Trends in private company mergers & acquisitions
June 2024 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
June 2024 Issue
FW discusses trends in private company mergers & acquisitions with Tom Bruce, Emily Jamieson, Charlie Court, India Benjamin and Georgina Fraser at Farrer & Co.
FW: In your experience, are private company buyers making more of an effort to factor ESG considerations into their M&A strategies? How are they responding to the global ESG agenda?
Benjamin: We are seeing environmental, social and governance (ESG) considerations becoming increasingly central to buyers’ M&A strategies. This is the case pre-acquisition, in terms of the initial selection of targets in specific sectors, the scope and detail of due diligence questions, and linking through to warranties, indemnities and other protections for the buyer in the purchase agreement. It also includes, ultimately, the final price paid and, post-acquisition, where ESG considerations are now more frequently included in performance targets for key executives in the target group. In addition, long-term changes may be implemented in respect of the target’s governance and reporting policies to bring them into line with the buyer’s own. In particular, buyers are spending more time and resources conducting due diligence on a target’s people and culture, by way of multiple site visits and personnel interviews, not just with senior management but a wider range of employees, in order to get a truer sense of the business they are acquiring than can be obtained through responses to information requests. Reputation risk linked to ESG factors is also a key consideration for buyers, and increasingly can be a reason for a buyer to walk away from a transaction, if its due diligence uncovers issues it is not willing to bear, even with a price reduction.
“The growing prominence of W&I insurance is further evidence of the increased emphasis placed on risk management.”
FW: What impact is today’s regulatory environment, such as antitrust regulations and merger control regimes, having on M&A deal dynamics, execution risks and negotiated terms?
Court: Potential regulatory scrutiny of private M&A transactions has grown in prominence over recent years. In the UK, the Competition and Markets Authority (CMA) is ramping up its scrutiny of private capital transactions. Purchasers should expect increasing focus on ‘roll-up’ strategies, with the effect on local markets being examined even where national market share remains modest. The use of voluntary notifications should be carefully considered, to ensure that the CMA does not have a long ‘look back’ period to effect a call-in. And the focus on deal certainty between transaction participants remains central, including a focus on the drafting of ‘hell or high water’ provisions. Foreign direct investment regimes can be even more difficult to handle than merger control risks, given their explicitly political slant. In the UK, the National Security and Investment Act is agnostic as to the nationality of the relevant investor and has no financial threshold for notification. This breadth continues to present challenges for dealmakers with a UK nexus.
“Businesses are keen to implement, and be seen to implement, environmentally conscious and ethical business practices into their operations.”
FW: What value creation strategies are private companies deploying in today’s market? To what extent are you seeing a divergence in approach compared to traditional transactions?
Bruce: We are seeing private companies deploying strategies that look to the longer-term success of the company above short-term gains – for example, investments in technology and automation, to streamline and future-proof systems by increasing productivity and enhancing efficiencies. We continue to see focused efforts around ESG concerns. Businesses are keen to implement, and be seen to implement, environmentally conscious and ethical business practices into their operations. The benefits of this for value creation are twofold: it appeals to the changing preferences of consumers and develops and should sustain the long-term reputation of the business. The rise of ESG reports and rankings mean these issues are regularly at the forefront of stakeholders’ minds. The integration of innovation and ESG practices demonstrates a clear divergence from the overriding objective of maximising profits above all else, although in practice the two are often linked. Compared to traditional transactions, we see companies recognising the interconnectedness between the success of a business via returns to its shareholders and the success of a business via its impact on a much broader range of stakeholders.
FW: Has talent become a key focus in private company M&A transactions? By extension, how important is a sound cultural integration process to maximising talent?
Benjamin: The level of a company’s focus on talent will be industry and asset dependent. There is a recognition among buyers that there is a need to retain and develop talent who are business critical. It will be relevant at management level but will also be skills dependent, particularly of course for sectors reliant on technology to develop their platforms – for example, for businesses looking to integrate and develop their artificial intelligence (AI) strategies. For M&A in sectors where the revenues are correlated strongly to long term customer or client relationships, such as wealth management, alongside pricing structures – such as earn outs – and retention plans, identifying cultural synergies and fit between the target’s business and the buyer upfront in a process is important to ensure the long term return on investment. It will also be relevant for sellers, as they plan for a sale to determine whether they have the right depth of experience at management level in the eyes of potential purchasers, particularly if they are looking to step away from the business as part of any exit.
“Foreign direct investment regimes can be even more difficult to handle than merger control risks, given their explicitly political slant.”
FW: Could you provide an overview of current trends in private company M&A? What key developments have you observed?
Fraser: While trends in private company M&A continue to vary greatly by sector, there are two which highlight the buy-side’s increased emphasis on risk management. First, the consideration and evaluation of ESG factors, and second, the rise of warranty and indemnity (W&I) insurance. ESG factors have continued to gain traction and influence deals across multiple sectors. They are increasingly a key consideration for buyers, both pre-acquisition, when they are identifying and evaluating potential acquisition targets and carrying out legal, financial and commercial due diligence, and post-acquisition, when buyers are focusing on business integration. The growing prominence of W&I insurance is further evidence of the increased emphasis placed on risk management. W&I insurance is a tailored product which provides the insured with cover in the event of a breach of warranty or indemnity, allowing the insured, usually the buyer, to safeguard against unforeseen liabilities, and thereby mitigate some of the risks associated with its acquisition. Again, this is a cross-sector trend.
“Higher interest rates, the prospect of political change and economic uncertainty mean the ‘valuation gap’ between seller and buyer will take time to converge.”
FW: Looking ahead, how do you expect private company M&A activity to evolve throughout 2024?
Jamieson: Higher interest rates, the prospect of political change and economic uncertainty mean the ‘valuation gap’ between seller and buyer will take time to converge. We can expect to see the continued use of earn outs and consideration shares in the buyer vehicle as a way to bridge that gap. Due diligence is and will continue to be a higher priority in acquisitions, extending the timeline of transactions, especially early stages. Available cash from both UK and international buyers will be more readily deployed into specific sectors. These include fast-growth businesses – specifically scalable technology and AI – sectors where there is a clear underlying demographic which requires investment, such as the wealth management sector or assisted living, and vital infrastructure, such as life sciences and data centres. Seeking deal certainty, sellers will place a high value on those who can demonstrate liquidity, deliverability and a credible professional team with experience of M&A. There will be opportunities for nimble buyers and ‘patient capital’ is likely to be at a significant advantage.
“There is a recognition among buyers that there is a need to retain and develop talent who are business critical.”
FW: Could you outline some of the underlying drivers of private company transactions? What role are technology and innovation playing, for example?
Jamieson: In the current M&A market, buyers are increasingly focused on fast-growth technology-driven businesses. AI is a hugely topical subject, but this has not yet trickled down into a large number of M&A transactions of pure AI businesses. In part this is because AI is, relatively speaking, in its infancy and AI’s practical use is not yet widespread enough to be a key part of a meaningful number of technology businesses. AI is also a focus for UK regulators too as they oversee the continuing adoption of generative AI and machine learning technologies. AI will therefore continue to dominate the headlines, but with an increased focus on the practical delivery of safe, robust systems, and how AI can support and develop businesses. The application of the National Security & Investment Act for inbound investments and acquisitions will continue to be relevant to transactions at all levels. Acquirers and their advisers will have to conduct an ongoing assessment of whether any share acquisitions, including minority stakes, will require a mandatory or voluntary notification under the legislation.
Tom Bruce is an experienced corporate lawyer. His expertise spans fundraising and M&A for ambitious and fast-growing private businesses and corporates. He acts for owner-managed businesses, investors and other corporates. He can be contacted on +44 (0)20 7385 7192 or by email: tom.bruce@farrer.co.uk.
Emily Jamieson advises on corporate transactions including acquisitions and disposals, joint ventures, investments and corporate structuring. She also provides advice on general company law matters and in relation to corporate governance. Her clients include individuals, private companies and not for profit organisations such as charities and sports governing bodies. Her expertise spans the life of a business, from company incorporation, through investments and restructurings, to company or business disposals. She can be contacted on +44 (0)20 3375 7127 or by email: emily.jamieson@farrer.co.uk.
Charlie Court is an experienced corporate solicitor focusing on private capital, working closely with companies and individuals across a variety of different sectors. He advises private businesses and those investing in, acquiring and exiting them – as well as providing advice around matters of ongoing governance. He has a particular focus advising owner-managed businesses and their shareholders throughout their lifecycle and on exit. He also has an extensive knowledge of the regulated M&A sector. He can be contacted on +44 (0)20 3375 7487 or by email: charlie.court@farrer.co.uk.
India Benjamin is a specialist corporate lawyer with significant experience advising on mergers and acquisitions, investments, joint ventures, complex structuring and restructuring projects, and corporate governance. She has particular expertise working with a range of private businesses and corporates on environmental, social and governance matters, and advising families and family businesses on transactional, structuring and governance issues. She is a regular speaker at conferences, both in the UK and overseas. She can be contacted on +44 (0)20 3375 7659 or by email: india.benjamin@farrer.co.uk.
Georgina Fraser advises private businesses on all aspects of corporate law. She has significant transactional experience and advises on a range of matters, including acquisitions, disposals and reorganisations. She works with both buy-side and sale-side clients across diverse sectors, with a particular focus on the sale and purchase of owner-manged businesses to and by UK and international financial buyers and trade buyers. She can be contacted on +44 (0)20 3375 7103 or by email: georgina.fraser@farrer.co.uk.
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