Access your pdf version of the M&A Yearbook 2024

Editor’s Letter

Foreword – Taylor Wessing: Blue skies ahead

After two subdued years, global M&A activity is showing signs of recovery.

Cleared for departure – charting the course for deal optimism

After a dismal 2023 for dealmaking, partners are focusing on the positives, despite lingering economic and geopolitical uncertainties. So is the M&A market ready for takeoff?

Dialling in the deal – the inside track on the Vodafone/Three merger

The planned tie-up between Vodafone and Three UK stood out in last year’s stuttering M&A market. Here, Slaughter and May M&A partners Victoria MacDuff and Richard Hilton, lead counsel for Vodafone, tell Legal 500 London editor Cameron Purse all about the deal

The real deal – the firms dominating the rankings for M&A

From premium, multibillion-pound practices to national players handling heavy volumes of transactional matters, the Legal 500’s M&A rankings cover the full gamut of the deals market

Stress test – partners on how they deal with a life under pressure

Long and unpredictable hours can make transactional work hard to reconcile with mental health considerations. We spoke to City partners about how they keep things in check – and why the industry still needs to change

To live or die in DC – getting deals done amid US antitrust crackdown

Elite US law firms are stocking up on antitrust expertise as the Federal Trade Commission cracks down on enforcement. Barnaby Merrill speaks to top practitioners about the current deal landscape and the key issues for clients under scrutiny

M&A perspectives

Jennifer Bethlehem

‘We were at the centre of a deal that was necessary to ensure global financial stability – the stakes don’t get higher’ – Freshfields’ head of consumer and healthcare Jennifer Bethlehem on deal highlights and having the personality for M&A

Lorenzo Corte

‘The deal was the most complete learning experience I could have ever hoped for’ – Skadden’s global head of transactions Lorenzo Corte on deal highlights and coming from a family of lawyers

Melissa Fogarty

‘I pinch myself (most days!)’ – Clifford Chance’s London corporate co-head Melissa Fogarty on memorable deals, embracing technology and why she would absolutely recommend a career in M&A law

Headline market briefings

AI spy: avoiding bad AI investments

In the wake of recent advances in generative artificial intelligence (AI), AI has shot to the top of the board agenda. No one wants to miss out on this transformative technology – but businesses need to ensure FOMO doesn’t lead to bad investments. Jonny Bethell and Jo Joyce of Taylor Wessing explore the potential pitfalls to avoid in AI acquisitions

Getting exit ready

Multiple signs are pointing to an increasing momentum around M&A activity. If you’ve been holding out for better conditions to sell your business, now is the time to make sure you’re exit ready. Taylor Wessing’s Emma Danks, Suzy Davis and Siobhán Langwade outline key areas of focus and practical matters

Argentina market briefing

Understanding mergers and acquisitions in Argentina

Rafael Salaberren Dupont, Juan Manuel Campos Álvarez, and Diego D’Odorico of SyLS discuss the processes, challenges, and prospects for M&A in Argentina

Belgium market briefing

Excess cash in a Belgian M&A context

Jérôme Terfve and Guillaume Charlier report on the treatment of excess cash in M&A transactions by the Belgian authorities

Philippines market briefing

Capitalising on opportunities in the Philippines

Gorriceta Africa Cauton & Saavedra lawyers led by Mark S. Gorriceta (managing partner), Kristine T. Torres (partner) and Kathleen T. Guiang (mid level associate) explore the challenges, cross-border elements and post acquisition disputes for M&A transactions in the Philippines

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Please see below for a link to an online pdf of the M&A Yearbook 2024.

M&A Yearbook 2024 complete pdf link

Return to M&A Yearbook 2024 contents.

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When M&A markets slowed down in the second half of 2022, the positive spin from dealmakers was that at least they got a little respite after the heady heights of the post-pandemic 2021 deal boom.

But when the lull continued and 2023 turned into a year that set all the wrong records in terms of deal values and volumes, any attempts at positive spin were a lot less convincing.

But now, at the halfway point in 2024 and with inflation falling, M&A partners are once again optimistic that things could be about to turn. Certainly, Q1 deal values suggest a market moving in the right direction, even if deal volumes are still lagging.

In the 2024 M&A Yearbook, in association with Taylor Wessing, we speak to leading corporate partners at UK and US firms to find out their thoughts on the year ahead and the way the prolonged slowdown in activity has changed the way deals have to be done in order to go ahead.

It’s a reality that Slaughter and May partners Victoria MacDuff and Richard Hilton grappled with when they advised on one of the biggest announced deals of 2023 – the planned £15bn combination of Vodafone and CK Hutchison’s Three. It’s a deal that will create the biggest mobile network in the UK, if it gets competition clearance. They tell Legal 500 London editor Cameron Purse all about their role for Vodafone.

With competition authorities around the world taking an increasingly aggressive stance towards M&A, and governments worldwide being more protectionist, it’s the perfect time for Legal 500’s US editor Barnaby Merrill to take an in-depth look at what’s happening in the world’s busiest M&A market – the US. He speaks with some of New York’s top antitrust lawyers in our feature.

Elsewhere, in ‘Stress test’ Elisha Juttla speaks to partners at firms from Milbank to Hogan Lovells and Freshfields to Simpson Thacher about the reality of a life under pressure and finds out their tips for staying calm in the midst of a deal. We also have a trio of interviews with market-leading M&A partners Jennifer Bethlehem at Freshfields, Melissa Fogarty at Clifford Chance and Lorenzo Corte at Skadden.

In addition we have updates from partner firms in Argentina, Belgium, the UK and the Philippines.

We hope you enjoy it!

Georgina Stanley

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After two subdued years, global M&A activity is showing signs of recovery. Though large-ticket M&A and private equity deals have been suppressed, Q1 2024 recorded the highest number of large deals per quarter in nearly 24 months¹.

Market sentiment is turning positive as macroeconomic conditions improve. There have been spikes, but the inflation that soared in 2021/22 and spooked investors and business leaders now seems to be heading in the right direction. Interest rate cuts have been delayed, but officials have indicated they’re on the cards if inflation rises have peaked, which will also provide reassurance.

Although it’s taken longer than many expected, there’s definitely a feeling that the market is going to heat up again.

There will always be global events that affect confidence – the recent geopolitical tensions in the Middle East are just one example. But overall, we expect a significantly better deal-doing environment later this year, and an increase in M&A volumes.

We’re not alone in this view. At our recent M&A Summit, when polled 59% of the market experts, intermediaries and investors attending indicated they believe we’ll see an increase in deal volumes by the end of 2024. Although it’s taken longer than many expected, there’s definitely a feeling that the market is going to heat up again.

The market outlook

It’ll be a very different market to that of 2021. As activity picks up, we’ll see a smaller number of deals, but they’ll be high-value ones, as opposed to a larger number of low- to mid-value ones like we saw during the pandemic.

Buyers have had time during the downturn to do more thorough due diligence and identify high-quality targets. Although venture capital funds and private equity firms are under pressure to deploy dry powder, we’ll see more targeted acquisitions of assets that fit their strategies, rather than the backing of multiple horses which we saw in 2021.

We also expect to see longer negotiation periods on deal terms. During the pandemic there was a real push to get deals done, and high multiples were more easily accepted. Now, there’s still a mismatch in buyer/seller expectations, with companies that have held off selling to wait for better conditions wanting the best terms possible.

This may change as private equity firms that need to realise liquidity for their investors (especially with anticipated fundraising aims), and companies with dwindling cash reserves or leaders keen to sell to focus on other strategic imperatives, come under pressure. We’ll likely see parties in some cases forced to the negotiating table and distressed assets coming up for sale.

Another trend we’ve seen recently is antitrust and foreign direct investment concerns becoming more common in deals. There’s a lot more scrutiny now than the last time we had a large market upswing, and all parties involved in M&A will want to make sure they understand what’s required of them in advance of any negotiations. For those doing higher enterprise value and cross-border deals, regulator activity is now perceived as business as usual, and these transactions are typically building regulatory considerations into the process.

Active sectors

Companies in the technology, life sciences and clean energy sectors are currently receiving a lot of interest, and this is likely to continue. Resilience is a big theme. Acquirers are identifying assets that will help future-proof their business models and help them adapt to megatrends like artificial intelligence (AI), clean energy and data infrastructure.

Given recent technological developments, AI is especially high on target lists for the C-suite. We’re not seeing a lot of M&A involving AI businesses at the moment. But given the interest in the sector, and as businesses with promise mature, you can see a pipeline of activity developing for 2025 and 2026. Acquirers would do well to familiarise themselves with the due diligence areas required in advance, especially as M&A in this sector will be the fast-track to developing their own generative AI platforms.

Notes

1. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/large-m-a-deals-come-to-market-defying-regulatory-headwinds-80891717

For more information contact

Hill House
1 Little New Street
London EC4A 3TR
T: 020 7300 7000
www.taylorwessing.com

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‘There is hope that 2024 will be a year of recovery for the M&A market,’ says Gavin Davies, head of Herbert Smith Freehills’ global M&A practice.

Over at FTSE adviser stalwart Slaughter and May, the firm’s co-head of corporate and M&A, Richard Smith, agrees that the firm is ‘happy’ with the way 2024 has started but admits that things are ‘still quite fragile’.

As the dust settles on a dismal period for M&A, with 2023’s severely subdued deal activity making the year notable for all the wrong reasons, city corporate partners suggest there are glimmers of optimism that markets are picking up.

And any signs of positivity are being welcomed with open arms. In 2023, the global M&A market dropped 17% to a total deal value of $2.9tn, the lowest in a decade according to the LSEG global M&A review. The total decline masks significant disparities between regions; while US target M&A fell only 5%, it accounted for almost half of all dealmaking, meaning European target M&A plummeted by 28% year-on-year, with Asia Pacific seeing a similar drop.

Looking at worldwide volume, total deals fell 6% to more than 55,200 – a three-year low and a sobering contrast with the highs of the post-pandemic deal boom in 2021.

Private equity backed buyouts in particular saw a hard decline, with global PE deal values falling by 30% to $566bn, according to the LSEG report – the slowest full year for PE since 2019, but still the sixth highest since records began in 1980.

‘It was yet another bad year for capital markets and for equity markets in general – so it was a pretty down year,’ says Lorenzo Corte, London-based global head of transactions at Skadden, Arps, Slate, Meagher & Flom (Skadden).

Throughout the year, the same issues that weighed heavily on the second half of 2022 persisted. High inflation, rising interest rates, and the ongoing conflict in Ukraine remained pervasive, casting a continued shadow over the economic landscape. Navigating these challenges proved daunting for buyers, who grappled with high funding costs and a mismatch with sellers’ lofty valuation expectations.

‘Creativity has been there as people try to work out something that works for everybody that means a deal can happen today.’
Sam Newhouse, Latham & Watkins

Megadeals – those valued at $10bn or more – fell 13%, with 32 worth a total of $646.6bn – the lowest period for mega-deals since 2017. ‘The big mega-deals were very few and far between,’ says Simon Branigan, global corporate head at Linklaters.

Emma Danks, co-head of Taylor Wessing’s global corporate and M&A group, describes it as an uneven M&A landscape: ‘It’s been a market of extremes; by that I mean we have found that either transactions are moving quickly and they’re very competitive, or they are being slow, and/or they are taking a different course to what was originally anticipate. So, there doesn’t seem to be much in the middle that follows a nice regular pattern.’

However, some partners are now showing a healthy dose of optimism when asked about prospects of recovery for the year ahead.

As Simon Nicholls, co-head of corporate at Slaughter and May, comments: ‘We expect a material uptick in deal activity from last year.’

Early data suggests the optimism is based on solid foundations – at least when deal values are the focus. Data from LSEG shows Q1 2024 deal values climbed 38% globally to $797.6bn.

This was underpinned by a notable uptick in mega-deals, with the number of transactions worth more than $10bn more than doubling to 14 globally worth $278bn – the strongest opening period for mega-deals by value since 2019.

‘With interest rates coming down in most jurisdictions and those finance conditions becoming a lot more benign and positive, we’re currently seeing an uptick in M&A activity as compared to last year. That’s coming through in our numbers,’ remarks Branigan.

But, while there have been some positive developments, global mid-market M&A worth under $500m fell in value year-on-year in Q1, with total deal volumes globally also falling.

So, against this turbulent backdrop and with the road ahead remaining fraught with economic and geopolitical uncertainties, are dealmakers clear for take off?

Tackling market turbulence

Even amid 2023’s record low activity levels, there were still some positive deal outliers.

Successful transactions include Danaher’s spin-off from its environmental and applied solutions business to form Veralto, a $21.3bn demerger which generated roles for Latham & Watkins (Latham) and Skadden. Meanwhile Gibson, Dunn & Crutcher and Davis Polk advised on ExxonMobil’s $60bn acquisition of Pioneer Natural Resources Co, while Cisco Systems’ $28bn acquisition of Splunk generated roles for firms including Clifford Chance, Skadden, Kirkland & Ellis, and Cravath, Swaine & Moore.

Economic headwinds and geopolitical instability are far from novel challenges – dealmakers have been grappling with them for years. Amid this adversity, the ability of those involved to find creative and complex solutions to steer transactions across the line becomes particularly important. As Latham’s global vice chair of M&A Sam Newhouse comments: ‘Creativity has been there as people try to work out something that works for everybody that means a deal can happen today.’

‘Sellers and buyers have had to work hard to get deals done and we have seen some more complexity in deals,’ says Nigel Wellings, joint head of London corporate at Clifford Chance. ‘The deal structures are a bit more innovative; there’s more structured deals, such as corporates doing spinouts and carveouts,’ adds Danks.

In the face of tough financing markets, companies have been turning to carveouts and joint ventures to monetise non-core assets. This strategy serves a dual purpose – deleveraging while also delivering shareholder value – which ultimately unlocks value against the backdrop of market challenges.

‘We’re going to continue to see a large number of carve-out transactions where our corporate clients are going to try to focus on their core businesses and take action to dispose of things that are less core,’ notes Melissa Fogarty, Wellings’ fellow joint head of London corporate at Clifford Chance. This trend for carve-out transactions is demonstrated by deals such as buyout firm GTCR’s $11.7bn carve-out acquisition of Worldpay, from US fintech company FIS.

Given one of the biggest obstacles to M&A has been the valuation gap, partners point out that more time is spent discussing the mismatch between buyers’ and sellers’ expectations.

‘You spend more time up front on meeting people on valuation than you did before’, notes Newhouse. ‘We’re seeing a variety of techniques coming into the fray to help reconcile differing price perspectives between sellers and buyers.’

In an attempt to bridge this gap, Contingent Value Right (CVR) securities that offer additional compensation to investors in the event that certain conditions are met, such as hitting a specified sales/earnings target, have become a popular choice on deals.

‘CVRs of some sort or another are much more present in deals than they have been for a long time’ says Jennifer Bethlehem, head of the consumer and healthcare group at Freshfields Bruckhaus Deringer (Freshfields). Julian Pritchard, head of global transactions at Freshfields, adds: ‘we are seeing more structured investments, with downside protection for investors as one technique to bridge value.’

‘I suspect that some deals are left on the table because of the heightened focus by regulators. People tend to go into them much more hesitantly.’
Lorenzo Corte, Skadden, Arps, Slate, Meagher & Flom

Despite these tactics, numerous deals were stalled or abandoned last year. For example, a consortium led by Brookfield and EIG on its $18.7bn acquisition of Origin Energy fell through, while Credit Suisse Group’s $175m acquisition of The Klein Group was withdrawn. As Nicholls succinctly puts it: ‘If the gap is too far apart, you’re just not going to be able to bridge it with structures.’

According to Branigan there are signs that the gap is now closing. ‘The general economic and financial conditions are much more benign, and lot of sellers and boards are a lot more realistic in terms of valuations,’ he observes.

A spotlight on regulators

Adding significantly to the complexity around dealmaking is heightened regulatory scrutiny, with regulators around the world adopting a more expansive approach to merger control and foreign direct investment (FDI).

‘Deals are taking longer to close and becoming increasingly more complex due to, in part, antitrust regulators, both at home and abroad, becoming much more interventionist and less predictable’ says Branigan. ‘Antitrust authorities are closely scrutinising transactions and intervening more frequently, which slows down the dealmaking process,’ agrees Corte at Skadden.

Across 2022 and 2023, a total of $361bn in announced deals have been challenged by regulators worldwide, and many of the deals that went on to close required some form of remedy, according to data from Bain & Co.

Most notably, Microsoft’s $69bn acquisition of Activision Blizzard underwent restructuring due to concerns raised by both the UK’s Competition and Markets Authority (CMA) and the European Commission (EC). The deal closed in October 2023, but has since faced challenges from the Federal Trade Commission (FTC). Partners point out that regulators have considerable resources to pursue their causes, resulting in an uphill battle for some companies in the spotlight.

Newhouse notes that it is now ‘very seldom that you don’t get regulators using the full amount of their time and questions as they go through even a simple process’, a shift that inevitably adds significant pressure on more complex mega deals.

This uncertainty around the actions of the regulators has left many wary, and prompted a number of companies to abandon deals. ‘I suspect that some deals are left on the table because of the heightened focus by regulators. People tend to go into them much more hesitantly’, says Corte. This hesitancy was demonstrated recently in December last year, when Adobe abandoned its planned $20bn acquisition of Figma after pressure from the CMA and EC.

Across the Atlantic, the FTC and Department of Justice (DOJ) have increasingly resorted to litigation as a tool to challenge deals. For example, the FTC’s challenge to Amgen’s $27.8bn purchase of Horizon Therapeutics was resolved via a consent order. It’s a trend that prompts Pritchard to warn that ‘you have to be willing to litigate, and if you’re not willing to litigate, you won’t get the best outcome in your transaction; you may not even get your transaction done.’

Antitrust regulators are not the only regulatory bodies putting the brakes on M&A deals. In a global landscape marked by escalating geopolitical tensions, those seeking to complete M&A deals must also navigate rules regarding FDI and the Foreign Subsidies Regulation (FSR), as countries embrace policies that prioritise protectionism.

‘The landscape is constantly evolving; Foreign Direct Investment regimes continue to grow in number and complexity – which ten years ago was not something you had to consider,’ notes Corte. Philip Cheveley, a partner in Sidley Austin’s London M&A team, adds: ‘The various regulators increasingly talk to each other, so we’ve seen instances of clients concluding that an antitrust filing is not required, but a National Security & Investment Act (NSI) filing is needed. Then the antitrust regulators intervene because they’ve been alerted by the NSI regulator.’

While corporates are keenly aware of the vigorous scrutiny from regulators, it isn’t deterring everyone. ‘Those high-value transactions are beginning to come back and demonstrate an increasing confidence in the market’ says Danks. She continues: ‘The high-value deals are the ones where there is more likely a need to work with regulators to progress a deal, so this is indicative of regulators being willing to work together with those involved to achieve completion. M&A-doers now anticipate what it’s like to work with the regulators and it’s being baked into the deal process in a manner that was not the same 12 months ago.’

PE’s creative take-off

But what about the buyout market, where LSEG data shows PE-backed buyouts accounted for 19% of Q1 2024 M&A activity, down from 24% last year, albeit overall value grew year-on-year?

‘Private equity firms are holding onto their assets for a bit longer because of the continued market uncertainty and the challenges of taking assets into successful sale processes which match their valuation goals. The result of that is that there has been a slowdown in returning capital to investors,’ says Freshfields’ Pritchard. ‘Funds have amassed investor commitments that are well into their typical five-year investment period, so there’s growing pressure to deploy that capital from investors,’ adds Linklaters’ Branigan. As a result, PE firms have amassed a record amount of dry powder/cash to spend on buyouts.

TOP GLOBAL M&A DEALS 2023

TOP FIVE EMEA M&A DEALS 2023

With mounting capital piles at their disposal, PE houses are feeling under pressure to make their moves count in 2024. ‘As conditions stabilise, private equity is hoping for a busy year when the window for M&A activity optimises, with portfolio companies prepped for sale, and lender support lined up for buying,’ comments Davies.

PE dealmaking has not yet completely stalled though. Instead, carrying on the theme of creative thinking, PE dealmakers have resorted to innovative approaches such as performance-based earnouts to sidestep the mismatch in sell-side and buy-side expectations. ‘There’s still quite a lot of work in the PE space, with fewer plain vanilla processes, and an enhanced trend towards continuation funds and secondaries transactions,’ says Freshfields’ Pritchard. Sidley’s Cheveley adds, ‘there’s been a lot more sharing of pricing risk, with more contingent pricing through earn-out mechanisms.’

In March 2024, Blackstone’s life sciences arm announced that it would invest $750m in Moderna to develop flu shots. Commenting on the transaction, Freshfields’ Bethlehem notes: ‘They are potentially taking a big risk because pharma pipelines are not certain, but the reward is incredibly high. That kind of novel deal structure is being driven by the fact that people are more prepared to be creative about the structures they are prepared to entertain in order to collaborate. The fact that PE has so much dry powder and needs to put it to work is actually triggering novel ways of thinking about these things.’

Bright spots

Looking at it by sector, energy has been bucking the trend for sluggish M&A activity, with total deal values soaring to their highest levels in recent years. In total, the sector saw 3,559 energy deals worth $704bn in 2023, making it the top-performing sector in terms of deal value. It is expected that energy will continue to perform well in 2024, buoyed by the flurry of mega-deals observed in Q4 2023. This includes ExxonMobil’s $65bn acquisition of Pioneer Natural Resources and Chevron’s $60bn acquisition of Hess.

Energy transition in particular remains popular. ‘There’s a huge opportunity in energy transition,’ says Pritchard. ‘Energy transition is going to continue to be a mega-trend’. Taylor Wessing’s Danks echoes this sentiment, noting, ‘the transition from fossil fuels to clean energy and anything adjacent to that, eg EV charging vehicles and technology around that is very attractive to acquirers.’ The International Energy Agency predicted that $1.7tn would be invested in energy transition assets. Noteworthy transactions from 2023 include Brookfield’s $1bn acquisition of Banks Renewables and KKR’s £600m investment in UK battery storage developer Zenobe – both deals generated roles for Clifford Chance.

Infrastructure also had a strong year and is poised for continued success in 2024. Digital infrastructure specifically continues its upwards trajectory, driven by significant investment by private equity houses; ‘[private equity houses] are more involved in infrastructure, particularly digital infrastructure – a sector that is incredibly busy at the moment and will continue to be busy throughout the next year’ observes Branigan.

Clifford Chance’s Wellings sheds light on why these sectors have performed so well in a down market, commenting: ‘These assets tend to have long-term contracted revenue so they’re less susceptible to this valuation gap than operational assets as buyers are taking a longer-term view of value.’

The impact of ESG considerations cannot be overlooked in driving activity within these sectors, with Latham’s Newhouse adding: ‘ESG consideration is one of the multiple drivers for increased activity in the infrastructure and energy space’. But he stresses that ESG is not the only factor driving activity in these sectors: ‘Another vital component is security of supply. How do we ensure we get energy in a sustainable manner in a way that still ensures that we still have security of energy supply and how do we do it in a cost-effective manner? Trying to find the optimum balance of these factors means people are buying and selling and operating creatively which is always interesting for M&A.’ Indeed, with increased geopolitical tensions, this will undoubtedly remain a top priority for boardrooms.

Elsewhere, pharmaceutical and life sciences are predicted to be busy, particularly after a notable uptick in the second half of 2023. ‘Major life sciences companies are not short of money; they are pretty impervious to a lot of the other headwinds that impact other companies,’ says Freshfields’ Bethlehem. Highlight deals in the sector include Bristol Myers Squibb’s $14bn acquisition of Karuna Therapeutics and Pfizer completing its $43bn acquisition of Seagen – the largest biopharma deal in recent years.

In contrast, tech deals dragged last year, with overall value down from 2022. However, partners remain optimistic about its resurgence in 2024. ‘Tech has had a challenging year last year, but it’s such an unstoppable trend,’ notes Pritchard. He adds: ‘We still saw very high levels of activity, including PE investments in tech. Examples in our US business include Coupa Software being acquired for $8bn by Thoma Bravo and Qualtrics being acquired for $12.5bn by private equity firm Silver Lake and CPPIB – both significant public company transactions.’ And despite values being down, total deals were up slightly. Key highlights include Cisco’s $28bn acquisition of Splunk and Broadcom finally closing its $83bn acquisition of VMware.

Artificial intelligence (AI) is set to be a major trend in the tech sector. ‘While tech has had its valuation challenges, it is undeniably one of the key secular themes driving M&A across all sectors. The transformational potential of AI across all areas of work and play is the current most obvious manifestation,’ says Davies. However, Danks notes that significant AI-related activity is still a few years away: ‘We’re not seeing a lot of M&A involving AI businesses per se because they are generally at an early stage. The businesses are not mature enough at present for M&A but given the rate of fundraising that they’re doing, you can see that pipeline of M&A activity lining up for 2025-26.’

‘High-value transactions are beginning to come back and demonstrate an increasing confidence in the market.’
Emma Danks, Taylor Wessing

Clear skies ahead

It’s undeniably been a challenging year for the M&A landscape. However, despite the hurdles, partners remain optimistic about what lies ahead. There’s a palpable sense of pent-up M&A demand, with dealmakers eagerly poised to push transactions through.

While the anticipated surge may not mirror the rapid pace witnessed post pandemic, cautious optimism prevails. As Wellings notes: ‘The trigger is not quite the same as post-pandemic – that was incredible – we went from nought to 60 in five days and I’m not expecting that. Although there is that pent-up need, there are still some macroeconomic, geopolitical uncertainties.’

Pritchard adds: ‘A lot of our clients have got transactions that they have been wanting to do and have been waiting for the right deal environment. I suspect that when the stars align again in terms of the macroeconomic situation, boards will have that conviction to complete deals, and we will see more robust activity returning.’

Geopolitical tensions persist, with the ongoing conflicts in Ukraine and the Middle East. As more than half of the world’s population enters elections this year, including the US and UK, a sense of uncertainty lingers. Davies cautions, ‘a recovering M&A market will need to brace for, and adapt to, more shocks.’

As Bethlehem aptly puts it, ‘once people absorb the fact of prolonged uncertainty, it doesn’t actually paralyse human endeavour forever; people psychologically adjust to the new normal.’

TOP ADVISERS FOR UK M&A: 2024 YEAR TO DATE

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In the wake of recent advances in generative artificial intelligence (AI), AI has shot to the top of the board agenda. No one wants to miss out on this transformative technology – but businesses need to ensure FOMO doesn’t lead to bad investments. Jonny Bethell and Jo Joyce of Taylor Wessing explore the potential pitfalls to avoid in AI acquisitions

The launch of OpenAI’s ChatGPT in November 2022 took a flamethrower to the last AI winter. As users explored the chatbot’s wide-ranging generative AI capabilities to answer questions, draft copy, write code and more, it dawned on many businesses that this technology could be a game changer for how they operated. The challenge is pinpointing how, given the unprecedented frontier, to embark on the journey with eyes open to the risks associated with this new technology.

ChatGPT also lit a fire under leadership teams. After years of pitching AI as the future, suddenly they were under pressure to demonstrate they had been preparing for that future. A flurry of activity followed as companies raced to reassure investors they were on top of the issue and had their own revolutionary AI tech ready for deployment.

A wave of product launches, investment announcements and strategic alliance arrangements swept the globe, accompanied by a never-ending stream of media coverage on what AI could mean for the way we live and work.

After the NFT hype of 2021 and the metaverse dominating 2022, 2023 was certainly AI’s year. There were too many notable developments to mention exhaustively here, but to name just a few:

• Microsoft announced a $10bn investment in OpenAI to accelerate breakthroughs in AI technology¹.
• Google launched its own AI chatbot, Bard, and announced a $2bn investment in large language model provider Anthropic².
• Amazon launched Amazon Bedrock, a suite of tools to help users build generative AI applications under its AWS brand³.
• Demand for Nvidia’s AI chips saw a surge in its stock price, and in May it reached a $1tn valuation⁴ .
• Professional services firms PwC and Accenture announced investments of $1bn and $3bn respectively into generative AI⁵ .
• US President Joe Biden signed an executive order on AI to foster innovation while avoiding AI risks⁶.
• The EU agreed the EU Artificial Intelligence Act, the first-ever legal framework on AI that will come into force in 2025⁷.

It did feel like at one point or another, everyone got a little swept up in the AI wave.

Big money, low volume

Interestingly though, AI’s resurgence in popularity didn’t translate into M&A activity. Indeed, after a huge upswing in AI M&A between 2019-21, last year M&A dealmaking in the sector declined 31%, with only 190 deals compared to 276 in 2022 according to Crunchbase⁸.

There were a handful of big-ticket acquisitions last year. These included:

• cloud data platform Databricks purchasing MosaicML, an infrastructure company for training models, for $1.3bn in June;
• Thomson Reuters acquiring AI legal research tool Casetext for $650m in August; and
• Travelers Insurance announcing the acquisition of Corvus Insurance, a company which uses AI to predict and prevent cyber risks, for $435m in November (which completed in January 2024).

That said, overall, M&A activity in 2023 was significantly lower than previous years. Given the various macroeconomic factors at play – most economies were suffering rising inflation and increasing interest rates, as well as geopolitical uncertainty and conflicts – perhaps this is understandable. All of these components suppressed market confidence and valuations.

Now the economic outlook is stabilising and becoming more positive, we’re expecting an upswing in M&A activity later this year. As companies look to make strategic acquisitions to future-proof their business models and enhance product offerings, AI is going to be an increasingly active vertical within the tech sector, particularly as investors chase the elusive unicorn – both in terms of pure AI businesses, of which there are a limited number, and companies that create AI-enabled products and services.

Targets and risks

We expect AI-driven businesses focused on the following areas to be the most sought-after acquisition targets:

• productivity and the automation of software development;
• drug discovery and personalised medicine;
• predictive analytics and data analysis;
• content creation, recommendation algorithms and consumer engagement analysis; and
• agriculture and sustainable farming.

Many acquirers will be operating in unfamiliar territory though. AI and machine learning are not new, but the rapid pace of their development is. The explosion of chatter around AI technologies and the shift in development focus from a few big players to a much broader range of participants means it can be hard to assess which products and companies are actually going to have a positive impact vs which are well-polished (and expensive) vaporware.

There is a risk that in racing to make an acquisition to avoid being left behind, or to beat others to an in-demand target, businesses unfamiliar with AI technologies either don’t take the time to do proper due diligence or know what constitutes ‘proper’ diligence, meaning that they end up with a bad investment. Given the complexity of the technology, diligence providers are still learning what to look out for and what constitutes a ‘red flag’ issue. Demonstrating a track record may not be possible, and identifying what the threats to the future of the business being acquired might be (whether commercially, legally or regulatory) is harder to achieve.

Buyers are also having to navigate the fact a lot of companies are being less than honest about their capabilities. There has been a surge in businesses positioning themselves and their products as ‘AI-powered’ in order to ride the AI wave when they don’t actually incorporate AI technology. This ‘AI washing’ has reached such a level that regulators have promised more scrutiny to ensure companies aren’t misleading consumers and investors.

In December US SEC chair Gary Gensler warned businesses against making false AI-related claims, and the SEC hasn’t hesitated to take action. In March it charged two investment advisers with making false and misleading statements about their use of AI, resulting in $400,000 in fines⁹. The US Justice Department’s top prosecutor in San Francisco, Ismail Ramsey, has also indicated he’ll be on the lookout for AI and other start-ups that defraud investors before they go public.

So… a transformative technology. But many potential pitfalls to avoid to take advantage of it. If you are planning to make an AI-related acquisition later this year, there are a number of areas you should pay particular attention to in due diligence to ensure you avoid a bad investment and are able to enjoy the benefits of innovation.

AI acquisition due diligence

Verify the technology

This may sound obvious – but then again, Theranos was able to raise $700m in funding after weaving a web of secrecy about its supposedly revolutionary tech – which didn’t actually work.

If you are planning to make an acquisition to gain technology that you think will give you the edge, make sure you are given an opportunity to actually thoroughly test it. A hands-on demonstration with testing conducted by your own or independent third-party specialists can be a very simple way to test if flashy promises are grounded in reality and avoid a potentially disastrous investment.

Assess the team

When making an acquisition, you are not just investing in the business but also its people. You should assess the quality of the target company’s leadership team to ensure they have a background in AI or relevant qualifications and to make sure there are no red flags or past instances of overpromising and underdelivering. Look for diversity wherever possible. Diverse development teams are less likely to develop AI-driven tools that create unintendedly biased or discriminatory results.

You should also identify key personnel you want to retain for business continuity and their knowledge of the business and ensure all employment contracts are up to standard and contain appropriate confirmatory assignments of intellectual property (IP) and sufficiently attractive related benefits. It’s also important you understand what options have been granted to employees and ensure all tax considerations related to these are in order.

If independent contractors or other third parties have been instrumental in the development of the technology, check that they have assigned their IP and waived other rights.

Review accountability

To ensure AI transparency and explainability are upheld, and that regulatory concerns around bias and discrimination don’t arise, make sure any company you are interested in acquiring has robust governance frameworks in place. These frameworks should include ethical guidelines, auditing procedures for algorithms, and mechanisms to track decision-making processes.

The reporting structure and responsibility for ensuring AI accountability within an organisation will depend upon its size and operational focus. But whether the individual responsible for accountability is the chief ethics officer, chief privacy officer or general counsel, they should have a direct reporting line into the board and ideally should be independent of the development or engineering team.

Monitor regulatory risk

As we’ve mentioned, AI is an area that regulators are paying increasing attention to. You need to stay informed on the evolving regulatory landscape and ensure you are prepared for regulations that might impact you, like the EU’s incoming Artificial Intelligence Act.

Although general (as opposed to sector-specific) AI regulation is relatively new on the scene, UK regulators are already investigating AI-driven businesses (and those claiming to be so) and have been for some time. In line with its innovation-first approach, the UK government has instructed a number of regulators including the Information Commissioner’s Office (ICO) and the Competition and Markets Authority (CMA) to direct their focus towards AI risks falling within their competence. As regulators consult and engage on the use of AI in areas within their purview, there may be advantages for businesses to seek positive regulatory engagement at an early stage.

As AI is one of the sectors classified as ‘high risk’ under the National Security and Investment Act, you may also need to inform the UK government of your acquisition to ensure compliance if it falls within the Act’s scope.

Consider competition law

It’s worth considering how antitrust authorities might view strategic acquisitions and consolidation in the AI sector. The European Commission has raised concerns¹⁰ about both AI facilitating collusion between algorithms and the AI sector itself raising competition concerns, as companies with cloud services facilities and vast amounts of data and unique data sets may be incentivised to favour their own AI systems.

In the UK, after launching a review of AI large language models last year, the CMA has published a set of guiding principles¹¹ relating to the development of AI technology which you’ll need to consider.

Understand intellectual property and patentability

Understanding the scope and protectability of AI-related patents requires a nuanced approach given the abstract nature of some AI concepts. You should work closely with intellectual property lawyers familiar with current trends in patent protection law as they pertain to software and algorithms to ensure you understand what you are acquiring the rights to. Patents, if sought in one jurisdiction, are likely to come at the expense of preserving trade secrets everywhere, since the trade-off for patent protection is publication of the details of the underlying invention. Careful consideration of the expected geographical scope of the business’s proposed operations should be undertaken before applications are filed.

Whether the business wishes to rely upon trade secrets or patent protection, it must first have maintained the confidentiality of its IP. If the company has not been careful in protecting its developments, it may find its only real advantage will come from being first to market and you may find that it is a less appealing investment as a result.

Review data protection

Data is one of the essential components of any AI system, fed in so it can learn and deliver useful outputs. In many cases that data will be personal data. You should engage with legal counsel who specialise in data privacy to ensure that any acquisition target has adhered to data protection laws including the European GDPR/UK GDPR and that the acquisition doesn’t introduce risks concerning personal data, data protection governance and accountability.

Privacy compliance is as much about record keeping as it is about handling personal data properly. Any target company using personal data in its AI operations should be able to provide copies of data privacy impact assessments, records of data processing, policies and procedures, and evidence of privacy training for staff. The company should have a clear privacy notice which explicitly addresses its use of personal data for AI development.

Not all small businesses need to have appointed a data protection officer but if a company is processing personal data for AI training or development purposes, it is imperative that a senior member of the team takes the lead on privacy compliance.

Helping you make the right choice

We have a long history of advising clients on how to introduce AI into their business while steering clear of risk. We’ve helped developers create the technology in accordance with regulation, advised companies how to introduce it in their business, and helped investors sort the hype from the real opportunities.

If you are planning to make an AI acquisition or investment and need legal advice, please let us know if we can help.

Notes

1. www.bloomberg.com/news/articles/2023-01-23/microsoft-makes-multibillion-dollar-investment-in-openai
2. www.axios.com/2023/10/30/google-invests-2-billion-anthropic-openai
3. www.aboutamazon.com/news/aws/aws-amazon-bedrock-general-availability-generative-ai-innovations
4. www.theguardian.com/business/2023/may/30/nvidia-chipmaker-value-ai-chip-shares-artificial-intelligence#:~:text=Nvidia%20becomes%20first%20chipmaker%20valued%20at%20more%20than%20%241tn%20amid%20AI%20boom,-This%20article%20is&text=US%20chipmaker%2
5. www.consultancy.uk/news/34492/accenture-to-invest-3-billion-in-ai-over-next-3-years#:~:text=This%20investment%20from%20Accenture%20follows,collaboration%20with%20Microsoft%20and%20OpenAI.
6. www.whitehouse.gov/briefing-room/statements-releases/2023/10/30/fact-sheet-president-biden-issues-executive-order-on-safe-secure-and-trustworthy-artificial-intelligence/
7. www.taylorwessing.com/en/insights-and-events/insights/artificial-intelligence-act
8. www.news.crunchbase.com/ai/artificial-intelligence-startups-mergers-acquisitions-vc-funding-data/
9. www.fortune.com/2024/03/18/ai-washing-sec-charges-companies-false-misleading-statments/
10. www.competition-policy.ec.europa.eu/system/files/2023-11/20231108_VI-Lisbon-Conference_Olivier-Guersent_speech.pdf
11. www.gov.uk/government/news/proposed-principles-to-guide-competitive-ai-markets-and-protect-consumers

For more information contact

Jonny Bethell
Partner
E: j.bethell@taylorwessing.com

Jo Joyce
Of counsel
E: j.joyce@taylorwessing.com

Return to M&A Yearbook 2024 contents.

The post AI spy: avoiding bad AI investments appeared first on Legal Business.

Whatever metric you track, 2023 was a poor year for M&A. One bright spark amid the gloom was the proposed £15bn merger between Vodafone UK and Three UK, which was announced in summer 2023. If cleared by competition authorities, the deal will create the UK’s biggest mobile phone operator.

The transaction was one of the five largest announced UK M&A deals by value last year according to Dealogic data, seeing Vodafone and CK Hutchison – the Hong-Kong based owner of Three – announce their intention to combine both UK mobile arms.

The transaction has generated roles for firms including Slaughter and May, in the lead for Vodafone, and Linklaters, which is advising CK Hutchison and Three UK. Just over half of the combined group (51%) will be owned by Vodafone, with CK Hutchison retaining 49%. The network will have around 27 million customers.

This merger is set to create a new market leader in the UK. Can you walk us through the initial stage; how did this deal opportunity first arise and what were the strategic drivers behind pursuing it?

Victoria MacDuff: It’s a mammoth transaction. The market in the UK has been ripe for consolidation for a while and the telecoms sector has changed quite significantly over the last 10 to 15 years. As it stands, Vodafone and Three do not benefit from the same scale as others, and this deal will help them achieve that. These transactions always start as an idea, and then take some time to come to fruition. This particular one was in the making long before it was announced as a signed deal. There’s a lot of groundwork that has to happen, not to mention the important post-signing CMA process.

Richard Hilton: But as mammoth as the project is now, it all started with a conversation.

Considering all the various workstreams, what have been the most challenging aspects in managing a transaction of this scale and scope?

Victoria MacDuff: Each side has a number of advisers, but as lawyers we tend to find that the nitty gritty of the transactional work falls into our court. At its peak, we had 70 lawyers working on this deal full-time, with teams on the ground in Hong Kong and London. There was a lot of heavy lifting, and it was a real sprint to the end. The size and scale of Vodafone and Three made it more complex than most deals and the joint venture structure meant we needed to think about what this partnership would look like long-term. What’s the lifespan of this joint venture going to be? How’s it going to work in the meantime?

Richard Hilton: From a lawyer’s perspective, the stakes are much higher than in a more straightforward M&A deal. These are the documents that will govern the relationship for as long as it lasts.

‘Joint ventures are different each time we do them and that’s one of the things that makes them so interesting. Every time you work on one, the terms are truly bespoke.’
Victoria MacDuff, Slaughter and May

Victoria MacDuff: It’s a complicated and unique endeavour. Joint ventures are different each time we do them and that’s one of the things that makes them so interesting. Every time you work on one, the terms are truly bespoke. Teams are used to pulling together in the trenches at the firm and that was much more acute here than it would be on an average deal. All the various workstreams – competition, tax, corporate, our team dealing with the provision of services for the joint venture in the future – came together. Nobody was siloed.

You have to work with your client to establish what’s truly important at every stage. What is most crucial at the outset can become second order as something new comes in. You’ve really got to nail the most important things and then focus on the next layer down to get to agreed documentation.

What are the priorities for a successful integration between the two companies?

Victoria MacDuff: From the beginning, they (Vodafone and CK Hutchison) did a really good job of establishing who the leadership team for the joint venture would be. Both businesses have huge numbers of employees. It’s important to establish what the combined business will look like as soon as possible. Ultimately, these are customer-facing companies and they need to demonstrate how this deal will benefit them. That has to be the priority. The joint venture agreement is a bit like a prenup. You’re having lots of difficult conversations as you’re entering something quite exciting, but the more robust these conversations are, the better prepared you’ll be as partners.

Richard Hilton: You have to make sure people are aligned on the boring stuff. How are decisions going to be made? How often will you meet? It’s all about mitigating the chance of misaligned expectations. To extend the metaphor, it’s not just about signing the prenup. It’s about establishing who’s going to be cooking and who’s going to be putting the bins out.

Did the deal terms evolve significantly? Can you share some of the points where you had to compromise?

Victoria MacDuff: It’s actually quite hard to put my finger on anything specific. In deals that go on for this long, there’s always a natural evolution of terms. But really, the key points of the structure of the joint venture, the financials – all of those core terms were pretty fixed. It was the next layer down which proved to be more of a moveable feast. There’s always compromise, but in a joint venture you have to remember that everything you want impacts you in reverse. It’s always mutual. In negotiations, a joint venture drives good behaviour. Being in a 51/49, you’re on a more even keel economically. That financial alignment certainly helps.

For more junior lawyers, what advice do you have on developing strong M&A skills and standing out in deal teams?

Victoria MacDuff: Absolutely focus on getting the basics right. Obviously that means different things at different levels but this is what will give you the confidence to stretch yourself and take on something harder. On a deal like this, where there are so many workstreams, it’s easy to become focused on your own tasks. My advice is to show interest in the project beyond your own remit. It makes it more exciting, more interesting, more rewarding, and you can learn loads. Not only about what other people are doing, but about where you might see yourself in the future. You can see what you like, what you don’t like, what does and doesn’t fit your personality.

And what advice do you have for coping with the pressure of a transaction like this?

Victoria MacDuff: It’s a large, complicated deal but it can be broken down into manageable parts. Lots of the smaller tasks, we’ve done multiple times. You don’t run a marathon without training. You’re always building. Think about it as lots of little steps coming together. This is not an everyday transaction. The very exceptional nature of a deal like this makes it a very strategic and important project to work on. Sometimes that does mean intensity.

Richard Hilton: It’s demanding but people want to be involved. People come to work here so they can do transactions like this. It’s great work, it’s exciting work, and they’re willing to get stuck in.

Earlier this year the CMA confirmed that it has referred the joint venture for an in-depth Phase Two investigation amid concerns that it may reduce competition in the UK market.

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Multiple signs are pointing to an increasing momentum around M&A activity. If you’ve been holding out for better conditions to sell your business, now is the time to make sure you’re exit ready. Taylor Wessing’s Emma Danks, Suzy Davis and Siobhán Langwade outline key areas of focus and practical matters

After record highs in 2021, global M&A activity in 2022 and 2023 fell significantly, both in terms of deal volumes and deal values (with different sources recording varying degrees of the proportional drop, but some reporting up to half year-over-year). Though disappointing, this is understandable given the impact of macroeconomic factors at play, including: a sharp increase in interest rates (after many years of sustained low percentages), geopolitical uncertainty and conflicts, supply chain disruption, soaring energy prices, and high inflation.

All of these factors combined to suppress market confidence, leading to a drop in multiples which resulted in valuation gaps between sellers’ expectations and what buyers were prepared to pay (particularly given the stark contrast within certain sectors to the multiples that were being achieved in 2021).

From early on last year, where sellers had the ability to exercise discretion, many were opting to wait until market conditions improved. As the year passed, expectations for when those improvements would materialise kept being pushed out. Now (at the time of writing), at the end of Q1, it doesn’t feel like we are on the precipice of a ‘floodgate’ M&A moment. But green shoots are emerging and market momentum is building:

• Stabilising interest rates: though the US Fed declined to cut interest rates in March, it indicated that three rate cuts are coming this year as it expects inflation to continue cooling. Similarly, the Bank of England has indicated that there will be cuts to interest rates if inflation continues to fall – it is now at 3.4% in the UK¹, the lowest level in almost two and a half years. While we shouldn’t expect interest rates to drop back to where they were in 2021, the general consensus in the market is that we are past the peak. As the debt markets stabilise, buyers (particularly private equity sponsors) who rely on debt to part-fund transactions can put greater reliance on what the rates will be in the coming months and adjust their models accordingly.
• Political change: countries making up about half of the world’s GDP are holding elections this year. The threat of a change in government within the UK has, in the past, driven deal activity because of a fear of changes to tax rates (especially to capital gains tax (CGT)) or general uncertainty as to what the future would hold. That is not the case for the current impending election (the outcome of which is generally being treated as an inevitability) and it does not seem to be driving or stunting deal activity. Labour’s statement that it has noplans to raise CGT is likely salving sellers’ jitters. The geopolitical turmoil that may ensue following the US election outcome is of greater concern – but any fallout from that is likely to be less immediate.
• Supply chain re-establishment: while there are still ripples of disruption flowing as a result of the war in Ukraine, the initial shock factor has passed. The various supply chain issues have started to settle, companies have found alternative sources of goods or components, the increased costs have been passed on to customers and the spike in energy prices exacerbated as a result of Russia’s invasion has eased as markets rebalance.
• Record amounts of dry powder: after several years of burgeoning fundraising rounds, private equity investors are sitting on over $2tn of dry powder² which needs to be deployed. The drop in the number of assets coming to market, and the deal-doing hesitancy of the past couple of years, means that capital is burning a hole in sponsors’ pockets.
• Aged investments: private equity sponsors have held off on bringing assets to market pending improvements in market valuations and are reportedly sitting on a record 28,000 unsold companies worth more than US$3tn, globally³. The pressure to sell these aged investments and return capital to their investors is building. Furthermore, investors need to demonstrate their ability to deliver returns in order to raise further capital.
• Consolidated platforms: the lower end of the market has been less suppressed over the past couple of years. Companies have taken the opportunity to ‘buy and-build’ by acquiring complementary businesses to supplement their offering. Those that have effectively consolidated and integrated operations will have increased their overall value.
• Future-proofing: all businesses are looking at megatrends like AI and climate change, and working out how their models and plans need to change to future-proof their business whether organically or via acquisitions.

While we can anticipate an uptick in deal-doing activity, there is still a general hesitancy hanging over the market. Buyers have had time to reflect on the (at times, hasty) decisions they made two years ago and are likely to re-enter the market with greater caution. We can expect diligence to be more thorough, additional time taken to consider and assess the risks, and less vulnerability to getting swept up in the excitement.

That means sellers who have undertaken a fulsome vendor due diligence exercise, spent time getting their house in order and focused on, and can clearly articulate, what value their business can provide to a buyer, will be a much more attractive acquisition target for buyers. That will facilitate a much more efficient sales process and minimise the risk of process-failure.

Who’s looking to buy?

There are three types of buyer who are going to be most active in the UK market:

• Private equity: private equity buyers will be, and are, looking to make acquisitions. With the stabilising of interest rates and record amounts of dry powder to deploy as discussed above, private equity buyers will be keen to put their funds to work.
• Strategic corporates: trade buyers’ acquisition goals can vary, but typically include: securing new technological capabilities and integrating assets and operations with a view to realise costs or other synergies; gaining new customers, talent or intellectual property to enhance market position; expanding product lines and offerings; and/or accelerating growth in new markets. Trade buyers often make acquisitions for strategic rather than purely financial reasons, however as discussed earlier the stabilising of interest rates and the availability of aged investments will likely reignite their acquisition focus.
• US buyers: US buyers will be looking at the acquisition market for reasons similar to strategic buyers. Coupled with the relative strength of the US dollar and the perceived discount at which UK targets trade relative to their US peers, this means we will see increasing amounts of US acquirers taking an interest in UK companies, in particular ahead of this year’s US election.

Are you exit ready?

If you have been considering a sales process, and assuming you don’t have a functioning crystal ball to tell you when the best time to sell will be, the best we can advise is to ‘be ready’. It’s a time-consuming process to collate the necessary financial, tax, commercial and legal information required for a sales process and that needs to be balanced with ensuring sufficient time is dedicated to continuing to run the business.

Legal due diligence

Here are a few of the key areas that you will need to focus on in terms of the daily business activities to get exit ready and ensure a smooth transaction process:

• Commercial contracts: ensure you have formally documented, and signed, contracts with commercial counterparties (such as suppliers, customers, agents and distributors). Familiarise yourself with the termination and amendment terms, and whether they require notification to the counterparty of potential M&A transactions. Do they permit your counterparty a right of first offer or refusal if a buyer takes control of the company? Are there any material/key agreements which are coming to the end of their term or have been terminated, which would impact the company’s value?
• Intellectual property, know-how, trade secrets and brands: can you evidence that the company either owns, or has the right to use, any IP necessary and/or relevant to the business? Also, confirm whether you have measures to manage and protect these assets from infringement or unwanted onward disclosure, and if not, consider whether such measures should be implemented.
• Disputes: monitor, assess and manage actual and/or potential disputes and investigations to minimise their impact on the value of the business. Resolution of a dispute before the sale process begins may not be possible but it’s important to conduct a proper assessment of relevant risks and to maintain clear records of decision-making processes.
• Employment: maintain good employee records, eg by regularly updating the company’s policies and employee handbook, and ensure detailed records are kept of any disciplinary and grievance procedures that are undertaken.
• Contractors and self-employed workers: do you have documentation and working practices in place to reflect the correct status of any independent contractors or self-employed workers (as misclassification presents a number of risks)?
• Immigration: do you have proper evidentiary records that your employees have the right to work in the jurisdiction they work in?
• Options: where tax-favoured options (eg enterprise management incentives or company share option plans have been granted and will be exercised in connection with a transaction, buyers will want to see that the company has followed HMRC rules and guidance in granting such options and operating the scheme. Any failures in this respect can affect, or result in the loss of, CGT treatment and/or other tax-favourable treatment for option holders, with their option exercises instead being subject to income tax and national insurance contributions on the full gain.

Transaction-specific considerations

As well as preparing for a due diligence process, there are a number of practical matters you will need to consider in order to get a deal over the line:

• Regulatory approvals: the global regulatory framework is multifaceted and becoming more extensive:
  • Antitrust/competition: regulating businesses to avoid a market dominance and preserve competition has been an element of M&A for many years. There are more than 100 countries with merger rules based on turnover, market share and asset tests. Analysis will need to be undertaken to determine whether your transaction will be caught or (subject to who the buyer is) may be caught.
  • Foreign direct investment (FDI) and national security: an increasing number of jurisdictions are implementing some form of FDI or national security regime, requiring transactions to be notified to regulators. Furthermore, several are now refining and adapting their requirements as their understanding of the application of the rules to transactions in practice changes.
  • Regulated businesses: those businesses whose activities are regulated will typically need consent from, or a notification will be triggered to, the relevant regulatory body in the event of a transaction. This will depend on the nature of the transaction, the rules of the body and the conditions attached to the authorisation.
• Shareholder communications: particularly relevant for a share sale, the timing for when to communicate the details of the transaction (and even the fact a transaction is proposed) is a delicate balancing act when there is a wide shareholder base. Enough time will need to be given to allow sellers to consider (and get advice on) the proposed terms of the sale and the negotiations will need to be sufficiently well progressed for the terms to be explained. If there are any shareholders with whom the company has not maintained contact, or with whom there has been past animosity, this can further complicate the process, both in terms of when and how to send the communications, and whether they will sign and deliver the documents necessary to implement the transaction.
• External lenders/debt providers: if you have any third-party lenders, it’s likely that their consent will be required for the transaction or the transaction will trigger a repayment obligation. Buyers typically expect an unencumbered asset to be delivered by the sellers, and co-ordinating the repayment of debt, the release of security and completion of the transaction to the buyer requires careful orchestration.

Help is at hand

An M&A transaction can be complicated, time consuming and daunting if it’s an unfamiliar process. We are here to help you get exit ready. We’ve released a new ‘Exit Guide’ which distils our experience from countless deals to help companies prepare and successfully navigate an M&A sale process. To get a copy, please get in touch.

Notes

1. www.bbc.co.uk/news/live/business-685815261
2. www.ft.com/content/079ccde6-3c3d-4791-953b-6e3e8203ef12
3. www.bain.com/insights/topics/global-private-equity-report/

For more information contact

Emma Danks
Partner
E: e.danks@taylorwessing.com

Suzy Davis
Partner
E: s.davis@taylorwessing.com

Siobhán Langwade
Partner
E: s.langwade@taylorwessing.com

Return to M&A 2024 contents.

The post Getting exit ready appeared first on Legal Business.

The Legal 500’s London M&A rankings are among the most competitive across the entire UK guide, with high-profile dealmakers vying for position among the upper echelons of the market, national practices competing for recognition in the mid-market, and smaller, specialist teams hoovering up lower-value – but just as complex – transactions for acquisitive clients.

As well as providing a full rundown of the firms with the most individual rankings, this data feature looks at how the rankings have shifted over the past decade, looking at who’s in and who’s out across all three value bands, and also how the gender balance has vastly improved as increasing numbers of female dealmakers come to the fore in a market traditionally dominated by men.

Return to M&A Yearbook 2024 contents.

The post The real deal – the firms dominating the rankings for M&A appeared first on Legal Business.

Gorriceta Africa Cauton & Saavedra lawyers led by Mark S. Gorriceta (managing partner), Kristine T. Torres (partner) and Kathleen T. Guiang (mid level associate) explore the challenges, cross-border elements and post acquisition disputes for M&A transactions in the Philippines

Can you describe your expertise with M&A transactions within the Philippines? How does the Philippine legal and regulatory framework influence your approach?

Our firm, Gorriceta Africa Cauton & Saavedra, a top-tier full-service law firm in the Philippines, has extensive experience in providing legal and transactional advisory services for M&A deals, representing either the buy or sell side in all types of domestic and cross-border acquisitions, investments and divestments of businesses across a wide spectrum of industries.

We are highly regarded and trusted for our advice on all stages of transactions, specifically in due diligence, structuring, drafting of definitive agreements, negotiating and closing M&A transactions. Through our team’s vast experience, we have developed industry-specific knowledge in public and private deals and cross-border transactions, as well as equity investments and divestments.

Currently, we have been very active in representing sell and buy side parties in equity investments of foreign investors; acquisition of highly regulated entities such as those with secondary licences from the Securities and Exchange Commission, Philippine Central Bank and Department of Information and Communications Technology; as well as holders of permits and licences from the Department of Energy and other regulatory bodies.

In structuring and negotiating deals, we always make sure that our advice is a result of a thorough review of relevant legal and regulatory frameworks, including taxation, corporate, securities, intellectual property and civil law, to ensure adherence to laws while optimising shareholder benefits and protection in the deal’s arrangement. Moreover, we also conduct legal analysis of the potential regulatory issues that might surface concerning the acquisition or transaction.

Our approach in providing transactional advice is impacted by the developments in the legal and regulatory framework relating to M&A in the Philippines. These considerations include: (i) restrictions on foreign investments, (ii) antitrust regulations and compulsory notification thresholds under the Philippine Competition Act, (iii) environmental, social and governance principles, and (iv) potential tax exposures, among others.

We provide transaction-specific advice and offer out-of-the-box solutions that consider both the legal and regulatory requirements in closing a deal, and the business and commercial considerations of our client.

What do you see as the most significant challenges and opportunities for M&A in the Philippines today?

The Philippines continues to open up its economy to more diverse investors with recent legislative amendments, encompassing the amendment to the implementing rules and regulations of the Renewable Energy Act of 2008 which effectively removed the foreign ownership restriction on the renewable energy sector; the amendments to the Public Service Act which now allow 100% foreign ownership in public services entities; the amendments to the Foreign Investments Act which reduce the required minimum paid-in equity capital for foreign investors in micro and small domestic enterprises; and the amendments to the Retail Liberalisation Act which lower the minimum paid-up capital requirement for foreign investment in the retail sector to Php25m.

The continued accelerated digitisation and the current licensing moratorium on certain industries imposed by regulatory agencies also open up a wealth of opportunities for M&As and investments particularly in the fintech, technology, banking and lending spaces.

Nevertheless, while the Philippines strives to position itself as open to foreign investments with the significant regulatory changes that will drive M&A and investment opportunities in these sectors, high interest rates, geopolitical tensions, stagnant capital market activities and limited IPO exit opportunities, coupled with heightened regulatory requirements, may introduce intricacies and challenges to M&A deals.

Our reputation and expertise allow us to assist our clients in navigating these challenges. We guide them through providing out-of-the-box solutions and deal structuring options which are compliant with regulations with minimised exposure to these roadblocks, while still being able to achieve the client’s goals and objectives for the transaction.

The Philippines has seen an increase in cross-border M&A activity. Can you share your experience with these types of transactions?

We have a proven track record in assisting clients in transactions with cross-border aspects, including foreign private equity and venture capital investments in companies in the Philippines, spanning a diverse range of sectors.

Cross-border transactions are highly complex and sophisticated in nature, especially when a number of jurisdictions are involved. We render a full spectrum of legal advisory services to help our clients resolve issues or mitigate risks, on cross-border investment rules, foreign exchange controls and compliance with securities laws and investment limitations. We closely liaise and collaborate with foreign counsel to navigate and comply with varied legal frameworks, laws and business environments prevalent in the jurisdictions involved.

Due diligence is crucial in any M&A transaction. How do you tailor your due diligence process to address the unique aspects of the Philippine market?

Our approach in conducting due diligence depends on the type of the deal; the purpose, size and complexity of the transaction; the parties involved; the risk profile; tolerance; and background of our client. The industry the target company belongs to is also a factor in strategising for diligence work, since the legal and regulatory considerations and areas of focus would be different.

Most of our recent deals involved acquisitions in highly regulated companies with secondary licences, or imbued with public interest. These types of transactions require more extensive and specialised due diligence as they have specific requirements under special laws, and change-in-ownership requirements.

We have a number of M&A deals which took a relatively longer timeline to close and some which did not push through due to diligence issues. In some deals where the main objective was to acquire the target companies because of the licences they possessed, the fact that there were material issues on the licence status and compliance which were uncovered during our due diligence, among others, became a dealbreaker for our clients. We also have deals which fell apart because of financial and valuation issues, and accounting practices of the target company.

After the deal closes, integration and potential disputes pose new challenges. How do you support clients in the post-acquisition phase, especially in ensuring smooth integration and handling any disputes that arise?

It is during post-acquisition integration that challenges often emerge, ranging from exposures and risks that were not possible to uncover during the diligence exercise, or consequences that arise from pending litigation or administrative proceedings.

As transaction counsel, we assist and provide advice to clients throughout the lifecycle of the transaction including post-acquisition integration. Our M&A team also implements a proactive approach in monitoring post-closing compliance from both buy and sell sides to ensure a smooth transition and effective integration in the business operations of the target company.

We provide post-merger integration support by assisting our clients with their tax structuring, restructuring and corporate reorganisation, and providing legal advisory and consultancy services.

Where disputes have arisen after a deal has closed, we work alongside our client to look for solutions and to effectively handle these disputes without going through litigation. Unfortunately, some deals gave rise to disputes that were elevated to courts. In such cases, our M&A team together with our litigation group continues to assist our clients in providing strategic advice to resolve these disputes.

For more information contact

Mark S. Gorriceta
Managing partner; head of corporate and TMT practice groups

Kristine T. Torres
Partner; head of project finance and ESG

Kathleen T. Guiang
Mid-level associate

E: counselors@gorricetalaw.com

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