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Mergers & Acquisitions – simplified. Or, a practical guide

Mergers & Acquisitions – simplified. Or, a practical guide

The term “Mergers and Acquisitions (M&A)” is generally used in one breath, but they are different. Let us go back to basics.

A merger means 2 companies combine to become one with some legal variations where one company loses its identity, or share the identity or create a new one. Though mergers are between companies, in some cases the Government may help facilitate a merger by passing a law. This is rare and controversial.

An acquisition means purchasing of assets of another entity. The assets could be shares in whole or part, business, property or combinations of them. However, in this case, the acquiring entity is the dominant one.

The philosophy for both may be for growth and size. The reasons may be taking advantage of a bigger name, market access, clearing past mistakes, pool resources, reboot the respective businesses, combining products or simply to be bigger.

The risks of M&A have been covered in an earlier article When Mergers & Acquisitions Don’t Work. In addition to the problems listed there, there are also legal risks of anti-trust and anti-monopoly laws in large M&As.

 

M&A process

  1. Strategy
  2. Identification
  3. Preliminary Due Diligence
  4. Expressions of Interest
  5. Detailed Due Diligence
  6. Definitive Documentation
  7. Post M&A

 

1. Strategy:

M&A begins with an idea in a company that helps it increase market share and access, talent acquisition, product or technology acquisition, growth and size. Each of these deal drivers help narrow down the potential target companies and the regions they operate in. The prepared profile also helps in the preliminary due diligence.

At this point, it is also important to know the type of company to be added to the company’s portfolio. Whether there is a philosophical fit and proper post-integration timelines have been added.

Why M&A:

  • Why and what are you acquiring?
  • Boosting current performance
  • Acquiring resources, premium pricing
  • Acquiring resources, lower cost
  • One-stop shop
  • Reinventing business model
  • Acquiring a disruptive business model
  • Acquiring to decommoditize
  • Paying the right price
  • Avoiding integration mistakes

2. Identification:

In line with strategy, identification of potential companies for a merger or an acquisition by a company takes place. Identification can be conducted by business and management consultants, investment bankers, business brokers, lawyers, accountants or simply, by the company/individual itself.

Most target companies that are amenable to acquisition (not merger) may be distressed companies i.e., debt laden. They may also have management or shareholder issues, hit a sales / revenue ceiling, danger of disruption, funding issues.

Acquiring a business:

  • Brokers: Business and management consultants, investment bankers and bank special assets group, business brokers, lawyers, accountants, news sites, business sites, networks and close circles
  • Reference/reputation check: market information, clients, employees
  • Level of distress
  • Meeting, discussions and negotiations with owner
  • External affecting factors such as lenders, shareholders, third parties
  • Continued use of target, reinvent or retain current business plan
  • Requirements of target and cost of acquisition including IP, database and assets
  • Goodwill and reputation

3. Preliminary Due Diligence

During or simultaneous with the identification process, a preliminary due diligence or DD should take place. Available online search including LinkedIn on the key persons involved, other directories with brief information, reportage about the company and persons involved, references from common friends and resources, ex-management and employees.

An important aspect of DD is that it is not a singular process. It can be in two parts. One, if there is trust and two, the detailed DD.

The deeper the general DD, the longer lasting the M&A. Identification is not only about targets that add to the bottom line. It greatly improves the credibility of the target when the representations made matches with the final DD.

A few dollars spent in the initial stages will go a long way in either a long-lasting relationship or a much valuable and cheap lesson learnt for future projects. It is a relationship because it involves not only internal personnel, but clients and customers post M&A as well.

4. Expressions of Interest

The companies may then reach out directly or through third parties to evince or find out interest in M&A. A series of meetings will take place. May also involve exchange of contracts relating to confidential information, circumvention or solicitation.

Next is an exchange of expressions of interest. These may be simple email exchanges, formal letter of offer, binding or non-binding term sheets, memorandum of understanding or an agreement.

5. Detailed Due Diligence

A formal process involving exhaustive inspection and review of documents and information to see if assets represented are true and uncover any unstated liabilities. DD may involve commercial, financial, technical or legal DD. The DD process may take over 3 months to conclude.

6. Definitive Documentation

These are the final documents signed and executed and assets transferred. They may include – sale and purchase, share transfer, share subscription, management/key employment agreements or variations of these. There may be additional documents such as restated charter documents, shareholder, escrow, closing and future engagement contracts.

7. Post M&A

This involves philosophy, leadership, legal documentation review, management review, integration, training, regulatory and statutory compliance, corporate compliance, operations, human capital reorganization, customer/client contracts, change and culture management, risk management, name change processes, corporate communications.

 

 

 

 

Merged & Acquired – Solution

  • M&As are delicate subjects. In these cases, I say that the shortest distance between two points is never a straight line. Diplomatic skills, EQ, empathy, motivational theory applications, change management and cultural integrations are pre-requisites for a successful M&A. This actually saves time in the long run and are the multiple points that in fact bring the main 2 points together.
  • Capture and reallocation of HC in merged or acquired companies. This capital which has high return on investment in an M&A.
  • Guanxi – Like most Chinese expressions, guanxi is complex. Simply put, it means “relationships” (but without hierarchy). Build understanding and acceptance before M&A. It forms what I call Human Due Diligence.
  • Find professionals that give you the paradoxical and elusive “Collaborative M&A with Organic Growth” that consider contribution by all parties to an M&A to help each other increase output, increase customer base, improve and develop new products and successfully deploy HC.
M&A – The Legal Angle

M&A – The Legal Angle

M&A – The Legal Angle

The solution and problem in a merger or acquisition is regulatory in nature. In all cross-border deals, there is no go-around to regulations. Laws are enacted to essential protect life and property of its citizens. Therefore, it will always be the aspiration of law to protect them. Understanding this will focus the negotiations in a direction that eases M&A deals.

M&As require a successful combination of businesses, technologies, regulation handling and relationships. A clear vision and strategy must involve a legal approach as well as alternatives to legal problems. Relationships can be managed across cultures. Interchange the players in the M&A. Cultural negotiations should adopt a bottom up approach.

Pricing of the transaction will form part of deal structuring. Whether leveraged, unleveraged, debt, participating debt or JV. The deal structure should be clearly spelt out in that particular document. Focus should not only be on the seller’s RNWs or WNIs, but also on local compliance. Non-compliance can have an effect on the price of acquisition.

Many companies decide to dive in first and solve the problems on the go; or application of the words of Rear Admiral Grace Murray Hopper, a U.S. Naval officer and an early computer programmer in 1986 – it is easier to ask for forgiveness than permission. While quick fix non legal solutions may result in fast action and shortterm benefits, it is a highly expensive and disastrous decision and will result in penalties, fines or even jail by law. This shotgun approach may work well for small companies which can wind up fast, but large and listed companies have much deeper roots to uproot. It is always advisable to be over- and self-regulated.

Pre- and post- M&A legal and tax considerations for different jurisdictions are an important angle and determines most M&A deals. What changes the equation will be matters relating to DTAA – double taxation avoidance agreements between relevant countries, DTAA, dividends, royalties, profits, capital gains, legal issues relating to anti-money laundering and anti-terrorism funding as well as international relations. These considerations need to be applied in detail. Involving the proper international legal minds from inception results in cost savings not cost overruns. Good lawyers also bridge connections between the companies involved as well as the regulators. Different angles of approach, including bringing in legal at the right times, can produce time saving and higher chances of success.

Alternative Legal Recourse

Avoiding litigation in any area of business is preferable. Court litigation requires plenty of time, effort on company representatives in court and is highly expensive. Simple transactions to be settled in court can start from USD 200,000 and grow exponentially. 

 

Mediation

Mediation works only if both parties have a good relationship and require a third party to adjudicate on a fair price. This is because mediation is voluntary. The only place where mediation works is if it has the sanction, implied or express, of the court in a country, which can be neutral. 

 

Arbitration

Arbitration is equally expensive in the initial stages, but since the result can be much faster, it will save in long term costs. However, arbitration provides for a neutral venue as well.

 

Transaction Liability Insurance

Transaction Liability Insurance is available for Buyers covering legal liabilities and is an excellent alternative legal recourse. Where transaction liability insurance for sellers is available, it would form a probable win-win situation for both parties. 

 

Alternative Legal Recourse

Another alternative legal recourse is to engage third parties who can either subrogate claims. For example, litigation and recovery arms of banks and III party litigation funders. These maybe in-house or outsourced. third parties would Since the main or prominent part of their business is litigating on a regular basis, a premium of sorts can be negotiated. This will eliminate the M&A parties from expending too much time, effort and money and they can continue with their business.

A third alternative legal recourse is not so much a direct one, but to quantify the liability or have liquidated damages measured to the closest extent. For instance, convert a negative covenant to a positive on. Instead of vague consequences to breach of a contract, a fixed amount may be agreed between the parties on violation or breach. A party may be permitted to circumvent, compete or solicit provided they pay a fixed amount or fees for the same. Where the certainty of a claim exists, there will be better outcomes for both parties, for good or bad.

2iB Partners in brief

2iB Partners is a specialist M&A and management consultancy firm that has extensive networks with strategic buyers, MNCs, listed companies, investment networks and funds from US, UK, China, Philippines, India, Vietnam, Myanmar, etc.

2iB Partners help companies scale up and internationalize through inorganic growth, joint ventures or management consultancy. Through Singapore as a strategic base, 2iB Partners helps companies outside of Asia gain market access and companies in Asia expand internationally and regionally. 2iB Partners also provide ad-hoc entrenchment of highly qualified professionals and experienced businessmen to solve complex business problems through experience and insight.

For partnerships, speaker and general business enquiries with 2iB Partners:

Contact Person Dylan Tan
Designation Chief Operating Officer
Email Dylan@2ibpartners.com

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Why M&As Go Wrong

Why M&As Go Wrong

Acquisitions that are rushed can result in problems and challenges after closing in a transaction:

Some of the reasons why M&As go wrong are:

 

1. Assumption Asymmetry

Leaders and owners may over value a target by making assumptions including over-valuation, over-optimistic assumptions in revenue, cross-selling and cost synergies by the target may create expectations higher than the real value of the business or company. These may be contrary to what a due diligence or post-integration may reveal. If the former address the asymmetry, it will address some issues. But if it occurs post-integration, then it would be too late.

Most legal issues center around disclosures and reps and warranties during and after DD. But some interesting legal questions are whether a buyer should provide his assumptions to the seller or can a party can be held legally responsible if the facts do not match the assumptions. This is what leads to moral hazards where a party to the transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or attempts to earn a profit in a questionable manner. While such legal considerations may be covered in the NDA (and the Overture Documentation – discussed later) signed in the initial stage, actual control over assumptions and facts and enforceability thereto may become sticky issues.

The Parties need to have honest approaches during negotiations in their expectations, disclosures, representations and warranties on both sides to make a successful M&A.

 

2. Having a “take” mentality

M&A is a bi-lateral proposition. Both parties need to be honest and should share equally in the responsibility of making the M&A work. M&A to merely increase share price or increase of income and status of acquirer’s management or professionals can create hurdles and challenges. Such approach reduces shareholder wealth largely over a period of time.
Post-integration, the acquirer should take care to ensure it contributes to the target company and not merely exhaust the latter’s resources.

 

3. Lack of emphasis on post M&A integration

Acquisitions do not end with Closing. It is a continuing process of business building. As part of post-integration will be corporate policies, new HC related contracts, replace as opposed to displace employees, active management alignment and participation. These documents should have corporate sanctions for non-compliance. However, deep consideration should be given to local laws.

Many acquirers slack off once Closing has taken place and leave it to the rank and file to take care of integration. Lack of emphasis or poorly executed steps on post M&A integration will not reap dividends, but create issues that gradually builds up to sure failure. Post M&A integration between the acquirer and target includes not only bringing harmony and coordination, but efficiencies in management, change and cultural integration, application of corporate psychology, adaptation to common vision and equitable distribution of resources. The original leaders and teams of the two companies need to continue work closely together to implement the vision and strategies.

 

Most M&As fail due to a lack of a sound post-integration plan.

4. Shareholder issues

There are two stages. Before and after an M&A. Existing and new shareholders’ expectations need to be brought in alignment to the objective of the M&A in both stages. Some issues would include buying out existing shareholders, reclassification, exchange or combination of shares. The expectations may also need sensitive alignment amongst cross-border shareholders.

5. Employee issues

Analogous to shareholder issues are employee treatment. In an ideal scenario, no employees are displaced, but are successfully reallocated. However, where employees have to be let go despite efforts, clear negotiation objectives need to be in place before the M&A takes place. In addition to this, there will be matters relating to key employee or key management personnel. Negotiations need to cover retention of such persons to ensure successful transition in the acquirer-target combine.

The legal consideration from the seller point of view is whether there has been any effect on the contracts entered into between the main business owner / founder – in particular if there are earn-outs.

6. i-contact

When there is no i-contact – both in terms of seeing eye to eye and discarding egos, the M&A may be doomed at the start; or if it were to sound legalese, mortuus ab initio. In most M&A discussions, getting the parties to agree is a daunting task. There will be differences in terms of valuations, revenues or profits, or potential growth. When the captains of the business come to an understanding, the professionals or advisers will come in with their own set of needs and wants to potentially scuttle the deal. The M&A negotiations should be devoid of emotional baggage. In negotiations, it is not enough to merely have the leaders discuss. The leader should develop a good team that can work in parallel. Personal relationships and persuasive skills between the teams should be balanced. A good legal “team” need not necessarily play bad cop all the time and can assist in diplomacy and righting wrong assumptions.

In addition to the aforegoing, consideration should be given to media attention. The higher the media attention during the negotiations, the larger the variation in price. Smaller deals create more value than bigger deals where expectations are high. Another consideration during negotiations is that even if the M&A goes through despite the above, it can lead to litigation.

2iB Partners in brief

2iB Partners is a specialist M&A and management consultancy firm that has extensive networks with strategic buyers, MNCs, listed companies, investment networks and funds from US, UK, China, Philippines, India, Vietnam, Myanmar, etc.

2iB Partners help companies scale up and internationalize through inorganic growth, joint ventures or management consultancy. Through Singapore as a strategic base, 2iB Partners helps companies outside of Asia gain market access and companies in Asia expand internationally and regionally. 2iB Partners also provide ad-hoc entrenchment of highly qualified professionals and experienced businessmen to solve complex business problems through experience and insight.

For partnerships, speaker and general business enquiries with 2iB Partners:

Contact Person Dylan Tan
Designation Chief Operating Officer
Email Dylan@2ibpartners.com

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[Video] 2iB Partners Speaks at Southeast Asian M&A and Corporate Investment Conference 2017

[Video] 2iB Partners Speaks at Southeast Asian M&A and Corporate Investment Conference 2017

In the above video, Managing Director of 2iB Partners, Mr. Yang Yen Thaw delivers a 50 minute speech on Legal issues in cross-border Mergers & Acquisitions (M&A) and a new approach to M&A.

2iB Partners formed part of a repertoire of experts hailing from MNCs, mainstream banks, advisory firms and funds with substantial AUM.

 

 

Speaker line-up included:

Sanjay Mathur Chief Economist – Southeast Asia and India ANZ Bank
Sikh Shamsul Ibrahim Investment Director Malaysian Investment Development Authority (MIDA)
Greg Ohan Director Jones Lang Laselle, Vietnam
Hector Wang Investment Director China-ASEAN Investment Cooperation Fund
Edwin Vanderbruggen Senior Partner VDB Loi Co.,Ltd
Jonathan Fein Vice President BDA Partners
Ryoichi Nishizawa Head of M&A Advisory Mitsubishi Corporation
Yang Yen Thaw Managing Director 2iB Partners
Kevin Murphy Managing Director Andaman Capital Partners

Panelists include:

Kate Holgate Partner and Head Brunswick Singapore
Aaron Howell Managing Director Rothschild
Robert Rosen Co-CEO Kenon Holdings
Kala Anandarajah PBM Head Competition & Anti-trust and Trade Rajah & Tann
Dag Ove Solsvik Head of Group Legal, Middle East and APAC DNV.GL

The room was filled with more than a hundred people representing big listed companies, billion dollar funds and conglomerates from all sectors taking a strategic interest in the Southeast Asian region.

 

Mr. Yang Yen Thaw addressing “Why M&As go Wrong”.

Legal strategy in M&A

Mr. Yang Yen Thaw engaging the audience in an open floor discussion. CoAggregation® in action!

Message from the Director:

2iB Partners continues to build its reputation and broaden international networks with MNCs, strategic buyers, listed companies, funds and networks in US, UK, China, India, Phillipines, who have taken a strategic interest in the Southeast Asian market. We also understand that there are a significant number of small and medium enterprises (SMEs) in the region that are looking to scale up and regionalize in SEA or gain market access into China.

With regards to these 2 different channels of companies, we have the appropriate networks and expertise to assist them with their expansion plans whether through joint ventures, inorganic growth or general business consultancy. We see ourselves in a strategic position to assist these stakeholders in their internationalization and growth plans in or out of the region through Singapore.

From a macroeconomic perspective, the ASEAN story is generally positive and is one of the fastest growing regions with projected 4.9% GDP growth this year compared to projected global growth of 3.5%. Fast growing Myanmar is also projected for a growth of 7.5% next year, though for this country, regulations may slow the advancement of certain sectors. The ASEAN growth is projected to outperform that of global growth rate for the foreseeable future with relative political stability and increased connectivity in terms of both investment and trade.

Global trade has also re-emerged and as a result, Asia, that is the most export dependent has benefited substantially. Indicators suggest that domestic demand is also improving post slow down but it would take awhile before this reaches a steady state. This could suggest investment opportunities in the medium to long term.

Inflation is behaving and the region as a whole is not sitting on any large imbalances. Therefore, with regards to concerns on fed hikes, as long as they are well introduced and earnings growth is faster than the rise in cost of capital, we should sift through the shifts in global monetary conditions.

The ASEAN Economic Community (AEC) blueprint which aims for tax collaboration by 2025 and reduction in trade transaction cost by 2020 also point to significant improvements in opportunities.

-Data from FocusEconomics and World Economic Outlook.

Last but not least, we would like to express our thanks to Mr. Tony Huang and ValueTang LLC and look forward to greater and deeper collaboration in time to come.

 

Dylan Tan

2iB Partners – Director

 

 

For partnerships, speaker and general business enquiries with 2iB Partners:

Contact Person Dylan Tan
Designation COO
Email Dylan@2ibpartners.com

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8 Legal Points to note during a Liquidity Event

8 Legal Points to note during a Liquidity Event

Flashing back to Part 1, a liquidity event is an exit strategy for investors to convert their equity into cash and occurs when any of the following typical change of control events takes place:

  1. merger
  2. acquisition
  3. sale purchase – part or whole, shares or assets
  4. leveraged recapitalization – debt to finance purchase of equity
  5. ESOP
  6. IPO of a company

The occurrence of liquidation, dissolution or winding up of a company may also be included as a liquidity event.

Continuing on from Part 2: 8 Considerations before the liquidity event, which in summary talked about the below 8 considerations, we now move on to Part 3: 8 Legal Points to note during a liquidity event.

  1. Types of entities involved
  2. Cash receipts or pay-outs
  3. Escrow Consideration
  4. Type of Equity
  5. Value of Equity
  6. Local Laws
  7. Effects on Employment
  8. Tax matters

As if Part 2 were not exciting enough, here is where the real exciting part comes. Here are practical things to take note of DURING the event itself. You’ve flirted ideas with your buyer/investor and finally there is some understanding and mutual agreement after a courtship process.

However, here is where you will need to get really cautious and have a full understanding on what each part means and why it is done. The below is a far from exhaustive list but points out some essential points to note.

 

8 Legal Points to note

 

At the liquidity event itself, the following legal issues should be considered:

  1. Representations and warranties in contract containing the liquidity events that could make or break a deal

Sometimes overlooked as standard clauses, a target is willing to give any and all representations and warranties that an acquirer is looking for. But this could be quite dangerous as the sale and purchase agreement will invariably contain indemnity clauses and this will affect the deal. In a sale and purchase agreement, certain specific representations and warranties are covered within the substantive part of the agreement itself and many so-called standard clauses are covered as an annexure, schedule or attachment to the main agreement. The standard clauses are mostly the sum total of the experiences of professionals and standard templates that have evolved over time. Involvement of local lawyers is required. Misrepresentations could have serious legal repercussions.

 

  1. Covenants (to do or not to do something) and obligations. On pre-closing, closing and post-closing

As with all financial transactions, a buyer would seek to protect his money and delay payment until all conditions are satisfied and a seller would agree to do anything to receive the pay-out at the earliest. Incapacity to pay, failure to fulfil conditions, non-receipt of corporate and statutory approvals are some of the factors where the deals fall through. Post-sale, many negative covenants such as non-disclosure, non-compete, non-solicit and non-circumvention would continue to operate and can operate against the seller/target and affect the future operations of the target.

 

  1. Special rights that are covered in the agreement, such as options, transfer, approvals, put-call, drag-tag along, lock-ins/lock-ups, share-asset price ceilings

Liquidity events call for perusal and scrutiny of past and future contracts for sale and purchase, subscription and shareholders agreements. Many corporate, statutory and regulatory approvals are required. The constitution or articles of the target may also contain special rights of existing shareholders. In some occasions, agreements between shareholders may be privy and enforceable between shareholders and not involve the company. In these circumstances, the company will not be liable for the contract inter se shareholders unless these rights are enshrined within the constitution documents.

 

  1. Indemnification, liabilities and remedies. Who bears consequences

Liabilities and indemnification thereto vis-à-vis the seller are called for misrepresentations and failure to comply with conditions of transfer. Similarly, the buyer can also be liable by forfeiting his deposit at the time of signing a contract as well as be liable for indemnification for non-payment/non-fulfilment of conditions of the contract. Legal liabilities should be monitored during and after the liquidity event.

 

  1. Set offs. Does cash pay-outs or equity issuance create set-offs on price and valuation?

If projections are not met or if conditions fail during the course of a transaction that does not involve a bullet payment, this will affect the cash pay-out as well as issuance of equity. Some events for set-offs in terms of cash and time may be mitigated by force majeure clauses. Even in bullet payments, if negative covenants are violated, the seller can still be dragged into litigation and set-offs may not mitigate the risk.

 

  1. Other contracts relating to or effecting the liquidity event

The occurrence of liquidity events affects many other factors in the target. Investors will seek blanket clauses covering their investment in the present and near future and will look out for other contracts entered into by the target that affect the valuation of the company or its shares. The other contracts would include existing shareholders agreement, deeds of adherence, options agreements, voting agreements, warrants, management agreements, key employee agreements, debt instruments and agreements, share subscription agreements, constitution documents – where the company is bound to do or not do certain acts. Documents such as warrants may also contain provisions for protection when public acquisitions take place. Normally, a due diligence covers these issues. Negligence of a proper due diligence affects the investor greatly rather than the target.

 

  1. Governing law. This is particularly relevant on cross-border transactions

Some countries provide specifically for the place where the cause of action arises and thus bring the parties within that jurisdiction. Some countries may completely ignore the governing law and protect its citizens, individuals and corporates. The governing law also matters as contracts are interpreted differently, whether under civil law or commonwealth law or general law by different countries. There have been instances where the governing law is of a jurisdiction different from the nationalities of both parties.

 

  1. Dispute resolution. Arbitration, mediation or local courts

Alternate dispute resolutions such as mediation, arbitration and conciliation may mitigate consequences when heads of the respective parties meet, but these may be exercises in futility. Where the parties are from different countries, treaties between the countries where the parties reside will dictate whether a judicial order passed can be enforced against the penalized party. Many parties settle for international arbitration which can be slightly more expeditious than established court systems. This is because arbitration takes only a particular matter into consideration whereas the courts have to handle all matters relating to its jurisdiction.

Stay tuned for the LAST part of the series: 8 Points on Initial Public Offerings

For partnerships, speaker and general business enquiries with 2iB Partners:

Contact Person Dylan Tan
Designation COO
Email Dylan@2ibpartners.com

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When Mergers & Acquisitions don’t work

When Mergers & Acquisitions don’t work

Mergers and Acquisitions (M&A) aim for financial stability of a business and wealth maximization of shareholders. It provides a potentially bigger and diversified market share. In these days, it is the most commonly use methods for the growth of companies. M&A are a dominant means of globalization and is key to scaling up and internationalization.

The potential problems of M&As are aplenty. Ego issues, inflated books, race against time, misrepresentations, etc. As long as the business looks profitable, the merged / acquisition parties are happy but when profits go south, then the finger pointing begins.

M&As should be familial not financial. If M&As are driven purely by finance, it is going to be a disaster for the business. Finance in business rarely takes a long-term view. It is the maximization of profits in the shortest time. Finance people laugh all the way to the bank. Maybe it is solely driven by time value of money. But great businesses are the greatest collateral damage if such a view is adopted.

M&A Reasons

Collaborations and synergies, often touted as reasons for M&As, are highly advantageous to M&A parties. This brings in, among other things, cost savings + efficiencies (CSE), value, returns and profitability. CSE brings in sharing of resources, centralization of corporate functions and systems, elimination of duplicate overheads, optimization of over-capability, shared networks, business op­timization, managing financial risk, elimination of double incidence of taxation, shared technology and human resource reallocation. These can bring about high profitability by itself.

M&A Headaches

i-contact

Though the term “merger” implies a creation of a single entity from two or more equals this does not work in practice. There is no i-contact – both in terms of seeing eye to eye and discarding egos; both of speaking on the same eye level and equal egos. In most merger discussions, getting the two to see eye to eye itself is a daunting task. There will always be a bigger equal in terms of higher revenues or profits, or in terms of potential growth or their war-chest. And when the captains of the business come to an understanding, the professionals will come in with their own set of needs and wants to potentially scuttle the deal. This is worse in an acquisition. There will always be a difference of opinion in every aspect of valuation depending upon the buy or the sell side. Warren Buffet’s “price is what you pay, value is what you get” would probably be the anti-thesis of such business deals.

Non-prima inter pares

The big problem and headaches for M&A reasons are many a times the perception of primus inter pares. There is always the issue of one being bigger than the other. Whether it be in terms of revenues or profits or growth or talent or arrogance of cash. Substantial amount of time is spent in sorting out the babel from benefits. Hence when 2 or more parties get into a room, it is very difficult for them to have a balanced discussion or negotiation and this leads to high protraction of deal completion.

Human Capital

Human capital (HC) deals with all three tenses – past, present and future. It is strategic and takes into consideration issues beyond logic as well. HC is probably the first collateral damage in an M&A. While M&As are supposed to bring in CSE of scale, paradoxically, most of the valuable existing experience in a company is lost in redundancies, lay-offs, retrenchment, human resource conflicts. This capital which has high return on investment, must be captured and reallocated in an M&A.

Professionals assisting in M&As are also part of HC. If the professionals’ vision is not aligned with M&A parties, the M&A is headed towards dangerous times. Such professionals, even with good intentions, will take the M&A one step forward, but 3 steps back.

On a different note, an interesting development in HC companies getting into an M&A would be the development of big data and analytics and its application on the experience of individuals. With most interested individuals expressing / uploading their thoughts in some form of the other on the web, one day sufficient processing speed and bandwidth can give us the benefit of this experience.

Time

Time is money, time is the enemy. But it is a long-term investment. In the haste to close a deal, most M&As gloss over critical issues. Time is also the culprit in closing deals over weekends resulting in missing out potential added costs, disputes, rushing go-to-market, pushing to agreements without careful consideration and relationship building (cf. guanxi below). Time is not speed and speed is not time. What is important, is speed based on calculated timing. An M&A built on relationships takes time, but it calculates the long-term benefits of working well together resulting in a high average speed.

Legal

The importance is always understated and misunderstood, especially in international M&As.

Merged & Acquired – Solution

  • M&As are delicate subjects. In these cases, I say that the shortest distance between two points is never a straight line. Diplomatic skills, EQ, empathy, motivational theory applications, change management and cultural integrations are pre-requisites for a successful M&A. This actually saves time in the long run and are the multiple points that in fact bring the main 2 points together.
  • Capture and reallocation of HC in merged or acquired companies. This capital which has high return on investment in an M&A.
  • Guanxi – Like most Chinese expressions, guanxi is complex. Simply put, it means “relationships” (but without hierarchy). Build understanding and acceptance before M&A. It forms what I call Human Due Diligence.
  •  Find professionals that give you the paradoxical and elusive “Collaborative M&A with Organic Growth” that consider contribution by all parties to an M&A to help each other increase output, increase customer base, improve and develop new products and successfully deploy HC.

 

Yang Yen Thaw Managing Director – 2iB Partners

 

For partnerships, speaker and general business enquiries with 2iB Partners:

Contact Person Dylan Tan
Designation COO
Email Dylan@2ibpartners.com

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