The biggest blockers delaying M&A completion

June 2024 | SPOTLIGHT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

June 2024 Issue

Throughout 2023, concerns over market concentration, consumer welfare and national security implications led to increased scrutiny and due diligence efforts, often prolonging the M&A completion process.

Additionally, the global economic landscape remained volatile, characterised by inflationary pressures, rising interest rates and geopolitical tensions. These uncertainties impacted the availability of financing and the perceived value of target companies, causing some acquirers to reevaluate their strategies or renegotiate terms.

Alongside this, shifts in industry dynamics and emerging technologies disrupted traditional business models – complicating the valuation process and raising questions about the long-term viability of certain acquisitions. Companies had to reassess the strategic fit and potential synergies of their target companies, leading to extended negotiations and, in some cases, terminations of deals.

This article explores the ongoing barriers faced by businesses in M&A transactions and common pitfalls that can be easily avoided.

Due diligence: a common (but potentially avoidable) blocker

Due diligence has become one of the most prominent blockers when it comes to slowing down deal completion. Due diligence allows acquirers to investigate, verify and audit a target business to confirm all relevant facts and financial information ahead of sale. In the last couple of years buyers, investors and funders have taken a much more conservative approach to issues arising from due diligence.

Critical items often come out of the woodwork during due diligence processes that could easily be mitigated in advance with a little bit of preparation. From a property-heavy business checking that its asbestos surveys and legionella risk assessments have been done, to all businesses saving and storing all customer and supplier contracts in one central location – there is a lot to consider.

When issues do crop up, it tends to be later down the line when these are often the items that can take the most time and money to resolve. Intellectual property ownership uncertainties have been a prominent issue of late, including confusion around software creation and ownership.

To prevent delays when it comes to a business sale later down the line it is important that ownership is clearly established from the outset, including clear terms in employment contracts and third-party assignments being clearly documented.

Regulatory hurdles: competition and national security concerns

A robust approach to merger control enforcement is also topical, with competition regulators including the UK’s Competition and Markets Authority (CMA) demonstrating an increasingly interventionist stance within M&A deals. A recent example includes the regulator announcing in January this year a formal investigation into the planned merger of Vodafone’s domestic operations with Three UK.

This is only set to continue, with businesses increasingly scrutinised by competition regulators – therefore it is vital that organisations understand how and why deals get caught in the UK. The CMA has a dedicated Mergers Intelligence Unit (MIU), responsible for monitoring markets to identify transactions for potential investigations.

Engaging with the MIU can involve heavily detailed submissions. But for those businesses able to demonstrate that no formal phase I investigation is warranted, the process can be comparatively quick for transactions compared with the length of an average UK phase I investigation, which can last for some months. Building in sufficient time for those processes to play out is therefore crucial in allowing a smooth transition to completion.

Deals can also be held up by the National Security and Investment (NS&I) Act, in which the government is able to review, and ultimately block, transactions that pose a risk to national security. The UK government justified its requirement due to sweeping technological, economic and geopolitical changes in recent years.

The NS&I Act powers risk being seen as a significant hurdle for potential investors into the UK, and businesses should consider that the Act can mean an increased timeframe for deals to be cleared. That said, in the vast majority of transactions, any competition and NS&I Act considerations can be managed effectively by proactively identifying the issues, and an effective strategy for dealing with them, early on in the process.

An increasing number of other countries also now operate their own equivalents of the NS&I Act, and these need to be considered too on deals that have an international angle.

Integration considerations

Integration in M&A transactions often encompasses a broad range of factors beyond the typical regulatory and due diligence hurdles that come to mind. One of the most overlooked yet critical components involves addressing cultural and internal conflicts within the organisations involved.

For a seamless integration, businesses need to have a clear understanding of their objectives, whether it is an expansion through acquisition or a strategic exit. A key initial step is establishing a consistent schedule of meetings between parties, which serves as a platform for maintaining open and transparent dialogue.

Another crucial aspect is developing a comprehensive communication plan, detailing not only how information will be disseminated across the merging entities but also the frequency of these communications. It is essential to keep stakeholders, including employees, customers and suppliers, informed about merger progress and any changes that may affect them. Consistent communication can help manage expectations, reduce uncertainty and maintain morale during a period of significant transition.

The hard work often begins after the acquisition is finalised. Many organisations find it beneficial to establish a dedicated integration team tasked with overseeing the integration process, identifying potential bottlenecks, and devising solutions to prevent or mitigate them. Having a specialised integration team can also help manage unexpected costs that might arise during the post-acquisition phase. These costs could be related to balancing different systems, processes or corporate cultures.

Mitigating delays in M&A transactions

In summary, successful M&A integration requires careful planning, consistent communication and dedicated resources. Organisations must focus not only on the strategic and financial aspects of the merger but also on the human element.

As the pace of M&A transactions begins to accelerate, innovative solutions such as advanced analytics and artificial intelligence tools can be used to identify risks and streamline integration processes. To avoid costly and time-consuming delays, or in the worst case deal failure, it is crucial to address common blockers proactively.

The M&A sector is constantly evolving, and predicting future trends can be tricky against an ever-evolving market backdrop. Looking ahead, pockets of market interest will increase dealmaking appetite and M&A will remain an important tool for companies as they look to expand and evolve their strategy.

Alison Gilson, Lisa Sigalet and Nina Smith are partners at Shoosmiths LLP. Ms Gilson can be contacted on +44 (0)3700 868 123 or by email: alison.gilson@shoosmiths.com. Ms Sigalet can be contacted on +44 (0)3700 866 913 or by email: lisa.sigalet@shoosmiths.com. Ms Smith can be contacted on +44 (0)3700 868 975 or by email: nina.smith@shoosmiths.com.

Alison Gilson, Lisa Sigalet and Nina Smith

Shoosmiths LLP