52 mergers & acquisitions The corporate marriage


Like marriages, not all mergers or acquisitions are successful, but the odds of success are increased by good preparatory work, writes Katherine Cereghino of Brethertons


Every business is different and every transaction has its own peculiarities, but most mergers and acquisitions start with a decision by the management board of the acquirer that the move will be good for their business.


The key question is how?


Sometimes, the answer will be obvious. It might take a competitor out of the market, or it could open up leads to markets you don’t currently have access to. But sometimes it can just be a feeling which comes from experience.


Whatever the reason, it’s important, before the merger or acquisition is completed, that this key question is fully and satisfactorily answered. That is where an experienced commercial legal adviser comes in to play, along with your management team, accountants and other professional advisers.


The scope of a due diligence investigation will depend on the purpose of the acquisition. For example, where the acquirer is looking for a trade advantage through a merger, the investigation will focus on matters such as economies of scale and marketing advantages, whereas a deal to secure access to new markets might focus on the key client contracts and the contracts of employment for staff working with those clients.


However, for all acquisitions subject to English law, the principle of caveat emptor, or buyer beware, will apply and therefore due diligence is an essential part of the acquisition or merger process. A buyer should undertake a thorough audit of the target organisation's affairs – legal, business and financial – with the primary purpose of obtaining sufficient information about the target's business to enable the buyer (or other parties with an interest


Get ahead with heads of terms


David Tighe, partner in Penningtons Manches’ corporate team, explains the value of using heads of terms when embarking on corporate transactions


What’s not to like about a set of succinct and well drafted heads of terms? The reason I ask is because on a couple of occasions recently we’ve had clients who’ve found it impossible to resist the temptation to crack on with the full legal documents on the back of an email exchange and their recollection of discussions with their opposite number.


It may be a sign that the market is getting a little exuberant, and so deals have to be done at pace or not at all, but it’s not an ideal recipe for a smooth transaction.


In the absence of heads of terms, unless the lawyers employ their psychic powers, they will either need to take a bit of a punt when preparing the documents and ’fill


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in the blanks’ by making educated guesses in a number of areas. Or they may try to plug the gaps by going round the houses again with their clients (which means that the parties may as well have gone for heads of terms in the first place).


If the first alternative is the preferred choice then, when the documents hit the mailbox of the other side, the odds are that that they will feel that they don’t reflect their understanding of the deal. Cue misunderstandings, two steps back and another round of negotiations. Cue delays and extra costs plus possible cracks in the goodwill that’s previously been built up between the parties.


So, once you have a ’deal’, ask your lawyers (or perhaps your financial advisers – we’re not precious) to prepare a well-crafted two or three page document. The majority of it is not going to be legally binding but it will have unambiguous moral force and will cover the following:


• Key commercial and financial terms. How much, when will it be paid, how is any earn-out to be calculated?


• What’s the process to completion? What are the critical steps? How is due


THE BUSINESS MAGAZINE – THAMES VALLEY – SEPTEMBER 2015


in the transaction) to decide whether the proposed acquisition represents a sound commercial investment.


Armed with the information provided in the due diligence report, a buyer can then assess the risks and rewards of the purchase and work out what contractual protection it requires from the seller. For example, with a share purchase, the buyer inherits all the historical liabilities of the target so, if the target company’s record keeping is haphazard, alarm bells should ring.


Ultimately, if the results of the due diligence investigation either cast doubt on whether the buyer can get what it wants from the acquisition or make it clear that it will be too risky at any price, it may be better to do no deal at all and a buyer should never be afraid of walking away from a bad deal – there will be other opportunities.


Katherine Cereghino is a member of the commercial team at Brethertons solicitors; headed by experienced corporate commercial solicitor Colin Witherall, the team operates from bases in Rugby, Banbury, Bicester and London and can be contacted in the first instance through Katherine Cereghino.


Details: Katherine Cereghino 01788-557599 katherinecereghino@brethertons. co.uk


diligence going to be handled and access to be given to documents and people?


• Set out the timing expectations.


• Provide a framework for potentially ’sensitive’ areas. For example, what is the parties’ approach to warranties and indemnities – who is giving them and on what basis (joint and several or proportionate?) and what are the principal limitations to protect the sellers?


In addition, a few legally binding paragraphs should be included, covering exclusivity and confidentiality, and it’s job done. Happy days – it will be time well spent.


Details: David Tighe 01865-722106 david.tighe@penningtons.co.uk www.penningtons.co.uk


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