Too many M&A deals ultimately fail as a result of a lack of transparency, adhesion of cultures, and a failure to determine the success of a deal beyond the final handshake.
Albert Coll, an internationally renowned financial advisor, has spent over 25 years executing key market transactions across Europe and Latin America, once acting as a senior contact for bilateral discussions between the International Monetary Fund (IMF) and its member states.
Following his in-depth presentation at a recent European M&A conference hosted by Ashfords and international legal network Advoc in London, Albert shares the disruptors and trends that are shaping the future of the sector.
Covid heavily disrupted our previous ways of working and since moving into the recovery stage of the pandemic, the format in which due diligence is conducted has changed. Previously, due diligence was a 60/40 split of virtual ‘data rooms’ and face-to-face meetings in physical ‘data rooms’. Now all due diligence is done virtually, removing the many opportunities face-to-face interactions bring between the lawyer and the client.
A successful M&A deal requires the use of many soft skills, which are often overlooked. Breaking down barriers and building strong relationships is traditionally easier in a physical meeting. Professional advisors involved in a deal increasingly have to place more planned emphasis on how they will build strong relationships that will help facilitate the deal during negotiations and past completion.
The constant evolution of technology, specifically AI, has brought risks but also opportunities. The use of large language models, for example, has prompted issues in intellectual property and copyright infringements, which legal processes are aiming to overcome, and the adoption of software and cloud technology provides opportunities to attract new clients.
Investing in the latest technology signals an understanding and a commitment to keeping ahead of the curve of innovation and, ultimately, guaranteeing the highest level of data security. Smart contracts, such as blockchain, are an increasingly attractive proposition and are something I believe should be on all companies' radars, if not at least, in the pipeline.
Cyber threats are not new but with all due diligence now taking place online they pose a heavier risk which requires large investments into more secure infrastructures to protect the receiving party. In my experience, the UK is one of the countries that is a major target for cyber-attacks, so it is important to be aware of this additional risk when engaging with companies based outside of the UK looking to complete an M&A transaction with a UK company.
A generational gap has now appeared for the first time. Previously, baby boomers were happy to inherit businesses from their parents, but the new generation is often not so keen to follow this path. This generational change is a catalyst for family companies to engage in M&A more frequently, a trend that is replicated globally.
Private equity as a business model, however, appears to be building a protective bubble by using secondaries and net asset value funding as a means to offset the past profitability that zero or low interest rates provided. This approach is currently being underestimated by stakeholders who should be mindful to properly understand this business model when engaging in M&A discussions.
In the short term, sustainability is unlikely to be as big a deal maker as investors are showing signs of developing the same exhaustion now felt towards Environmental, Social and Governance (ESG). Previously ESG served as a key factor in M&A deals but now, largely due to interest rates having gone up, the focus has begun to fade. This will only shift if regulatory changes are made, however, the pressure will fade faster for smaller deals as these traditionally carry more flexibility and are structured with fewer governance issues.
The UK is facing the same issues as most of its global competitors. It also has to contend with regulatory pressures which could, for example, lead to companies delisting. The recent Parliamentary scrutiny of the Financial Conduct Authority (FCA), placing pressure on supervised institutions, is something countries outside of the UK and regulated businesses will monitor.
You must carefully manage numerous moving parts when creating a successful deal. One that is seldom taken seriously enough is culture due to ‘agency risk.’ Executives who are focused on their personal or short-term goals, as opposed to the long-term future success of the company, can lose sight of the reasons why the company is a success and remain the main reason M&A deals fail.
Lawyers are in a strong position to identify this risk as they should be key trusted advisors in the process, with no conflict of interest. Being objective in that sense allows you to focus on the long-term success of the deal and align shareholder and management interests.
Being honest and transparent about the type of transaction the deal is meant to be seems an obvious approach to take but, in my experience, this is not always the case. Without setting clear and honest intentions it is hard to get a successful deal over the line.
Finally, negotiating the right way is paramount to a successful deal. Often people sitting at the negotiating table have not had any negotiation training. Negotiations involve a lot of psychology that moves past the aggressive and bullish nature we often see deployed in these transactions. It is a soft skill that should be treated as a key area for training and development.
Companies now understand that international M&A is not a panacea as it is difficult to generate synergies and create value outside of the common markets. Developing domestic M&A alongside international deals is on the rise - a response largely in respect of the current complicated geopolitical situation.
ESG has also gone from being an M&A enabler to no longer being a driving force behind investment decisions. Examples demonstrating this, include companies acquiring already established renewable energy companies and banks and corporates pulling out of global initiatives, such as the Net Zero Banking Alliance. The tech giant, Meta, have substantially stepped down diversity initiatives, echoing similar moves made by other large corporations.
Investors are now disinterested in ESG as the return on investment has become meagre.
Adapting to my audience has been one of my most valuable tools. On any transaction, there can be a lot of jargon and industry-specific language which is inaccessible to stakeholders. If you cannot effectively communicate with your stakeholders, it will directly impact the success of a M&A process. A little bit of patience and making yourself accessible will allow you to work in a way that meets your stakeholders in the middle and vastly reduces the risk of M&A failures.
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