June 7, 2016. By Matthew Okaty, J.D.:
At the beginning of 2016, there was a lot of excitement in financial news regarding mergers and acquisitions (“M&A”), as 2015 was a record breaking year for M&A transactions, with $3.8 trillion being spent across the globe, according to an article by Bloomberg. The previous record was set in 2007, just before the financial crisis and ensuing recession. Many industry professionals predicted that 2016 would be another solid year for M&A activity, but not only are numbers down at least 20% YTD*, many of the deals announced last year have collapsed. Most notable was the $160 billion Pfizer-Allergen deal, which would have been one of the largest M&A deals ever before it was scrapped in April due to new regulations issued by the Treasury Department which targeted such inversion deals (i.e. where a U.S. company relocates to a country with a more favorable tax environment). In an interview with Bloomberg last month, Goldman Sachs co-head of Global M&A Gregg Lemkau says that although the fundamental drivers which fuel M&A activity are still present (namely, limited opportunities for organic growth and a surplus of available capital), there are greater headwinds this year, including a challenging regulatory environment and a drop in positive shareholder receptivity. Other high profile deals that fell through recently include Halliburton-Baker Hughes and Staples-Office Depot.
In light of the recent rise and fall of M&A activity, I came across a helpful article for companies that are contemplating a merger or acquisition, or for anyone interested in the inner workings of such deals. Shannon Zollo, Esq. and Mary Beth Kerrigan, Esq. of Morse Barnes-Brown Pendleton wrote a piece called Top Ten Issues in M&A Transactions that nicely summarizes the key issues from a legal standpoint that should be addressed by both parties at the very onset of a deal. They categorize the issues as follows: 1. Deal Structure; 2. Cash Versus Equity; 3. Working Capital Adjustments; 4. Escrows And Earn-Outs; 5. Representations And Warranties; 6. Target Indemnification; 7. Joint And Several Liability; 8. Closing Conditions; 9. HSR/Timing Issues; and 10. Non-Competes & Non-Solicits. There are other deal specific issues, of course, crucial to the ultimate success of the merger or acquisition and which would also need to be addressed, such as those relating to the integration of strategies or changes in management. But underpinning any transaction is going to be the same basic set of issues that will need to be resolved in order for the deal to move forward.
One thing I found interesting and which is tied to several of the key issues listed in the article relates to contingency planning and how the failure of certain conditions is handled by the parties. Escrow terms are commonly used in order to provide recourse in the event of any breaches or other happenings detrimental to one or both parties. This reminded me of something I read regarding the merger of the two largest beer brewing companies in the world, Anheuser Busch InBev and SABMiller, which is still in the works*. As a compliance professional, I am fascinated with the level of regulatory scrutiny this particular deal faces. Mergers/acquisitions of this magnitude trigger serious anti-trust concerns and how it may effect competition and thus ultimately consumers, not just in the U.S. but all over the world wherever they conduct business. In order to close the deal, AB InBev will need to win regulatory approval in numerous countries including the United States, the European Union, China, Australia, South Africa, Colombia and India. And should the merger fall through, AB InBev has agreed to pay $3 billion to SABMiller – a pretty steep price to pay for events not entirely within their control (in comparison, Pfizer is only required to pay Allergen a $400 million break fee per their merger agreement).
*as of June 7, 2016