to be issued. In practice this means that no the rules governing the loss of equity will
Finnish group company can give financial also be adjusted. According to the current
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proposal, the obligation to convene a about if the proportion of voting rights

shareholders meeting whenever the equity increases purely due to the companys or
falls below 50 percent of the share capital other shareholders actions (e.g., through
will be restricted to apply only to public the acquisition or redemption of own shares
companies. Further, the rules on calculating by the company).
the equity for the purpose of ascertaining
whether the equity has been lost (triggering
a requirement that the loss of equity be
reported to and registered with the trade
register) will be amended to allow for a
more balanced view of the equity situation.
The Finnish legislation does not distinguish between
Finally, the Finnish Securities Association hostile and friendly public tender offers.
has established a working group to
assess the needs to update the Finnish
Corporate Governance recommendation
and the possibility of establishing common
corporate governance principles for the
Nordic countries.
In conjunction with the implementation of
Amendments to the Finnish Securities the Takeover Directive a new special Panel
Markets Act has been set up in connection with the
Finnish Central Chamber of Commerce. The
The provisions of the Finnish Securities Panel gives non-binding recommendations
Markets Act (statute 495/1989) were primarily regarding company law issues
amended on 1 July 2006 in order to arising in public takeover situations. The
implement Directive 2004/25/EC of the Panel has issued a general recommendation
European Parliament and of the Council on on the procedures concerning takeover
Takeover Bids, also known as the Takeover bids and a couple of opinions to the
Directive. Financial Supervision Authority (FIN-FSA)
on questions such as insider registers for
Pursuant to the amended Securities projects and disclosure obligations for listed
Markets Act, a shareholder whose holding companies and shareholders.
in a listed company exceeds 3/10 or 5/10
of the total voting rights attached to Typical for the Finnish takeover legislation
the shares of the company, after the and rules is a neutral approach to public
commencement of a public quotation of offers. The Finnish legislation does not
such shares, must make a public tender distinguish between hostile and friendly
offer to purchase the remaining shares and public tender offers.
other securities entitling holders thereof to
shares in the company. In addition to the Securities Market Act and
the Panel, public takeovers and mergers
The obligation to launch a mandatory bid are mainly regulated by the FIN-FSA, which
is triggered only by a shareholders own monitors and controls compliance with the
actions. In other words, it does not come SMA. The FIN-FSA also issues standards,
L+ L- 3 4 CONTENTS
regulations and guidelines that supplement the price to be paid for the shares in a
the provisions of the SMA. Other essential mandatory offer.
provisions are the Rules of the Helsinki
Stock Exchange, The Act on Competition Typical market practice in takeover
Restrictions, which provides national situations is for the target company and
merger control, and The Companies Act. the bidder to enter into a combination or
similar agreement in a friendly takeover,
There are also special regulatory control where the board of the target usually
provisions designed to control ownership recommends the bid. According to
in certain industry sectors, for example, recommendation number six of the Panel,
banking and insurance. Whenever holdings the board may enter into a combination
in a listed company reach, exceed or fall agreement with a bidder, if it considers
below certain thresholds, the shareholders the agreement to be in the main interest
of listed companies must disclose the of the shareholders. However, the targets
changes in their holdings by notifying the board should reserve the opportunity to
company itself and the FIN-FSA. reconsider the offer in case a competing
offer is made, and it should disclose the
Under the Companies Act, the bidder must information concerning the signing and the
without undue delay notify the target when main terms of a combination agreement to
its holding exceeds or falls below 90 percent the market.
of the shares and votes of the target. The
price paid by the bidder when building
a stake in the target before announcing Andreas Doepel is a specialist partner at
the bid may affect the determination of Borenius & Kemppinen.
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g In search of deal security the Finnish version
by Jyrki Thtinen
The M&A market in Finland has been effectively continued to take the risk that
particularly noteworthy. From the autumn banks may utilise the material adverse
2006 leading up to the spring of 2007, change clause in the finance agreements to
deal volumes were at record levels. Asset halt the deal.
prices were high and terms and conditions
seller-friendly. Banks competed for In the current environment, liquidity is
acquisition financing and loan terms were tighter, lending covenants are back to what
accommodating. It was, in short, a heated can be considered a more normal level,
period of deal activity. prices have fallen and sellers are beginning
to look to more strident deal protection
Representations and warranties in share to secure the transaction. What happened
purchase agreements were limited, and in other jurisdictions much earlier in the
many times sellers effectively represented market cycle in terms of seller-side deal
solely that they were the legal owner and protection is only now gaining momentum
that they had the authority to sell. in Finland.
The market reached a point where This phenomenon is very particular to

bidders in controlled auctions marked Finland and shows, in some respects, how
representations and warranties against the Finnish market is often a bit slower
themselves just to make the point that to adopt the latest trends. Sellers refusal
they were very keen to sell. These were to grant buyers any finance-related walk
heady times. That said, the terms of away movement spread from the US to
representations and warranties during this our neighbouring Sweden in spring 2007, a
heyday mirrored events that transpired country that is traditionally quicker to adopt
in other markets. Representations and new ideas than more-conservative Finland.
warranties were lax elsewhere, too, and
were a reflection of the seller-friendly deal Comparisons can be made to the
environment. dotcom boom in the early part of the
new millennium. Finnish venture capital
The harder they fall firms were hesitant to invest in newfound
dotcoms; Swedish VC firms, in contrast,
But where events in Finland differed were quicker to provide financing. When
considerably in 2007 from the UK and the the bubble finally burst in 2000, numerous
US relate to deal protection issues. Even Swedish VC firms went belly up, but no
at the height of the M&A boom, buyers Finnish VC firm shut its doors.
in Finland were in most instances able
to walk away from the deal if they could This statement is not intended to wave the
not drawdown on bank financing. Sellers Finnish flag. As a consequence of Finnish
L+ L- 3 4 CONTENTS
hesitance, market players may often be The state of affairs on the other side of the
unable to reap the highest returns at the Atlantic during the pre-credit crunch period
height of a bubble. But, on the upside, was quite different. Sellers negotiated no
Finnish investors also may not fall as far if financing out and specific performance
the cycle ends abruptly. Dexterous market clauses as a prerequisite to deal signing.
plays are something Finns have yet to learn. Sellers refused to accept any MAC risk
The poker game in this particular Nordic that resulted from financing availability
market, in that sense, is at times less high on behalf of the buyer. This tendency also
stakes. gained hold in Sweden and effectively
resulted in shifting the risk of MAC clauses
Show me the money in financing agreements to the buyer.
Deal security is vitally important for sellers All went well in the US until the spring
and buyers. The media regularly publishes credit crunch. Banks stopped providing
news items on an impending acquisition financing and buyers tried to use the MAC
at the time of signing and little mention is clause to halt the deal. Buyers, in turn, sued
made of conditions precedent to closing based on no financing out language and
the deal. The deal is effectively done in the demanded specific performance. Costly
eyes of the public. Buyers that walk away litigation ensued (See United Rentals, Inc. v.
before closing can create havoc for the RAM Holdings, Inc., Civil Case No. 3360-CC).
seller. A new buyer has to be found, and
the investing public may begin to wonder if During this same time period, parties
something is wrong with the sellers assets. agreed to reverse termination fees as
Lower prices are possibly negotiated, and a means to deter costly litigation and
the sellers brand potentially tarnished. payment of damages should banks
prevent drawdown on loan financing. This
From the buyers perspective, a condition strategy was effectively used in at least one
that is buyer-friendly allows it to walk instance to thwart potential litigation. On 4
away if it cannot drawdown on the agreed January 2008, it was announced that PHH
upon financing without fear of impending Corporation reportedly received $50m in
litigation. In public auctions with private reverse termination fees from Blackstone
equity bidders, especially, acquisition Capital Partners V L.P resulting in a failed
financing is an important part of the merger that stemmed from the inability of
purchase price, making availability of bank the buyers to receive acquisition financing.
liquidity a vital prerequisite to closing the
deal. And in Finland during this 2007 boom, For many international banks, the credit
private equity investors, indeed, took the crunch meant that they were left with large
leading role on the buy-side. The principles loans that they were unable to syndicate,
that We will buy you at the agreed terms thus preventing the issuance of further
and conditions if we can drawdown on bank loans for new deals. The market abruptly
financing prevailed in Finland throughout came to a halt.
2007, and sellers most of the time accepted
this important condition precedent Meanwhile, in Finland, deals continued
even though the market was otherwise to progress quite smoothly until July and
extremely seller-favourable. August 2007 when banks temporarily
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halted deal financing. The history of this alternatives to costly litigation should
occurrence is traceable to the subprime financing fall through.
mortgage crisis in the US and the
subsequent backlash to international Predicting the future is always difficult, and
banks. A number of pending transactions it is quite possible that spring of 2008 in
were temporarily delayed; but, interestingly Finland will end up resembling the spring
enough, starting in September, banks of 2003 when the M&A market dried up
(either the same or competing ones) started and deals were very limited. At this point,
providing financing anew, and the terms however, there is still some room for
and conditions started to shift back to what optimism.
had been seen some 18 months earlier. It
has now been reported that Nordic banks Private equity interest in Finnish assets
operating in Finland do not have significant still remains. PE houses have been able to
US subprime mortgage holdings. sell assets at good prices and have raised
new funds. For banks, the smaller size of
The party is almost over or is it? deals in Finland means that there is not the
same need for syndication as exists in larger
Even in the autumn 2007 very few, if any, markets. This is important, as syndication
deals in Finland died as a result of the buyer in this post-credit crunch environment is
not being able to drawdown on financing. difficult.
There are about eight to ten banks in
Finland that are willing to do acquisition Market participants certainly no longer
financing under Finnish law. None of the expect a repeat of spring 2007, but how
banks in this group have written-down big a volume drop-off will be experienced
loans in any meaningful way even post- remains to be seen. At the moment, no
credit crunch. public deals in Finland have ended up in
litigation as a result of deal protection
But following in line with international issues. If there are disputes, those are being
trends, by the end of 2007, Nordic banks handled in confidential arbitration, which is
expressed concern that buyers were the norm for M&A in the Finnish markets.
paying too much. Lending covenants
became stricter and liquidity less available. Where we are seeing M&A litigation
A number of sellers still stuck to valuations increasing is where buyers are alleging that
that were no longer possible; deals were assets are not as represented. In contrast
pulled by sellers at times, and buyers to events in the US, litigation surrounding
expressed disinterest in the high-end price deal protection issues have not come to the
terms of the good old days. forefront, at least not yet and due to the
possible future use of reverse termination
Only now are sellers looking to secure deal fees coupled with no financing outs, may
protection at signing through no financing not come to fruition in the future, either.
out clauses. It is possible that buyers in
Finnish markets may have to agree to
the full risk of financing in the near term.
In this environment, pre-set reverse Jyrki Thtinen is the managing partner of
termination fees look like attractive Borenius & Kemppinen Ltd.
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g Practices, trends and acquisition structures in

the Finnish property market
by Niklas Thibblin
The interest of foreign investors in the area but also in medium size cities and
Finnish property market has remained municipalities that have busy retail and
high in recent years leading to a quick commercial businesses. It appears that
internationalisation of the sector. foreign investors often concentrate on a
The Finnish property market is today niche, be it warehouses, hotels, retail and
characterised by high levels of transparency shopping centres outside the city centres,
and liquidity as well as fairly attractive or large commercial properties whose
growth prospects. tenants are large and reliable corporate
entities. In particular, retail properties
According to market studies, the aggregate have recently attracted foreign investors
volume of property transactions in Finland in smaller cities and municipalities since
amounted to around 6bn in 2007 up from these investments tend to offer a fairly
5.5bn in 2006. For comparison, in 2002 high return in circumstances where the
the transaction volume was as low as 2bn. cash flow is secured by a long term lease.
Last year, foreign investors accounted It is generally expected that foreign
for more than 64 percent of all property investors will sell parts of their Finnish
transactions by value. holdings in 2008 and that the restructuring
of the property portfolios by traditionally
From a global perspective, the prevailing dominant Finnish investors will continue,
view is that returns on property will be which enhances market liquidity further.
lower in 2008, based mainly on declines
in capital appreciation, which will only be Investment practices
partially offset by holding rental levels.
Nonetheless, it is generally believed that The emergence of new players in the
the Finnish property market will continue Finnish property market (including an
to be attractive in 2008, although no major increasing number of domestic private
increase in the transaction volume is equity real estate funds), in combination
expected. Contrary to property markets in with the increased internationalisation,
many other European countries, Finland is has resulted in new market practices in the
still expected to have fairly good prospects property investment process. Sophisticated
for total returns. Also the risks associated due diligence reviews as well as auction
with the Finnish property market are procedures have become standard
considered to be moderately low and the approaches, especially in transactions
risk/return prospects are considered to be involving larger property portfolios
among the best in Europe. and international players. In smaller
transactions and among domestic investors
Foreign investors are today not only familiar with the Finnish property market,
interested in the Helsinki metropolitan more traditional and less formal transaction
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procedures may still be applied. A MREC does not normally aim to show
any profit. The operating costs and
Another trend in recent years is the expenses of a MREC are usually covered
increasing role of leverage and, generally, by maintenance and management fees
external financing. It seems more like a rule payable by its shareholders to the MREC
than an exception that properties are being whereas the rental revenue is channelled
purchased by highly leveraged investors. directly to the shareholders of the MREC
From a foreign investors perspective, from the tenants. In general, a MREC may
this together with the lack of any specific for all intents and purposes be used in
Finnish thin capitalisation rules enables, Finnish property investments to minimise
inter alia, tax efficient debt push down the overall tax burden. In particular, in
structures for Finnish property investments circumstances where the amount of tax
(although harsh intra-group debt financing deductible depreciations of a MREC can
could, at least theoretically, be challenged be matched with the amount of its loan
by the Finnish tax authorities by virtue of instalments (which are included as a part
general tax avoidance provisions). of the maintenance and management
fees received from the shareholders), the
Finnish property structures total tax burden is effectively reduced.
Accordingly, a MREC is basically in a
From a legal point of view, owning property position to deduct for tax purposes the
in Finland means, in essence, owning the acquisition cost of its underlying property. A
underlying plot and the buildings located REC, as opposed to a MREC, can in principle
thereon (although the plot may also, not benefit from the corresponding
instead of freehold, be leased). In reality, matching of loan instalments with
property ownership is often organised depreciations.
through a Finnish real estate company
(REC) or a Finnish mutual real estate Property acquisition structures
company (MREC), whose sole objectives
are to own and manage the underlying Income from Finnish property, including
property. Both a REC and a MREC are income (gain) derived from the disposal of
by definition Finnish limited liability Finnish property as well as shares in a REC
companies with more or less similarly and a MREC, is taxable in Finland as Finnish
organised governance. source income. Therefore, it is generally
not feasible for a foreign investor to hold
However, a specific feature of a MREC is property directly. As Finland under most
that the lease income is allocated directly tax treaties similarly is entitled to tax such
to its shareholders whereas in a REC the gains, a Finnish holding-structure is more
lease income is allocated to the REC itself. or less necessary to enable a tax-efficient
Accordingly, in a MREC-structure the exit. The reason for this is that shares in an
lease contract is concluded between the ordinary Finnish limited liability company
shareholder of the MREC and the tenant, as (such as a pure holding company) are in
opposed to a REC-structure where the lease Finland by definition considered as movable
contract is concluded between the REC and property, why the gain derived from the
the tenant. disposal of such shares is generally not
covered by the provisions of tax treaties.
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However, there is no case law whether taken for the launch of such a vehicle.
general Finnish tax avoidance rules could Although certain amendments to the
become applicable in a clear tax avoidance Finnish property fund and mutual fund
situation causing Finland to claim the right legislation were recently made, they appear
to tax regardless of the formal status of not to bring about any significant benefits
the holding company in question. Such an for the property industry (at least from a tax
outcome would, however, seem farfetched perspective).
where sufficient business reasons can
be found behind the selected holding As a result of the declining stock market,
structure. Holding structures have to date increased uncertainty and general
been widely used for Finnish property overpricing of many asset classes, property
investments. investments can, however, still provide an
opportunity to achieve higher returns. Why
Domestic Finnish property investments then invest in Finnish the property market?
have, in turn, increasingly followed the
international trends of indirect property
There are a number of reasons for this.
investments through private equity real Undoubtedly, the ability to obtain higher
estate funds. The funds targeted for yields in combination with a highly liquid
domestic investors are most commonly market and large transaction volumes
structured as partnerships. Partnershipsshould qualify as motivating factors. In
are able to utilise debt financing, which
addition, the Finnish property market offers
often is an important incentive for sucha solid framework for doing business, along
structures at least from a tax perspective.
with virtually no corruption. Also a modern,
In addition, partnership-structures facilitate
dynamic and understandable legal structure
a third party management. However, pure supports the property market. The market
and direct Finnish partnership-structures
is open and investors can obtain virtually
cannot, as a rule, be beneficially applied
all the necessary information they desire
in property investments where foreign about specific companies and properties.
investors are involved. Last but not least, there is a surprisingly
large number of experienced domestic and
Recent amendments and future prospects international professional players on the
Finnish property market providing depth to
The Finnish property industry has long the same.
aimed for a REIT type tax-transparent
property investment vehicle. Yet, in
practice, no concrete actions have been Niklas Thibblin is a lawyer at Waselius & Wist.
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g Regional regulatory features of M&A deals in

Russia
by Tatiana Kachalina and Svetlana Dubinchina
The recent volume of both domestic and (AO) subdivided into open AO and closed
foreign capital attracted by the Russian AO. Most Russian companies targeted
economy has grown demonstrably. The by investors as targets exist within one of
volume of M&A deals and a sizeable these two main corporate structures.
number of professional investors on the
market inevitably resulted in a gradual Much of the regulation depends on a
displacing of raider methods for more corporations structural set up. Proper
civilised mechanisms for organising and consideration must be paid to statutory
executing M&A deals. requirements providing the pre-emptive
right to buy shares of closed AOs sold
The prevailing practice of dealmaking in to third parties as well as that of OOOs
this area increasingly permits investors participants to buy shares in OOOs charter
to gain the most clear-cut insight into a capitals when they are sold to third parties,
potential target, avoid blind purchasing, non-participants of the OOOs. Generally,
consider identified risks in the context of the procedure for exercising pre-emptive
a proposed transaction, go through all rights is set by a business entitys charter,
necessary preliminary target acquisition which can also fix the pre-emptive right for
approval formalities at administrative the entity itself to buy shares.
authorities and hit the mark while
forecasting projected resources, time and Most heavily regulated deals are still
costs associated with a deal. acquisitions of stocks in an open joint stock
companys charter capital. Particularly,
There are a number of specific features Chapter XI.1 of the Federal Law On
in the regulation of M&A deals in Russia Joint Stock Companies sets forth special
that prospective investors must consider requirements for the procedure of
when designing deals, to protect their acquisition of a large stock by investors.
own interests on the capital market and to Thus, an investor planning to purchase
exclude competition blocking. more than 30 percent of the total number
of voting shares has to take into account
The Russian legislation acknowledges a that: (i) prior to purchasing the said holding
wide spectrum of corporate structures of shares he has the right to send to the
within the bounds of which a proprietary open joint stock company a voluntary (bona
organisation may exercise its business fide) offer addressing shareholders who
activity. Two corporate structures have own shares of corresponding categories or
gained greater acceptance. The first types with a public offer to purchase their
structure is the limited liability company shares; otherwise (ii) within 35 days after
(abbreviated in Russian to OOO) and the buying the said holding of shares he will
second form is the joint-stock company have to send to owners of the rest shares
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of corresponding categories or types and of a stock market trade institutor for six
holders of other securities convertible into months prior to the date a mandatory offer
such shares a mandatory offer containing a is sent to the federal executive authority
public offer regarding the purchase of the for the securities market. If securities are
securities from them. On acquiring more traded by two or more trade institutors,
than 95 percent of shares the investor is their weighted average price is determined
obliged at the request of shareholders to upon trading results of all stock market
buy the remainder of shares placed by the trade institutors when the said securities
company (hereafter the specified course have been traded no less than six months.
of action by the investor is referred to as If securities are not traded on the stock
tender offer). market or have been traded for less than
six months, the purchase price of securities
The procedures indicated above are not cannot be lower than their market value
unique to Russian corporate law, as legal estimated by an independent appraiser.
systems of other countries also incorporate Notably, the market value in this case is
similar institutions. To a foreign investor the calculated for a single corresponding share
practical application of the cited chapter of (another security). If within six months prior
the Federal Law On Joint Stock Companies to the date a mandatory offer is sent to an
in 2006-2008 is of utmost interest. open company, the sender or its affiliates
have bought or taken a liability to purchase
It is essential to note that the tender offer the corresponding securities, the price
procedure is controlled by the FFMS of for securities due to the mandatory offer
Russia, a state authority regulating Russian cannot be lower than the maximum price
financial markets. The order of exercising the sender has bought or taken a liability to
the tender offer is regulated by the Order purchase these securities at.
of FFMS of Russia as of 13 July 2006 No
06-76/- (ed. as of 16 October 2007) On
Affirming the Provision for Requirements
for the Procedure for Specific Actions While
Purchasing more than 30 percent of Shares
in Open Joint Stock Companies. The strict The practice of exercising mandatory and
and orderly observance of the procedure voluntary offers has revealed cases when minority
is a prerequisite of validity of a transaction
related to the purchase of shares by the shareholders disputed the price estimated by
investor within the procedure itself. independent appraisers.
Fixing a redemption price of shares
determined within the tender offer is
a question that arises frequently in the
application of the Chapter XI.1 of the Despite the consistent approach to
Federal Law On Joint Stock Companies. determining a redemption price, the
The law strictly stipulates the procedure for practice of exercising mandatory and
determining a price for shares which cannot voluntary offers has revealed cases when
be lower than their weighted average price minority shareholders disputed the price
calculated with basis on trading results estimated by independent appraisers.
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Specifically, such a case is reflected in oneself with the legislative requirements,

Decree of the 9th Arbitration Appeal both in terms of time cost and financial
Court as of 07 November 2007 No 09- planning.
14428/2007- on Case No 40-23719/07-
34-161. In future such disputes are likely Applying business entity shareholder
to bring about still more strict and formal agreements
criteria for determining the redemption
price within execution of mandatory and Another significant factor one has to bear
voluntary (bona fide) offers procedure, in mind in contemplating M&A deals in the
including more stringent requirements for Russian market is primacy of the federal
independent appraisers estimating the legislation and foundation documents
redemption price. in regulating relationships between
shareholders (participants) of business
The second essential point a prospective entities as to the management of the
investor is to bear in mind is the company.
requirement for the investor to secure
payment of the share price to shareholders The international practice recognises
who have accepted the tender offer. agreements negotiated between and
Pursuant to Paragraph 2 of Article 84.1 entered into by participants (shareholders)
and Paragraph 2 of Article 84.2 of the that provide the parties with regulation
Federal Law On Joint Stock Companies a for the company management issues.
tender offer should be supplemented with This cannot be applied to a full extent in
a bank guarantee which should secure the the Russian context, as according to the
guarantors liability to pay the price of sold federal laws On Joint Stock Companies
securities to their former holders in case a and On Limited Liabilities Companies
sender of voluntary (bona fide) offer fails to the management of a business entity is
carry out his commitment and pay for the exclusively governed by the companys
securities on time. Need in the guarantee charter.
is conditioned, on the one hand, with the
necessity to protect rights of a companys The participant agreement can regulate
minority shareholders who have accepted only certain questions related to rights
the tender offer and, on the other hand, of the companys participants that
to avoid numerous lawsuits of minority are explicitly stated by the law. For
shareholders in case a sender of the offer instance, Paragraph 4 of Article 21 of
fails to carry out his commitment and pay the Federal Law On Limited Liabilities
for the securities transferred to him. Hence, Companies sets regulation for execution
the requirement results in higher standards of pre-emptive right to purchase shares.
for solvency and creditability and financial It is inadmissible to regulate matters
status of a prospective share acquirer, as concerning (i) the status of a Russian legal
potentially he must be ready to purchase up person and rights and obligations of its
to 100 percent of an open AOs shares. participants as to the OOOs activity, and
(ii) meetings of the OOOs participants
Thus, in planning acquisitions of a large and other companys authorities with
blocks of shares in open joint stock agreements regulated by foreign laws, as
companies it is necessary to familiarise these matters are subject to the Russian
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legislation, which is explicitly stated in 2109/2005(14785-75-11) on Case N 75-

Article 1202 of The Civil Code of the RF. 3725-/04-860/2005).
This is also reflected by the emerging
court practice in similar cases related to Under the circumstances, potential
joint stock companies set up under the investors need to take into account the
Russian legislation dealing the question regulations on a wide spectrum of issues
of applying provisions of shareholder related to the company management with
agreements governed by foreign laws regard of the foundation documents of a
(Decree of the Federal Arbitration business entity.
Court for West-Siberian District as of 31
March 2006 No 04-2109/2005(14105-
75-11), 04-2109/2005(15210-75-
11), 04-2109/2005(15015-75-11), Tatiana Kachalina is a partner and Svetlana
04-2109/2005(14744-75-11), 04- Dubinchina is an associate at Liniya Prava.
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g Antimonopoly policy in Russian M&A deals
by Tatiana Kachalina and Svetlana Dubinchina
In Russian M&A, it is essential to meet (its group of persons), equity interest,

the requirements of the antimonopoly shares, rights or property of which are
law aimed at ensuring sound competitive acquired exceeds 3bn rubles; or (ii) their
environment on the commodity and service aggregate proceeds from selling goods
market. For this reason most deals implying in the last calendar year exceeds 6bn
redistribution of capitals are subject to the rubles with assets in recent balances of
antimonopoly regulation. In Russia the the business entity (its group of persons)
main law governing the area is the Federal equity interest, shares or property of which
Law On Competition Protection No 135- and/or rights over which are acquired
as of July 26, 2006. This law stipulates exceeds 150m rubles; or (iii) if any of the
regulation for M&A deals both on the indicated persons is put on the register, run
financial service and commodity markets. by the Federal Antimonopoly Service, of
In this article we dwell upon controlling business entities with a market share on a
the purchase of equity interest (shares) in specific commodity market of more than 35
the charter capital of business entities and percent.
purchase of fixed assets and intangible
assets of business entities. This form of control is practiced when an
investor or a group of persons, including
While carrying out transactions for the an investor, purchases in a non-financial
purchase of equity interest in the charter organisation: (i) more than 25 percent
capital of a limited liability company of shares on condition that prior to the
(abbreviated in Russian as OOO) or shares acquisition such a person (a group of
in joint-stock companies (AOs) of non- persons) was not in command of this joint
financial organisations, attention should stock companys voting shares or was in
be paid to the following forms of control command of less than 25 percent of voting
over this category of deals executed by the shares of the joint stock company; (ii)
antimonopoly bodies on the territory of the more than 50 percent of shares provided
Russian Federation. that such a person earlier was in command
of no less than 25 percent and no more
Obtaining preliminary approval than 50 percent of shares of the joint
stock company; (iii) more than 75 percent
A preliminary approval must be obtained of shares on condition that before the
for investment deals involving purchase of purchase the investor had the right over
equity interest in charter capitals of OOOs no less than 50 percent and no more than
and shares of AOs if: (i) the aggregate 75 percent of shares of the company; (iv)
assets cost in recent balances of purchasers more than one third of equity interest in
of shares (equity interest in charter capitals, the charter capital of an provided
rights, property) and the business entity that prior to the purchase the investor
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did not have any equity interest in the which a minority shareholder of a foreign
charter capital of the or such interest holding gets the right to make decisions as
amounted to less than one third; (v) more for forming a position in the name of the
than one half of equity interest in the holding company while voting for specific
charter capital of an on condition agenda items at the stockholders meeting
that before the purchase the investor as a shareholder of a Russian company,
owned no less than one third and no more it may be subject to the antimonopoly
than one half in the charter capital of the control of the Russian Federation, including
; (vi) more than two thirds of equity cases when it leads to competition restrain
interest in the charter capital of an (Paragraph 2 of Article 3 of Federal Law On
on condition that before the purchase the Competition Protection).
investor owned no less than one half and
no more than two thirds in the charter Subsequent notification
capital of the ; (vii) acquisition, usage
or ownership over fixed production-related When equity interest in the charter capital
assets and/or intangible assets of another of an OOO, shares of an AO or property of
economic entity, if the balance value of Russian organisations as well as rights in
the property rendering subject to the deal respect of such organisations are acquired,
(or interrelated deals) exceeds 25 percent this form of control is executed in the same
of balance value of fixed production- volume and in the same cases a preliminary
related assets and intangible assets of the approval is applied. Though subsequent
economic entity alienating or transferring notification is applied in respect of deals
property; or (viii) as a result of one or involving companies with less asset volume
several deals (also pursuant to the property and proceeds, than it is established for a
trust contract, agreement of cooperation preliminary approval, namely, if aggregate
or contract of agency) an investor acquires asset cost in the last balance or aggregate
rights enabling him to specify conditions for proceeds from selling goods of the
business operation of the economic entity acquirer (its group of persons) as well as
or to act as its executive body. of the company in respect of which rights
(shares, equity interest and/or property)
The last category of deals is the greatest are acquired in the calendar year prior to
challenge for law enforcement. Thus, the the year of executing such deals (other
regulatory control does not deliver any clear transactions) exceeds 200m rubles, and
criterion for identifying a circle of deals aggregate asset cost in the last balance
that as a result provide the investor with of the entity (its group of persons) whose
rights enabling him to specify conditions shares, equity interest and/or property
for business operation of the economic are acquired or in respect of which rights
entity. It is very important to consider are obtained exceeds 30m rubles, or one
this form of antimonopoly control while of such persons is put onto the register of
drafting agreements between shareholders business entities with a market share on a
of foreign holdings that are already specific commodity market of more than 35
shareholders or are just planning to acquire percent.
a controlling share (equity interest in the
charter capital of an OOO). Assuming such Such a notification is to be issued within 45
an agreement contains provisions under days (no later) since the execution of the
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corresponding deal or transaction. By and large a list of deals related to

acquiring interest equity, shares and/or
Failure to meet requirements of the banking assets that require a preliminary
antimonopoly law on the procedure of approval of the antimonopoly authorities
endorsement of deals for acquisition agrees with the similar list above regarding
of rights in respect of commercial deals involving non-financial organisations,
organisation, shares (equity interest in with the exception of when credit
charter capitals) or/and property can lead institution assets are acquired. Thus, a
to a situation where the court may find preliminary approval is required for deals
such deals ineffective at a lawsuit of the when, as a result of one or several deals,
antimonopoly authority, provided that such the investor acquires financial organisation
deals have brought about or bring about assets if their volume exceeds 10 percent
competition blocking including cases of of the asset cost according to the balance
emerging or strengthening dominance sheet of the financial organisation as of
(Paragraph 2 and 4 of Article 34 of the the last reporting date, prior to the date of
Federal Law On Competition Protection submitting the application.
No 135- as of July 26, 2006).
Control of the Central Bank of the Russian
Special regulation for acquiring blocking Federation
shares in banking
Presently, foreign investors acquiring
There are specific forms of control over shares (equity interest in the charter
concentration of capital on the financial capital) of existing credit institutions are
service market, which includes a segment subject to the national regime, which
that has become particularly popular means they can acquire equity interest in
recently: banking. the charter capital of credit institutions
under the same regulation as provided for
Acquiring equity interest in charter capitals companies set up under legislation of the
(shares) of credit institutions investors Russian Federation. While acquiring large
have to meet both special requirements shares in credit institutions a preliminary
of the antimonopoly law in respect of approval of the Bank of Russia is to be
financial organisation like banks and special obtained or subsequent notification is to
requirements for acquiring blocking shares be delivered.
/ equity interest in charter capitals of credit
institutions established by the Federal Law According to Paragraph 8 of Article 11 of
On Banks and Banking. the Federal Law On Banks and Banking
the purchase and/or asset management
Control and approval of antimonopoly of more than 1 percent of shares or equity
authorities interest of a credit institution resulting from
one or several deals by a legal or private
This form of control is applicable to deals person, or a group of legal and/or private
with assets or/and equity interest in the persons constrained with an agreement, or
charter capital (shares) of a bank if the cost by a group of affiliates dependent on one
of assets of the credit institution according another, is subject to the notification the
to the last balance exceeds 3bn rubles. Bank of Russia. If more than 20 percent is
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acquired the deal is subject to a preliminary institution for the future and is provided
approval of the Bank of Russia. with a general demand of Paragraph 5 of
Article 11 of the Federal Law On Banks and
Within 30 days from receiving the Banking, which prohibits use of the raised
application the Bank of Russia informs funds for constituting the charter capital of
the applicant on its decision approval the credit institution.
or refusal. A refusal should be reasoned.
If the Bank of Russia does not inform Today, M&A in Russia is subject to rather
the applicant on its decision within the consistent control, both inter-corporate and
indicated period, the purchase of shares administrative. Companies contemplating
or equity interest in a credit institution is M&A deals in Russia have to develop a
considered to be approved. It should be detailed implementation plan for such
noted that considering acquisitions of large deals, allowing for material, time and
shares in credit institutions for approval costs and the ability to address specific
the Bank of Russia places emphasis on regulatory demands under laws of the
the financial stability of the acquirer. The Russian Federation.
criterion here is the sufficiency of the
acquirers own funds for the payment of a
corresponding share or equity interest in
the charter capital. The aim is to ensure a Tatiana Kachalina is a partner and Svetlana
sustainable financial position of the credit Dubinchina is an associate at Liniya Prava.
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g Recent trends in the Russian M&A mid-market
by Oleg Mikhailovsky
As the Russian economy continues eyes of potential, cash-rich buyers.

its impressive growth potential and
gradually becomes more sophisticated, With respect to inbound activity, we
M&A has largely replaced the plain asset expect continued strong demand from
accumulation that marked the 1990s. foreign players. Moreover, although a few
years ago interest stemmed mostly from
M&A has quickly become the driving force multinationals, we are now seeing a second
of the countrys third redistribution phase wave whereby smaller international players
of property and assets. The privatisation are trying to get a foot in the door of the
process of the early 90s was a crude Russian market. This desire to establish
affair, but it created myriad investment presence in a quickly developing market
opportunities that are now beginning to with high growth potential will increase due
bear fruit, especially in the flourishing mid- to expectations that developed markets will
market sector. underperform and experience slow growth.
We expect to see in the near future Investors can generally be divided into
continued and growing activity in the two major categories: strategic and
Russian mid-market, with a focus on the financial. Strategic investors usually seek a
retail and consumer goods sectors. Both controlling stake in a business. They usually
sectors are still fragmented, and Russia also have a longer investment horizon and
is a large consumer market. This offers are often reluctant to pay higher prices.
tremendous opportunities for both large The major advantage of a financial investor
Russian as well as international acquirers. from a sellers point of view is that
they provide access to capital to capture
Russia is often perceived primarily as a growth opportunities, do not always
destination for inbound M&A activities, demand a majority stake and typically
and as a developing market with a huge exit within three to five years. Their major
growth potential. However, there is also disadvantage is that the strategic value-add
an increasing volume of outbound M&A they offer can be limited.
transactions in the recent years. We expect
that outbound activity will continue to In the last two years the Russian M&A
grow. One reason is the need for larger mid-market experienced a boom in private
Russian players to diversify their businesses equity, as more foreign players entered.
or improve their geographic diversification. Russia not only offers higher returns than
Moreover, the global credit squeeze many other markets, it also has a thriving
and expectations of a possible recession and comparatively young population of
in developed markets have resulted in entrepreneurs that prefer to keep control.
appealing valuations of some assets in the Consequently, PE players are welcome to
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provide capital for the further development public via an IPO. Even though an IPO
of the company. might be an option for a medium sized
business, the choice in terms of the listing
When dealing with this new generation place is usually limited.
of Russian entrepreneurs it is important
to understand the key issues. Most of There are many potential rewards of
the major deal drivers resemble those in conducting an M&A transaction in Russia,
mature M&A markets, but some are unique but dealmakers should be aware of,
to Russia. First, owners conclude that they and sensitive to, common acquisition
cannot survive on their own in a market and post-acquisition risks. Those risks,
that is increasingly competitive, particularly if not addressed or mitigated, can be
in the mid-market. At the same time, strong dealbreakers or ruin potential synergies.
consolidation trends are underway. Second,
there is a need for additional capital. Fast
growing businesses require significant
investments to keep pace with competitors
and to achieve ambitious targets. Third,
there is a necessity to get access to When dealing with this new generation of Russian
Western know-how and best practices.
Increasingly, Russian small and medium entrepreneurs it is important to understand the key
sized businesses would like to implement issues.
best practices to increase their growth
potential, productivity and business value.
Finally, there are succession issues. While
the average age of the typical Russian
entrepreneur is close to 40, quite a number
are above 50 and many of them realise First, company cultures can be very
that they need to sell while the timing is different, which may create impediments
favourable. to people working together smoothly.
It is critically important for an acquirer
Of course, the most frequent deal driver for to become familiar with the people it
Russian mid-market entrepreneurs is the is going to close a deal with. Cultural
need for finance to grow their businesses. differences between western investors and
Currently, a variety of financing options Russian entrepreneurs can sometimes be
exist in the Russian market, ranging from significant. Also, personal relationships
plain vanilla bank debt to an initial public in Russia play a much more important
offering (IPO). Obviously, the financing role then in Western Europe or the US.
choice depends on various factors: the You can solve some important deal issues
maturity of a business, the needs of the much more efficiently if you have already
current owners, market conditions, etc. established a good personal contact and if
For medium-sized businesses, it is easier, there is a mutual understanding with the
simpler and cheaper to finance business potential Russian partner.
growth through retained earnings, bank
debt or by bringing in an equity partner Second, many Russian entrepreneurs still
through a trade sale, compared to going bank on an outdated asset-based approach
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to company valuation rather than on more Finally, reporting processes and IT systems
sophisticated valuation approaches such as tend to be very different. As a result, proper
discounted cash flow. alignment is needed.
Third, due diligence is a critically In summary, we believe that the emphasis

important part of the M&A process. on return on capital (i.e., commercial
Many Russian companies still use various considerations in doing transactions) is
tax optimisation schemes, and there becoming a clear trend in the Russian M&A
can be significant differences between market. This will inevitably help redistribute
management and statutory reporting. property and assets to professional
Prior to entering into a deal, due diligence, stakeholders.
accounting and reconciliation issues
need to be understood properly to Oleg Mikhailovsky is a manager in
avoid destroying deal value due to poor the M&A Lead Advisory practice at
preparation. PricewaterhouseCoopers.
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g Nature and scope of M&A in Ukraine
by Bogdan Borovyk and Cameron Hall
Ukraine is in the midst of an M&A surge, market where many sectors remain largely
with growth in transactional numbers undeveloped.
continuing to escalate on a yearly basis
since the start of the boom in 2004. Attractive sectors
During 2007, an estimated 683 deals were
announced, with a total value around The banking and finance sector was the
US$15.6bn, according to ISI Emerging most active in 2007. Most of these deals
Market. Broken down by market sector, involved share acquisitions, with several
investors largely focused on financial, premier Ukrainian banks being acquired
mining and real estate, which made up by Western European multinationals,
about 72 percent of all transactions for including Bank UniCredit (Ukrsotsbank),
the year. The financial sector led in terms Commerzbank (Bank Forum) and Intesa
of investment, with $4.8bn, followed by Group (Pravex Bank). Overall, the
the mining sector at $4.3bn, and then real industry experienced a record number of
estate with $2.2bn. transactions in 2007, with 51 announced
deals. The National Bank of Ukraine noted
Despite the prolonged political instability that 35 percent of investment in the
surrounding the snap election and banking sector consisted of foreign capital
subsequent formation of a new Parliament at 2007 years end, including 17 banks
in 2007, foreign and cross-CIS investors wholly owned by foreign investors
are showing more confidence in Ukraine
as an accessible market with hidden value With this, however, the banking industry
and substantial growth potential. Overall, has largely topped out. Relatively few
the growth in M&A activity is forecasted to top Ukrainian banks are still up for grabs,
continue, although the relative monetary although smaller and medium sized
value will likely diminish slightly as much domestics may be the subject of future
of the large scale M&A activity in the most consolidation. That said, Ukraines approval
developed sectors has passed. as a member of the WTO in February 2008
may generate further interest in the sector,
Relative to western targets, purchase with Ukraine committing to providing
prices in terms of present value are high, non-discriminatory access to the financial
particularly in view of the balance sheet service sector, and accession paving
value of the assets acquired, many of which the way for foreign banks to establish
are in disrepair and/or not in conformity representative branches in the country.
with present day business standards.
However, valuations are justified by the Other sectors have not strictly been the
pace of development and the prospect target of M&A per se, however, insurance
for substantial future market growth in a and retail and commodity food industries
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are predicted to be up and coming sectors. legislative regulation of M&A remains

For example, the aggregate value of deals relatively poor and reform slow. To date,
in the food industry in 2007 was estimated Ukraine has no specific law regulating M&A,
at $1.3bn, including the acquisition by Pepsi requiring an investor to consider and comply
Co. of a 100 percent interest in Sandora, with a multitude of laws and regulations.
Ukraines leading juice producer, valued at Because of the combined novelty and lack
$760m. The arrival and expansion of larger of effective regulation of M&A in Ukraine,
multinational hypermarket chains will foreign investors will often conduct a share
also lead to the consolidation of profitable deal under foreign law, and provide for
domestic chains. Insurance M&A is driven disputes to be resolved by international
by low competition at present, and will commercial arbitration abroad.
likely grow with Ukraines forthcoming
WTO accession.
Foreign investors: potential risks and

their minimisation
Despite the M&A volume in Ukraine, legislative
Foreign investors play a significant role
in the M&A sphere in Ukraine. According regulation of M&A remains relatively poor and
to ISI Emerging Markets, 297 of the 683 reform slow.
announced M&A deals in 2007 involved a
foreign party. In terms of investor origin,
the main sources of M&A investment are
Russia (43 deals), Poland (18 deals) and the
Netherlands (18 deals), with the popularity
of the latter partly due to favourable tax The lack of familiarity with the M&A
conditions between the two countries. process itself is further exaggerated by the
chaos and disorder in which many prior
Both Ukrainian and EU counterparts corporate ownership rights were achieved.
will form holding companies in Cyprus A foreign investor will discover that
for the purpose of financing Ukrainian Ukrainian companies are unable to produce
operations, largely due to the favourable tax the necessary evidentiary and economic
treatment on many forms of passive income support for a transaction, i.e., in terms of
established by the Double Taxation treaty legal due diligence and valuation. Ukrainian
between Cyprus and Ukraine. However, in owners may also express consternation
2007 the Ukrainian Government initiated with the legal demands of their foreign
renegotiations of the Double Taxation counterparts, particularly with regard to the
treaty with Cyprus. The draft of the new number of representations and warranties
convention on Double Taxation presented sought by a foreign buyer.
by the Ukrainian Government does not
establish zero withholding tax on some sorts Additionally, the foreign investor should
of passive income as the present agreement expect to face substantial bureaucratic
does. A new treaty on Double Taxation may conditions and requirements, particularly
be adopted in 2008. in terms of state issued permits, approvals
Despite the M&A volume in Ukraine, (e.g., Anti-monopoly Committee), and
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document authentication, among others. international commercial arbitration;

and (iii) non-competition agreements
However, recently the High Commercial between shareholders of Ukrainian
Court of Ukraine threw corporate companies. While other jurisdictions may
governance in M&A into limbo. On 28 enforce such agreements or clauses, the
December 2007, the High Court passed a recommendations instruct that such
recommendation Regarding the Practice of agreements should not be recognised,
Applying Legislation during Consideration as they are contrary to the imperative
of Cases relating to Corporate Governance, norms and public policy of Ukrainian law,
which cut deeply into the ability to use regardless of obligations which Ukraine has
foreign law to govern corporate relations in as a signatory to the New York Convention
Ukraine. on Recognition and Enforcement of Foreign
Arbitral Awards. Much confusion has been
The principle points of the recommendation expressed in the legal field regarding this
render null and void: (i) shareholder recommendation.
agreements regulating corporate relations
between shareholders of Ukrainian
corporations governed by foreign law; Bogdan Borovyk is co-head of the Corporate
(ii) shareholder / participant agreements Law Practice Group and Cameron Hall is an
providing for dispute resolution by attorney, at Beiten Burkhardt.
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g Sector-specific M&A in Ukraine
by Bogdan Borovyk and Ekaterina Katerinchuk
Ukraines rising M&A market has driven insurance companies, due to the growing
some notable developments in a number potential and relatively low competition.
of sectors. Those with the most activity International insurance groups including
are banking and finance, agriculture, Vienna Insurance, Generali, Fortis, BNP
telecommunications and IT, and consumer Paribas and Allianz have already entered
products. the Ukrainian insurance services market,
mainly through acquisitions of Ukrainian
Banking and finance insurance companies.
The banking and finance sector occupies The following specific features are pertinent
the leading position in terms of M&A to M&A transactions in the banking
transaction volume in the Ukrainian market and finance sector: (i) high transactions
and is expected to remain active in 2008. prices in comparison to other sectors; (ii)
The most attractive investment targets in involvement of investment banks, financial
2007 were banks: 51 M&A transactions were and legal advisers; (iii) due diligence
conducted with the shares of Ukrainian procedures in the acquisition process;
banks. According to the official statistics and (iv) acquisition of decisive control
of the National Bank of Ukraine, as of 1 (from 75 to 100 percent of share capital).
January 2008, 47 Ukrainian banks had Among the legal regulations affecting such
foreign capital, with 17 being solely owned transactions, it should be mentioned that
by foreign investors. The most notable M&A the applicable laws require approval from
transaction of the year was acquisition of the National Bank of Ukraine for acquisition
Ukrsotsbank, one of the leading Ukrainian of a substantial portion (10 percent or more)
banks, by Bank Austria Creditanstalt AG of a banks share capital, as well as approval
which belongs to the UniCredit group, for from the Anti-monopoly Committee of
US$2.2bn. Ukraine (should the transaction satisfy
certain quantitative thresholds, which is
Although a number of the top 10 Ukrainian usually the case in the banking and finance
banks have been already acquired by sector M&A).
foreign investors, experts predict more
acquisitions in 2008 as the banking Agriculture
and finance sector has not yet reached
saturation. Moving forward, investors are The Ukrainian agricultural industry is
more likely to acquire mid-level banks and believed to have considerable potential
small local banks. for M&A transactions. Currently, this
sector is characterised by a low level of
Investor demand has also increased in consolidation and competition as the
non-banking financial institutions and majority of agricultural market players (up
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to 90 percent) are small retail companies and oil-producer) and Astarta Holding N.V.
possessing small agricultural land areas. (a leading Ukrainian sugar company).
In addition, due to weak development of
the real estate market in Ukraine, many Target companies in this sector are
experts believe that land is substantially mostly small agricultural enterprises with
undervalued. The Ukrainian agricultural no modern technology and machinery,
industry suffers from a lack of funds and sizeable liabilities and low profitability.
investment, in particular, the northern and Major legal flaws are often discovered in
western regions of Ukraine are considered the land and real estate title documents of
to have good development potential with such companies. For these reasons, target
a large number of investment targets companies in the agricultural sector may be
available for acquisition. Another important acquired for moderate prices.
factor is the increasing demand in the food
market, which is experiencing a substantial Telecommunications and IT
lack of high quality raw materials from the
agricultural industry. Due to increasing consumer demand for
communications services and the rise in
GDP in Ukraine, the telecommunications
and IT sectors have demonstrated rapid
Due to increasing consumer demand for developments in recent years to become
communications services and the rise in GDP in more attractive to potential investors.
Segments with the most potential for M&A
Ukraine, the telecommunications and IT sectors are mobile communications and internet
have demonstrated rapid developments in recent services. Investor interest is also growing in
media businesses and cable broadcasting
years to become more attractive to potential services.
investors.
The most notable M&A transactions of the
last year were the domestic acquisition of
Optima Telecom, the Ukrainian fixed line
Investing in the agricultural industry telecom operator and internet services
carries certain risks, such as dependence provider, by System Capital Management
on climatic and weather conditions, and for US$130m, and the cross-border
uncertainty in the Ukrainian land market acquisition by US buyout firm Providence
due to the moratorium imposed on the sale Equity Partners of Ukrainian cable
of agricultural land. Nevertheless, experts television group Volia Cable for US$200m.
predict several M&A transactions in 2008,
particuarly in the fat-and-oil and sugar A number of large M&A transactions in the
industries. last year have brought major consolidation
and intensified competition to the
The most notable M&A transactions last Ukrainian mobile services market, including
year were domestic acquisitions made by the substantial acquisition of UMC, a
Kernel Group (the leading Ukrainian oil leading mobile communications provider,
producer), Allseeds Ukraine company (a by MTS, the leading Russian-based CIS
major Ukrainian seeds trading company mobile communications provider. This has
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decreased investment opportunities in the leading juices producer Sandora by Pepsi

sector. Moreover, due to time consuming for $US758m, dairy company Fanny by
and complicated licensing procedures, Lactalis Group at for US$45m, mineral
and the absence of any regulations on water company Rosinka by Orangina Group
new communication standards, the for US$65m, cheese manufacturer Shostka
mobile services market bears certain by Bel group for US$50m, and cheese
administrative risks for potential investors. manufacturer Klub Syru by Renaissance
Capital for US$197m.
Experts estimate that the profits of
internet services providers have grown Despite a large number of acquisitions,
by 90 percent over the last year, making the food industry is still considered to
them attractive targets for M&A. Experts have major investment potential as the
note investor interest in the acquisition of level of consolidation and competition is
local internet providers and small phone low compared to developed economies.
companies with values around US$4- However, a number of sub-sectors (e.g.,
5m. When acquiring Ukrainian internet beverages, beer and alcohol) have already
providers, investors favour asset deals, thus seen consolidation as the most attractive
acquiring only real estate and equipment to targets have already been acquired, so they
avoid corporate and financial risks. do not offer many opportunities for new
investors to enter these markets.
Consumer products
One of the main risks in consumer products
The increasing wealth of the Ukrainian M&A is the lack of high quality raw
population and the development of the materials (which must be imported) and
consumer credit market have provoked the increasing competition which is likely to
a consumer market boom. The most follow WTO accession, as Ukraine opens up
considerable M&A transaction volume has to a large amount of imports.
occurred in the food industry, which experts
estimate at around US$1.3bn, putting it in
fourth place in terms of M&A transaction
value. Bogdan Borovyk is co-head of the Corporate
Law Practice Group and Ekaterina
The most notable M&A transactions of Katerinchuk is an attorney at Beiten
2007 were the acquisition of Ukraines Burkhardt.
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g Due diligence in Ukraine
by Bogdan Borovyk and Ekaterina Katerinchuk
Generally, due diligence may be described summarises the findings and risks in
as the process by which a potential investor the executive summary. The executive
evaluates a target company or its assets summary should reflect the basic findings
for the purpose of its acquisition. This is relevant to the envisaged transaction
made through conducting an investigation and estimate the identified risks either in
and audit of the potential investment. Due a quantitative manner (e.g., amount of
diligence plays prominently in nearly all penalties, fines which may be imposed on
M&A transactions, with the subsequent the target company for non-compliance
outcome serving as a basis for the potential with the certain legal requirements), or in
investors decision on whether to go a qualitative manner (e.g., the potential
through with a deal, as well as how to risk of contesting certain agreements or
structure the deal and define the material property title may be estimated as minor,
terms of acquisition. moderate or high).
The due diligence process varies depending While drafting transactional

on the different areas concerned, which documentation, it is particularly important
may include financial and accounting, legal, to consider the outcome of the legal due
tax, environmental, technical due diligence, diligence and minimise the uncovered risks
etc. This article deals with certain aspects of by providing in the acquisition agreement,
legal due diligence. as the case may be, the sellers obligation to
eliminate flaws (if applicable) as conditions
In the course of the legal due diligence precedent to closing, any pertinent
review, the availability of a data room, representations and warranties of the seller,
a sufficient level of documents available indemnification and remedial provisions.
for review, and proficiency of the legal
due diligence team are considered to be Due diligence is quite a new notion for
essential for a successful legal due diligence Ukrainian business practices. As a matter of
review. In some cases it may be necessary fact, the Ukrainian market for due diligence
to agree with the investor on a certain services started its active development
threshold, meaning that any document in 2004, to satisfy the massive inflow
raising risks below the agreed threshold of foreign investments into Ukraines
shall be disregarded while conducting the economy, and consolidation of assets of
legal due diligence. It allows investors to major Ukrainian business groups.
optimise the expenses related to the legal
due diligence and conduct the review within Due to the fact that a practice of legal
a shorter time limit. due diligence in Ukraine has only been
established within the past few years, there
The final stage of legal due diligence are certain difficulties and specific features
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to be considered while conducting legal due a negative impact on legal due diligence
diligence on a Ukrainian target company. practices. It has resulted in extremely
irresponsible and negligent attitudes
First, the specific character of the towards proper documentary execution of
acquisition and allocation of property in business operations, titles to property, etc.
Ukraine which is more likely to be the Thus, in the course of a legal due diligence
result of certain historical developments, on a Ukrainian target company, it is often
combined with a rather young and discovered that, while outwardly financially
developing legal system, and even the lack healthy and operating effectively, the
of legal regulation of particular issues has company has no duly executed title
affected the approach to legal drafting documents, registrations of intellectual
and execution of official documents. In property rights, or formally reflected
particular, this has resulted in a large relations with its owners or management.
amount of discrepancies and deviations
from Ukrainian statutory requirements As a general rule to minimise the
contained in the documents, and even risks, investors should obtain as much
the absence of certain documents of information about the target company
the target companies. These flaws are as possible. Thus, a full-scale legal due
often discovered in the documents while diligence review of the target company
conducting legal due diligence of the is recommended, as the most efficient
Ukrainian target company, particularly way to protect and secure the interests
with regard to having all title documents to of the investor. However, in some
assets and real estate, non-compliance with instances, conducting a comprehensive
privatisation procedures or a failure to fulfil legal due diligence review may appear
privatisation obligations. difficult under Ukrainian conditions. Due
to the abovementioned factors, when
Second, additional legal obstacles cause conducting the legal due diligence the
difficulty in the legal due diligence process, investors often have to face problems
and are mainly connected with the lack of related to poor organisation of data rooms,
sustainability of the legal framework (i.e., absence of necessary documentation,
frequent revision and amendments of laws, and/or failure of the target companys
absence of the unified court practice, etc.), managers or employees to provide the
and ambiguity and contradictions of the requested information. These issues,
legal provisions, which causes problems though of a technical nature, should not
even for companies with the highest be underestimated as they substantially
legal standards in terms of compliance. influence the effectiveness and timing of
Consequently, Ukrainian companies are the legal due diligence review. As data room
often not in compliance with currency, tax, arrangements are usually the responsibility
anti-monopoly and corporate laws. of the seller and/or target company, it is
important to agree in advance upon the
Third, the mentality and legal manner of providing documents (copies or
consciousness in Ukraine, mainly electronic form), availability of data room
characterised by a neglectful attitude index, data room working hours and rules,
towards the legal standards and obligation the possibility and form of submitting
to comply with their requirements, also has additional requests and interviewing
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certain officers of the target company, diligence. While buyer due diligence has
appointment of the contact persons of each become quite common for Ukrainian
party and a person in charge of the data transactions, vendor due diligence is
room, etc. conducted by a sellers legal advisers and is
intended to present information about the
One more issue to be taken into account is target company to any potential buyers.
that the applicable laws and regulations of Vendor due diligence usually expedites
Ukraine generally do not stipulate liability auction procedures and facilitates
for providing false information during the buying the target company at a more
legal due diligence review. For this reason, favourable price. Moreover, vendor due
investors should pay particular attention diligence enables the seller to discover
to the pre-due diligence negotiations potential risks and legal flaws of the target
and arrangements as described above, company and eliminate them if possible.
the participation of investment advisers Although, Ukrainian laws and regulations
representing the target company and/or do not expressly charge the seller with an
the seller, and make sure that the seller obligation to inform the buyer of potential
representations and warranties regarding risks pertinent to an acquisition of the
the correctness, credibility and authenticity target company, the seller should inform
of the documents and information the buyer of the rights of third parties to the
provided for the legal due diligence review target company, if there are any.
by the seller, target company and/or its
representatives and officers, are included in
the acquisition agreement. Bogdan Borovyk is co-head of the Corporate
Law Practice Group and Ekaterina
The latest trend in the Ukrainian M&A Katerinchuk is an attorney at Beiten
market is the inclusion of vendor due Burkhardt.
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g Antimonopoly laws in Ukraine
by Bogdan Borovyk AND Ekaterina Katerinchuk
The antitrust laws and regulations of obtaining direct or indirect control over one
Ukraine are aimed at protecting economic or several business entities, or parts thereof,
competition and precluding monopolisation by means of direct or indirect acquisition of
of the Ukrainian market. In recent years, a property complex or a business entitys
the increasing investment of foreign subdivision, or appointment of a person
capital in Ukraine and consolidation occupying a managing position in one
among major Ukrainian financial groups business entity to a similar position in other
has resulted in a huge amount of M&A entities; (iii) establishments of new business
transactions having a substantive effect on entities by two or more business entities;
the competition and consolidation of the and (iv) direct or indirect acquisition
Ukrainian market. Consequently, they fall resulting in the acquirer obtaining or
under the requirements of the antitrust exceeding 25 or 50 percent of the voting
laws and merger regulations of Ukraine. rights of the business entity, which is the
The purpose of this article is to give most common type of concentration under
investors an overview of the antimonopoly cross-border transactions in Ukraine.
laws and regulations of Ukraine and basic
information on the requirements to be Should an M&A transaction fall within
met and procedures to be followed by the either of the abovementioned criteria, it
parties to M&A transactions. shall be considered as a concentration. In
such cases, the AMCs prior approval of
The principal legal act regulating anti- such transaction shall be obtained if the
monopoly control is the Law of Ukraine certain quantitative thresholds are met.
On Protection of Economic Competition. In particular, the AMCs prior approval is
The Competition Law is intended primarily required if during the last financial year
to prevent the monopolisation of product the combined asset value or total sales,
markets, abuse of monopoly positions, and including those abroad, of the participants
the creation of limits on competition. In of concentration, exceed an amount
fulfillment of those goals the Competition equivalent to 12m, provided that: (i)
Law grants the Antimonopoly Committee the combined asset value or total sales,
of Ukraine (AMC) the legal authority to including those abroad, of at least two
approve or disapprove of concentrations participants of concentration exceed
of business entities, as well as certain an amount equivalent to 1m for each
contractual and other activity. The participant; and (iii) the combined asset
Competition Law provides a non-exhaustive value or total sales in Ukraine of at least one
list of the types of transactions which participant in such concentration, exceeds
qualify as concentrations. In particular, an amount equivalent to 1m.
these are: (i) mergers or consolidations
of business entities; (ii) acquisitions or The AMCs prior approval must be obtained,
L+ L- 3 4 CONTENTS
irrespectively of the abovementioned application shall be filed with the AMC. In

thresholds, if the market share of one, ordinary cases, the AMC requires 45 days
or the combined market share of all, the to review an application, consisting of an
participants of concentration exceeds 35 initial preview 15-day period during which
percent. the application can be rejected for formal
non-compliance, and 30-day maximum
Should the parties close a transaction period for substantive evaluation. The
without the AMCs prior approval or in case AMCs failure to commence evaluation
of post-closing filing, the AMC is authorised by the end of this period is deemed to
to impose fines on the participants of constitute an approval, dated as of the last
unauthorised concentration. Namely, day of this period.
according to the Competition Law, the AMC
may impose a fine of up to 5 percent of a However, in some cases, the AMC may
participants revenues from the sales of require an in-depth investigation which
products (services, works) accrued within may take up to three months, whereby
the preceding financial year. the AMC will ask for the provision of
additional information or an expert
There are also types of transactions that appraisal. Consideration of the application
do not fall under the AMCs approval may be also suspended should certain
requirements. The following transactions circumstances prevent its consideration
are expressly exempted from obligation to (e.g., pending resolution of other related
obtain the AMCs approval: (i) acquisition of and concurrent cases before courts,
the shares by the company specialising in international tribunals, or agencies).
financial or securities operations, provided,
however, that the shares are resold no later As to the filing procedure itself, filing entails
than one year after such acquisition; (ii) preparation of the application, supporting
transactions between the related business documents and payment of the filing fee.
entities provided that the relations of Usually, a few weeks may be required for
control between those entities were initially preparation of the application due to the
established with the AMCs prior approval; volume of data, information and documents
and (iii) acquiring control over a business that must be processed and compiled
entity by the appointed bankruptcy in the appropriate form. The supporting
receiver. documents shall be submitted together
with the application (depending on the type
Should an M&A transaction not satisfy of concentration this may be constituent
the criteria of an exemption, the AMCs documents, financial statements of the
approval of such transaction must be participants of concentration, copies of
obtained prior to its closing. Once the the acquisition agreement, etc.). Any
approval is granted it remains valid for one documents issued abroad shall be notarised
year. If the transaction is not closed within and, in certain circumstances, apostilled
one year, a new AMC approval must be or legalised. Moreover, foreign language
obtained. documents shall always be supported by
an official Ukrainian translation. At present,
In order to initiate the procedure of the filing fee for an ordinary application is
obtaining the approval, the respective approximately 760.
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Ukrainian laws and regulations grant the on the whole Ukrainian market or at its
AMC a broad scope of general competence considerable part.
and a large authority in considering
concentration applications; in particular, The approval granted by the AMC may
the AMC is authorised to request any be conditioned on certain requirements
additional information, the absence of or obligations being fulfilled by the
which prevents the AMC from considering participants of concentration in order
the application. In practice, this approach to decrease the negative impact of
has resulted in the AMC, at any time and at the concentration on competition in
its discretion, requesting information, data the relevant market. In particular, such
or documents which it deems necessary obligations may provide certain restrictions
for the consideration of application. related to the management or disposal of
Moreover, the AMC is entitled to dismiss property, or obligations to alienate certain
the application without deciding on the property.
merits because of the failure to provide the
requested information within a specified
term, even though the submission of such
information may not be expressly provided
by applicable laws and regulations.
The refusal may specify certain recommendations for
While considering an application, the
AMC has the authority to request any the participants of concentration to follow, in order
information, including confidential and for approval to be granted.
restricted access information. In particular,
it is common practice of the AMC to
request information on the shareholding
structure of the participants of the M&A,
including information on the beneficial
owners, information which foreign If the AMC refuses to approve a
investors are usually reluctant to disclose. concentration, such refusal shall
Nevertheless, the applicable laws and always be supported by stated legal
regulations of Ukraine stipulate the AMCs grounds. The refusal may specify certain
non-disclosure obligations, provided that recommendations for the participants
the information submitted to the AMC is of concentration to follow, in order
expressly stated to be confidential and to for approval to be granted. The AMCs
be treated as restricted access information. refusal may be contested in court. The
Otherwise, the AMC is entitled to disclose Competition Law also grants authority
certain information on the envisaged to the government of Ukraine to approve
concentration, in particular, by publishing it concentrations disapproved by the AMC,
on its website. under condition that the positive impact of
such concentration on the public interest
According to the Competition Law, the will exceed the negative consequences
AMC shall always grant its approval, unless on the limitation of competition in the
the concentration causes monopolisation Ukrainian market.
or substantial limitation of competition
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According to the Competition Law, the approval decision and the non-exhaustive
AMC is also entitled to revise its own list of grounds for such revision causes a
resolutions (approving or disapproving situation of legal uncertainty. However, as a
concentration) either at its own initiative, or matter of practice, the AMC does not tend
under application of any person. However, to use its revisionary powers, unless the
such revision may be made only on the abovementioned grounds occur. Moreover,
following grounds: (i) discovery of material the Competition Law also provides for
circumstances unknown to the AMC, if such statute of limitations for revision of the
circumstances result in the unwarranted AMCs decision of three to five years
or unlawful resolution of the AMC; (ii) (depending on the grounds for revision)
discovery of false information unknown from the date of the respective AMCs
to the AMC if such information results in resolution.
the unwarranted or unlawful resolution
of the AMC; (iii) non-compliance of the
participants of the concentration with
the obligations conditioning the AMCs Bogdan Borovyk is co-head of the Corporate
approval of concentration; and (iv) other Law Practice Group and Ekaterina
grounds provided by applicable laws. Katerinchuk is an attorney at Beiten
The powers of the AMC to revise its Burkhardt.
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g Legal issues in Romanian M&A
by Ctlin Micu and Nicolae Hariuc
Foreign acquirers targeting all or part of a statement of the company.

company incorporated in Romania should A person that, as a result of its purchase
be aware of various capital market, labour, or those of the persons acting in concert
environment, competition and fiscal law with it, holds more than 33 percent of
implications. the voting rights in an undertaking must
launch to all shareholders of a company
Capital market issues around takeover listed on BSE a public offer addressed to
offers all securities holders for all their holdings
as soon as possible, but no later than two
The Law no. 297/2004 on capital market months from reaching this holding position.
establishes two types of takeover offers: Until such mandatory takeover offer is
the voluntary takeover offer and the made, all the rights related to the securities
mandatory takeover offer. exceeding 33 percent of the voting rights
within the issuer are suspended, and the
The voluntary takeover offer represents a said shareholder and the persons acting in
public purchase offer that results, for the concert with it may no longer purchase, by
entity that launches it, in the purchasing of other operations, the shares of the same
more than 33 percent of the voting rights in issuer.
a company. This public purchase offer (i) is
addressed to all shareholders of a company In a mandatory takeover offer the price
listed on the Bucharest Stock Exchange offered shall be at least equal to the
(BSE), for all their holdings and (ii) is highest price paid by the offeror or by the
launched by a person that does not have persons with whom it acts jointly within
this obligation. the 12 months prior to the offer. If no
such price exists, the price offered shall
In a voluntary takeover offer the price shall be determined in accordance with RNSC
be at least equal to the highest price from: provisions, at least taking into account
(i) the highest price paid by the offeror or the following criteria: (i) the average
the persons acting in concert with it during weighted price of trading for the last 12
the period of 12 months prior to the date months prior to the offer being made;
of submitting to the Romanian National (ii) the value of the companys net assets
Securities Commission (RNSC) the public according to the latest audited financial
offer documents; (ii) the average weighted statements; (iii) the value of the shares, as it
price of trading, referred to in the last 12 results from an experts report made by an
months prior to the date of submitting to independent valuator, in accordance with
RNSC the public offer documents; and (iii) the international valuation standards.
the net assets of the company per shares in
circulation, according to the last financial Any person may launch a counter-offer for
L+ L- 3 4 CONTENTS
the same securities, under the following or parts of the undertaking or unit, and
conditions: (i) it addresses the same the assignee the person that acquires
amount of securities and targets, at least, the capacity of employer towards the
the same share capital holding; and (ii) employees mentioned).
it offers a price that is at least 5 percent
higher than the first offer. This counter- The European Court of Justice regulated
offer shall be carried out by submitting to that the notion of economic entity
RNSC the required documentation within a represents an organised aggregate of
maximum of 10 working days from the date persons and elements permitting the
when the first offer was made available performance of economic (essential or
to the public. Through the decision to secondary) activity pursuing an own
authorise the counter-offers, RNSC shall objective. In other words, the economic
establish once the same closing term for entity is construed as being a unit or
all the offers, as well as a deadline for the a part of the unit, that establishment
submission for approval of the supplements and/or sector (division) of activity of an
regarding price increases within competitor undertaking that has or may have an
offers. The single term for closing autonomous activity, the necessary and
competitor offers may not be longer than sufficient human, technical and logistic
60 working days from the date when the capital.
first offer has been made.
Pursuant to the above-mentioned legal
Labour issues provisions, the employees rights in case
of transfer of the undertaking, unit or
Law no. 67/2006 on the protection of parts of the undertaking or unit shall be
the employees rights in case of transfer protected by informing the employees
of the enterprise, unit or parts of the representatives with regard to the legal,
enterprise or unit transposes into Romanian economic and social consequences of the
legislation the Directive 2001/23/EC on transfer and by establishing the rule that
the appropriation of the legislations of the the employees rights and obligations
member states relating to the maintenance entailing from the individual labour
of the workers rights in case of transfer agreements or the applicable collective
of the enterprise, unit or parts of the labour agreement, existing on the date of
enterprise or unit. operation performance, shall be integrally
transferred to the assignee.
According to the law the transfer
means transferring from the assignors Environmental issues
ownership into the assignees ownership an
undertaking, unit or part of the undertaking The Emergency Government Ordinance no.
or unit as a result of an assignment or 195/2005 regarding environment protection
merger, for the purpose of carrying on provides that the notice for establishing
the main or secondary activities, without the environment obligations, meaning the
considering its obtaining or non-obtaining technical and legal document issued by
of any profit (the assignor being the person the competent authority for environment
that loses its capacity as employer towards protection, must be obtained in case of
the employees of the undertaking, unit the change of the holder of an activity with
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significant impact on the environment, community dimension if the following

the sale of the majority block of shares, conditions are met: (i) the combined
the sale of assets, merger, split-up, aggregate worldwide turnover of all the
cessation of activity, having as purpose the undertakings concerned exceeds 5bn; and
establishing of the environment obligations (ii) the aggregate community-wide turnover
as provisions of a compliance plan in order of each of at least two of the undertakings
that the parties involved in the situations concerned exceeds 250m, unless each
previously mentioned undertake them. of the undertakings concerned achieves
more than two-thirds of its aggregate
The issuance of the environment notice community-wide turnover within one and
is the first step in order to obtain a new the same Member State.
environment authorisation.
Also, a concentration that does not meet
Competition issues the thresholds specified in the paragraph
above has a Community dimension if: (i) the
The specific issues pertaining to the combined aggregate worldwide turnover
economic concentrations resulted from of all the undertakings concerned exceeds
international mergers and acquisitions 2.5bn; (ii) in each of at least three Member
are regulated by the Council Regulation States, the combined aggregate turnover
(EC) No. 139/2004 on the control of of all the undertakings concerned exceeds
concentrations, which is applicable to 100m; (iii) in each of at least three Member
the economic concentrations with a States included for the purpose of point (ii)
Community dimension. In such cases, the the aggregate turnover of each of at least
European Commission is the competent two of the undertakings concerned exceeds
authority for applying the provisions of 25m; and (iv) the aggregate community-
the above-mentioned Council Regulation wide turnover of each of at least two of the
subject to review by the Court of Justice. undertakings concerned exceeds 100m,
unless each of the undertakings concerned
For the economic concentrations that affect achieves more than two-thirds of its
the competition on the Romanian local aggregate community-wide turnover within
market, the provisions of the Competition one and the same Member State.
Law no. 21/1996 are applicable. The
competent body for applying these The above-specified thresholds are subject
provisions is the Competition Council. to the Councils modification following
the proposals submitted to it by the
Specific thresholds are set up by the Commission.
applicable laws for starting the procedure
of notifying the European Commission or As per the Romanian competition law,
the Competition Council. In this respect, the the thresholds are the following: (i) the
parties involved in an international merger combined aggregate turnover of all the
and/or acquisition will notify the competent undertakings concerned exceeds the
authorities. equivalent in RON of 10m and (ii) at
least two of the concerned undertakings
The Council Regulation states that an achieve, in the Romanian territory, a
economic concentration has an EU turnover exceeding the equivalent in RON
L+ L- 3 4 CONTENTS
of 4m each. The equivalent in RON is authorities, depending on specific criteria,

calculated at the exchange rate RON/EUR namely the form of incorporation of the
communicated by the National Bank of company whose shares are the object of
Romania in the last day of the financial year the transaction, respectively the person
previous to the year when the merger or obtaining the revenue (Romanian or foreign
acquisition occurs. natural person or Romanian or foreign legal
person, as the case may be).
Should the economic concentration not be
notified by the undertaking that had the Moreover, both the trade registry and the
obligation to submit the notification, the independent registry company that holds
Commission or the Competition Council the shareholders register shall deny the
can apply penalties that shall not exceed 10 registration of transfer of ownership over
percent of the undertakings turnover. the shares, as provided by the Companies
Law, in case proof of the due tax payment,
Fiscal issues as per the above criteria, is not presented.
For the revenues acquired as a result of

the acquisitions of Romanian companies, Ctlin Micu and Nicolae Hariuc are
the Romanian Fiscal Code establishes associates at Zamfirescu Racoi Predoiu Law
certain taxes to be paid to the fiscal state Partnership.
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g The Baltic M&A markets
by Raminta KarlonaitE
M&A emerged only 17 years ago in remain high in 2008. The Bank of Lithuania
Lithuania, Latvia and Estonia, at the predicts that Lithuanias average annual
beginning of privatisation involving state- inflation will be around 7.9 percent this
owned businesses. From 1991, M&A year, dropping to 4.9 percent in 2009.
markets in the Baltics have grown rapidly Last year, inflation in Latvia reached 14
for a number of reasons including fast percent while the forecast is 12.8 percent
economic growth, an influx of foreign direct for 2008. In Estonia, inflation has actually
investment, consolidation of the economies started declining: an average of 8 percent
of the three Baltic States, and ongoing is expected in 2008. Notably, such high
integration into the European Union. inflation rates might cause further
Transaction practices have undergone postponement of the euro in the Baltic
significant changes in the Baltics, adopting countries.
many standards compatible with M&A in
developed markets. From nothing they Experts indicate a number of reasons for a
have evolved to achieve global recognition. slowdown in the Baltic economies. These
include the cyclical downturn, turbulence
2007 was a record year for Baltic M&A. in global financial market, the large current
According to disclosed deal size, the account deficits of Lithuania, Latvia, and
largest M&A deal was the acquisition of the Estonia, low exports, high pay increases in
Lithuanian Telecommunication Company recent years, and high domestic demand.
by private equity firm Mid Europe Partners But despite the cooling period, economic
for 450m. growth in the Baltic countries is expected to
remain significantly higher than many other
In recent years, the economies of the three European countries. The Baltic currencies
Baltic States have been among the fastest euro pegs should survive.
growing in the European Union. GDP in
the Baltic countries last year reached 10.5 Prospects for the Baltic economies are
percent in Latvia, 8.7 percent in Lithuania bright. The economies of Lithuania, Latvia
and about 7 percent in Estonia. However, and Estonia are flexible because they are
there has been a recent slowdown that puts small, open and offer many opportunities.
2008 and 2009 forecasts at 3-4 percent for An economic slowdown should be
Estonia, 7.2 and 5.5 percent for Latvia, and temporary, giving way to a fast recovery.
6.5 and 6 percent for Lithuania respectively The Bank of Estonia estimates that in 2008-
in 2008 and 2009, according to SEB 09 economic growth will drop more than
Economic Research. expected, but this would help to decelerate
rising prices and trade deficits.
Inflation in the Baltic countries has
increased considerably, and is expected to When the adjustment period ends, the Baltic
L+ L- 3 4 CONTENTS
countries will have good chances to continue be active acquirers of less efficient Baltic
their rapid growth. The forecasted long companies, whose shareholders now have
term sustainable growth rate of the Baltic fewer illusions about the value of their
States would still be about 6-7 percent per business. Also, relatively strong Lithuanian
year. However, future growth and economic companies that benefit from a stronger
expansion will have to be more balanced domestic economy could acquire weaker
with a need to promote exports. It will be Latvian and Estonian companies.
necessary to promote the private sector
to invest in industries primarily focusing Private equity in the Baltics has picked
on the foreign markets. Moreover, taking up only very recently, much later than in
into consideration the current economic Western Europe. The credit crunch has
adjustment stage of Estonia, Latvia, and imposed limits on the leverage of private
Lithuania, strict and prudent fiscal policies equity investments and therefore their
are vital to maintain economic balance and global activities are expected to slow down.
support investments. In the Baltics, this hurdle is reduced because
transaction values are relatively small.
In recent years, trends in Baltic M&A Furthermore, international private equity
practice have included an increase in funds are now showing increasing interest
auction sales, growing activity by private in Central & Eastern Europe, including the
equity funds and a higher volume of local Baltics, where economies are growing
or cross-Baltic investments. All these faster than those of the Western Europe.
trends should persist, albeit at a reduced For these reasons, the Baltic private equity
scale. M&A activities should not be market should continue to grow.
heavily influenced by a slowdown in the
Baltic economies, since even struggling The economic deceleration of the Baltic
companies can provide attractive targets. States should open new opportunities for
M&A activity. Currently, legislation and
In this deceleration phase, the leading practices are comparable to developed
companies will have strong cash flows markets because they are harmonised with
that are not too dependent on domestic the EU. Certain EU Acts covering M&A
demand, but rather exporting. They have been fully implemented in Lithuania,
will have healthy balance sheets and Latvia and Estonia, such as the Directive on
strong management capable of acting Takeover Bids (2004/25/EC; the Takeover
on opportunities. On the other hand, Directive) and the Cross-Border Mergers
struggling companies will have weak Directive concerning limited liability
cash flows that are highly dependent on companies (2005/56/EC; the Cross-border
domestic demand, or highly leveraged Directive).
balance sheets.
The Takeover Directive creates a common
In terms of M&A, winning companies set of rules for all EU Member States and
will have a better chance of buying thus promotes the idea of unifying the
underperforming companies at a lower common market in the European Union.
price, thus expanding their activities The Takeover Directive was aimed at
and strengthening their position in the creating efficient takeover mechanisms,
market. Nordic or Polish companies could a common regulatory framework, strong
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rights for shareholders, including minority amendments in the Estonian legislation

shareholders, and to remove some of the related to the MiFID provide for the
main company-related obstacles which creation of deregulated multilateral
were permitted under national company trading facilities which will provide new
law (these obstacles meant that takeovers opportunities for small to medium size
could not be undertaken under equal growth companies seeking to raise capital.
conditions in the different Member States).
After implementation of the Takeover Finally, as of 1 March 2008, amendments
Directive in the Baltic States, acquiring to the Law of the Republic of Lithuania
companies are able to rely on the same on Collective Investment Undertakings
mechanisms to tackle probable challenges were adopted. The main novelty under the
when acquiring companies on a pan-Baltic law is that besides harmonised collective
scale. investment undertakings within the
meaning of Council Directive 85/611/EEC,
All three Baltics States have also adopted special collective investment undertakings
measures to transpose the Cross-Border investment funds and investment
Mergers Directive. The purpose of the companies whose operation are not
cross-border merger legislation was to harmonised at the EU level might be set
simplify the procedure for mergers between up in Lithuania. Thus, the law provides legal
limited companies registered in the grounds for establishing in Lithuania private
Member States of the European Union. The capital, real estate, alternative investment,
cross-border merger legislation establishes and other special collective investment
general requirements for merger undertakings, allowing investors to make
agreements and related documents and indirect investments in perspective and
procedures that are uniform for all parties. growing companies whose securities are
The cross-border merger legislation could not traded on regulated markets as well
facilitate company mergers in the Baltics. as in real estate objects and financial
derivatives.
In addition, the Estonian Parliament
recently adopted amendments to the Although the growth rate of Baltic
Securities Market Act transposing economies is experiencing a slowdown, the
provisions of the Markets in Financial M&A market remains attractive, especially
Instruments Directive (MiFID), the Takeover for corporate buyers. Legislation and
Directive, and the Capital Adequacy of practices are comparable to developed
Investment Firms and Credit Institutions markets and harmonised with the EU. So
Directive. The amended Securities Market despite the slowdown, the Baltic economies
Act imposes significant new requirements will have a good chance of continuing their
for investment advisers, investment funds, rapid growth.
fund managers, stockbrokers, and banks
with activities in Estonia as well as new
rules pertaining to takeovers and capital Raminta Karlonait is a senior associate at
adequacy requirements. In addition, the Sorainen.
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g Completing a successful deal in the Baltic States
by Veikko Toomere and Jacob Strandgaard Andersen
The Baltic States are three different in a significant increase in the standard of
countries. A general misconception is living.
that the Baltics can be regarded as one
region of countries, which share a common Economic growth and inflation. Since the
cultural background and which have similar re-independence of the Baltic countries,
languages, institutions and mentality. all of them have seen an extraordinary
Foreign acquirers planning a business growth in GDP, with some of the highest
venture in Estonia, Latvia or Lithuania must growth rates in Europe. The disposable
address this misconception. There are not income for consumption is high. There are
only differences in languages, but also signs of a slowdown, although there is no
historical and cultural differences. Doing consensus on how abruptly or by how much
your homework to achieve a prior basic the economies will cool down. Inflation
knowledge of the relevant Baltic country is is increasing and reached double digits
an important part of success. in Latvia and Estonia in 2007. This must
be seen in light the virtually non-existent
Post Soviet legislation versus modern unemployment and growing concern
European legal systems. The legal systems among companies, which are desperately
in all three Baltic States are relatively new. looking for employees to fill vacancies. This
Less than 20 years ago, sale or purchase is a contributing factor in pay increases. For
for profit was a criminal offence and example, the increase in Estonia averaged
the legal systems were an echo of the 20 percent from Q4 2006 to Q4 2007. It
communist Soviet legal system. However, means Estonia is losing the competitive
the development of the legal systems advantage it had because of low manual
is a reality, and EU legislation has been labour costs.
largely implemented following accession
to the EU in 2004. Judiciaries that function Challenges with long term planning. Long
relatively well have been established, term planning is not a top priority, and is
offering protection of contractual rights, still new to most companies in the Baltic
enforcements of claims, etc. States. Most businesses are much younger
than 15 years, and their managers and
Business culture. When looking closely owners are much more impatient than their
at the business cultures, most foreigners counterparts in Western Europe. When
find that the pace is high, and that the coming from a background where long
Estonians, Latvians and Lithuanians term strategic and visionary planning is the
are looking for fast returns on their norm, and where a pragmatic approach
investments. Part of the reason for this is is often chosen to ensure steady growth
that the region has only seen progress in over the coming decade, it takes some
the last 10-15 years. This is also reflected time to get used to and appreciate the
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entrepreneurial atmosphere aimed at fast employees or other unusual agreements.

returns today rather than tomorrow. Not all of these are registered in the books.
These practices appear to be decreasing,
Patriarchal style of leadership. When but they will still arise for some years to
entering negotiations it is always a good come.
idea to approach the owners directly, as
they will be the real decision makers. In Management interviews and written
most cases they will also be the managers. evidence. The challenges with disclosure
Contact with managers who are not and the existence of unwritten practices
the owners is inadvisable. The style of underline the importance of management
management is patriarchal and major interviews. This is important as it partly
decisions, particularly concerning sale of a compensates for slow or challenging
business, will rest solely with the owners. disclosure of written information. Secondly,
it often gives an insight into how customary
unwritten or unusual practices are.
It should be stressed that it is unwise to

rely on oral agreements. Information
Until agreements are in writing an acquirer cannot obtained in an interview should always be
confirmed in writing. This becomes even
be confident that the outcome of a discussion will be more crucial as negotiations progress and
the actual final result. a final agreement is within reach. It has
caused problems for buyers who have
relied too much on an oral discussion that
only needed to be written down. Until
agreements are in writing, an acquirer
cannot be confident that the outcome of
Issues to consider in M&A in the Baltic a discussion will be the actual final result.
States This is not due to foul play, just an aspect of
business culture and negotiations.
Disclosure challenges and unwritten
established practices. When a foreign Pricing. Setting the price for a business
acquirer comes to one of the Baltic is often influenced by emotions and
countries, they often encounter problems speculation. Although sellers today are
with disclosure of information. Companies more likely to use external advisers when
are generally not keen to disclose as appraising the company, many still base
much information as may be customary the price on their own feelings, which are
in other regions. This is particularly true often unrealistic. This is further complicated
for sellers with a Russian background. The by the fact that the price of goodwill is still
main reason is not necessarily because valued very conservatively. These factors
there are things to hide, but because of make transactions more challenging, and
a general suspicion towards buyers, who a potential buyer needs to take them into
may also become a future competitor. account.
Another reason is that unwritten practices
exist, such as special benefits to certain Not for sale does not always mean not for
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sale. Not only is the price often set based most requested information will be made
on emotions. Upon contacting a potential available.
target with a preliminary inquiry, an
acquirer will likely be met with a Not for Professional valuations. Emotions are
sale, followed by a Who told you we are seldom part of the pricing in the Nordic
for sale? This should not be taken as a full countries. The value of the company
and final no. The not for sale is rarely both the internal value and the value
final, and can just as easily be interpreted of the goodwill is in most cases set by
as a maybe. Who told you? can often be professional advisers. This also makes
explained by the size of the Baltic markets. the price negotiations more difficult as
As the business community is small, an acquirer will need to point out specific
everybody seems to know each other in a reasons, before it will be able to change the
particular business sector, so this is likely professional valuation significantly. Finally a
a defence mechanism to stop any sales not for sale is exactly what it means.
rumours and not show signs of weakness.
The essence is that an initial negative Recommendations
response should not immediately stop an
acquirer from planning an acquisition. Local representation. Working with a local
adviser is strongly recommended when
The Nordic perspective and comparisons considering acquiring a company in Estonia,
Latvia or Lithuania. The levels of spoken
Verbal agreements followed by written foreign languages are quite high, and many
contract. It is much more normal to use potential business partners work well in
oral agreements in Nordic markets, which English, German and/or Russian. There are,
will be confirmed in writing without much however, other good reasons to work with a
difficulty or delay. This is not an approach local adviser. The cultural differences in the
that is likely to succeed in Estonia, Latvia or business environment are different so the
Lithuania. Pressing forward with drafting risk of failure due to misunderstandings is
the sale and purchase agreement is quite high.
necessary during the entire investigation
and negotiation process. The typical Generally an acquirer will be met with
decision makers in the Nordic countries are scepticism if approaching a seller in a typical
managers, although the final and formal Nordic manner. They may have a good idea
decisions are made by the owners, which of exactly what they want and what the
reflect a much less patriarchal management terms should be. Slamming such a proposal
structure than in Estonia, Latvia and on the table may offend the target, and
Lithuania. portray the acquirer as a know-it-all type.
Furthermore, nuances in spoken English
Disclosure levels. Another difference is a are often lost when not all parties are native
much more open approach to disclosure. speakers, and this combination of cultural
Both the management interviews and the differences and language barriers can end
data room information are typically more an otherwise lucrative business opportunity
informative in the Nordic area. There is at an early stage. Representatives and
not as much suspicion towards buyers. negotiators are more respected when they
Unless the purchaser is a fierce competitor, speak the local language.
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Be ready for fast decision making. As return is the aim, an acquirer should not
the pace of doing business in the Baltic sit and wait until a company is officially for
States is often found to be much more sale. The acquirer should be honest and
hectic than in the Nordic region, acquirers direct, and refuse to take no for an answer
should be prepared for the process to right away.
become extremely hectic when the closing
approaches. In this phase it is still important Keep it in writing. The final advice is to keep
to get written confirmation of issues a written track record. Conversations and
discussed in meetings or via telephone. This interviews should always be confirmed in
can help to keep the process focused on a writing. If not, it will be extremely difficult
final result. to push towards a final agreement.
Try to approach before the company is

officially for sale. As the pace is high in the Jacob Strandgaard Andersen and Veikko
Baltic States, and since a fast and large Toomere are lawyers at MAQS Law Firm.
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CHAPTER twelve:
Regional view
Asia Pacific
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g Recent trends in Japans M&A market
by Masakazu Iwakura, Yoshiaki Sakurai and Juan L. Ramirez
Decreasing population and continued Over the past 12 months, practices relating
economic stagnation, together with intense to hostile takeovers have developed. The
competition among Japanese and foreign decision of the Supreme Court of Japan
companies alike, have exacted a heavy toll in Bull-Dog Sauce Co, Ltd. v. Steel Partners
on Japanese financial markets. In 2007, Japan Strategic Fund (Offshore), L.P., was
the Nikkei average fell nearly 11.8 percent the most important legal precedent with
as the subprime crisis spread from the regards to M&A during this period. Steel
United States to the rest of the world. The Partners, a US based activist fund, launched
market decline has only accelerated in the its bid for Bull-Dog on 5 May 2007, which
first quarter of 2008 with the Nikkei falling was opposed by Bull-Dogs board of
another 17.3 percent as the strengthening directors on 7 June 2007. On 24 June 2007,
yen added to the Japanese economys more than 80 percent of the shareholders
woes. Given the market situation, there of Bull-Dog approved a defensive measure
were approximately 3000 M&A transactions whereby the company issued and allocated
involving Japanese companies in 2007, the three new share warrants to each of
total value of which was about 16.8 trillion its shareholders with discriminatory
(roughly US$168bn), representing a slight conditions, such that Steel Partners and its
increase compared to 2006 in both deal affiliates could not exercise the warrants.
volume and transaction value. The most Bull-Dog reserved the discretion to
active market participants over the last repurchase and did repurchase the warrants
12 months included financial institutions, from Steel Partners and its affiliates based
department stores and the pharmaceutical on the tender offer price which Steel
industry. Partners initially offered to the shareholders
of Bull-Dog, resulting in a drastic reduction
Although 2007 was not a significant year of Steel Partners ownership in Bull-Dog.
with regards to market growth, it was The Supreme Court, on 7 August 2007,
notable for several important developments dismissed Steel Partners appeal, for the
in the legal arena. These include: (i) the first time endorsing a defensive measure
endorsement by the Supreme Court of adopted in the face of a hostile takeover
Japan of, essentially, a kind of poison pill by bid. The Court held that the issuance of
a Japanese corporation; and (ii) provisions the share warrants did not violate the
of the Financial Instruments and Exchange principal of shareholder equity or any
Law (FIEL) and the Japanese Corporate other applicable laws and regulations. It
Law becoming completely effective. The also held that the share warrants were
transactions and cases described below not issued in a significantly unfair manner.
highlight some of these developments and In addition, the decision of the Supreme
will help illustrate the latest market trends Court suggested that pre-bid measures
in Japanese M&A. improve the predictability for shareholders,
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investors, possible bidders and other which was on the verge of being delisted
related parties. Such measures typically due to an accounting scandal. The total
include a rights plan using share warrants transaction value (including the tender-offer
with discriminatory conditions, where made before the triangular share exchange)
only certain shareholders can execute the was about 1.6 trillion (about US$16bn),
warrants and so on, structured so that the largest deal in Japanese M&A history.
the company simply notifies in advance The initial tender offer alone ranked
the possibility of using this defence, and as the largest ever in Japan. Citigroup
after a bid is made the company has the Japan Holdings Ltd., a direct, wholly-
right to allot warrants to its shareholders. owned Japanese subsidiary of Citigroup,
Though approximately one-sixth of listed completed the acquisition of the Nikko
companies in Japan have already adopted shares through a triangular stock-for-stock
similar measures as of the end of 2007, exchange, in which the parent companys
the Supreme Courts suggestion may shares are used for consideration (i.e.,
encourage other Japanese companies to do Nikko shareholders received Citigroup
the same. shares). Such triangular stock-for-stock
exchanges and triangular mergers (in which
The year also saw a rare example of a a subsidiary absorbs and merges with the
successful hostile takeover of a Japanese target, and provides shares of its parent
investment firm in Ken Enterprises bid company to shareholders of the absorbed
for Solid Group Holdings Co., Ltd, a used target), which are common in the US, have
car dealer. It would be unwise to draw only been permitted since 2007 under the
any conclusions from this deal, however; Japanese Corporate Law. By using this
despite opposition from Ken Enterprises deal structure, a Japanese subsidiary of a
board, approximately 48 percent of the non-Japanese company is able to absorb
shares were owned by Lehman Brothers a Japanese company by using its parent
Japan Inc., which supported the deal. companys shares, whereas a merger
Although almost all hostile deals in Japan between a Japanese company and non-
are unsuccessful, hostile bids may still Japanese company is still prohibited under
increase in the years ahead, mainly due the Japanese Corporate Law. Nevertheless,
to the dissolution of deep-rooted cross- due to, among other things, uncertainty
shareholding among Japanese companies over the tax treatment with respect to
and an erosion in the cultural resistance triangular transactions, the Citigroup deal
to hostile bids or takeovers in Japanese is the first and the only one to be structured
society, especially as activist shareholders in this way. Whether this is the beginning
attempt to takeover the companies with of a new trend in the coming year remains
low price book-value ratios, such as Steel uncertain.
Partners ongoing proposed tender offer
for Sapporo Holdings Limited, a major Other notable deals include the merger of
Japanese brewer. Mitsubishi Pharma Corporation and Tanabe
Seiyaku Co. Ltd., valued at about 525bn
The largest M&A transaction by value in (about US$5.3bn), and the strategic alliance
the last 12 months was Citigroup Inc.s between the Kyowa Hakko Kogyo Co., Ltd.,
acquisition of Nikko Cordial Corporation, Kirin Pharma Company, Limited and Kirin
one of the top Japanese securities firms, Holdings Company, Limited the value
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of the integration is approximated to be which new regulations regarding disclosure

300bn (about US$3bn). Both transactions under FIEL applied. The regulation requires
are in the pharmaceutical industry, which an issuer of new shares delivered in
is experiencing drastic changes, including connection with a corporate reorganisation
the revision of Japanese national medical (including a merger) to submit a security
treatment fees and pharmaceutical price registration statement with the regulatory
reductions, increased global competition authority and to make the ongoing
and increased research and development disclosures as prescribed in the FIEL
costs of new drugs, which have motivated under certain conditions. These disclosure
these companies to enter into alliances with duties may also be applicable to non-
one another. Japanese companies in certain triangular
transactions.
Economic pressures have also led to
increased competition in the retail shops As practitioners of the law, it is difficult to
market, involving not only department forecast the particular industries or sectors
stores, but also general merchandise where M&A activities will increase for the
stores, drug stores and large scale discount year ahead. However, current negative
stores. The largest department store market conditions persist. Thus, we expect
transaction was the business integration of that restructuring and consolidation will
Isetan Company Limited and Mitsukoshi, remain at the forefront in Japan.
Ltd. through the establishment of a
joint holding company by share transfer,
creating the largest Japanese department
store operator. The transaction value of Masakazu Iwakura is a partner, Yoshiaki
this deal was approximately 292bn (about Sakurai is an associate and Juan L. Ramirez is
US$2.9bn). This deal was also the first in foreign counsel, at Nishimura & Asahi.
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g Buyouts, takeovers and surrounding legal issues

in Japan
by Paul ORegan
While the credit squeeze has impacted throughout the world turned Arysta into
severely on the large buyouts seen in 2007 a successful worldwide business. This is a
in other parts of the world, it was expected good example of how private equity buyers
to have little effect in Japan. This is can turn businesses around. Permira has no
primarily because the size of deals in Japan doubt taken the view that there is still room
has traditionally been smaller than the for value enhancement in Arysta.
mega deals in the US and Europe, and also
because leverage levels have traditionally The biggest M&A transaction in Japan in
been lower. However there have been no 2007 was the takeover of Nikko Cordial
substantial buyouts announced in Japan in by Citi. These two corporates already had
the first quarter of 2008. a relationship through a joint venture
investment bank trading under the name
In the past 12 months there have been Nikko Citi. Again the pattern of distressed
two buyouts at prices in excess of US$2bn: assets being the targets foreign companies
Arysta LifeScience Corporations acquisition can successfully acquire was followed
by Permira and Tokyo Star Banks here in that Nikko Cordial had been the
acquisition by Advantage Partners. Both of subject of an investigation by the FSA and
these were in effect secondary transactions, was found to have intentionally falsified
with the vendors being other private equity its accounts resulting in a heavy fine, an
firms. Thus these can be differentiated from apparent loss of confidence in it by some of
other transactions involving a Japanese its customers and a deflating share price.
seller where there is a perceived animosity While not exactly distressed, Nikko Cordial
towards private equity funds in general, was certainly on the back foot and Citi took
and foreign ones in particular. Foreign PE advantage of this to mount a successful
firms thus often find it worthwhile to team takeover bid. It was forced to increase its
up with Japanese funds in a consortium price because of the hostility to the original
structure to bid for Japanese companies. offer of several hedge fund shareholders,
some of whom refused to accept even
The major successes of foreign entities in the higher offer but Citi declared its offer
Japanese M&A have been with distressed unconditional once it had reached 66
assets. Even Arysta was a company put percent.
together out of the respective agro-science
businesses of two trading companies Subsequently Citi became the pioneer of
which had foundered during the 90s. the new triangular merger law which allows
Olympus, the US buyout fund, joined the shares in a company other than the bidding
two businesses and progressively bought company, including a foreign company,
out the former shareholders and by to be used as consideration for a takeover
following an aggressive acquisition strategy offer when its local bidding vehicle made
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a further all Citi scrip offer for the minority The trend of increasing shareholder
hold out shareholders. This looked at one activism in the US has been followed in
stage to be in trouble because of Citis own Japan, and TCI was not the only activist
share price weakness but the takeover was shareholder endeavouring to improve
eventually successfully completed. the lot of shareholders in Japan. The US
fund Steel Partners, which holds shares
Apart from this lone use of the triangular in several Japanese companies, has made
merger law by Citi, there was no evidence business improvement proposals to several
of the wholesale takeover of Japanese of them but with no apparent success to
companies predicted by the japanese date. However, it has been noted that
business federation (Nippon Keidanren) in an ever increasing number of Japanese
its strident opposition to the law coming companies have embarked on share
into force. As wiser heads had predicted the buy back programs and, in some cases,
limitations inherent in the law as a result of have increased dividends, so perhaps the
the way it was eventually enacted ensure pressure is starting to tell.
that it will be able to be used for takeovers
in Japan by foreign companies only in On the other hand the Nikkei, the Tokyo
agreed bid situations. Stock Exchanges (TSE) main stock index,
has declined severely over the past few
Furthermore the government considerably months and this may be due in part to a
widened the number of companies subject perceived bias against shareholders in
to a requirement that consent be obtained Japanese companies. Over 450 Japanese
before a shareholding in excess of 10 companies have introduced takeover
percent can be acquired by a foreign entity. defence mechanisms and recently a
Previously the prior consent requirement financing package involving Sumitomo
was confined to companies operating in a companies introduced a form of warrant
limited number of sectors such as defence, which would enable the friendly financiers
nuclear power, telecommunications and to take significant equity stakes thereby
the like. Even that resulted in a long list diluting the unwanted shareholder but
of companies but now, citing concern also all other shareholders. However, to
about the potential for leakage overseas date only one of these formal defence
of Japanese technology, the net has been mechanisms has been activated (Bull-
widened considerably. Dog Sauce) and ironically its effect was to
reward the unwanted bidder (compensated
One company for which such an application in cash for being severely diluted) better
has been made is J Power, the electricity than the other shareholders who were left
company, in which an activist hedge fund, holding much less valuable shares. This,
The Childrens Investment Fund (TCI), though, and the recent confirmation by
holds 9.9 percent. It has applied to increase shareholders in Sapporo, the brewer, of
its stake to 20 percent but to date no that companys poison pill in opposition
decision has been announced. It is generally to another Steel Partners initiative, shows
assumed that the required consent will not that shareholders in Japanese companies
be granted. Meanwhile TCIs proposals to are quite prepared to back management in
J Power to improve efficiency and increase rebuffing unwanted foreign suitors, even at
dividends were rejected by J Power. their own cost.
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The equities sell-off accelerated in February but to date its controlling shareholder,
2008, possibly because of a statement NEC Corporation, has been unmoved. The
made by a government minister that subsidiarys share price performance has
shareholders were too fickle to control been abysmal and Perry Capital alleges
the companies they hold shares in. In that related party dealings with the
order to slow down the exodus of foreign parent have been at the expense of the
investors from Japan, Mr. Atsushi Saito, subsidiary. Related party transactions are
the head of the Tokyo Stock Exchange, not regulated by the TSE and accordingly
called on Japanese companies to consider are very common in Japan, usually to the
their shareholders rights warning that detriment of shareholders.
otherwise Japans capital markets will not
develop. The Financial Services Agency As long as these sorts of regulatory gaps
certainly is encouraging better corporate exist and allow Japanese companies to
governance too and is keen to see Tokyo ignore basic rights of shareholders, there
become a leading financial centre again will be a continuation of the pattern
(both Hong Kong and Singapore have of minimal foreign direct investment
a much greater claim to such a status and Tokyos declining influence as a
than Tokyo now does) but unless there global financial market centre. Japanese
is a change in attitude among Japanese companies are looking to invest overseas
companies (as compliance with basic and are increasing their takeover activity in
rules of corporate governance, including Europe and the US but may face a backlash
the TSEs own Corporate Governance if the situation in Japan remains so heavily
Principles are, for the most part, voluntary weighted against foreign investment in
only), or the TSE and the governments Japanese companies. What this all means
regulators regulate to force change, this is for M&A in Japan in 2008 though, is that the
unlikely to happen. outlook is not strong and M&A activity is
likely to be less in 2008 then it was in 2007,
It has been popular in Japan for subsidiaries perhaps improving in the second half of the
to be listed but with controlling stakes year.
retained by the parent, and the takeover
and de-listing of some of these would
be welcome. One such company (NEC Paul ORegan is head of the Corporate
Electronics Corporation) is subject to attack Department in the Tokyo office of Clifford
by Perry Capital, an activist US hedge fund, Chance.
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g Australias foreign investment framework: a

more challenging landscape emerging for M&A
by Matthew Latham and Weyinmi Popo
Australias foreign investment regime with national interest concerns.

is made up primarily of the Foreign
Acquisitions and Takeovers Act 1975 (FATA) Takeovers by foreign persons of foreign
and sector/company specific legislation. companies which own Australian assets
The FATA provides legislative backing (comprising less than 50 percent of the
for the Australian Governments foreign targets total assets) valued in excess of
investment policy and screening of foreign $200m also require the approval of the
investment into Australia. The FATA is Treasurer under the FATA, as do asset
administered by the Foreign Investment acquisitions and investments in urban land
Review Board (FIRB), a non-statutory body (including via companies or trusts). Direct
which was established in 1976 to perform investments by foreign governments and
an advisory function only. their agencies must also be approved by the
Treasurer, irrespective of their size.
Under the FATA, a foreign person (or an
entity in which foreign persons individually Australias policy is to encourage foreign
or in aggregate have substantial interests) investment, such that in the last five
must notify and seek the approval of years it increased by $168bn to reach
the Federal Government Treasurer for $244bn in 2007. Notwithstanding this
any agreement under which that person inflow, like other nations Australia seeks
acquires a substantial interest in an to balance these economic benefits
Australian corporation (or an offshore against community concerns about foreign
company whose Australian assets ownership of Australian assets. However,
comprise more than half of its total assets) compared with the US and UK, foreign
whose gross assets exceed AU$100m (or investment in Australia remains closely
AU$913m for US investors not investing regulated.
in prescribed sensitive sectors). A foreign
person is deemed to have a substantial National interest test
interest if they control voting power in or
hold (legally or beneficially) 15 percent or The FATA does not define what the
more individually or 40 percent or more national interest constitutes, and past
in aggregate of the issued shares in an governments have been loath to disclose
Australian corporation. The Treasurer policy guidelines for any national interest
can make orders prohibiting a proposed test. The most guidance that the former
acquisition, or requiring a divestment where coalition Federal Government issued was
the acquisition has already occurred, if he that it determined what is contrary to the
considers it to be contrary to the national national interest by having due regard to
interest. Alternatively, the Treasurer can the community concerns of Australians.
impose conditions on any approval to deal
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The failure of the FATA and successive incidence of cross-border investment

governments to define or provide guidance consortia and the use of corporate
on the national interest test has been structures which (even unintentionally)
often criticised because it is opaque and avoid triggering the mandatory notification
allows foreign investment decisions to be thresholds; (ii) increasing geo-political
made based on prevailing political winds of and strategic importance of Australias
change. In 1994, a Senate Select Committee non-renewable natural resources driven
recommended that the FATA be amended by demand from rapidly industrialising
to include national interest criteria which economies in Asia, but particularly China;
would be applied in determining foreign and (iii) advance of sovereign wealth funds
investment applications. Successive and sovereign controlled corporate entities
federal governments have chosen not to into Australian markets.
implement this recommendation. Certainly,
in an M&A context, where it is mandatory These three factors will likely make for
for acquisitions above the FATA thresholds a more complex foreign investment
to be made conditional on FIRB approval, regulatory climate in Australia in the
the ambiguities around the national interest coming years when compared to the
test can sometimes lead to significant relatively benign foreign investment
execution uncertainty. challenges of the last decade. This
means that the balance between foreign
The uncertainty around the national investment (and international trade
interest test is not helped by the fact that competitiveness) on the one hand, and
there has only been one high profile M&A Australias strategic interests and populist
transaction blocked in recent times on concerns about iconic and strategically
national interest grounds. In 2001, Royal important assets being controlled by
Dutch Shell attempted to acquire Woodside foreign persons on the other, will become
Petroleum, an Australian company that more challenging for the Australian
held strategic interests in Australias North Government to achieve. The controversy
West Shelf LNG project, from which large in the US raised by CNOOCs proposed
Australian exports were earned. The then purchase of UNOCAL, Dubai Ports World
Federal Treasurer blocked the acquisition acquisition of P&Os US port facilities and
on the grounds that Shells ownership the hostility in certain European countries
and control of Woodside would not have to the cross-border flows of capital driven
guaranteed the promotion and sale of by hedge funds, all show to some extent
North West Shelf products over competing that similar issues are common to all
international exports. Western nations.
Foreign investment in the Australian M&A Corporate structuring

context: recent trends and challenges
The unsuccessful bid by the Airline
Australia has traditionally had a liberal Partners Australia consortium (APA) to
stance towards foreign investment in the acquire Qantas Airways in 2007 provides a
M&A context. However, foreign investment recent and apposite example of corporate
policy is likely to face new and evolving structuring by a consortium comprising
challenges due to the: (i) increasing foreign investors which, on initial analysis,
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obviated the need for foreign investment the FATA when faced with corporate
approval. It also illustrates the practical structuring which complies with the
limitations of such structures when letter (but perhaps not the spirit) of the
confronted with the political reality which legislation. It also showed that in the case
surrounds transactions involving iconic of acquisitions of politically sensitive assets,
assets. complying with the letter of the law is by
no means determinative of whether the
Government believes FATA approval is
required. The APA precedent suggests that
in such acquisitions a voluntary application
Coupled with the recent investments by sovereign to FIRB would be politically expedient,
wealth funds in major US and European banks, this irrespective of whether the legislative
thresholds are triggered.
has led to some apprehension in Australia as to how
Australias foreign investment regulatory regime Strategic resources and SWFs
should respond to these developments. The unprecedented demand for Australian
non-renewable natural resources by
rapidly industrialising Asian nations such
as China has fuelled Australias economic
In December 2006, APA (a consortium growth and prosperity in recent years.
which comprised Australian and foreign It has also highlighted for itself and its
investors) announced a takeover offer trading partners the strategic importance
to acquire Qantas. The structure of the of Australias natural resources. This has
consortium bid vehicle meant that no led to an increased interest by countries
foreign persons had voting interests above such as China in securing the supply of
the relevant FATA thresholds (either such resources by acquiring interests
individually or in aggregate), although in Australian mining entities, including
the economic interests of certain foreign more recently through bids for outright
consortium members exceeded such control of public companies. Chinalcos
thresholds. While APA argued that it did acquisition in February of a significant
not require the Treasurers approval for the minority stake in Rio Tinto has also raised
acquisition under the FATA, the intense the political temperature in respect of
political pressure and media interest in foreign ownership of economically strategic
the acquisition of an iconic Australian Australian assets. Coupled with the recent
company in a Federal election year investments by sovereign wealth funds
eventually resulted in APA having to make in major US and European banks (such as
a voluntary submission to the Treasurer. Citigroup, UBS and Morgan Stanley) this
APA then had to give binding undertakings has led to some apprehension in Australia
to the Government as part of the foreign as to how Australias foreign investment
investment screening process about regulatory regime should respond to these
Qantas continued Australian ownership developments.
and control.
The recently elected Labor Government
The APA bid exposed the limitations of has been relatively quick to respond to
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some of these challenges. In February, the commercial considerations and may

current Treasurer, Wayne Swan, clarified instead pursue broader political or strategic
the national interest tests he would apply objectives that could be contrary to
to sovereign fund investments in Australia Australias national interest, and reiterated
by releasing six principles he would apply that all such acquisitions must be notified to
when approving investment applications the FIRB.
from such funds, namely whether: (i) an
investors operations are independent from Concluding thoughts
the relevant government; (ii) an investor
is subject to and adheres to the law and The recent trends and challenges of
observes common standards of behaviour; foreign investment in the M&A context in
(iii) an investment may hinder competition Australia discussed above highlight the
or add to undue concentration or control complexities facing Australias foreign
in the industry or sectors concerned; (iv) investment regulatory regime in the near
an investment may have an impact on term. The response by the Australian
Australian government revenue or other Government to these complexities will be
policies; (v) an investment may have an crucial in determining whether Australia
impact on Australias national security; remains a competitive destination for
and (vi) an investment may have an cross-border capital flows internationally.
impact on the operations and directions The initial response by the newly elected
of an Australian business as well as its Australian Government is positive, and
contribution to the Australian economy and shows that Australias foreign investment
broader community. regulatory environment is still welcoming
of foreign investment and that Australia
The Treasurer has explained that Australia is not adopting a potentially damaging
maintains a welcoming stance towards protectionist stance. However, it also
foreign investment, but also appears shows that the regulatory framework and
to distinguish between transparent and the manner in which it is interpreted will
commercially driven sovereign investors inevitably need to evolve perhaps with
and those which are not. Proposals by greater policy guidance around the national
foreign government owned or controlled interest criteria than has historically
investors that operate on a transparent occurred to address the key issues raised
and commercial basis are less likely to by market developments such as the
raise additional national interest concerns increasing presence of SWFs.
than other proposals. The Treasurer
also acknowledged that investors with
links to foreign governments may not Matthew Latham is a partner and Weyinmi
operate solely in accordance with normal Popo is an associate at Jones Day.
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g Control of foreign investment in Australia
by Rod Halstead, John Elliott and Michael Parshall
Foreign investment into Australia has complying with Australian law.

long been subject to a statutory review
and approval procedure. The Foreign What have changed over the years have
Acquisitions and Takeovers Act (FATA) was been the monetary thresholds below which
enacted in 1975. Despite several changes proposed investments are exempt from
of government since then, the processes notification or examination. In keeping
established by the Act have remained with the (again bipartisan) official policy
largely unchanged. There is bipartisan of welcoming foreign investment, these
support for the Acts major objective to thresholds have been raised by several
ensure that the Australian Government factors since the Act came into operation.
retains the ultimate legal right to prohibit The most recent general increase was
proposed investments which are contrary in late 2006, when the thresholds were
to the national interest. doubled.
Of course, the existence of the power is In practice, therefore, FATA is not a major
not the same as the exercise of the power. hurdle to the overwhelming majority
Although the Act requires the notification of inbound investments. Nevertheless,
and examination of a large number of because of the sovereign sensitivities
proposed business investments, outright around foreign investment, compliance
prohibitions of such proposals are very rare: with the notification procedures is
the last prohibition of a foreign takeover regarded very seriously by the Australian
was in 2001, when the government acted Government and corporate lawyers. In
against Shell Australia Investments other words, the fact that a proposed
Limiteds proposed acquisition of Woodside investment is extremely unlikely to raise
Petroleum Limited, the operator and part- concerns for the government does not
owner of the North West Shelf, Australias mean that the legal requirement to notify
largest developed energy resource. The that proposal is to be treated lightly.
governments action was prompted by
concerns about the resulting foreign Another important aspect of the FATA
ownership of North West Shelf and the regime is that it operates at the interstices
potential for underdevelopment of that of law and high government policy. To
resource. understand how it works, one needs to
consider both the statutory requirements
Conditional approvals are more common of the Act and the governmental policy
than rejections, but are still only a which governs its operation. That policy is
small percentage of total applications. readily available in published form, which
Conditions typically relate to such matters means that: (i) the processes of the Act are
as maintaining an Australian presence and predictable and largely transparent; and
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(ii) the Act is applied in accordance with recommendations to the Treasurer.

existing published policy, thus mitigating
the potential for ad hoc interventions by the The Act empowers the Treasurer to prohibit
legislature such as characterised the Dubai any proposed foreign investment on the
Ports affair in the US. grounds that it is contrary to the national
interest. However, a foreign investment
The only policy matter which is not publicly would only come to the Treasurers
defined is the national interest criterion. attention in one of three circumstances:
The national interest, and what is contrary (i) the value of the proposal is above a
to it, are matters for the government of the statutory threshold, in which case the
day to decide. However, as noted above, it Act requires that it be notified to the
is rare for a proposed business investment Treasurer; (ii) government policy requires
to be rejected on the grounds that it is that the proposal be voluntarily notified
contrary to the national interest. under the Act (because it is in a designated
sector of the economy, for example); and
In addition to FATA, there are a number (iii) although notifiable under one of the
of industry-specific statutory controls on two categories above, the proposal was
foreign investment. These are discussed not formally notified in accordance with
below. the Act (in which case, the investor faces
the possibility of an order to unwind the
transaction if the Treasurer subsequently
declares that the investment is contrary to
the national interest).
Which foreign investors are affected?

The national interest, and what is contrary to it, are
matters for the government of the day to decide. FATA applies to investors who are natural
persons or corporations. Natural persons
fall under the Act if they are not ordinarily
resident in Australia. A person is ordinarily
resident if they were in Australia for at least
200 days in the 12 months preceding the
transaction. Investments by corporations
How is FATA administered? fall under the Act if: (i) a single non-resident
controls at least 15 percent of the voting
Nominally, the Act is administered by power in the corporation; or (ii) total non-
the Treasurer of Australia (the Australian resident voting power in the corporation is
equivalent of the Chancellor of the at least 40 percent; or (iii) a single foreign
Exchequer in the UK or the Secretary of the corporation controls at least 15 percent; or
Treasury in the US). In practice, most of the (iv) total foreign corporation voting power
administrative work is done by the Foreign in the corporation is at least 40 percent.
Investment Review Board (FIRB). Although
formally addressed to the Treasurer, What is notifiable?
notifications under the Act are lodged with
FIRB. FIRB assesses notifications and makes FATA has two notification and review
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regimes. One covers the acquisition of real Domestic aviation. Foreign persons
estate in Australia. The other, the subject (including foreign airlines) can generally
of this article, covers foreign investments expect approval to acquire up to 100
in Australian businesses. Legally, there percent of the equity in an Australian
are two broad categories of notifications: domestic airline (other than Qantas), unless
those required by the Act and those this is contrary to the national interest.
required by policy. In practical terms, this
means that the following transactions International aviation. Foreign persons
by foreign interests must be notified. (including foreign airlines) can generally
First, acquisitions of a substantial holding expect approval to acquire up to 49 percent
in an Australian corporation where the of an Australian international carrier (other
acquisition involves more than a statutory than Qantas) individually or in aggregate,
threshold dollar amount. A substantial provided the proposal is not contrary to
holding is 15 percent of the voting shares the national interest. In the case of Qantas,
in the corporation (if controlled by a total foreign ownership is restricted to a
single person) or 40 percent if controlled maximum of 49 percent in aggregate, with
by two or more associates. Broad anti- individual holdings limited to 25 percent
avoidance provisions extend the Act to and aggregate ownership by foreign airlines
arrangements which deliver de facto, rather limited to 35 percent; a number of national
than legal, voting control. Second, the interest criteria must also be satisfied for
establishment of a new business involving Qantas, relating to the nationality of board
a total investment of AU$10m or more. members and operational location of the
The establishment of new businesses by enterprise.
US investors, except an entity controlled
by a US government, do not require Operators of major airports. There is a
notification. Third, takeovers of offshore 49 percent foreign ownership limit, a 5
companies whose Australian subsidiaries percent airline ownership limit and cross
or gross assets exceed the statutory ownership limits between Sydney airport
thresholds. Finally, direct investments by and Melbourne, Brisbane and Perth
foreign governments and their agencies airports.
irrespective of size.
Shipping. Under the Shipping Registration
Industry-specific foreign investment rules Act 1981 a ship registered in Australia
in Australia must be majority Australian-owned, unless
the ship is designated as chartered by an
There are a number of industry- or Australian operator.
company-specific foreign investment
regimes in Australia. Some of these arise Telecommunications. Australias largest
under FATA policy; others are the result of telecommunications company, Telstra,
specific statutes: was progressively transferred to private
ownership over the last decade; part of
Media. Portfolio investments in the media the sale process involved the imposition
of 5 percent or more and all non-portfolio of limitations in foreign ownership of the
investments irrespective of size must be company: aggregate foreign ownership
notified under FATA. is restricted to 35 percent and individual
L+ L- 3 4 CONTENTS
foreign investors are limited to a holding of foreign governments and their agencies
no more than 5 percent. are notifiable. In September 2007, the
Australian Government reportedly raised
What are the statutory monetary the issue of investments by sovereign
thresholds? wealth funds with FIRB. Subsequently, in
February 2008, the government announced
The monetary thresholds above which new guidelines that would be applied to
notification is required depend upon the the examination of investments by foreign
type of acquisition and the nationality of government agencies such as state-
the acquirer. As a result of the Australia- owned enterprises (whether or not partly
USA Free Trade Agreement, many US privatised) and sovereign wealth funds. The
investors enjoy higher thresholds than guidelines focus on the separation of the
other nationals (although there is provision commercial objectives of the investor from
for these higher thresholds to be extended the policy objectives of its government.
to other countries as Australia enters other The greater the separation between the
free trade agreements). two, the less likely it is that the proposed
investment would raise national interest
For non-US investors, US investors in concerns for Australia.
prescribed sensitive sectors and US
investors which are controlled by a US What happens when a notification is
government, the current thresholds for made?
notification are set as follows: (i) for the
acquisition of substantial interests in an Although very few business acquisitions
Australian corporation, the value of the fall foul of FATA, the process of compliance
corporations gross assets is $100m (non-US must be taken into account when planning
investors) or $105m (US investors); (ii) for a transaction. When a notification of
the takeover of offshore companies with a proposed acquisition is lodged, the
Australian subsidiaries that account for less government has 30 days in which to reach
than 50 percent of the offshore companys a decision on whether to approve it (this
assets, the threshold value of the Australian can be extended by up to 90 days). The
subsidiaries gross assets is $200m for non- governments power under FATA is on a use
US investors and $210m for US investors; it or lose it basis. If, by the end of the 30
and (iii) for the takeover of offshore days or extended period, the government
companies with Australian subsidiaries that has not prohibited the acquisition or
account for more than 50 percent of the approved it subject to conditions, the
offshore companys assets, the threshold government loses the power to make
value of the offshore target companys orders in relation to the acquisition.
gross assets is $100m for non-US investors
and $105m for US investors. For other US As a matter of commercial reality, few
investors, the dollar threshold is $913m. US major commercial transactions can go
thresholds are indexed annually. into stasis for up to four months while the
Australian Government decides whether to
Foreign government investment approve them. This problem is addressed
by two procedures. In the initial planning
As mentioned above, all investments by stages of an acquisition, FIRB can be
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contacted directly to discuss the impact persuasions have retained the FATA
of FATA and policy on a specific proposal. process, largely unaltered, for over 30
Later, when an acquisition is announced, years. Nor has the relative paucity of
the parties will usually state that it is prohibitions resulted in any lessening
conditional upon FATA approval. Where of the rigour that FIRB applies to the
the acquisition is by private contract, this evaluation process. Although they have
condition is necessary to avoid a breach of developed considerable expertise in lodging
the Act through the acquirers signing of the notifications and negotiating with FIRB,
contract (and hence making the acquisition) Australian commercial lawyers know that
before the lodgement of notification. Such each business proposal and notification is
a condition also allows the acquirer or unique and that the FATA outcome cannot
bidder to walk away if its deal is ultimately be treated as a forgone conclusion.
ruled to be against the national interest.
Conclusion
Rod Halstead is chair of Mergers &
Regardless of the fact that foreign Acquisitions, and John Elliott and Michael
takeovers are only rarely prohibited, Parshall are joint heads of Mergers &
Australian Governments of all political Acquisitions, at Clayton Utz.
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g M&A in emerging Asia
by Nicholas Assef
Although China captures much of the Second, many of the economies, such as
world attention, other Asian nations also Vietnam, have been under political regimes
present incredible opportunities. In India, where state ownership of businesses has
for example, the Telecom & Regulatory been the norm. Therefore, the ability to
Authority released statistics in January even transact has been effectively non-
2008 which revealed that mobile phone existent.
subscribers in that country grew by around
84 million in 2007, with growth in the later An acquirer entering a Tiger economy for
part of the year ramping up to around the first time must be patient. They must be
8 million a month. Unsurprisingly, telco quiet in their approach, and invest the time
executives are keen on the prospect of to understand the cultural subtleties that
entering such a high growth market. each nation possesses. CEOs need to get
to know the market intimately and avoid
Conducting business in the Asian region making assumptions. Approaching Asia as
presents unique and ever evolving one nation is a sure-fire path to failure.
challenges. In addition to the mature Despite the fact that borders are often
markets of Australia, South Korea and shared, nations are incredibly unique.
Singapore, there is growing activity
in the emerging markets of Vietnam, Legal frameworks. The first thing for the
India, Malaysia, Indonesia, Thailand, the CEO to appreciate is that a legal contract
Philippines and Cambodia. We believe the is generally cold comfort in an emerging
opportunities in these explosive growth Asian economy. Any acquirer that believes
economies justify the investment of time it will be able to enforce warranty claims,
and capital that needs to be dedicated in contractual rights and so on, will often be
order to establish and develop a presence disappointed.
in what are undoubtedly the markets of
tomorrow. This is a key a reason why Westerners
regularly fail. Rather than having a
Traditional M&A. Taking the traditional, fundamental acceptance of a collaborative
highly structured, strict approach to approach to taking a business forward, the
a transaction rarely wins the day in typical us and them approach is applied
developing Asia. There are a couple of at the outset of a potential corporate
fundamental reasons. First, many of the transaction. Many deals simply stall and
Tiger economies are not places where deep wither as a result of a failure to accept
experience in M&A has evolved among a quieter, and in many ways a more
either corporates or the professional sophisticated, approach to doing business.
community.
The CEO should also become familiar
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with the licensing regimes of conducting case typically needs to be built up by the
business in each market. There are often acquirer and its advisory team which
requirements (such as in Vietnam) for can be a difficult and drawn out process
every company to be licensed to conduct in itself. Even government data can lag by
business. This is before one considers the considerable time periods.
requirement of local joint venture partners.
Often these issues are not complicated, just Although a traditional due diligence
time consuming. framework provides parameters by which
any opportunity can be investigated, the
Political and environmental landscapes. commercial drivers of where a business can
Another matter that Westeners need to be taken in the future should be the priority
gain comfort with is the ever changing of any assessment, rather than focusing on
political landscape that typifies many yesterdays risks.
jurisdictions. Such instability, however,
is not new to the region. Political change Financial data. One challenge that has to be
at either the government or the individual pointed out is the difficulty in reconciling
bureaucratic level can materially disrupt the financial data of a target. This happens
business activities. for a variety of reasons, many of which are
widely publicised, although often with a
The associated matter is environmental touch of urban myth around them. A simple
stability. Over the last decade there explanation relates to the maturity of
have been a number of potential health markets and the fact that most businesses
pandemics across the Asian region are private. Yes, there are often multiple
including SARS and avian flu. The potential sets of books. To overcome this, the CEO
for such occurrences needs to be accepted must build enough trust with the target
by any potential market entrant. Their company to understand the real potential
reoccurrence may have a devastating of the opportunity.
impact on operations and demand in
the short term across a wide range of The job for the acquirer will often involve
industries. And of course, they cannot be building a robust financial model to such an
modelled. extent that the acquirer may think that it is
drafting the business plan and associated
Due diligence. Another point of frustration financials for the target, which in reality it
for Westeners is the due diligence process. often is.
Material from business plans to financial
data is not typically produced on a day to Can the business scale? During the financial
day basis in hardened form by many Asian and commercial assessment CEOs should
companies. Therefore the process of due critically analyse the ability of any target
diligence needs to be flexible and tailored company to leverage its operational base,
to the individual case. more so in developing Asia than mature
economies.
Associated with this is credible market
and sector data, which is unavailable In particular, the quality of the physical
in most emerging Asian countries. The assets that may be purchased must be
data to support an acquisition business assessed. This is because in most Asian
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jurisdictions entrepreneurs will favour factors in these markets, the entrepreneurs

second hand equipment to reduce costs, themselves are generally highly educated,
and maintenance can be lacking. The academically or commercially. The internet
useful life of this equipment may be less has educated them about the potential
than expected which means that capex wealth that can be derived from having a
and opex might be materially higher just a successful business.
few short years following the acquisitions
completion. Wary of professionals. Many emerging
markets (such as Vietnam and Indonesia)
Again, these issues are not unique. But have a reasonable mistrust of professional
more time should be spent investigating advisers, often stemming from the fact
the business case for scalability of that the use of such professionals is not
operations. all that common for facilitating corporate
transactions. For this reason it is important
Support and control. Flowing on from that the bidder aligns itself with groups
the need to build financial data is the that understand the framework of any
requirement to effectively control matters marketplace. The use of a senior local
such as cashflow following completion of an figure can also be useful in smoothing over
acquisition. Seasoned acquirers will often potential bumps in deals.
seek to interpose an intermediary if they
have no permanent local management Valuation. Rapid growth markets pose a
in place. This intermediary can control all great challenge in establishing the value
aspects of cashflow and reporting of KPIs. of acquisition candidates particularly
when an educated entrepreneur believes
Young teams. Many entrepreneurs are the potential value the company may
young and highly ambitious, but they reach tomorrow is what should be paid
are not particularly experienced. This can today. Seasoned CEOs should agree to
mean a certain amount of almost irrational a value based upon specific milestones
behaviour from time to time which is being achieved over periods of up to five
a natural result of believing one is more years. Although a structured transaction is
experienced that one is. In particular, this nothing new, the levels of structures used in
can affect the time it takes to do a deal. emerging Asia can be highly beneficial for
Founders have a habit of regularly changing the acquirer.
their minds, for example.
Skill shortages. Enthusiasm in business
Acquirers need patience and a level does not replace experience. Many rapidly
head. This also links into the requirement expanding Asian companies hit a major
of having earn outs. Without golden hurdle in the recruitment of skilled and
handcuffs attaching the individual to the experienced professionals. A basic issue
target there is little chance they will be is that experienced Asian executives are
there post acquisition. Many will invariably themselves opting for the path of growing
be off doing another deal, if they dont have their own businesses rather than being
multiple deals underway already. employees.
Despite the immaturity of economic Therefore, a key attractor that a bigger
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offshore player can give is the infrastructure immature by many western standards.
and systems by which the entrepreneur Consumers are enjoying increasing
can quickly expand in a controlled fashion. standards of living. Technology is assisting
In the media sector in particular, the in driving both consumer demand and the
winning factor in a deal is often the career maturing of these markets. In the event
opportunities that the acquirer can offer. an acquirer can adapt its business model
Although Asian entrepreneurs are typically to deal with such a fluid environment, it
happy growing their businesses to a certain may open itself up to opportunities which
level, they often acknowledge that there have the prospect of delivering exceptional
is a real attraction to being part of a larger shareholder value.
organisation.
Opportunity exists. These markets are Nicholas Assef is an executive chairman at

big. They are growing rapidly but are still Lincoln Crowne & Company.
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g How to speed up M&A deals in China
by Fei Guoping
A foreign acquirer entering the Chinese they are likely to suffer communication
market needs to know how to conduct problems and may be unable to complete
efficient negotiations, understand Chinas the transaction.
legal system and familiarise itself with the
various due diligence requirements. To overcome this, an acquirer should build
trust, tell its Chinese partner how they will
Conducting an efficient negotiation in benefit, and grant its team freedom to
China manage the deal.
Foreign investors often complain that Build trust

transactions with Chinese companies
will take them more time than similar Chinese entrepreneurs have a saying which
transactions with European and US advises them to conduct oneself first
companies. But the length of time should before running the business, meaning that
not be blamed solely on Chinese companies in a deal they need to assure themselves
or the governments complicated scrutiny that their potential business partner is
procedure; in most cases the foreign reliable. After this confirmation, they
investor must share the blame. When doing will tend to take a more active role in
business in China, investors are always forthcoming negotiations. It is therefore
carrying out their M&A plans according to strongly recommended that acquirers
some fixed code without paying attention make the effort to establish trust. The
to what their Chinese partners are really widespread notion that an acquirer cannot
concerned about. It follows, unsurprisingly, make a deal without having a personal
that the Chinese sellers are always slow to relationship with government officials has
nod their heads at the negotiation table. As substantially distorted the importance of
a result, it takes more time to conclude a the Chinese philosophy on relationships.
deal. The underlining essence of the relationship
structure is the trust among people in
When negotiating, a Chinese entrepreneur China.
is always taking several issues into
consideration. What benefit can he get from Chinese culture stresses that individuals
a deal? Is it imperative to take part? After should listen to his words and watch his
the takeover, will the acquired company deeds. It means, when building trust,
be turned into a SOFE? Unless all these people should not only listen to what
issues are agreed by both parties, it will be others say, but take note of what they do,
difficult to proceed with the deal. If foreign because their actions are just as important.
buyers carry out the deal as they planned, So how is it possible to judge whether a
and close their eyes to such concerns, potential business partner is reliable before
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cooperating? Clever Chinese businessmen be considerate. When negotiating, they

find the answer at the dinner table (one usually inform their prospective partners of
more thing a foreign party may complain their intentions and interests at the outset.
about). The Chinese entrepreneur will invite That way, they can always easily catch the
his potential partner for lunch or dinner, attention of Chinese businessmen. It is wise
and during this period, listen carefully to for a foreign investor to explain early and in
what the potential partner says and watch detail their future profit estimates, which
closely what he does at the table. From will accelerate the transaction process.
that, the Chinese businessman will assess
his trustworthiness. Foreign investors have Grant the team freedom to manage the deal
a tendency to ignore Chinas profound wine
and food culture when they complain that To conduct a deal which strictly conforms
the dinner process take too much time. In to norms is never wrong. However, as far as
fact, it is at the dinner table that the parties the value of a merger is concerned, the key
will get to know each other and build trust. is to maximise the shareholders benefits. It
Of course, there are also other Chinese is therefore important to grant your team
ways to built trust. the necessary right to conduct the M&A in
a feasible way, which normally shortens the
It is only partly true to say that the time needed to complete the transaction.
relationship comes before the deal; more
accurately, if there is no trust, there will be
no deal.
Tell the Chinese partner how they will benefit
Chinese managers and shareholders are It is only partly true to say that the relationship
born experts at weighing options. They are comes before the deal; more accurately, if there is no
also acutely aware of the saying lose at trust, there will be no deal.
sunrise and gain at sunset. Hence, when
they are going to sell their companies,
they are considering what they will get
in the deal. It is natural that in an M&A
negotiation, a Chinese manager will care
about nothing but the essence of the deal An enterprise which made numerous global
the actual value and benefit he will gain. deals once imposed a rule that it would
never participate in cross-regional or cross-
He may also express concerns about cultural M&A markets. But it moved into
whether the deal will harm his vested Chinas M&A market two years ago, and has
interest or have an adverse effect on his surprisingly completed three acquisitions
future rewards. Unless this material matter successfully. Not only did the transactions
has been agreed by both parties, Chinese themselves go smoothly, their post-merger
managers and shareholders cannot turn integration turned out favourably. One of
their attention to other issues. the reasons for this success was that the
enterprise had every confidence in the M&A
On this matter, financial investors tend to team and gave them the right to make
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quick and feasible responses according to interpretation and enforcement of the law.
the specific context of a deal as long as it To understand such a legal system, not
benefited the M&A value. Such a team need only is legal knowledge required, but also
not be restricted by the fixed processes and the knowledge of Chinese culture and rich
procedures of M&A. social practice in China.
Understanding Chinas legal system The long-delayed Carlyle and Xugong deal
is just one example. In that deal, the parties
Foreign investors often complain that they have failed to get the approval document in
did not receive fair treatment in China. They over two years. The most significant reason
investigate Chinas law carefully to comply for this is that the acquirers have failed to
with the procedures. They also grasp the fully understand Chinas legal system and
most authoritative and latest detailed regulatory mechanism, and as a result they
M&A strategies supplied by international have drafted a legal structure to the deal
advisory agents. However, when dealing which does not conform to the laws and
with relevant PRC regulatory authorities, regulative rules in China.
many find Chinas legal environment highly
confusing. An acquirers inadequate grasp Therefore, foreign investors need to
of PRC laws and regulations is often a understand fully the construction of the
greater weakness than its M&A strategy. PRC legal system. They should not only
pay attention to the documents officially
In line with the findings of some foreign termed law or regulation, but also to
investors, even if an acquirer stays in those polices or documents that help them
line with all laws and regulations, the to understand the application of the law.
transaction may not be conducted as
scheduled. One reason is that the principle Due diligence in China
of no prohibition in law means admission
was not followed entirely in China, and When it comes to the due diligence
whether a law can be carried into execution process, there are three main issues: (i) the
will be decided by a definitive rule problem of non-transparent information,
concerning the details of implementation. (ii) the complexity of Chinas tax, labour
Another important reason is that when and IPR problems; and (iii) the problem of
PRC authorities are supervising deals, oversimplified Chinese contract clauses.
they will not only follow the law but also
the definitive rules or directive principles The problem of non-transparent information
called Red-Title Documents. Furthermore,
the Chinese Government allows these In the due diligence investigation, it
regulatory agencies to draft supervising is difficult to investigate the legality,
rules by themselves. There are other integrity and veracity of information on a
documents which an acquirer should pay target company in China. This is because
attention to, including speeches made Chinese courts cannot supply such
by senior officials of the governing party. investigative services when needed and
Even though these documents are not some information is difficult to obtain,
followed directly by regulatory agencies, such as details on the target companys
their contents exert influence on regulators underlying litigation, arbitration and
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execution. Furthermore, it is difficult to related laws, such as labour contract law.

collect desired information on the targets A violation, if serious, could mean a risk of
management because the social trust administrative punishment but seldom will
mechanism described above has not been it constitute a crime.
completely established. A typical example
is that when commercial banks in China
provide a loan, in addition to the pledges
they always ask for the other companies
to guarantee the credit of the borrowing Because of the irregularities, some companies with
corporations as guarantor. The inter- tax problems do not want regulatory authorities or
processing of a credit guarantee may
combine several corporations together in others to have access to their information, afraid
one area by mutual guarantee. Banks often that exposure will subject them to an economic fine
fail to register such information timely
and correctly, which means the acquirer or even criminal liability.
cannot obtain and thus is unable to forecast
the contingent pledge risk. The situation
becomes even worse when a company
provides credit guarantee for others Addressing tax problems is slightly
without recording it. complicated. For tax problems in due
diligence, buyers will ask for patching-
The complexity of Chinas tax, labour and IPR submittance or accrued preparations, even
problems re-valuation, which seems reasonable
to them, but not to Chinese companies,
When buyers excitedly agree on a which understand the realities in China
cooperative intention and start to review and do not believe they are at risk of being
the details of the target company, they punished. As a result, they cannot accept
will be concerned by Chinas tax and the condition to pay tax owed or do accrued
labour problems, which exist in Chinese preparations and lower the deal value.
corporations universally but with varying Indeed, because of the irregularities, some
degrees of severity. These problems companies with tax problems do not want
are connected with the legal system regulatory authorities or others to have
and social environment of China. The access to their information, afraid that
universal irregularity, as well as the abuse exposure will subject them to an economic
of administrative power, means that the fine or even criminal liability. Many
costs of compliance are higher than that companies in China will therefore choose to
of infraction. Therefore, in order to reduce avoid M&A opportunities. However, if these
costs, companies will take action which problems are tackled appropriately, it will
more or less amounts to breaches in tax and help to conclude a deal more smoothly, and
labour laws. more M&A candidates will emerge.
In China, addressing the labour problem is Another common problem in M&A due
not as difficult as that of tax. One just has diligence is the infringement of IP rights.
to draft the labour contract and undergo all Although the Chinese Government
the employment procedures according to has struggled to tackle the continued
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infringement of IPRs in recent years, there it difficult for enterprisers to forecast

are still numerous IPR infringements in potential risks buried in simple contracts.
most Chinese enterprises. If the target For example, one reason for the conflict
company is the victim, it is easy to handle between the French company Danone
just leave that issue to legal action. If the and the Chinese company Wahaha in 2007
acquirer is working with a capable legal was oversimplified contract clauses. In
team, it may also manage to recover any the joint venture contract, Wahaha was
loss, which will add share value. But if the bound to an anti-competition clause,
target company infringes others IPRs, while Danone was not. The situation in
the situation is more complicated. In any Chinas underdeveloped market economy
event, this should be dealt with tactfully to leads some companies to start up without
avoid harming the interests of the target attempting a thorough forecast of the
companys shareholders and managers. future, which would probably explain why
Wahaha took the view that nothing was
The problem of oversimplified Chinese more important than cooperation with
contract clauses Danone.
When foreign investors investigate a It is hard to obtain the necessary

Chinese companys contracts, they will information for complete due diligence.
often find that the contract clauses are It is even more difficult to forecast
oversimplified. This has much to do with its effect on the transaction and take
Chinas culture and stage of development. pertinent countermeasures. If an acquirer
and its advisory team want a satisfying
As mentioned earlier, under Chinese outcome from M&A, they need a thorough
culture, people prefer dealing with those understanding of Chinese law and its
they can trust and are not accustomed to market, backed up by extensive practical
consider a business partner untrustworthy. experience in China.
When negotiating, they are reluctant to
raise questions because they believe it will
harm their friendship.
Fei Guoping is vice chairman of China M&A
In addition, Chinas young market and its Association and partner of Long&Field, the
less developed commercial culture make M&A Department of Grandall Legal Group.
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g Will cross-border buyouts in China ever be

feasible?
by Marcia Ellis and Jay C.S. Tai
Every week it seems a new buyout fund is buyouts continue to be very difficult if not
opening an office in China or announcing impossible for private equity investors.
a new Asia-focused initiative. In the last Several recent inbound China buyouts,
couple of years, smaller funds and the funds most famously the Carlyle Xugong deal,
of international investment banks that are have been announced but never closed
well-established in Asia have been joined by due to difficulties in obtaining required
larger buyout funds such as KKR, Bain and government approvals. In general, buyout
Blackstone, which have opened offices in shops have had to content themselves
Hong Kong in the last few years from which with significant minority stake investments
they plan to source and manage China and (for example, KKRs investment last
other Asian investments. year in Tianrui Cement), and even these
investments have become increasingly
The numbers tell the story. In 2006, eight difficult due to regulatory changes.
Asia-focused buyout funds raised a total
of US$6.44bn, while in 2007 18 Asia- Impediments to private equity
focused buyout funds raised a total of investments
US$15.67bn. Despite the subprime crisis
and the resultant dampening of buyout The last few years have presented a rocky
activity in the US and Europe, 2008 already and ever-changing regulatory landscape
promises to be a boom year for buyout for inbound private equity investments in
activity in Asia. Blue Ridge Partners already China. In some ways, China has come a
has announced it has raised a US$1.45bn long way in constructing a framework for
buyout fund focused on Asia and JP Morgan acquisitions by foreign investors of interests
Asia Partners has announced it has raised in Chinese companies, a framework that
a US$750m fund to invest in mid-market did not exist before 2003. Unfortunately,
buyouts in Asia. In fact, there is every regulations on foreign M&A that came into
indication that buyout funds are shifting effect in September 2006 have created
greater attention to the Asian markets a major impediment to inbound private
as the types of LBOs that they have been equity transactions.
accustomed to doing in the US and Europe
have become more difficult to accomplish. Prior to September 2006, the primary
means used by private equity funds
A question still remains, however: how to invest in non-state-owned Chinese
much of this money will they be able companies was for the individuals who
to be put to work in China? Inbound owned the companies to incorporate a
private equity deal flow to China is still special purpose vehicle in an offshore tax
a tiny fraction of that in most other haven such as the Cayman Islands and for
countries by any measure, and inbound that special purpose vehicle then to acquire
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the equity of the Chinese target company. Domestic Enterprises by Foreign Investors
After that, the fund would subscribe for or M&A rules require that a roundtrip
shares of the offshore special purpose investment be approved by the Ministry
vehicle. of Commerce at the central level and, thus
far, since 8 September 2006 when the M&A
This structure, commonly referred rules came into effect many have applied
to as roundtrip investing or red chip for such approval and apparently none have
restructuring, offered many advantages to received it.
both the fund and the Chinese investors.
Funds generally prefer to hold shares The government has many concerns
in an offshore company in which their with this structure, but the fundamental
agreements with the Chinese founders factor at the core of all these concerns is
can be governed by law other than that control. The funds and the founders like
of China. Unlike in a Chinese company, in this structure as it effectively situates their
which equity comes in only one class, funds relationship and any future exit outside of
can hold preferred shares in an offshore the control of the Chinese government;
special purpose vehicle. This permits the the Chinese government does not like
fund to receive any and all preferred rights this structure for the very same reason.
that it is able to negotiate and to put in In addition, this structure raises tax and
place a value adjustment mechanism that currency control issues with respect to the
would be triggered if the Chinese company Chinese founders. Finally, the government
does not meet certain specified metrics. dislikes the structure because it facilitates
This structure also provides the advantage offshore listings at a time when the
to the fund of making it possible for the government is promoting listings on Chinas
fund to be granted a pledge of the shares stock exchanges.
of the Chinese founders in the special
purpose vehicle as security for all of the Impediments to buyouts
obligations of the Chinese founders. Finally,
the greatest advantage of this structure for Buyouts and control transactions might at
both the fund and the Chinese founders is first glance appear to be shielded from the
that it provides a ready-made means of exit issues surrounding roundtrip investments.
that does not require Chinese governmental That is because they do not necessarily
approval. The shares of the special purpose entail bringing the Chinese founders
vehicle can be listed on an offshore stock offshore as investors in an offshore special
exchange or sold in a trade sale with (in purpose vehicle and thus do not fit under
most cases) no Chinese governmental the definition of roundtrip investment in
approval. the M&A rules. However, despite the fact
that most buyout and control transactions
However, after gradually chipping away at do not require Ministry of Commerce
this structure for a number of years with approval at the central level as roundtrip
legislation that made it increasingly difficult investments, they often require such
to implement, in August 2006 China issued approval under separate provisions of the
regulations that all but put a complete stop M&A rules that govern foreign investor
to implementation of this structure. The control transactions which may impact the
Provisions on Mergers and Acquisitions of economic security of China or involve a
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target company in a key industry. Foreign the urban inhabitants of China and about
acquisitions of control in companies China assuming its appropriate place on the
that own a well-known trademark or an world economic stage. In addition, in some
established Chinese trade name alsorequire cases, the internet has allowed domestic
centrallevelapproval. competitors of target companies to use the
serious and emotionally charged concerns
These provisions (and similar provisions reflected in these debates to increase
that appear in Chinas recently enacted public and official sentiment against foreign
Anti-Monopoly Law) appear to be modelled acquisitions in order to eliminate foreign
on the so-called Exon Florio provisions acquirers from the playing field.
pursuant to which the Committee on
Foreign Investment in the United States In addition, there is certainly some sense in
(CFIUS) reviews proposed acquisitions by which the security-related review provisions
foreign investors of US assets to determine in the M&A Rules and the Anti-Monopoly
whether the foreign investor might Law and their use against primarily US-
take actions that threaten the national based funds are a legislative tit-for-tat,
security of the United States. As is the aimed at paying the US back for its CFIUS
case of the Exon-Florio provisions (and the review of the proposed acquisition of
implementing regulations promulgated Unocal by China National Offshore Oil
thereunder), the relevant provisions in Corp. (CNOOC) and most recently the
the M&A rules provide for the parties proposed acquisition of 3Com by Huawei,
to the transaction to notify the relevant a Chinese telecommunications equipment
authorities (the Ministry of Commerce, company, and Bain Capital. China has
in the case of China) if they believe their learned from the US that in a post-WTO
proposed transaction may be subject accession framework the permitted ways to
to review under these provisions and if control certain types of foreign investment
they fail to do so leaves the transaction are through anti-monopoly control and
open indefinitely to the requirement of national security review.
divestment or other remedy.
Finally, beyond the regulatory impediments
The factors that would trigger a notice to foreign control transactions, there are
requirement under the M&A rules are cultural factors that limit such transactions.
sufficiently broad and the potential In China, fundamentally, most founders of
impact of failing to notify the Ministry of private companies and even CEOs of state-
Commerce is sufficiently onerous that few owned enterprises regard trade sales of
buyout funds would risk proceeding with a their companies, even at what objectively
significant transaction without notifying the would be viewed as a very good valuation,
Ministry of Commerce. Unfortunately for as a less attractive exit option than an
buyout funds, the consideration of foreign IPO. This position partially stems from the
control transactions has become enmeshed desire for the prestige that the founders/
in a debate that is going on within China CEOs believe they will only achieve if they
about whether economic reforms have complete any IPO, and partially stems
been beneficial for Chinese in general in from the relatively underdeveloped level
light of the increasing gap between the of understanding of valuations in China.
well off and the poor and the rural and Because founders/CEOs have a very unclear
L+ L- 3 4 CONTENTS
idea of the actual market value of their become significantly more complicated
companies and the inflated valuations than it used to be. Investors must not
being achieved in IPOs, they almost only worry about pleasing an effectively
inevitably believe that any offer made in a monolithic local government but must
trade sale is too low. lobby at both the local and central levels
at various agencies that will have a say in
Financial investors are good for China whether a particular transaction receives
all required approvals and may have
The main task of financial investors in the markedly different views on fundamental
next couple of years should be to work issues regarding foreign investment in
with the Chinese government to convince China. In addition, investors must consider
policymakers that financial investors are how their proposals will be viewed by the
good for China and in fact, in many cases, management of the target companies,
better for China than strategic investors. how they will impact the employees of
Whereas strategic investors are primarily the target companies, how they will be
interested in rolling up Chinese businesses viewed by opponents of reform, how
into their existing global operations and they will impact competitors of the target
imposing their internationally recognised companies and how those competitors
brand on Chinese businesses, financial can be convinced to support the proposed
investors are more often than not merely acquisitions. The financial investors must
concerned about restructuring and grapple with the issue of how the proposed
rationalising Chinese enterprises so that acquisition can be structured so that it is
these companies which employ millions of good for the financial investors but also
Chinese workers and are important forces clearly good for China.
in the local economy are realising their
ultimate value under their existing brands. Convincing all the relevant players that
Financial investors could be key to ensuring financial investors in general and the
that companies from China take what current investment being proposed by
Chinese regard as their rightful positions on the relevant financial investor is good for
the global economic stage and make their China, good for the target company and
brands into internationally recognised and good for the current owners of the target
respected names. company is not something that is going to
happen overnight. However, it is a task that
Financial investors, and particularly buyout financial investors must undertake if they
funds, need to get better at structuring intend to continue to make investments in
their investments and their investment- China.
related lobbying and positioning of their
investment proposals to ensure that they
are appealing to all the right interest groups Marcia Ellis is a partner and Jay C.S. Tai is a
related to the transactions. China has senior associate at Morrison & Foerster LLP.
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g Rules and issues surrounding M&A with Chinese

companies
by Stephen Chan
On 7 January 2008, the China Mergers Foreign investors are also pursuing assets
and Acquisitions Association released the despite restrictions imposed by the
top 10 most influential cross-border M&A MOFCOM. Arcelor Mittal, the largest iron
bids in 2007. Among the bids, the Chinese and steel manufacturer which accounted
corporations benchmarked the emerging for 10 percent of the world steel output in
significance of the Chinese financial 2006, acquired a 28 percent equity stake
industry players in the global M&A market. in China Oriental Group Company Limited,
Chinese financial institutions played a major a Hong Kong listed company, through its
role half the top 10 cross-border M&A subsidiary, Mittal Steel Holdings AG, for a
bids related to Chinese banks and insurance consideration of HK$5.02bn in November
companies in the outbound M&A market as 2007.
US economy slowed due to the subprime
crisis and global credit crunch. Unlike However, not all foreign investments go
outbound M&A deals transacted previously, smoothly in the M&A market.
Chinese corporations, especially stated-
owned enterprises in the financial industry Group Danone, a Global Fortune 500
sector, are interested in any opportunities company, has developed its foods and
in the developing countries. beverages business in China since 1987,
selling its products not only in China but
During the fiscal year ended 31 December also exporting them to other countries.
2007, foreign direct investments in China Group Danone has formed joint ventures
rose 13.8 percent to US$82.7bn (including under certain operating and licensing
foreign investments in banks and securities agreements with Wahaha Group and
totalling $7.9bn), as reported by the became the majority shareholder of the
Ministry of Commerce (MOFCOM). This joint venture in 1996. Wahaha, one of
is despite Beijing authorities executing its four leading brands, is also the most
certain measures to cool down the boom, popular in China. In April 2007, Group
especially the spending on real estate and Danone has planned an acquisition of
other assets. Wahaha Groups remaining assets for RMB
4bn. Unfortunately, the planned acquisition
The growth of foreign direct investments is opposed firmly by the Chinese parties of
in the real estate sector is tremendous and Wahaha Group. Since then, Group Danone
is expected to continue. In 2006, it reached and Wahaha Group have been engaged in
$8.2bn compared with $5.4bn in 2005. a series of disputes and lawsuits. Foreign
Overseas property funds (REITs, etc.) were investors should be aware that some
the hot money providers, driven by the Chinese lawyers might call for protection to
rise of Chinas property market and the avoid any loss of controls of major brands
appreciation of the Renminbi. when cooperating with foreign investors.
L+ L- 3 4 CONTENTS
Another mega bid in May 2007 came from approvals from the National Development
Singapore Airlines Limited and its parent and Reform Commission and the
Temasek Holdings Pte Limited, which State-owned Assets Supervision and
offered US$930m for a 24 percent equity Administration Commission of the State
stake in China Eastern Airlines Corporation. Council are required in respect of M&A and
They are struggling to get an equity stake restructuring of state-owned enterprises.
since China National Aviation Corporation In the event that the target company is
proposed a counterbid to strengthen its operating in a regulated industry or market,
presence in the market on 6 January 2008 the approval of the relevant industry-
one day before the shareholder vote. The specific regulator should be obtained. For
deal was rejected by substantial votes in the instance, if the target company is a listed
shareholders meetings. Chinese bank, the approval of both the
China Securities Regulatory Commission
Approval of M&A transactions and the China Banking Regulatory
Commission will also be required.
The Chinese government has offered a
number of different ways to facilitate Restrictions by industry sector
foreign direct investments. Acquiring a
domestic company is the quickest way to The Chinese government issued the first
enter Chinas market. Foreign investors version of the Catalogue for Guidance of
have recently expanded into China by Foreign Investment in Industry in 1995.
accelerating their M&A transactions in Since then, it has been revised several
accordance with the rules and regulations times. The latest version of the Catalogue
stipulated in the Provisions on Mergers and became effective on 1 December 2007.
Acquisitions of Domestic Enterprises by The Catalogue classifies industries into a
Foreign Investors since 8 September 2006. number of categories. Industries which are
The Chinese authorities play a substantial not specified as encouraged, restricted
role in M&A transactions, especially or prohibited by default fall under the
in terms of examination, approval and permitted category. The classification
supervision. Foreign investors should be affects the regulatory approval process and
aware that the completion of M&A deal also the tax and other incentives available.
might require the approval of several
Chinese authorities, depending on different Structuring M&A transactions
circumstances. It may take considerable
time and effort to reach completion. An offshore M&A transaction is the most
efficient method. The change of ownership
In accordance with the present Provisions is simpler if the investment in China is held
on Mergers and Acquisitions, MOFCOM by a special purpose vehicle in an overseas
is the approval authority, the State country. This does not technically trigger
Administration for Industry and Commerce any approval of M&A transactions in China,
(SAIC) is the registration administrative other than those straightforward changes
authority and the State Administration of of any items under the Articles of the
Foreign Exchange is the foreign exchange investment in China.
administrative authority.
Under certain exceptional circumstances, In the past few years, foreign direct
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investments have entered China directly liabilities and so on. Records and financial
through onshore M&A of domestic information is also kept in different
Chinese companies, typically via an equity languages. All this make legal, financial
acquisition, an asset acquisition or a and commercial due diligence impractical.
statutory merger. Of these methods, equity Foreign investors therefore seek
acquisition is the quickest. Upon signing comprehensive representations, warranties
the equity acquisition agreement or new and indemnities from the vendors or
equity subscription agreement, the target owners of domestic companies, but it takes
company will be transformed into a foreign- time to negotiate terms and conditions
invested enterprise (FIE) subject to the acceptable to the relevant parties.
Chinas approval process. Foreign investors
should be aware that foreign investors Financing arrangements. Banks are often
will acquire the rights and assume the unwilling to finance onshore M&A of
obligations of the domestic company. domestic Chinese companies, subject to a
statutory leverage ratio and provision of
Unlike equity acquisitions, asset sufficient security. Foreign investors may
acquisitions are time consuming. Through consider bringing in offshore funds for the
the peel off process, foreign investors purpose of M&A. Further, foreign investors
acquire the ownership of the assets from should be aware that once the new offshore
the target companies and leave the funds registers in the capital account of
obligations, unusual and potential liabilities FIEs, repatriation of funds will need to be
with the target companies. Unfortunately, dealt with.
foreign investors cannot directly operate
the acquired assets without having an Taxes. The Unified Enterprise Income
establishment in China. Foreign investors Tax Law was introduced on 1 January
must establish a FIE for the purpose of asset 2008. It unifies the income tax rates for
acquisition. domestic companies and FIEs at 25 percent,
but retains a low tax rate of 15 percent
In accordance with the Regulations on applicable to new and high technology
Merger and Division of FIE issued by the companies. More tax incentives are
Ministry of Foreign Trade and Economic provided to venture capital investments
Cooperation and SAIC, FIEs are allowed and to certain industries in environmental
to merge with each other. This may take protection and infrastructure. Foreign
the form of either absorption or new investors should be aware that tax holidays
establishment, subject to multi-stage of two-year tax exemption, followed by
approval processes. a three-year 50 percent reduction, are
gradually being eliminated, except in
Some practical issues western China where reduced tax rates are
still available. The law also contains transfer
Due diligence. Often the public records pricing considerations. Foreign investors
of domestic Chinese companies are should also evaluate the impacts on
unavailable or unreliable. Yet foreign contingent liabilities in respect of business
investors need such information to operations of the acquired company.
determine the legal titles of assets,
potential or pending litigation, priority of Closing. Simultaneously closing the
L+ L- 3 4 CONTENTS
acquisition of a domestic Chinese company clauses in anti-monopoly examination

is almost impossible. The transfer of when planning M&A deals.
ownership is effected when an approval
certificate is granted by the Chinese On 30 August 2007, China passed the Anti-
approval authorities. Both M&A parties will Monopoly Law which will come into effect
not fulfil their obligations in accordance on 1 August 2008. The law stipulates that
with the acquisition agreements until MOFCOM will need to approve M&A of
the legal transfers of ownership of assets domestic companies which may affect
are effected. Foreign investors may be national economic security in China.
eager to take the associated risks. Some Foreign investors should review the list
foreign practicable measurements and of strategic sectors of which the Chinese
arrangements are expected to fill in the government will retain control.
gap, however the existing laws governing
these are not well established. The Danone-Wahaha disputes and
Singapore Airlines struggle for a stake in
Anti-monopoly review. The anti-monopoly China Eastern Airlines the two mega M&A
review clauses are stipulated in the bids of 2007 triggered the two critical
Provisions on Mergers and Acquisitions areas that impact customer welfare and
to stabilise the economic activities of the national economic security in China. It
domestic market. MOFCOM and SAIC have seems the Chinese government will prevent
responsibility for discretionary examination traditional private equity giants from
and approval, but with no clear guidance acquiring its major brands outright.
on the impact of a deal, regardless of size,
on competition or welfare in China. Foreign
investors should evaluate the exemption Stephen Chan is a partner at LehmanBrown.
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g Necessities in a cross-border Indian deal
by Bijesh Thakker
India registered more than US$55bn worth India has exchange control regulations.
of M&A transactions in 2007, the most ever. Moreover, although the foreign investment
The nature of M&A has undergone drastic norms are substantially liberalised,
change. Cross-border deals have become a approvals could be required in certain cases
common feature in the Indian M&A market. (e.g., where a company has an existing
Although issues involved in a cross-border trademark licence agreement or a technical
deal are not very dissimilar to those in a collaboration in the same field). The
domestic transaction, it is the complexity evolving competition law and its impact
of issues that is both interesting and should also be assessed. Highlighted below
surprising. The essential difference between are three key legal issues.
an internal merger and a cross-border
transaction is that the evaluation process Deciding the structure. In the process of
in a cross-border transaction involves a identifying the target, it is important for the
detailed analysis of the targets country (its acquirer to decide the main objective of the
economic, cultural and political situation). transaction, i.e., whether it is to acquire an
Moreover, a cross-border deal requires existing business completely or whether it is
familiarity with new procedures and to buy into an existing business and run it as
frameworks involving regulatory bodies, tax a joint venture with the existing promoters.
authorities and new accounting practices. This would help determine matters such
as the sellers expectation. Moreover, the
Increasing cross-border M&A has helped nature of the transaction, such as an asset
make the Indian market more sophisticated sale or share transfer, would be dependent
and the Indian seller more flexible in on this fundamental question.
adapting to the global business culture.
However, India is a sub-continent in itself Structuring the transaction from a tax
with 29 distinct languages and culture, perspective. When structuring an M&A
customs, traditions and habits varying transaction, tax plays a crucial role.
(almost) every few kilometres. Hence, Although most equity investments
India adds special complexities to a cross- (whether by private equity funds or venture
border transaction. In this article, we have capital funds) are being made through
highlighted potential areas for a foreign investments by Mauritius based entities, we
acquirer to monitor. find that most M&A acquisitions are being
made directly from the country of origin.
Understanding the regulatory This is because the objective of M&A is long
environment term synergy and business development,
not short term exit. Hence, finding an
Understanding and knowing the regulatory investment route which is tax efficient at
environment is a key starting point. the time of exit may not be essential or
L+ L- 3 4 CONTENTS
important to a strategic buyer. However, if Indians are deeply religious and connected
the objectives are more short term and exit to their historical and cultural roots. A
driven, finding an investment route which multinational corporation entering India
is tax efficient at time of exit is of immense must recognise this. For example, in many
importance. jurisdictions the position of director may
not be rated as the highest, but in India, a
director is on top of the corporate ladder
whether or not in actuality he has any
powers. The work environment in Indian
businesses, especially those run by families,
Any changes should not overwhelm, or create is still very traditional, conservative and
insecurity in, either the local management or the centred around the promoter. Employees
are often treated as family and hence,
employees. implementing new ideas like a hire-fire
policy or a modern professional work
environment, has to be handled subtly
and carefully. Any changes should not
overwhelm, or create insecurity in, either
the local management or the employees.
Exchange control implications. India has
exchange control regulations, and foreign Due diligence
direct investment, although substantially
liberalised, is still regulated. Prior Central Very often a deal has failed to deliver the
Government approval may be required if an value envisaged due to failure to conduct
acquirer is investing above the prescribed thorough due diligence. A careful and
sectoral caps in certain regulated sectors elaborate due diligence process helps to
(such as insurance, single brand retail, ensure that there are no surprises later. For
telecom, etc.) or if you have an existing a good due diligence to be conducted, it is
joint venture or technical collaboration imperative to have an experienced team
in the same field in which investment is with a proper understanding of the market
proposed. Further, matters such as price and regulations and with sufficient time to
at which the shares of the Indian company do a thorough job.
could be bought as well as the instrument
of investment may also be regulated Integration
(e.g., whereas a convertible preference
share is considered as share capital from a How to transition the target into the
corporate perspective, it is considered as multinational companys fold, attune it to
debt under exchange control regulations). its business practices, work culture and
environment, and teach its people reporting
Cultural issues and information requirements, is a question
management of the acquirer must ask
Cultural issues are one of the most before the acquisition. Acquisition by a
commonly cited factors for failure of an foreign multinational is not always seen as a
M&A deal. Indias vastness, population and positive step and hence, management must
years of history make it culturally unique. have a transition plan in place prior to deal
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closing and executed immediately upon well as the integration process. Acquisition
closing. of the Indian company should be seen not
as the final destination, merely a step along
There are no secret formulae for successful the road.
M&A. Each situation is unique and presents
its own set of potential problems and
solutions. However, a better understanding
of each legal issue could mitigate the risks Bijesh Thakker is a managing partner at
posed in both the transaction process as Thakker & Thakker.
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g Mergers under Indias new antitrust laws

challenges ahead for enterprises
by Farhad Sorabjee
Now highly visible on the global corporate a dominant position will be unacceptable.
scene, India has become a hotbed of both Competition agencies have very limited
cross-border and domestic corporate scope to ban mergers outright, but a
mergers and acquisitions. Starting with merger, acquisition or takeover could be
information technology, it has made rapid prohibited if it is likely to substantially
and often surprising strides in biosciences, lessen competition or prevent access to a
pharmaceuticals, telecommunications, market.
aviation, minerals and a host of other
sectors. 2006 and 2007 have signalled The Competition Act 2002 is poised for
a terminal departure from the hitherto implementation around late spring in
stately pace of Indian corporate expansion. 2008. So enterprises, both existing and
Cross-border transactions increased from prospective, will now have to negotiate
40 in 2002 to more than 180 in 2006. Last with a competition watchdog: a prospect
year topped the lot with the total value that sends shudders down the spines of
of cross-border M&A standing at roughly many old India hands who are aware of the
$55bn, including some of the highest profile track record of its existing watchdogs.
global deals.
The new regime
One of the basic economic reasons for
the spurt in cross-border and internal The Act provides for the regulation of
consolidation is the pressure of increased combinations and provides for the financial
competition from new and nimble Indian limits of thresholds which parties to
enterprises and the fact that foreign players combinations would require to consider
are finally able to enter and play in the before notifying the transactions to
Indian market with relative ease. the Competition Commission of India.
Combinations which are likely to attract
Every rose has its thorn though, and the scrutiny of the Commission under
India needs an effective competition law the Act are mergers, amalgamations and
to curb the possible adverse effects of acquisitions. Joint ventures could also be
this economic explosion on competition investigated.
within its markets. But the old shibboleths
first need to be vanquished. Dominant Regarding thresholds, companies with
enterprises are no longer bad news, global assets of more than US$2bn or sales
only the abuse of their position is. At the of more than $6bn, and assets in India
same time, a proper competition law of more than $125m (Rs 500 crores) or
enforcement regime needs to signal to sales in India of more than $375m (Rs 1500
enterprises that alliances and structures crores), would be required to notify the
that are motivated by the eventual abuse of Commission.
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The new law may consider combinations The Commission is empowered to

to be void only if they are found to cause or allow, modify or reject a transaction or
be likely to cause an appreciable adverse combination and to impose penalties
effect on competition in the relevant for non-compliance of its orders or the
market. furnishing of false information. The Act
does not seek to eliminate combinations,
Compulsory notification to the Commission only their harmful effects. The Commission
and application for approval must be made also has the general power to enquire
within 30 days from the date of proposal into and pass orders in relation to anti-
to combine. Failure to notify may result in competitive practices taking place beyond
the imposition of a penalty up to 1 percent India, which may affect the Indian market.
of the total turnover or assets of the
combination, whichever is higher. Where Challenge or chaos?
the parties to the combination include a
foreign acquirer, it is necessary to notify the Unnerved by many provisions of the
Commission if the parties or group crosses new law, various industry associations,
the asset or turnover threshold jointly. foreign trade commissions, and even the
International and American Bar Association
have represented variously to government
that several provisions of the new law raise
Unnerved by many provisions of the new law, serious cause for concern.
various industry associations, foreign trade
There is an inordinately long waiting
commissions, and even the International and period of 210 days for clearance. Breaking
American Bar Association have represented variously this into two phases (Phase I for simple
clearances in say 30-45 days, and Phase
to government that several provisions of the new II potentially utilising the whole 210 days
law raise serious cause for concern. for more complex situations) has to some
extent been addressed in the Commissions
regulations, though there is more than a
hint of a suggestion that legally this needs
Thereafter, the Commission is required to be embodied in the Act itself and cannot
to decide within a maximum of 210 be done by regulation. Add to this the
days whether or not the merger has any possibility of an appeal to the Competition
appreciable adverse effect on competition, Tribunal, and days could easily turn into
else the merger will be deemed to have years.
been approved. The Commissions draft
regulations for combinations indicate that The introduction of the mandatory
it would approve simple cases of mergers notification of transactions in the recent
within a period of 30 to 60 days from receipt amendment to the law, coupled with the
of the application, and only in mergers low thresholds for local (Indian) assets
requiring more detailed investigation would and turnover involved is another concern.
the Commission utilise the entire 210 day In theory, mergers and acquisitions that
limit. have no or de minimis connection with
India could require Indian clearance from
L+ L- 3 4 CONTENTS
the Commission. The fact that the new suspect? What would be the division of
law as it stands requires compulsory powers between the two? The relationship
filing even if just one of the parties has a between the competition agency and
threshold interest in India is also a cause the individual sector regulators is likely
for concern, though the regulations now to be a complex and uneven one, and a
clarify that a two party interest minimum rollercoaster of uncertainty looms, at least
requirement would be required. Add to this in the near future.
the absence of any provision for pre-merger
consultations, and the situation becomes There is no doubting the commitment and
even more rigid and opaque. integrity of the current Commission or of
the government to the establishment of
The regulations also appear to require the an effective competition regime, but there
filing of excessively detailed information is already talk of a further delay in the
that may be redundant and in fact cause implementation of the law due to hiccups in
unnecessary harassment at the procedural the selection process for new members of
level. Serious concern also exists as to the Commission.
the level of protection of confidential
information that may be filed. The The law itself is adequate if not elegant, and
prescribed filing fees of up to $150,000 will evolve with judicial interpretation. But
are among the highest in the world, any law is only as good as its implementers,
and a payment is to be made in stages, and there is no guaranteeing the quality
which could incentivise protraction of the of future enforcers. The reliance upon
clearance process. transferable civil servants to man the
Commission is a cause of concern. And then
Then again, the effective implementation there is the possibility of protracted legal
of merger control requires the availability challenges to the provisions of the Act and
of sophisticated and reliable economic the regulations framed.
data concerning products and geographic
markets, market structure and shares, Interesting times, uncertain times. The
and likely effects. Much of this is only present Commission has made it clear that
rudimentary as yet in India. it will principally adopt a light touch, but
go in hard where necessary. An admirable
And what of the existing regulators approach, if maintained.
and indeed, the common law courts?
For instance, the power, oil & gas, and
telecommunications sectors all have their
regulators. Who does one go to? Or do both Farhad Sorabjee is a partner at J Sagar
exercise jurisdiction? And is that legally Associates.
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g US-bound acquisitions by Indian companies
by Anil Kumar
Companies such as Nirma, Wipro, Gitanjali, Highlights in 2007

GHCL and Hindalco not only represent
the changing economic face of India, they 2007 raised a number of highlights. Indian
represent a new league of Indian companies companies accounted for a total of 83
going global. Each of these companies US-bound acquisitions with a cumulative
acquired large companies in the US in their transaction value of over $10bn. This
quest to become truly global. represents a 73 percent increase over the
48 transactions of 2006. The mega deals
With 83 US-bound transactions worth over comprised Hindalcos acquisition of Novelis
$10bn in 2007, India has suddenly emerged for $6bn, Rain Calcinings acquisition of CII
as a serious contender in the cross-border Carbon for $595m, Wipros acquisition of
M&A space. Neither the global credit Infocrossing for $568m and Firstsources
crunch and or economic slowdown in the acquisition of MedAssist for $330m. IT/ITES
US seems to have impacted this trend. was the most acquisitive industry capturing
over 51 percent share of the total US-
Increasing competitive pressures, emerging bound transactions by volume, followed by
global opportunities and the decline in healthcare (11 percent); chemicals, textiles,
overseas trade and investment barriers and automotive (5 percent each); metals
are encouraging Indian companies to seek & mining, jewelry, travel, and media (4
acquisitions in the US. Factors supporting percent each). Other industries accounted
this trend are strong balance sheets, easy for less than 2 percent each in terms of
access to capital, business confidence and volume.
a relatively stable economic and political
regime. Deal sizes of less than $25m accounted
for 76 percent of US-bound acquisitions
Developed economies like the US are volume, followed by transactions in the
attractive to Indian companies because $25-$50m range (8 percent). This reflects
of their large consumer markets, the increasing pressure to gain scale
transparent business processes, robust among smaller companies. Deal sizes in
legal environment, advanced technologies, the $50-$100m; $100-$500m, and greater
skills and knowledge capital. Moreover, as $500m range each accounted for less than
the markets in these economies tend to 6 percent of the 2007 transactions. Most
be mature and saturated, it often proves transactions involved the acquisition of 100
difficult for Indian companies to gain percent stock for cash consideration. These
market share without acquisitions. transactions generally had an earn-out
structure, where a portion of the deal value
is paid on future milestones.
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Factors fuelling US-based acquisitions by overseas. In addition, with the rupee rising
Indian companies against the dollar, Indian companies are
required to spend less to acquire overseas.
Although the strategic rationale for US-
based acquisitions varies by industry and Meanwhile, regulatory changes in India
the individual company, there are a few have made it easier for Indian firms to
common drivers. US-based acquisitions become more global in their operations.
provide easy access to the worlds largest As foreign exchange reserves have grown,
market and customer base through the Reserve Bank of India has progressively
marketing and distribution channels of the relaxed the controls on outbound
acquired company. Indian companies are investments, making it easier for Indian
able to acquire well-established brands, a companies to acquire or invest abroad.
wider product portfolio, and readymade
distribution networks, thus, globalising Analysis by sector
and augmenting their competitive asset
base. An organic approach to building Information technology / ITES. With 42 US-
customer base and gaining market access bound acquisitions in 2007, information
in the US could otherwise take many technology is the most acquisitive industry
years. In addition, many Indian companies in India. The IT industry accounts for over
are seeking to expand their distinctive 51 percent of US-bound transactions
capabilities by acquiring specific skills, from India. Within this industry, the sub-
knowledge and technology abroad that are segments focused on healthcare and
either unavailable or of a lower quality at financial services are most attractive
home. Indian companies are able to identify for acquisitions, given their untapped
foreign firms with value-added offerings, opportunities in the US market. While
which complement their own low cost large-size companies such as Wipro
products and services to create an efficient and Firstsource are seeking to add new
integrated global business model. service capabilities through US-bound
acquisitions, mid-size companies such as
Due to the lowering of import tariffs, Logix Microsystems and Cranes Software
Indian companies are facing increased are seeking to strengthen their current
competition within the domestic market. capabilities.
In order to compete effectively, these
companies are under pressure to access The high rate of US-bound acquisition
global markets and operating synergies. US activity in India is being propelled by the
companies provide one of the best global need to gain scale in terms of size, product
platforms in the world. In addition, low offerings and geography. This, coupled
interest rates and tariffs coupled with easy with the availability of acquisition targets,
access to external commercial borrowings sufficient liquidity, favourable exchange
provide Indian companies with sufficient rate and competitive pressures is pushing
liquidity for global acquisitions. Sustained Indian companies to pursue an inorganic
growth in corporate earnings has improved path to building scale.
their profitability and strengthened balance
sheets. This has, in turn, strengthened their Healthcare. The healthcare industry
credit ratings and ability to raise funds captured 11 percent of the transaction
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volume with nine US-bound acquisitions in manufacturing space were Ashok Leylands
2007. Jubilants acquisition of Hollister Stieracquisition of Defiance Testing for $17m and
Laboratories for $122m and Wockhardts Sintexs acquisition of Wasaukee for $20m.
acquisition of Morton Grove for $38m was Higher valuation of available acquisition
not only about gaining market access in targets and a general industry compression
the US but also accessing firm-specific in the US has forced Indian automotive &
strategic assets like internationally certifiedmanufacturing companies to be slow on the
manufacturing facilities, new products, acquisition trail. However, as demonstrated
research capability, brands, etc. and by Ashok Leyland and Sintex, there are
benefiting from operating synergies. certain sub-sectors such as engineering
design and plastic product manufacturing
As a target location, the US has traditionally which remain attractive. With US
lagged behind Europe in pharmaceutical companies moving their basic auto-
outbound acquisitions from India. But component production to China and India,
this could change based on the upcoming assemblies and finishing sub-industries
generic opportunities and the size of the US represent the interesting segments.
market. Relying on third party marketing
agents may not be a good strategy in Others. The largest transaction in 2007
the long run, thus, Indian companies are was Hindalcos acquisition of Novelis
expected to acquire export-supporting for $6bn. This acquisition was driven by
networks in the US. Hindalcos desire to access global markets
and gain complete integration of its
Consumer goods. In consumer goods, the value chain. Calcined petroleum coke
need to acquire US companies is driven maker Rain Calcinings acquisition of US-
by the desire to acquire new supplier based CII Carbon for $595m has enabled
relationships and distribution channels and the company to become the largest
not for manufacturing capacities. Front-end manufacturer of calcined petroleum coke in
distribution is a common theme in many of the world. As seen last year, the metals and
these deals. specialty chemicals industries continue to
demonstrate the potential for billion-dollar
In recent years, Indian textile and jewellery transactions.
companies have built new manufacturing
facilities and special economic zones Key considerations
(SEZs). These companies are looking to
acquire distribution and retail channels to Typically in these deals, the Indian
utilise the additional capacity; Himatsingka companies have paid for their US
Seides acquisition of Divatex follows acquisitions in cash, for a variety of reasons.
commissioning of a facility in Hassan SEZ Because most Indian companies are still
and Gitanjali Gems acquisition of Samuels owned and managed by the families who
Jewelers and Rogers Jewelers follows founded them, they are often reluctant to
commissioning of their SEZ factory in bring other parties into the shareholding
Hyderabad. structure. Moreover, regulatory issues
make it difficult to issue stock to foreigners
Automotive & manufacturing. The for considerations other than cash, while
key transactions in the automotive & the capital markets in India may require
L+ L- 3 4 CONTENTS
onerous lock-in periods when new stock culture, regulations, legal framework, and
is issued. With respect to financing, a tax consequences of the target country
combination of internal accruals and debt are fundamental considerations. There
/ equity financing is generally used. Of the certainly are pitfalls but these are becoming
multiple factors that need to be considered less serious as Indian companies gain more
for determining the acquisition structure, experience in making foreign acquisitions.
jurisdiction, tax incidence, accounting, Indias accomplishments in liberalising
access to funds and local regulations are regulation, modernising the business
the most important. Generally, US-bound environment and boosting the countrys
acquisition structures include an earn-out growth over the past decade has created a
clause where a portion of the enterprise self-sustaining pace. And this bodes well for
value is to be paid over a period of time Indian companies looking to go global and
based on achieving milestones. innovate.
Indian companies looking at the US market

for acquisitions are generally advised to
know the market, the culture and quality Anil Kumar is a managing director at Virtus
of the management. Understanding the Global Partners.
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g Legal issues and regulatory issues in Indonesias

M&A market
by Tasdikiah Siregar and Setia Nadia Soraya
Indonesias M&A activity has recently At the initial stage, foreign investors need
increased. Factors contributing to this to observe which businesses are open or
include the global resources boom and the restricted for foreign investment as set out
single presence rules of Bank Indonesia in the negative list and other rules of the
prohibiting a controlling stake in more technical departments. For example, the
than one bank. Below are some general maximum foreign shareholding in a bank is
observations and advice on certain 99 percent, while in a finance company it is
Indonesian legal and regulatory matters 85 percent. In some cases, although certain
concerning M&A. businesses are not restricted under the
negative list or other rules, by policy, the
Regulatory matters authorities may impose certain restrictions.
The legal framework covering M&A is M&A must satisfy certain regulatory
provided primarily in the new Company requirements including preparation of
Law that came into force in August 2007 an M&A plan, corporate approvals and
and legislation on takeovers, mergers and announcements. Acquisition can be
foreign investment. Specific regulations through purchasing shares directly from
apply to M&A in certain sectors. existing shareholders or by approaching
the management of the target. The latter
No single government agency is presently involves a lengthier procedure than the
responsible for the supervision of all M&A former. The former bypasses the acquisition
activity. Rather, different government plans jointly prepared by the management
departments are involved in M&A of banks, of the target and investors for approval by
finance companies, foreign investment the supervisory boards of the target and
companies and public companies. M&A the investors. The acquisition requirements
involving foreign investment companies under the Indonesian Company Law will
are subject to approval from the Capital also apply to a capital increase resulting
Investment Coordinating Board. For M&A in a change of control of the company.
in the financial and insurance sector, However, the applicability of the acquisition
approval from the Ministry of Finance is requirements to the capital increase
required. The Capital Markets and Financial remains unclear.
Institutions Supervisory Board (BAPEPAM-
LK) must be consulted when the target is a As a general rule, M&A should not be
public company. M&A of banks is subject to detrimental to the interests of the target,
approval from Bank Indonesia. The Minister minority shareholders, employees,
of State Owned Enterprises is involved in creditors or the public, or lead to
M&A of state enterprises. monopolistic practices or unfair business
competition.
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Minority shareholders. M&A must not acquisition may also give certain severance
prejudice the right of minority shareholders compensation entitlements to employees.
to sell their shares at a reasonable
price. While the Company Law does not Creditors. Investors also need to consider
specifically regulate how the reasonable creditors rights to object to M&A within
price is determined, in practice it can be a certain time limit. Creditors include all
based on the market value of shares or parties having receivables payable by the
determined by independent appraisals. target regardless of value. As a result,
suppliers of the target can also be classified
Employment. Investors should take as creditors. The target needs to reach
proper measures to deal with employees a settlement with objecting creditors,
as they have the option to discontinue otherwise M&A cannot go ahead. No
their employment with the target specific settlement method is determined
following a share acquisition and to by law. It is reasonable to assume that
claim severance. Severance is payable settlement will involve payment of debts by
by investors unless otherwise agreed in the target.
the acquisition documents. Although
there are conflicting views among the Antimonopoly. Other than in the banking
authorities on the applicability of the sector, there are no clear guidelines to
option, if the acquisition will not result in assess monopolies resulting from M&A
a change in the terms and conditions of in Indonesia. The Antimonopoly Law
employment, in most cases, the option prohibits M&A if it will lead to monopolistic
still remains applicable. The monetary practices or unfair business competition.
value of the overall benefit received by M&A resulting in the targets assets or sales
employees following the acquisition turnover exceeding a certain value must be
should not be less than the existing reported to the Supervisory Commission
overall benefits package. There have been on Business Competition. Unfortunately,
frequent occasions where employees the value threshold remains unclear as
have lobbied for ex-gratia entitlements the expected implementing regulation on
even where there was no termination antimonopoly has not yet been issued. The
of employment upon the acquisition. implementation of laws in Indonesia often
Although there is no legal basis for requires implementing regulations to give
these demands, employees make these full effect to the laws.
overtures for a payment as a sweetener
simply because their acceptance of the A party is no longer able to have control
acquisition is considered necessary. in more than one bank as a result of Bank
Employees may hint that without their Indonesias single presence rules of 2006.
acceptance, they may consider initiating Certain controlling stakes are exempt from
termination or withdrawing cooperation the rules inter alia controlling stakes in two
with management. The employees banks with a different banking business
usually treat these entitlements as an basis. The rules force existing controlling
appreciation from the employer for their parties to take certain options, including
willingness to continue their work with to transfer their shares or merge or
the new management. The transfer consolidate the banks or establish a holding
of employment in an asset or business company.
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Fit and proper test. Investors in banks must offer process.

pass the Bank Indonesia fit and proper test
before the acquisition. Bank Indonesia will Privatisation. The acquisition of state
assess the investors up to their ultimate owned limited liability companies (known
shareholders. Bank Indonesia has wide as Persero) for privatisation is subject
latitude in any circumstances to examine to prior approval from the House of
the investors and their controlling stakes. Representatives. Investors must comply
Bank Indonesia does not allow the funds with guidelines for privatisation determined
for the acquisition to be sourced from loans by a privatisation committee established
or other forms of financing originating by the government. The Minister of State
from Indonesia, or from crimes. The fit Owned Enterprises has authority to cancel
and proper test may also apply to a new or postpone the acquisition on certain,
controlling party of the existing controlling including commercial, grounds.
shareholders. Investors in insurance
companies are also subject to the fit and
proper test conducted by the Ministry of
Finance.
Capital market rules. Additional rules under

capital market regulations apply to M&A Investors in banks must pass the Bank Indonesia fit
involving public companies. A report on and proper test before the acquisition.
the negotiation of the acquisition must
be made by the investors to BAPEPAM-
LK, the Indonesia Stock Exchange, the
target and the public. The acquisition of at
least 25 percent of a public company will
require the investors to conduct a tender
offer for the remaining shares. Even if the Searches. It is not practicable to conduct
acquisition is less than 25 percent of the searches to ensure there is no pending or
shares, the investor will also be subject threatened litigation against the target, its
to a mandatory tender offer if it results in assets or its ability to continue business.
investors having direct or indirect control,
such as ability to control amendments to In Indonesia, claimants may submit claims
the targets articles of association or over against another party in the District Court
the management and supervisory board of having jurisdiction over the domicile agreed
the target. Certain acquisitions are exempt in an agreement, or the District Court
from the mandatory tender offer, inter where the party is domiciled or the District
alia, the acquisition of shares owned by Court where the partys assets are located.
governmental institutions in the target and There is no centralised filing system for the
the acquisition of up to 5 percent of shares judicial process in Indonesia. Rather, each
issued by a publicly listed company within a District Court manually maintains its own
period of 12 months. The tender offer rules filing system. A power of attorney from the
also apply to acquisition at the controlling target is required for a court search.
stake level. Consultation with BAPEPAM-
LK is recommended throughout the tender Currently, there is no effective public
L+ L- 3 4 CONTENTS
registration of corporate information. diligence enquiry. For example, warranties

Indonesia presently also lacks any registry and representations in the acquisition
of security interests with the exception documents may be more detailed and other
of land mortgages, fiduciary securities enquiries, such as with lenders, clients
and vessel hypothecs. Searches over real or customers of the target may also be
property can be undertaken at the relevant undertaken. Indemnities from sellers and
Land Office. However, in most cases, that certain officers against the targets past
Land Office will not grant access to records liabilities (particularly unrecorded liabilities)
without a power of attorney from the and security in the form of guarantees or
registered owner of the property. purchase price retention may also need to
be obtained.
Other Matters
Finally, it may not be easy to give precise
Consultation with the authorities is forecast of how long a deal may take
always recommended prior to M&A. in Indonesia. It is not uncommon in the
Investors should take into account certain Indonesian context for M&A to take
peculiarities of the Indonesian legal longer than similar procedures in other
system, how matters are interpreted by jurisdictions. This should be taken into
the authorities as a matter of written or consideration if a multi-jurisdictional M&A
unwritten policy and also be aware of what is being considered.
competitors are doing in practice.
In acquisitions, almost inevitably foreign Tasdikiah Siregar is a partner and Setia Nadia
investors will want to obtain comfort Soraya is a senior associate at Makarim &
from methods other than a normal due Taira S.
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CHAPTER thirteen:
Regional view
Middle East
L+ L- 3 4 CONTENTS
g The Middle East as an emerging market
by Eleanor Kwak, Antony Turton and Phil ORiordan
In the restaurants and shisha cafes of Dubai, interventions and the worlds increasing
conversations among the ever growing demand for energy resources has ushered
expatriate population almost inevitably turn unprecedented growth and change across
to the topic of sky rocketing property prices the region.
and the latest announcement for a mega
project. While such individuals often tend In many countries, increased wealth has
to get carried away (as in Hong Kong in the sparked investment in major infrastructure
1980s) it does seem that something quite projects to upgrade facilities, and coupled
remarkable is occurring in the Middle East. with this has been a shift towards
In turn, certain Middle Eastern countries diversification of economies and fostering
seem to exude confidence at the moment growth and development of various
and are keen to play a larger role on the industries through state investments. The
world stage, as economic powerhouses. overall result is that for many countries
This article considers legal, procedural across the GCC, the modernisation process
and socio-economic factors that should has been compressed into decades rather
be considered in M&A transactions in the than centuries.
Middle East.
Some examples of recent mega projects
The Middle East in this context quite often in the GCC include the World Islands
means the countries that are members of and the Palm Jumeirah off the coast of
the Cooperation Council for the Arab States Dubai in the United Arab Emirates, King
of the Gulf (GCC), namely Bahrain, Kuwait, Abdullah Economic City in Saudi Arabia,
Oman, Qatar, Saudi Arabia and the United Dubai International Financial Centre, Qatar
Arab Emirates. Financial Centre, and Bahrain Financial
Harbour.
There is no doubt that in many respects the
traditional way of life in GCC countries has The revenue generated via the sale
changed dramatically since the discovery of of energy resources, investment in
energy deposits. It is estimated that these infrastructure and economic diversification
countries hold 55 percent of the worlds initiatives has procured unprecedented
known oil reserves and are producing just economic and population growth in the
under one-third of the worlds daily output. GCC and broader Middle East region. For
In addition to oil reserves, the region is rich example, in the United Arab Emirates, the
in natural gas and it is estimated that the 2005 government census found that the
region houses 40 percent of the worlds population had grown by 74.8 percent in the
known natural gas reserves, according years 1995 to 2005. This is accompanied by
to the United States Energy Information estimated economic growth of 7.8 percent
Administration. External political in 2007 and predicted growth of 6.6 percent
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in 2008, according to the Central Bank of partner. However, it is essential that careful
the United Arab Emirates. thought is given to the drafting of these
arrangements, as there are often criminal
Recently, the international media has penalties for transgressing the law in this
focused on massive outward investment regard. In the case of local acquisitions,
from sovereign wealth funds based in the any existing schemes to assign control and
GCC region. With investment markets profits need to be carefully reviewed to
such as Wall Street hunting instant capital, ensure that they are compliant with the
GCC sovereign wealth funds are seen law and also that they may be effectively
as a much needed source of liquidity. A assigned to the new investor.
recent example of a sovereign wealth fund
acquisition is the Abu Dhabi Investment Licensing and consents. Business in the
Authoritys purchase of a $7.5bn stake in GCC countries generally operates within
Citigroup. a culture of consents. Whereas in western
jurisdictions, most acts are permitted
Investment is also flowing the other unless expressly prohibited, the assumption
way, and on an enormous scale. Rising in the GCC should be that an act must be
economies in the Middle East, particularly expressly permitted.
in the GCC countries, have spurred interest
from a broader class of international For many foreign investors, it comes as
investors and others seeking to establish a shock to learn that a number of official
a presence in these emerging markets. consents are required for such things as an
In many countries, diversification of acquisition of shares, a change of directors
the economy and investment has been or the establishment of a joint venture. The
encouraged by favourable government red tape and delays that result from the
policies and initiatives, such as those requirement for these consents can also
relating to free trade initiatives, taxation be frustrating and bewildering for foreign
laws and import duties. investors, although most will conclude that
the rewards outweigh the headaches.
Ownership and structuring. Although there
are exceptions, for example in the UAEs Careful planning can minimise these
free zones and in respect of certain business problems. In particular, completion of
sectors in Saudi Arabia, any investment acquisitions should always be conditional
into the GCC countries (whether in the form on the obtaining of official consents, and
of an acquisition, start-up joint venture the flow of funds should reflect this. Escrow
or otherwise) will need to account for the arrangements are frequently the preferred
requirement that most local companies route.
must have a majority of their shares held
by a national of that country or (in some In most cases, companies operating in the
circumstances) the GCC. Where a foreign GCC will need to obtain a trade licence
investor is seeking to control more than 49 permitting them to carry out their specific
percent of a local subsidiary, it is usually business. Generally it is not possible to
possible to put in place arrangements operate a general objects commercial
which effectively assign rights to control company, and there are frequently
and profits in a company from the local complications on the transfer of a licence,
L+ L- 3 4 CONTENTS
for example in the case of an acquisition. decrees in the Emirates of Dubai, Abu
Dhabi and Sharjah, in practice at the
Financing. Where an acquisition or joint date of publication these decrees are not
venture is to be financed, local law issues enforced and with exception of banks and
may arise. These mainly relate to the taking oil companies there are currently no direct
of security, especially in relation to shares taxes levied on the profits or incomes or
and more general charges over a companys individuals or businesses. In the free zones,
assets. a tax-free environment is guaranteed for a
defined period.
The law and practices in the region relating
to enforcement of security are largely Law and practice. Another crucial difference
untested. Generally, enforcement of between the GCC region and many western
security must be pursued solely through jurisdictions is the degree to which the
the courts. This contrasts with the position current practice of the authorities (for
in jurisdictions such as England and the example, in relation to the criteria for
United States where the financier has a the granting of consents) may be just as
wider range of self help remedies available, important as written laws. Entrants to the
together with more certainty in relation to market need to thoroughly research the
the types of security available. current practice and, where necessary, seek
pre-approval for their proposed investment
Although it is possible to have financing and before committing extensive time and
sometimes security documents governed resources to implementing plans.
by foreign laws more favourable to a lender,
in practice the enforcement of foreign Conclusion
law provisions before the local courts is
often problematic. Courts in many GCC The GCC is enjoying an unprecedented
countries will frequently seek to apply local boom and represents an enormous
laws notwithstanding a choice of foreign opportunity for foreign investors. However,
law, and the court process can be slow and the region does have a distinct business
costly. culture which presents challenges but also
great opportunities for growth. It is vital
A growing trend is the use of Islamic that any plan accounts for complications
financing and given the complex nature of which may arise as a result of the local
this type of financing it will be necessary to business law and practice, and that
consult both Islamic scholars in addition to sufficient time and resources are dedicated
obtaining specialised legal advice. to ensuring that any investment may be
safe, secure, legal and profitable going
Taxation. Taxation requirements vary forward.
across the region. However, generally it is
considered that countries in the GCC region
host favourable taxation regimes. Eleanor Kwak and Antony Turton are
associates, and Phil ORiordan is a partner, at
In the UAE, while there are income tax Clyde & Co.
361
L+ L- 3 4 CONTENTS
g The growth of IT investments in UAE and the

wider region an improving legal infrastructure
by Nasser Ali Khasawneh
Real estate has always been the investment compared to some other regions, it is
vehicle of choice for the Arab investor. catching up. In the UAE, more than one-
Whether it is the individual investor who third of the population is now connected
puts all his savings into buying land, no online.
matter how small, or the large investment
funds that are fuelling the towers of A law firms role in an IT-related
dizzying heights in the Gulf, land has alwaysacquisition is pivotal. Typically, a law
had its special allure in this region. A fundfirms involvement starts just before
manager who specialised in information the due diligence exercise. Ideally, a
technology recently spoke of an impatient lawyer should be involved at the very
investor who wished he had bought a piece beginning of the negotiations between
of land instead of a stake in a software the parties in order to make sure that
company. contractual arrangements are set in
place in a well defined and orderly
But that mentality is gradually, though manner. Unfortunately, in many cases,
slowly, changing. It is driven by a growing a lawyer will only get involved after
number of young and technology the parties had exchanged a number of
literate entrepreneurs. M&A, and private important communications or signed an
investment funds focused on the IT overrated piece of legal documentation:
sector, are on the rise. And while the the Memorandum of Understanding
aforementioned investor is right to suggest (MOU) or Letter of Intent (LOI). Arab
that real estate in the Gulf and the rest of businessmen have an extremely intense,
the Arab world can secure fast and huge often inexplicable, passion for MOUs and
returns, there is a deepening understanding LOIs. Many entrepreneurs in the region
of the long term benefits of investing feel that the first step must be an MOU.
in other sectors, particularly in new When faced with a request for an MOU
technologies. or LOI, it is important to clarify that an
MOU is inherently a legally non-binding
Behind this growth is an ever expanding agreement. They should not be trusted
IT industry in the region. According to the implicitly. What is the point of spending
industry research company IDC, IT spending hours and days negotiating a document
in the Gulf region will grow by 11.6 percent that is non-binding? Parties are much
to US$8.56bn in 2008. The largest market better off investing that time in exploring
is in Saudi Arabia where IT spending will all the major issues with a view to agreeing
reach $3.76bn in 2008 (an 11.28 percent the final and binding agreement, or
growth), and the UAEs spending will grow including all the initial points for discussion
from $2.66bn in 2007 to $2.99bn. Also, in a binding Non-Disclosure Agreement
while internet usage remains disappointing (NDA) or other such contract.
L+ L- 3 4 CONTENTS
The due diligence process in an IT is automatic and registration cannot be

investment must be conducted in a a condition for protection. Copyright is
particularly careful and measured manner. defined as any expression on any tangible
The DD exercise must of course cover medium of expression, and once a work is
all the usual areas, such as corporate, expressed it immediately gains protection
commercial and financial matters, as copyright. Therefore, when reviewing the
properties, employees, and litigation. copyright owned by the target company, it
However, in most IT deals, the most crucial is important to form a clear understanding
element of the DD is intellectual property. of the subject matter that constitutes the
The DD exercise must include a detailed copyright in question. This usually requires
analysis of all the IP that resides with meetings with the target companys
the company. A careful analysis must be employees who deal with R&D and the
conducted of the patents and trademarks technical side of the operations. There is
that are owned by the target company, no definitive formula for identifying, for
as well as any copyright that resides example, the copyrightable software.
therewith. Therefore, the lawyer must The key is to analyse the elements of the
compile a diligent list of all trademarks, program developed by the target company
patents and/or copyrightable subject with a view to determining whether this has
matter that is owned by the company under indeed originated from the company and
review. In this regard, a list of IP owned by has been properly expressed in a tangible
the company cannot be sufficient to satisfy format.
the lawyer and, more importantly, the
client that is making the investment. It is of In this regard, it is important to note that
paramount importance to insist on viewing the legislative infrastructure around IP in
documents such as trademark registration the region has been constantly improving
certificates confirming the completion of over the last 10 years, particularly in the
the registration process. If a trademark area of copyright laws. As countries in the
is still in process, evidence should be region joined the WTO, they were required
presented confirming the submission of the to meet their obligations under the TRIPS
application and its acceptance or approval Agreement. Furthermore, countries that
by the trademark office. have adopted, or are in the process of
negotiating, free trade agreements with
While software and other IT products are the United States have had to upgrade their
subject to patent protection, copyright law IP legislation and enforcement practices.
is also relied upon to provide protection. This has led to new and improved IP laws
This makes the DD exercise particularly in countries such as the UAE, Saudi Arabia,
difficult in IT transactions. Copyright Egypt and Jordan. Furthermore, key
protection, unlike patent and trademarks, players in the IT industry, particularly the
is not conditional upon any registration. software industry, actively enforced their
In fact, according to the Berne Convention rights throughout the region. This has led
(the underlying treaty on copyright first to a maturing process whereby rates of
adopted in 1886) and TRIPS Agreement of IP infringement and piracy have steadily
the World Trade Organization (Agreement dropped in the region.
on Trade-Related Aspects of Intellectual
Property Rights), copyright protection Another aspect of the legislative
363
L+ L- 3 4 CONTENTS
infrastructure that bodes well for the While the improving IP and e-commerce
future of IT investments in the region is legal infrastructure is laying solid
the growing focus on legislation regarding foundations for an IT industry boom,
electronic commerce and signatures. Laws there are of course additional challenges
that give legal effect and value to electronic in this field that are common to all
transactions are crucial to the growth of a sectors. In structuring an IT transaction
viable industry based on e-solutions and in the UAE, an ever-present issue is the
other forms of e-commerce. Most countries ownership limitation imposed by the UAEs
in the region do not yet have laws or Commercial Companies Law (Law No. 8 of
regulations in this regard but countries such 1984). This law stipulates that any company
as the UAE and Jordan are taking the lead. must have a local majority stakeholding,
The Emirate of Dubai was one of the very i.e., a UAE national must own 51 percent
first counties in the region to adopt such a of a company that is established in the
law, with the Electronic Transactions and UAE. Therefore, any acquisition of shares
Commerce Law (Law No. 2 of 2002) making in a UAE company must be structured
it to the Statute book in 2002. This law on this requirement. Furthermore, in the
gave substantial legal effect to electronic UAE, there is no developed concept of
communications and transactions. In preferential shares. Therefore, in most
principle, it enshrined various principles cases, any acquisition would involve a
that support electronic commerce. For complex agreement that would spell in
example, Article 7 states that an electronic detail the relationships between the parties.
mail does not lose its legal effect or its For example, in terms of limited liability
capacity for enforcement purely because it companies, the UAE Companies Law allows
was in electronic format. the shareholders to distribute profit in a
way that does not reflect the stakeholding,
Dubais Electronic Transactions Law fast and it allows the parties to nominate
became a model in the region, with the the general manager (hence, if there is
report of efforts aimed at adopting such agreement, the minority shareholder can
a law through a treaty at the level of the nominate the general manager). Therefore,
Arab League. Furthermore, a similar law, an agreement between the parties is always
Federal Law No. 1 of 2006 concerning necessary to define the rights within the
Electronic Transactions and Commerce confines of the Companies Law.
Law, was adopted by the United Arab
Emirates at the Federal Level in January A feature that is particularly relevant in
2006. Another related development is the the Gulf is the proliferation of free zones.
growth in improving laws around issues Usually, a free zone is an area in which
of cybercrime. It goes without saying certain exemptions are allowed from
that those who invest in IT / e-commerce various aspects of local law. Using Dubai as
solutions need to know that they can an example, there are tens of free zones in
protect their rights against the growing which companies are exempted from the
threat of hacking, phishing and other local ownership requirement laid down in
internet-based crimes. Once again, the the Companies Law. Consequently, non-
UAE has shown strong leadership with UAE nationals are free to own 100 percent
the passing of a law against cybercrimes of companies formed in the various free
(Federal Law No. 2 of 2006). zones, such as the Jebel Ali Free Zone and
L+ L- 3 4 CONTENTS
the Dubai Airport Free Zone. The Dubai all economic fields especially practice
Internet City is a particularly attractive of all economic, investment, and service
option for IT companies. However, activities. This means that companies in
companies in free zones do not have the the GCC and nationals thereof will be able
right per se to conduct business in mainland to operate freely within all the countries of
UAE. Free zone companies are a good the Common Market and that all ownership
option for a regional operational centre that restrictions for such nationals will be
will manage business in the whole region. If removed. While the Common Market came
the purpose is to set up an entity focused on into effect on 1 January 2008, the necessary
UAE business, then a UAE company must implementing laws and regulations are
be formed that respects the 51 percent rule. not yet all in place. However, the reality of
the Common Market will be reflected in all
Finally, in the years ahead, particular aspects of the legislative framework in the
attention must be paid to the Common region.
Market of the Gulf Cooperation Council
(GCC), the union of the Gulf states of Saudi The years to come will prove pivotal in
Arabia, Bahrain, UAE, Qatar, Kuwait and the IT sector in the region. As highlighted
Oman. The growing economic ties between above, the legal infrastructure is constantly
the Gulf countries are fast approaching improving in the region, and this provides
the levels of economic cooperation in a foundation for further growth. Or will the
the European Union. The GCC Common attraction of sky piercing towers overwhelm
Market is predicated upon the GCC the growing belief that investment in ideas
Economic Agreement which stipulated is the cornerstone of a new and vibrant
inter alia that The council countries Arab market?
natural and legal citizens are treated in
any country of member countries with the
same treatment of their citizens without Nasser Ali Khasawneh is a partner at
any differentiation or discrimination in Khasawneh & Associates Legal Consultants.
365
L+ L- 3 4 CONTENTS
CHAPTER FOURTEEN:
Contributor glossary
L+ L- 3 4 CONTENTS
A.T. Kearney Aperian Global
Vikram Chakravarty David Eaton

Navin Nathani
AppLabs
Acclaro Growth Partners
Graham Smith
Christopher Kit Lisle
Arthur D. Little
Advokatfirman Hammarskild & Co.
Oliver Lux
Philip Heilbrunn Christian Niegel
Peter Sarkia Evgeny Shibanov
Erik Swartling Dr. Karim Taga
Advokatfirman NorelidHolm Atos Consulting
Christer A. Holm Samantha Barklam

Susanna Norelid Sean Wells
Advokatfirmaet Steenstrup Stordrange Bates White, LLC

DA
Boris J. Steffen
Terje Gulbrandsen
BBK
Alvarez & Marsal
Christoph M. Schindler
Eric Benedict
Shepard Spink
George Varughese BearingPoint
Matthieu Baudouin
Amarchand & Mangaldas & Suresh A Stephane Cohen-Ganouna
Shroff & Co. Natalia Danon-Boileau
Olivier Sibenaler
Shardul S. Shroff
Begbies Global Network
Nick Hood
367
L+ L- 3 4 CONTENTS
Beiten Burkhardt Clifford Chance
Bogdan Borovyk Paul ORegan

Cameron Hall
Ekaterina Katerinchuk
Clyde & Co.
Berwin Leighton Paisner LLP Eleanor Kwak

Phil ORiordan
Rachel Cuff Antony Turton
David Harrison
Dealogic
Blake, Cassels & Graydon LLP
Salim Mohammed
FrankP. Arnone
ERM
Booz Allen Hamilton
William Butterworth
Justin Pettit Jaideep Das
Dr. Jrgen Ringbeck John Simonson
Borenius & Kemppinen Ltd Eversheds
Andreas Doepel Robin Johnson

Jyrki Thtinen
Garrigues, Abogados y Asesores

Bracewell & Giuliani Tributarios
John Brantley Fernando Vives

Amauri Costa
Martin Hunt
GE Commercial Finance
Clayton Utz Christoph Reimnitz
John Elliott
Rod Halstead Gibbons P.C.
Michael Parshall
Robert Coyne
Kevin Evans
L+ L- 3 4 CONTENTS
Grasty Quintana Majlis & Ca Katzenbach Partners, LCC
Eduardo de la Maza Timothy Galpin
Heenan Blaikie LLP Kaye Scholer LLP
Subrata Bhattacharjee Derek Stoldt
Homburger Khasawneh & Associates Legal

Consultants
Frank Gerhard
Nasser Ali Khasawneh
King & Spalding International LLP

Kirkland & Ellis International LLP
Mark Thompson
Frank Becker
Dr Jrn Schnigula
Kroll
Phil Antoon LehmanBrown
Stephen Chan
J Sagar Associates
Farhad Sorabjee Lincoln Crowne & Company
Nicholas Assef
Jennings, Strouss & Salmon, PLC
Richard Lieberman Lincoln International, LLC
Darren N. Redmayne
Jones Day Saurin Y. Mehta
Matthew Latham
Weyinmi Popo Liniya Prava
Tatiana Kachalina
Kate Lye (independent consultant) Svetlana Dubinchina
Kate Lye
369
L+ L- 3 4 CONTENTS
Linklaters Middletons
Matthew Middleditch Murray Landis

Greg McConnell
Long&Field
Milbank, Tweed, Hadley & McCloy LLP
Fei Guoping
Drew S. Fine
Alexander M. Kaye
Makarim & Taira S
Tasdikiah Siregar Morgan Joseph & Co. Inc.

Setia Nadia Soraya
Frank A. McGrew IV
Dunn Mileham
MAQS Law Firm
Jacob Strandgaard Andersen Morrison & Foerster LLP

Veikko Toomere
Marcia Ellis
Jay C.S. Tai
Mazars LLP
Oliver Hoffman MVision
Mounir Guen
McDermott Will & Emery LLP
Nick Azis NautaDutilh N.V.

Patrice Corbiau
Abigail Reed Willem Calkoen
Jeffrey Rothschild Harm Kerstholt
Dennis White Miriam van Ee
McKenna Long & Aldridge LLP Nishimura & Asahi
Chris G. Baugher Masakazu Iwakura

Anthony M. Balloon Yoshiaki Sakurai
Wayne N. Bradley Juan L. Ramirez
Michael J. Cochran
Marc C. DAnnunzio
Gary W. Marsh Patton Boggs LLP
Ann-Marie McGaughey
Richard R. Willis Walt Lemanski
L+ L- 3 4 CONTENTS
PricewaterhouseCoopers Thakker & Thakker
Will Bryan Bijesh Thakker

Mike Burwell
Ian Coleman
Denise Cutrone Ura Menndez
Richard Fuchs
Oleg Mikhailovsky Christian Hoedl
Greg Peterson Javier Ruiz-Cmara
Projectfusion Virtus Global Partners
Angus Bradley Anil Kumar
Sheppard, Mullin, Richter & Hampton Waselius & Wist

LLP
Niklas Thibblin
Tom Hopkins
Jason Northcutt
WSP Environment & Energy
Sorainen Tim Clare
Raminta Karlonait
Zamfirescu Racoi Predoiu Law
Partnership
SummitPoint Management
Nicolae Hariuc
Michael Sarlitto Ctlin Micu
David Soley
Taylor-DeJongh
Terry A. Newendorp
Nicole Weygandt
371
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FWE-BOOK

In assocation with: Customised edition for:

2008 Financier Worldwide. All rights reserved.

2008 International Mergers & Acquisitions:

unrestricted worldwide distribution

The publisher grants Booz & Company

Auctions in the M&A process

Telephone: +44 (0)845 345 0456

Copyright 2008 Financier Worldwide. All rights reserved.

No part of this publication may be copied, reproduced, transmitted or held in a

Views expressed by contributors are not necessarily those of the publishers.

g Contents NOTE: These Contents pages are interactive.

About the Publisher . . . . . . . . . . . . . . . . . . . 7

2007: a story of two halves . . . . . . . . . . . . . . . . 10

M&A trends 1997-2007 . . . . . . . . . . . . . . . . . 20

Will the next wave of M&A create more value? . . . . . . . . . . 40

The case for value creation focused LBOs . . . . . . . . . . . . 58

Preparing a company for sale to maximise value . . . . . . . . . . 68

Valuing assets in M&A under IFRS 3 . . . . . . . . . . . . . 119

The evolution of diligence: how a multi-discipline approach gives buyers a

Trends in independent oil company M&A . . . . . . . . . . . . 186

The M&A world comes to the United States . . . . . . . . . . . 199

Managing pan-European transactions for US buyers . . . . . . . . . 229

Recent trends in Japans M&A market . . . . . . . . . . . . . 312

The Middle East as an emerging market . . . . . . . . . . . . 359

About the Publisher

Financier Worldwide is a leading publisher of news and analysis on

Through a series of online, print and digital publications, the

Financier Worldwide tracks the latest trends in Mergers &

This e-book, entitled International Mergers & Acquisitions: Creating

To learn more about this and other e-books scheduled for

Data featuring in this e-book was compiled with the help of

Dealogics M&A Analytics provides a comprehensive view of M&A

g 2007: a story of two halves

iH versus 2H, 2002-2007

2002 2003 2004 2005 2006 2007

sector activity 2007

Finance ABN Amro / RBS, Fortis, BSCH $95.6bn

Real Estate/Property Archstone-Smith Turst/Tishman Speyer, Lemhan Brothers $20.6bn

Utility & Energy Endesa/ENEL, Acciona $52.6bn

Telecom BCE/Providence Equity Partners $48.5bn

Oil & Gas GlobalSantaFe/TransOcean $17.6bn

Technology IBM repurchase $12.5bn

Mining Rio Tinto/BHP Billiton $152.0bn

Healthcare Medlmmune/AstraZeneca $14.9bn

C onstruction/Building Eiffage/Sacyr Vallehermoso $23.8bn

C hemicals Lyondell Chemical/Access Industries $19.2bn 2007 Volume $bn

0.0 100.0 200.0 300.0 400.0 500.0 600.0 700.0 800.0

top 5 announced Global Financial Sponsor M&A Buyouts 2007

GLOBAL M&A BUYOUTS (excluding add-ons) 2007

$m - Volume represents full week volume

- Largest majority acquisitions of the week are noted

Radiation Therapy Services

Alexander Mann Solutions

PPG (automotive glass)

Regent Seven Seas

Bureau Van Dijk

Regional highlights AstraZeneca for $14.9bn in April.

The Americas Canada targeted M&A volume reached

top 5 announced GLOBAL TRAnsactions 2007

Announced Target Target Nat. Acquirer Acquirer Nat. Deal Value

g Sovereign wealth funds

sovereign wealth fund investments 1998february 2008