Eversheds' M&A Blueprint

"The international law firm has introduced what it calls a blueprint for M&A transactions. The blueprint reveals that in order to create value in an M&A transaction, the historic focus on deal execution needs to be replaced by a focus on the whole process from inception to integration"

In a tough global economic environment, the business of sealing deals is becoming tougher than ever. Company boards however are under pressure to secure growth and mergers and acquisitions are an essential business tool for achieving this. We have seen a steady stream of deals in the M&A market involving Indian companies in the last 12 months despite turbulent market conditions. This includes deals by the Aditya Birla Group, Hinduja Group, Infosys, Reliance Industries, India Hospitality Group and WNS (Holdings) Limited. It is important that a company gets better value for its M&A deals as there is even more scrutiny of those deals from shareholders, regulators and the general market.

Eversheds LLP, the international law firm, recently produced a report called the M&A Blueprint : Inception to Integration, which is a collection of experiences in the global M&A community working on cross-border deals. The Blueprint specifically looks at the legal challenges and experiences of the deal making process with particular focus on the due diligence and integration phases of the deal and analyses what impacts most on the success of integration. The research involved more than 400 businesses from around the world who had worked on cross-border M&A transactions in the last three years. Respondents were from 41 different countries, including the Indian sub-continent and collectively respondents had worked on over 3,000 cross-border deals between them.

Respondents to the research were anonymised, so parties felt free to talk about their experiences. Some key findings came out of the Blueprint:

The historic focus on deal execution as a distinct silo needs to be replaced by a focus on the whole process from inception to integration. In-house lawyers need to be the connective tissue

1. There is a failure to realise the full value of M&A due to weaknesses in the deal process rather than the target company itself. Most commonly, this is due to a lack of a strong enough connection between the planning, completion and integration phases of the deal. The findings point to the need for a core team at the centre of the project to provide the connective tissue between all phases of the deal process and to take a deal from the inception stage through to post-completion integration.
2. There is recognition amongst businesses that integration planning needs to be considered in more detail at the beginning of the deal process and there needs to be a move away from simply execution i.e. doing the deal, to thinking about life for the combined business beyond the deal at the start of a process i.e. provide an end-to-end solution.
3. There needs to be a rethink of the relationship between internal and external advisors and their role and also the relationship with the deal team and the integration team advisors.
4. Many businesses know they can be better and they are anxious to see best practice in action in each and every transaction.

The Eversheds Blueprint identifies key area businesses as best practice in the deal making process. These are:

1. Include personnel who are continuous on the deal team from the assessment and planning stages right through to the integration stages providing the necessary glue for the successful merger or acquisition. Connectivity is key.
2. Join up the dots between the different stages of a deal life more effectively.
3. It is critical that the team do the requisite research to get a proper understanding of the target's culture towards risk, compliance and supplier and customer relationships.
4. There needs to be a proper understanding of the target company's infrastructure and culture.

The Blueprint draws out a number of reasons for the failure to achieve value in cross-border deals:

In order to create value in an M&A transaction, the whole area of how a deal is put together needs to be reviewed

1. Nearly half of those interviewed (43%) said the challenges during integration phases were due to errors in the due diligence and planning prior to deal execution.
2. There was a lack of alignment between internal and external work streams. While a lot of businesses put the failure to realise value down to external factors such as economic crisis and markets, others point to the lack of alignment between the various internal teams in the company as well as external work streams creating unnecessary complexity.
3. Many felt that getting a proper legal review of a deal status was done too late in the process and was not carried out at a strategic level.
4. Legal risk is seen as an increasingly important consideration in the assessment of potential deals. More than 59% of all respondents said that they had spotted potentially damaging issues such that they had recommended that a deal should not go ahead or be restructured.
5. Integration went better for those businesses that involved their in-house legal teams in the transaction early enough.
6. There is a strong perception amongst respondents that external advisers were not sufficiently interested in the integration issues and that most advisers were too much focussed on deal execution rather than long-term strategic relationships. External advisors had separate deal teams to integration teams and as with internal teams, there was a lack of connection between the two.

An example of the issues that face companies is set out in the following comment from a senior business develop ment director of a major Asian-based corporate: 'My authority stops at completion. I provide encouragement and support to the acquiring divisions to prepare integration plans but have no formal role in making sure those are implemented properly'. When asked why this was so, he said there were two potential problems, one at each end of the process. "At the front end, the vision at the executive director level is not always realistic and even the best practical integration plan effectively delivered would not have met those expectations. More importantly, at the back end, a lack of experience in managing change projects or simple wishful thinking results in patchy performance."

An example of the issues that face companies is set out in the following comment from a senior business develop ment director of a major Asian-based corporate: 'My authority stops at completion. I provide encouragement and support to the acquiring divisions to prepare integration plans but have no formal role in making sure those are implemented properly'. When asked why this was so, he said there were two potential problems, one at each end of the process. "At the front end, the vision at the executive director level is not always realistic and even the best practical integration plan effectively delivered would not have met those expectations. More importantly, at the back end, a lack of experience in managing change projects or simple wishful thinking results in patchy performance."

If a company is to really succeed, there needs to be a change in accountability. Accountability for the strategic vision should rest with the CEO but the accountability for operational delivery often lies at the divisional level. A completion of a deal often represents a hand-over point that no person has clear accountability for and therefore has no strong interest in the end project.

If an integration team is not involved in the due diligence and negotiation, there is a loss e.g. of knowledge in hand-over. The Blueprint shows effective end-to-end management ensures everything is joined up.

One experienced Asian-based deal doer felt that "there was certain benefit in the management of a project being outside of an organisation" but clearly that is going to be resisted by many people, who believe that that is going to add cost rather than add value to an M&A transaction.

What the Blueprint shows is that in order to create value in an M&A transaction, the whole area of how a deal is put together needs to be reviewed. The historic focus on deal execution does need to be replaced by a focus on the whole process from inception to integration. Eversheds are changing the way in which they provide legal services to reflect this need by introducing a new integration approach capturing issues effectively during the execution phase so that they are dealt with in the post close phase. Whether the marketplace itself will adapt can only be analysed in a few years time.

We are developing a benchmarking tool to help companies benchmark themselves against other companies in the same sector or region – we will be launching this very soon and will post a link on the LegalEra blog as soon as it goes live.

(If you would like a copy of the Eversheds M&A Blueprint: Inception to Integration, please email Parmjit Singh (parmjitsingh@eversheds.com) or Neil Matthews (neilmatthews@eversheds.com) at Eversheds.)

Disclaimer –The views expressed in this article are the personal views of the author and are purely informative in nature.