Advanced Negotiation Issues in M&A - The Critical Commercial Aspects Impacting on Deal Value

This programme is aimed at those with a working knowledge of the M&A process.

The simplistic view of M&A is that it’s a bilateral process between buyers and sellers. Experience practitioners understand it is a far more organic process which involves multilateral negotiations between Buyers/Sellers on the one hand and their respective advisers on the other hand (fee negotiations being the most important). Additionally, parties need to be aware of the negotiating issues that arise in parallel negotiations between the parties own advisers themselves (e.g. accountants debating the completion accounts, lawyers the SPA).

This programme focuses on negotiating the key commercial aspects of the transaction which impact value for both buyer and seller and on creating the right framework and strategy for enhancing value to the seller or retaining value for the buyer. Part of this is understanding the internal politics of handling each side.

The programme is divided into two parts. The first part focuses on the soft negotiating issues which are common to most deals. The second part focuses on the legal, accounting and technical areas where the real value can be gained or lost; particularly completion mechanisms (completion accounts and locked box), the cash free-debt free and working capital adjustment, structuring the consideration, handling management and value leakage through the reps, warranties, disclosure and indemnities.

Warranty or Gap insurance, long seen as an expensive and cosmetic solution has experienced a new lease of life over the past few years, especially buyer insurance which has developed into a cost-effective solution for bridging warranty issues.

Course Content

General guidelines for effective negotiating

• 5 Key issues everyone should remember in Negotiating M&A
• Why price isn’t everything (10 aspects affecting the value)
• The three step approach to retaining focus
• The art of making concessions … how and why they can help
• Making the first offer …. Good or bad?
• 8 common mistakes in negotiating the deal (& how to avoid them)

Tactics for managing the advisers

• Choosing the best advisor (horses for courses)
• Tactics for managing your own team
• Tactics for managing the other side
  • Managing the good news & the bad
• The legal guys
  • Pros & cons of Single firm vs alliances vs unaligned firms
  • Managing conflicts
  • What about the Fees?
• Accountants
  • Setting the scope
• Issues with multinational / multi-jurisdictional deals

Negotiating – the Initial stages (pre-signing the SPA)

• Heads of Terms as a negotiating tool
  • Advantages of using Heads
  • Disadvantages of using Heads
  • Guidelines for negotiating Heads
  • Legal issues in re the Heads (enforceability)
  • What about multiples Sellers?
• Negotiating aspects re the Exclusivity Agreements
  • How to retain control & keep buyers honest
• The role of break fees as a negotiating tool
• Confidentiality Agreement
  • Their real purpose (its not confidentiality)
  • How to manage really confidential issues (e.g. formula for Coca Cola?)

Structuring the Offer – impact on value

• Offer structure – cash free, debt free & working capital/net asset value adjustment
• Analysis of the five key value drivers / areas for due diligence & value
  • Cash, debt, working capital, capex and EBITDA/cash run rate
• Problematic areas and how extract value
  • The “Trapped cash” problem
  • What is “debt”
  • “Working capital” – why and how it matters
• Two different approaches to completion: Locked box vs Completion Accounts
  • How they can add / destroy value
  • When to use them and when to avoid them – decision tree
  • Key areas for negotiation

CASE: Identifying the key aspects affecting the reconciliation from Enterprise to Equity Value; techniques for estimating average and normalised working capital

Value Leakage: Reps, Warranties, Disclosure & Indemnities

• Reps & Warranties – What are the main areas of risk
  • Problem areas – tax, environment
• Disclosure
  • All or nothing
  • Dangers of too aggressive disclosure
  • Using Disclosure to identify / mitigate risk
• Indemnities- caps and collars
• MAC clause – “Prospects” & specific carve-outs
• “Knowledge” Directors, Senior management & others?
• No Undisclosed liabilities – Buyer vs Seller position
• “Full Disclosure” Representation
• Representations – “When” & How must they be accurate
• Survival / Time to assert claims & carve-outs
• Exclusions for Damages – consequential, loss of profits, other
• Liability Caps / Baskets, de minimis/maximis

Warranty or “Gap Insurance” … the new & improved model

• Seller vs buyer policies
• Rationale: how they can ease negotiations
• Coverage, Exclusions and Excess
• Premium and costs
• Problem areas

Bridging the “Value Gap” on price

• Cash – how much cash is too much
• Shares
  • When to use them
  • What the market price – today, 1/3/6/12 month average?
  • Problems with volatility (they rise and fall)
  • Caps & collars – do they work
  • Other issues – pitfalls & how to avoid them
• Vendor Loans
  • When to use them
  • “Typical terms”
  • How they can help a vendor
  • How they can add value to the buyer
• Contingent Value Rights … undervalued tool
  • 3 Advantages of CVRs (EDF / British Energy)
• Stub equity – when to use it and why
• Anti-embarrassment … what is reasonable?
• Consultancy agreements
  • Where and how they can help
• Restraints/ Non-compete
  • Why you need them
  • Its never too late
  • How to make sure they work

CASE: Identifying the key issues in a tricky disposal, discussing how best to negotiate these with the other side and deriving the optimum deal structure to resolve the key issues to the benefit of both buyer & seller

Dealing with Management conflicts (retaining value)

• Why this is crucial to the deal
• Identifying conflict and potential value erosion from Managers
• Three ways in which management can kill (or hurt) the deal
• Controlling the flow of information
• How to handle Management “Sabotage”
• What if they want to buy the business themselves
• How & when to use sweet-heart deals to enhance value
• Potential liability for the Seller – Issues with warranties
• Potential liability for the Buyer – how to identify problems in advance
• Reverse warranties – what they are and how they can help
• Side letters – do they work

Earn-outs – a tool for arbitrage

• Anatomy of an Earn-out
• Use & application of earn-outs
• Key negotiation issues
• Duration and key issues
• Benchmarks (EBITDA, EBIT, NPAT, other metrics)
• Typical pitfalls for buyer
• Typical pitfalls for seller

CASE: Structuring an effective earn-out in terms of time frame and the optimum metric; identifying the key negotiating issues and risks, from both buyer’s and sellers’ perspective, that typically arise in earn-outs

What our clients are saying about the course

“Anecdotes brought important points to live, case studies were extremely interesting and answers to questions were detailed and informative”

“Real life “war stories” showed that the trainer was very experienced & brought a good depth to the course”

“The trainer was very engaging & knowledgeable with numerous real life examples which helped in applying the content”

“Helpful practical examples linked to theory”