BN: Hi Danny, welcome to Boss News. Can we start by asking a bit about your background and how you came to be involved in the legal aspects of M&A?
DP: For me, it felt like a natural progression, as I studied law at Cambridge then without fuss or effort, (Those were the days!) I was offered a training contract at a leading City law firm, SJ Berwin. I quickly fell in love with the telecoms and tech industry and, in particular, the strategic and corporate finance side. I then decided to become actively involved in those aspects by joining Morgan Grenfell, which, at the time, was a leading Investment Bank in the telecoms sector, and passed my SFA banking exams.
Whilst at Morgan Grenfell, Deutsche Bank completed its acquisition of the investment bank and I realized that I preferred working in smaller organisations, which afforded me greater control of my career. Consequently, I moved back to my core legal profession where the few years of investment banking experience would prove helpful. My clients were regularly involved in investment or M&A activity, so, being a specialist in the technology and telecoms sectors proved very useful and led me to become involved in the legal aspects of M&A.
BN: What are some of the main problems you have encountered when companies engage in an M&A process with lawyers who do not have the required experience in this specific area?
DP: Most of the fast moving tech and telecoms companies I have worked with have businesses that are very different to traditional businesses. Typically, they may face any number of the following additional challenges: regulatory and intellectual property rights issues; technological innovation, potentially decimating the core business; competition that can spring up from nowhere and crush a business with lightning speed; or simply, the sector falling out of fashion in the mindset of the financial analysts/private equity community.
Accordingly, Clients looking to exit might have a narrower window of opportunity than even they may realize, to cash in on a life changing exit. It is therefore important that the deal is concluded as swiftly as possible, with lawyers working through the night if need be, to complete the deal before the window of opportunity closes.
Typically, an exit will involve an earn-out period which invariably means that, further down the line, the buyers will look for any excuse to avoid paying out, even if it highlights their inability to get the best out of the tech company they have acquired. It is important to have a lawyer who understands how the purchasing business is likely to operate post completion and who can also draft suitably tailored earn-out protection mechanisms.
Another key criterion in selecting a lawyer is to appoint one with sufficient M&A experience, self-confidence and personality to ensure that the lawyers do not become embroiled in point-scoring and aggressive parading of egos, delaying the transaction and racking up fees on minor legal drafting points. Personality can be crucial as it is important that the client stays relaxed and focused during what can be a stressful period of time and, most importantly, does not make an enemy of the buyer, especially when they will have to work together on an earn-out.
When advising a buyer or investor, it is hugely important to have a lawyer who understands the business of the target company, in order to uncover commercial as well as legal risks that the client may not have appreciated. We have certainly saved some of our clients millions by uncovering flaws in the selling company’s business. As we have done, your lawyer should also be prepared to go the extra mile in identifying risks, despite the fact that could undermine their fees, earned on completion. A lawyer with an excellent understanding of the target business is much more likely to be able to identify and focus on the most important risks to the buyer. Having said that, the buyer ought ideally to seek independent financial and strategic advice and not rely solely upon the lawyer to carry out such aspects.
BN: Is there such a thing as a “typical” M&A transaction?
DP: Yes, in the broad sense, in terms of the likely documents to be negotiated and agreed. Yes, also, in the sense that a first time buyer or seller has no conception of the huge amount of legal work that will be required to protect them, in relation to the transaction. A typical transaction will involve most of the following, though often additional agreements and documents are needed:
- Term Sheet
- Due diligence process
- Share Purchase Agreement (including lengthy warranties)
- Tax Deed
- Disclosure Letter
- Revised services agreements for the key management
BN: In your experience, how long is a typical Due Diligence process likely to take?
DP: This will depend on how prepared the seller has been. It is important for sellers to start preparing for a due diligence exercise as soon as possible, once the business is set up. Sellers need to be able to provide access to all the key documents relating to their business, these days increasingly by means of online data rooms. Factors affecting the length of the due diligence can include the number of employees, whether any are being made redundant as part of the process and the number of offices and subsidiaries in the UK and overseas.
BN: What are some of the frustrations that an owner shareholder may experience?
DP: The main frustrations for a first time seller are:
- The lack of appreciation of how many months typically, a transaction will take to close from having shaken hands on the deal with a buyer;
- The retentions and conditional aspects of the transaction that may suddenly appear in the term sheet. Sometimes these are imposed by ungentlemanly buyers late in the process, despite not having been mentioned in the term sheet.
- The number of legal points concerning the sale, all of which are important to the seller, but which they had absolutely no idea were coming their way.
It is therefore important for the lawyer and financial adviser to forewarn the sellers and guide them through the process, explaining that all these nasty surprises are perfectly par for the course and that, as a team, the seller will be guided across the finishing line to exit.
BN: In your opinion, what are the major drivers behind the M&A deals you are engaged in? – And is this likely to continue?
DP: In my experience, typical drivers for buyers are that buyers are:
a. Using technology to achieve economies of scale in consolidating customer bases from a series of acquisitions; or
b. Adding a new but complementary line of business, again, with a view to using technology to consolidate and optimize the acquired businesses within the existing business.
BN: We know you operate internationally, how does this differ from working on projects in the UK?
DP: International deals, whilst bread and butter for my team, do indeed bring additional challenges. Perhaps not coincidentally, we have a team of dual qualified lawyers based in our City office who are very well versed in operating in different legal systems. It is very important to identify the additional elements at the outset to the client and then to ensure, where possible, that the UK lawyer is working with top local lawyers that he knows personally, and who are experienced in working with UK style M&A agreements, which are different to those in many other jurisdictions. Certainly, in many European jurisdictions, there is far more formality/bureaucracy involved, which typically comprises powers of attorney, notarization and registrations with the local Chamber of Commerce or companies register for the sale to take effect. Having a lawyer who is aware of these additional tasks, should mean that such supplementary requirements are built into the deal timetable, precluding them from coming as a nasty surprise close to completion - and thus impeding deal closure.
BN: Does your work also bring you into contact with company lawyers who may already have a relationship with the company?
DP: Absolutely. As a specialist, technology law firm we are often instructed by other firms of solicitors or in-house counsel.
BN: Do you have any top tips or recommendations for senior executives when about to enter the M&A process?
DP: Top tip is to take Document Boss’ guidance as they really understand the Information Management sector - and then, if you are ready, engage with them!
Related articles:
Know the Steps in the M&A Process or You Might Have a Tumble
Selling Your Business is Like a Parachute Jump – You need to get it Right First Time
