Every lawyer learns in law school that the practice of law is not confined to eight hours a day, five days a week, with tidy, timed breaks for snacks and lunch. Every law student, however, does not learn the brutal hours required to close an acquisition or merger.
Mergers & acquisitions (M&A) practice is a beast: it doesn’t acknowledge holidays, it doesn’t pause to celebrate birthdays (or births for that matter), and it certainly doesn’t care about your empty stomach growling for sustenance. While war stories abound among litigators, the acquisition that stole Christmas is less well-known but often true.
Knowing how to skillfully manage the M&A process while enjoying the moment during a holiday celebration is doable. Below are a few tips to help a lawyer successfully navigate each step of the M&A process, even during the hectic holiday season.
First Things First: Know the Motivating Factors
A lawyer must understand what is motivating M&A conversations. As the in-house attorney for the buyer or as outside counsel advising the client, it is your job to facilitate conversations with stakeholders that answer this question. Is this a strategic acquisition of a competitor or a financial transaction intended to grow an ownership portfolio? Understanding the motivation of those invested in the process is essential to evaluating potential target companies. Knowing the motivating factors and, therefore, establishing a framework early prevents wasting time engaging with companies that are not a fit for the business’s growth plan.
As the year winds to a close, the corporate leadership team tends to turn their attention to the coming year and all of the possibility it holds. Growing an organization through merger or acquisition can be the topic of conversation over a holiday dinner, and grand ideas abound during the waning hours of the celebration. But upon return to the office the following morning, establishing the framework is key.
Considering the deal structure and its implications deserves thoughtful attention. An asset or stock purchase brings tax implications and a buyer can risk exposure to the target company’s liabilities. This wasn’t part of the conversation during the holiday celebration the night before, but it should be now. Without deliberate alignment with the buyer’s motivations, the framework isn’t very useful.
Understand What Potential Targets Offer
Having established a framework, a buyer can start evaluating potential targets and metrics. What is critical to one buyer may be down the list of priorities for another. For some buyers, location, location, location is key. They want to increase their geographic footprint. For others, a transferred customer base is top priority and multiple NDAs with potential targets are necessary as part of the dealmaking process.
No matter the priority, all evaluations should include an analysis of performance indicators and metrics that the buyer expects to be met, and whether a transaction with a potential target company will fit in an overall budget for the transaction.
(An important note on this point is to include transaction costs as well as purchase price in the buyer’s budget. Transaction costs can be 5% to 10% of the purchase price and may become an unnecessary cost in the event a deal falls through.)
The M&A lawyer can assist stakeholders in evaluating opportunities that align with their top business goals and offer the most promising opportunities.
One requirement that any potential target has to offer: willingness. This is when the appropriate executive team members of the acquiring company can lend a lot of help. A nuanced approach to potential targets is necessary and eliciting whether certain companies are open to the conversation can cull the list of potential targets considerably. The holiday season offers a variety of in-person social situations to engage in this conversation, save for the ones that require an NDA and should be kept guarded.
Conducting the Valuation Analysis
There are a variety of valuation methodologies that may be conducted, but they should all result, in part, in answering this question in the acquisition process: How much is the target company worth? Real estate value, book value, enterprise value, multiples analysis to name a few can leave an M&A lawyer swimming in numbers and high on the potential outcomes.
As the lawyer for the buyer, working with an investment broker or financial advisor may be an option at this point. Determining a target company’s dollar value as a stand alone company is useful, but what is the dollar value when considering the synergies between the acquired company and the buyer? The lawyer should take all things into consideration when teasing out these numbers. Combined operational costs are a mutually advantageous conjunction. The target company’s operation in an adjacent industry offers financial synergy and could help solve supply chain shortages. These numbers will help the buyer determine if the target company is worth pursuing in earnest.
If this stage of the process falls during the holiday season and right before the start of the new year, resist calls to wrap things up quickly. The valuation process is not one to be rushed. A target company may offer an early Christmas present in the form of untapped potential in its workforce. Just as likely, the big proclamations of a seller may be nothing more than hot air. Numbers don’t lie and the valuation process is where the M&A lawyer will get to those numbers.
The Art of Negotiations
“M&A negotiations” conjures the image of late night conference room brawl-like screaming matches with lawyers perspiring and angrily arguing their point. In truth, the tenor of the negotiation process of an acquisition or merger is dictated by the alignment of the parties involved. If everyone is working towards the same end goal, the negotiations process may be long and tedious, but the larger purpose is the same.
This is when a well-written and comprehensive letter of intent is critical. The letter of intent, LOI, is the tool in the negotiating process that outlines the key terms of the transaction. When written clearly and transparently, it allows both parties to see where there is alignment between the buyer and target company, and more importantly, where there is disconnect. The LOI memorializes in detailed legal language the business understanding between the parties. While it may only capture the intent of the parties, it is the starting point for further negotiations and can make or break a deal if not thoughtfully and thoroughly drafted.
Negotiating can be the most difficult part of the M&A process and it can eat up a lot of ‘outside office hours’ for a lawyer. Late night telephone conversations and quick, working lunches on a Saturday are common to keep the momentum of a deal going. If this stage of the process falls over the holidays, expect the unexpected. Both buyers and sellers can become emotionally attached to the idea of consummating a deal and any idle time in the forward momentum can cause agitation. The end result of these negotiations is hopefully an agreeable amount and terms. You are only halfway through the whole process at this point. Take a moment to enjoy the holiday spirit, and rest up for the next steps.
The Long and Winding Road of Due Diligence
A M&A attorney for a buyer truly earns his keep in the due diligence phase. It is this lawyer’s job to turn a critical eye to every aspect of the target company’s business. The point of this scrutiny is to identify and mitigate risk. The process includes and is not limited to review of material contracts, leases, employment agreements, financial statements, customer contracts, loans being serviced, ongoing or potential litigation, and compliance status. The lawyer is tasked with examining every financial record and analyzing all aspects of the business operations.
Because due diligence is the buyer’s opportunity to confirm or disprove original valuations, the importance of a thorough due diligence roadmap cannot be understated. The process can last from a few weeks to many months depending on the size of the transaction and the amount of information involved. Again, lawyers often burn the midnight oil working through the due diligence phase as both parties want the deal to close now, this morning if possible.
If you are an M&A lawyer in the due diligence phase, do not let the holiday cheer lull you into complacency in your due diligence review. Due diligence reveals many nuggets of information, such as real estate assets not worth what the target company claimed, or a customer base not as transferrable as suggested. Such revelations give the buyer a strategic advantage and an opportunity to negotiate a lower purchase price, or negotiate representations and warranties from the seller that would not be agreed to otherwise.
Drafting the Purchase Agreement and Overseeing the Transition
The purchase agreement is putting the arrangement on paper and formalizing it. In short, it is the fully fleshed out version of the LOI, as well as additional terms and conditions. The M&A lawyer is responsible for consolidation all of the negotiated terms of the transaction, including any changes as a result of the due diligence phase, and incorporating them into the purchase agreement.
The rush of a year-end deal can add extra intensity to the acquisition process. Maybe the signing falls on December 31st and includes a one-day stint that involves flying documents from New York to the other coast, then being whisked by helicopter to several locations to file them that same day. I read this really happened. Though this type of case study may be highly unlikely, the signing of the purchase agreement is exhilarating for those involved and a huge milestone to celebrate the hard work done to achieve the shared goal.
With so much energy expended in getting to the point of drafting a purchase agreement, it is understandable that deal fatigue may have set in. To add to the cause for fatigue, once a buyer acquires the target, the real work begins with the integration process for the two organizations that are now one. The M&A lawyer can assist with the transition in a legal capacity as well as utilizing soft skills.
If the transition phase of an acquisition or merger coincides with the holidays, the M&A attorney may be burdened with providing input on employee retention, potential fallout from layoffs, declining morale and chaos from the restructuring, all of which put a heavy damper on holiday celebrations. Buyers that view retaining institutional knowledge as a competitive edge and embrace a merging-of-cultures ideal often fare better during the transition phase. But there is still plenty of work to keep a lawyer busy with ironing out the bumps that inevitably arise.
Appreciating the Process
Any lawyer that has participated in a successful merger or acquisition knows the event can be the pinnacle of one’s career. At the very least, the lawyer has been a legal advisor, contributor and guiding hand during the process and assisted a company to levels of growth that would not have been attainable through organic growth alone. If any step along the way in the M&A process happens to fall around the holidays, anticipate being stretched thin, but also embrace gratitude.
While not every merger or acquisition is successful, the opportune moments to learn and mature as a lawyer abound no matter the outcome. As the holidays are a time when we gather together and express gratitude for so many things, don’t forget to list the personal and professional growth opportunities every M&A experience offers.