Choose the right adviser and speed up your transactions…

Commentators almost unanimously predict that in 2021 M&A deals will increase in number and value.

In our experience, one of the main reasons that transactions can blow out in time or cost is disagreement between the buyer and seller, particularly as to the optimal structure of the transaction.  While the basics of the deal are often agreed early on (for example, price), many other aspects of an M&A transaction must be negotiated and documented.  Choosing a legal adviser with experience and understanding of the market is critical to a successful outcome.

In 2020, particularly in the first part of the year, when the effects of COVID-19 became evident, M&A transactions plummeted to the lowest level since 2016.  However M&A rebounded in late 2020, and 2021 activity is expected to rise exponentially.  For example, from September to November 2020, Intralink noted a 43% increase in the number of logins to its virtual data rooms compared to the same period in 2019.

In 2020, there was a tendency for deal timeframes to be prolonged, as the impact of COVID-19 was still being assessed.  Now there is a sense that global economic conditions are stabilizing, and that the effects of COVID-19 and associated policies are recognised and accountable, especially with regard to price adjustments, termination rights and other variations, enabling deals now to move faster.

What types of transactions are expected?  During the earlier months of 2020, there were more takeover bids than schemes, whereas in the latter half of 2020, schemes were more common.

Predictions about how 2021 will pan out include:

1. Deals from the latter half of 2020 will be consolidated in 2021 (for example the CCEP Coca-Cola Amatil deal).
2. Private equity will play a large role.
3. Initially, buyers will have the advantage in a stressed market, however the pendulum will swing to favour sellers as the robust assets emerge. (Currently, it seems that sellers and buyers are frequently opting for “bilateral deals” that preempt the traditional auction process.)
4. Changed FIRB rules have been introduced. While the rules regarding national security have  been tightened, on the other hand there has been a loosening of regulations where an upstream foreign government investor holds a passive interest in the purchaser.

Despite increased FIRB restrictions, and border closures, foreign bidder deals rose after April 2020 (with the exception of China-based bidders).

5. There will be more high value deals, and high value deals are more likely to be structured as takeovers, due to increased competition. (In contrast, in previous years, takeovers were more common for lower value deals.)  Data supports this assertion: in 2020, more than 70% of deals over $500 million were structured as takeovers.
6. Commentators predict that in an increasingly active and competitive environment, there will be more tension between boards and bidders, and bidders will apply pressure through bear hugs and acquisitions through outright stakes.
7. Warranty and indemnity insurance (WII) is more widespread. Traditionally the domain of private equity (PE) sell sides, WII is now more likely to be included in non-PE deals, including public M&A.  Insurers like policies to exclude losses attributable to the effects of COVID-19 and/or government actions to limit or eradicate viral spread.
8. Environmental, social and governance (ESG) issues and data issues will assume increased relevance and scope in the due diligence processes.

In summary, after the impacts of COVID-19 and associated policies created an early and significant dip in M&A in 2020, there is now widespread optimism that M&A is already recovering and 2021 will be year of exciting opportunities.  The 2020 experience has led to some modifications on how deals are structured, and the importance of legal advice with respect to deal structures, due diligence and documentation is more important than ever.  Undertaking M&A transactions is typically very time-consuming and distracting, particularly for the seller of the business.  Negotiating the non-price terms is a big contributing factor to this time burden, so early and targeted negotiations, with experienced and articulate legal guidance, will increase efficiency, reduce the burden on the seller’s time, and optimize the likelihood of a successful outcome.