securing value in m&a—making sure you get what you bargained for andrew saul/kevin barrow...
TRANSCRIPT
Securing value in M&A—Making sure you get what you bargained forAndrew Saul/Kevin Barrow
October 2012
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Introduction
1. Who's buying, who's selling and why
2. Key legal issues in private company M&A which secure value:
3. Buying a public company
4. Issues affecting value
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Who's buying, who's selling and why?
Buyers
1.US (and other international companies)
• Client demands
• Cash reserves
• Fans of UK companies
2.Private equity – NB recent large oil & gas deals
3.Companies outside the sector – IT & financial services companies
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Who's buying, who's selling and why?
Sellers
1.Privately owned recruiters/staffers
• Lack of capital for growth
• Cautious about next few years
• Entrepreneur's relief
2.Public companies – P2Ps
3.Private equity
• Exiting portfolio companies – often to another PE house
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What to get signed at the start
Buyer Seller
Letter of intent • Try to retain flexibility ( e.g. 'warranties typical for a transaction of this type')
• Address all key issues in as detailed a way as possible
Confidentiality Agreement
• Limit to basic confidentiality
• Time limit—2 years?
• Include non-solicitation of staff and customers
Exclusivity Agreement
• Tie in shareholders as well as target
• Costs indemnity
• Right to terminate if Buyer seeks to change deal terms
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Due diligence
Buyer Seller
Scope • Undertake detailed legal, commercial and financial DD
• Try to get to bottom of tax issues asap – can require extensive follow up questions
• Keep sensitive information until the end—e.g. redact key customer names, rates and margins
• Maintain confidentiality – offsite or electronic data room?
Commercial DD • Customer references and interviews with key employees
• Try to make these the last steps in DD
Outcome • Price re-negotiation? • Seek to avoid re-negotiation by controlled management of information to Buyer---no late surprises
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Net asset adjustments
Issue Buyer Seller
Preparation of balance sheet at completion underpins warranties
• NAV target figure based on completion accounts
• Prefer to warrant historic figures and 'no material change'
• If NAV test agreed, make sure get upside if surplus
Structure • 'NAV' , 'Debt-free/cash free', 'Normalised working capital' etc. – be clear what these terms mean in practice
• All calculations should consistent with target's past accounting practices
Option tax benefits • Try to include benefit of these in offer
• Make sure sellers get the benefit—otherwise windfall for Buyer
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Warranties and indemnities
Issue Buyer Seller
Scope • Full trading and tax warranties and indemnities—typically run to 40 or 50 pages
• Limit scope of warranties to exclude e.g. future events, non-specific items
Disclosure • If liability issues disclosed, possibly use to re-negotiate price or obtain specific indemnity
• Wide ranging as possible – to include general and 'deemed' disclosures
Liability for warranties
• Full damages (indemnity if possible—e.g. tax)
• Limitations of liability as to time and amount
• Warranty insurance?
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Earn-outs
Issue Buyer Seller
Purpose • Bridge gap between what Buyer prepared to pay and what Seller wants—avoid over-paying
• Ties in Seller shareholders if they are key to future trading performance
• Not generally welcome. Only acceptable as 'icing on the cake' – need to be happy with up front payment
Structure • Typically based on future EBITDA or turnover, or a combination
• 1-3 years normal
• May also be linked to retention rates of key customers/employees
• Retain as much operational control as possible
• 'Ring-fencing' the target business
• Tax—planning essential ( can be taxed at 10%, 28% or circa 58%)
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New employment contracts/incentivising staff
Issue Buyer Seller
Current contracts not fit for purpose? (e.g. Linked-in usage)
• Put key employees on new contracts at completion
• Terms commensurate with benefits/amount received for shares—especially restrictions
Retaining key staff post acquisition
• Possible new option scheme
• Loyalty bonuses
• Consider carefully impact of bonus schemes and options on earn-outs, net asset calculations
Structure • May need a 'compromise agreement' to implement
• Independent advice required for employees executing new service contracts
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Restrictive covenants
Issue Buyer Seller
Protect goodwill of business being purchased
• To include non-compete, non-solicitation of staff and customers, no 'bad mouthing'
• Commensurate with amount received
Scope • Enforceability – generally 2 years max
• What future plans do sellers have?
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Integration plan
Issue Buyer Seller
Most acquisitions fail due to poor post completion integration
• Prepare and update detailed implementation plan
• How will customers, employees, suppliers, contractors etc. be integrated into the enlarged group?
• Involved in plan if staying in business/earn-out arrangement
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Buying a public company
• Different regime to buying a private company
• Heavily regulated by the City Code on Takeovers and the Companies Act
• No representations and warranties; also no 'deal protections' now permitted
• Negotiations with the board, not the shareholders in the first instance
• Morson P2P a recent example
Private & Confidentialosborneclarke.com
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Allegis Group
Tribal Group
Morson Wynnwith Ltd
Ambition 24 Hours
Advantage Empresaria Group plc
Yoh
Recruitment Sector Corporate Transactions
Ciklum
Advised on acquisition of international IT recruitment specialist Aston Carter
Winner of Recruitment International's "Most Transformational Deal of the Year 2011"
Acting for former shareholders of Wynnwith Group Ltd on joint venture & acquisition from Administrators of business of Wynnwith
Winner of Recruitment International's "Most Transformational Deal of the Year 2010"
Advised on the acquisition of IT recruitment company, Atlan
Advised on the €14.6m acquisition of German recruitment company, Headway
Advised on the disposal of the Advertising and E-Solutions business of Tribal Resourcing Limited to TMP Worldwide
Advised on acquisition of nursing staffing businesses of Pinnacle plc for £2.75mShortlisted for Recruitment International's "Most Transformational Deal of the Year 2010"
Advised on significant mid-market investment by Horizon Capital in European IT staffing and services company Ciklum
Advised leading US recruiter Yoh on the acquisition of UK IT recruitment company Connections
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Company valuation issues
• Legal, tax and regulatory issues affecting value on sale/acquisition?
• Fact 1: Lawyers frequently tell clients to worry about legal developments, compliance and other threats to their business
• Fact 2: But somehow most recruitment companies survive and thrive (and attract buyers/investors), including many who do not treat all compliance and business protection as seriously as others
• (Obviously) the key is to work out what matters most and when, and to deal with true risks proportionately and efficiently
• Recent M&A transactions suggest there tend to be 6 key things for prospective buyers and sellers to watch
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Company valuation issues
1. Reputation, serious criminal prosecution, personal liability for debt
•= "sleep at night" issues – MSC issues - MSC provider and any "encourager" may have personal
liability for tax debts of contractors [checklist approach needed]– Offshore payment arrangements = conspiracy to defraud HMRC/s689
ITEPA [checklist approach needed]– Bribery Act/supply chain fraud e.g. kick backs? [check unusual margins and
suppliers etc.]– Competition law e.g. pricing cartels: fines, arrest and imprisonment [check
unusual margins etc.]– H&S in safety critical situations (Link Up Accreditation) – imprisonment,
fines, arrest and imprisonment [check processes]
•= relatively low incidence…but serious costs if problems arise
•= Sarbox etc. investors/buyers cannot afford to happen on their watch
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Company valuation issues
2. New laws?– AWR
• Has not really featured heavily (where AWR has been regarded as not significantly affecting target)
• Will do for lower paid end of market if claims start happening?– Pensions Act?
• Esp lower paid end of market? – Ill-thought through tax: controlling persons/IR35 changes/employee share
idea– (Signs of M&A i.e. market consolidation among umbrellas)
3. Exposure to certain MSPs– Big element of some forced sales?– Will affect value – strategy needed to resist margin erosion– Has influenced mid tier recruiters – "need to be part of bigger group"
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Company valuation issues
4. International operations
– Obviously good to be global (Hays/Page/RW etc.): will help multiple on sale e.g. many US buyers want a "footprint" to service global customers
– But if you are a smaller recruiter setting up abroad will that always make a buyer value you more highly?
• Local contractor tax/chain liability issues?
• Authorised to do what you do?
– Difficult for buyer to check because many grey areas in many countries
• Buyer may have pitched the price on the basis you are compliant in a country they want to be in
• Expect price to reduce if you are in a grey area?
• Some countries may be carved out?
• Will buyer bother with proper due diligence?
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Company valuation issues
5. Employee terms
– Share schemes must not pay out too much and too soon
• Link to earn out for main shareholders
• Tax planning – different class of share?
– Bonus arrangements etc.
• Must not be too out of kilter with the likely arrangements of a buyer – difficult integration issues.
• Is it such a good idea to have the best incentive schemes in the industry?
• NB TUPE issues for buyer when attempt harmonisation of T&Cs
• And claims of constructive dismissal (if new terms are imposed incorrectly) may lead staff to claim their restrictions do not apply
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Company valuation issues
6. Loss of database/key clients etc.
– Managed meetings with key clients of target?
– Monitoring consultant activity pre/post acquisition
– Photocopier use and homeworking
– Watching briefs at Companies House: newco's set up by key staff
– Social media policies/seller effective of ownership of contacts via [LinkedIn]
– Monitor recommendations etc. on LinkedIn?
– Obviously check for disputes and normal employment issues etc.
7. (Obviously each company has other special issues to check)
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Company valuation issues
Summary
•If you are selling - think who you may be selling to and why they are buying and make sure you cover the risks they worry about
•Unprovided-for contingent tax liability is not good!
•Sustainable profits surviving sale – systems must ensure clients and candidates cannot be stolen/terminated too easily
•Sustainable footprint in interesting countries/skills sets/sectors
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Contact Details
Andrew SaulPartnerBusiness TransactionsT +44 (0)20 7105 7372M +44 (0)7768 [email protected]
Kevin BarrowPartnerEmploymentT +44 (0)20 7105 7030M +44 (0) 7711 [email protected]
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