Acquiring (or Investing in) Foreign Companies | Transaction Advisors

let's get into then the cross-border deal conversation and what I want to do to keep us focused is have the kickoff this next session which look at outbound M&A so quite often the mandate we believe from from many boards is by innovative companies and by overseas by international expand the breadth and depth of the portfolio but these are far more difficult deals than buying a company in Michigan when you're buying a company overseas the the rules the challenges the risks are significant but we all I believe need to elevate our aptitude in terms of being able to do these deals effectively and boy are we fortunate to have one of the the preeminent M&A advisors in cross-border deals George Casey here with us today and he's going to walk us through this next session so welcome George and well good morning still maybe I'll ask the panel to introduce themselves the topic today will be what we will be discussing is cross-border M&A and we will try to in the 45 minutes that we have tried to highlight some of the challenges and issues that we see in cross-border deals we would very much welcome questions as we go along so that we can actually get into more interactive discussion but before we go there maybe let's let's quickly introduce the panelists Ryan do you want to go first sure hi I'm Brian Hannigan I'm the VP and associate general counsel at EDX Corporation were based up in Lake Forest Illinois or diversified industrial manufacturer have about 45 to 50 ish operating companies throughout the world about 2.3 billion in revenues 9's billion market cap and we've done a fair bit of international M&A the last three years I think four out of the five acquisitions we've completed have been international companies and then also a few companies on the divestiture side we've sold in Asia and in Europe last year good morning I'm Scott D'Angelo I'm the vice president deputy general counsel at Fortune Brands home and security we're headquartered here in Deerfield just north of the city we were holding company for a number of different building and home products brands Moen masterlock a large cabinetry business we're about six billion in revenue and I've been there for about three years doing primarily M&A work for them as well as managing the helping to manage the legal department as Brian mentioned our acquisition our quiz ative strategy over the last three years has been largely international both in the UK as well as other other jurisdictions so we've had done a lot of cross border work prior to that time I was with McDonald's Corporation for about 13 years as well where I worked both in their London offices and in Singapore and was responsible for a lot of their divestiture and acquisition work for them over the time I was with McDonald's Corporation so pleased to be here hi I'm John O'Brien responsible for corporate development at Brooks Automation Brooks is about two billion now and market cap and about 600 million in revenue 80% of our business is semiconductor capital equipment the other 20% is life sciences we've completed in the last seven years we've completed two deals in the UK one in Germany and one in Japan we've got an LOI for for another UK company in place and we're looking to make a bid for a Switzerland based company as well so we've got some cross-border experience in my company as well and I'm George Casey I'm practicing lawyer and partner chairman Stirling I had the global M&A practice at the firm I have done deals pretty much in every major jurisdiction over the years I also teach adjunct professor teaching him and a cross-border M&A at the University of Pennsylvania so hopefully we will give you some some insight into some of the cross-border topics as I mentioned and maybe we'll start with macro can a high-level view of the current M&A markets although we're not going to spend much time in macro because it's actually the most interesting part is really talking about some specific things and type of things we get into when we do deals at the macro level the MLM markets as we will see to be challenging on the one hand we see significant volume in terms of dollars yen euro spent on the other hand we also see relatively flat market in terms of number of transactions so what it suggests to those of us who pay attention to the markets is that market practitioner is a focused they are focused on specific opportunities but they are not rushing into deals where we see more activity these days is actually in the u.s. partially because the US economy is probably more stable now than some other parts of the world and although we may argue that it's not as predictable but it's probably a little bit more predictable than some of the European markets so there is quite a bit of money going into the US we also see quite a bit of outbound US M&A partially because dollar is strong and strong dollar allows US market participants to go and find good opportunities particularly in Europe were both the combination of the currency the exchange rates these days but also were in some of the markets valuations are depressed because of uncertainties in those markets so again not not going to spend a lot of time on the markets but looking at M&A as a as part of the corporate strategy John maybe starting with you as a business development practitioner who is surrounded by the way by lawyers what for better or for worse but looking at it as a businessperson right from the corporate development point of view how does cross-border M&A fit into the corporate strategy how should people think about cross-border M&A compared to domestic deals does it matter or maybe it doesn't matter how well you guys look at it yeah so I think so first of all M&A is an important part of our strategy generally speaking it's we articulated as part of my strategy to the street our board is very supportive of M&A so it is is a big focus of ours or global company and so when we think about M&A we think about it globally as well there are certain there are certain countries we would probably avoid but for the most part if there's a company that makes sense for us a target that makes sense for us from a strategic perspective you know we're we're willing to go to any country to to acquire business so should we look more on a product by product basis of business line by business line or do you look at geography as a strategic prerogative it's more it's more product line the business and then and then we'll then we'll assess the the country but it's first first order priority is is the strategic thing what the business does you know if it's if it's in a country where we don't have a footprint currently we'd probably think harder about it but we haven't done one of those yet right right okay and when you think about assembling the team Brian when you look internally externally so you go your venture into the country where you may not the company may not have ventured before how do companies go about it how do you assemble the team how do you try to identify the internal expertise outside help if you need it what what's the thinking yeah I mean sometimes that's a challenge for us because we've got a very small legal department you have a small business development department as well so especially if it's an international deal we're really reliant on our outside advisors to a certain extent and it's it's challenging on the legal side especially if you're in a auction process where you don't have a lot of time to get up and running to identify the critical stuff that needs to get looked at so it's it's very important to have the right legal counsel in-country and one of the challenges we face just for example a couple of deals we did were in Italy in Germany in the past couple years where we didn't have anybody on our team in our corporate office that spoke the language and kind of the space that we play in in M&A is in the 50 to 250 ish million dollar businesses so kind of private equity owned or family owned businesses so it's not necessarily a division of a public company where you'd have you know local folks there more of the documents in English so I need to get out in front of that and be in conversations with our legal counsel to say hey here's what we need from you we don't want you to translate every Paige in the data room because you know 80% of that stuff is worthless anyway right but I need you to focus on these particular things and what we found is sometimes the law firms have a different idea of what legal due diligence is I mean they're very good at telling us you know if there was a share transfer 25 years ago that wasn't you know updated properly in the register or yeah they don't have any claims that are outstanding but what we really need their help on is yeah more the commercial sort of stuff yeah reviewing employment contracts reviewing commercial agreements you know that sort of stuff so it's some you really have to give them a roadmap so you get the the right work product and you're covering the critical areas right right and and then you know we will talk a little bit later today a little bit about cultural differences and so to Brian's point you sometimes run into cultural differences even and how people do deals right because it's a very different sometimes very different dynamic what we find is that often when we help with deals in jurisdictions that may be less known it's very helpful to have a financial adviser or consultant who actually knows the country and knows and can navigate some of the both cultural but also deal dynamics with the counterparty and then with local authorities and so forth on legal counsel similarly some countries have very very sophisticated law firms very sophisticated and very experienced lawyers some countries less so and so we sometimes find ourselves where we do the global deal and then we have local counsel working with us because they would not have as much experience and again we'll touch on some of the differences in some countries people would expect that the purchase agreement will be five pages long right and it's not a question of length it's a question of what's in it right or so and you end up actually going into some much more detailed discussions than maybe people are accustomed accustomed to and so when we look at cross-border there are some countries where you do full-blown acquisitions that sort of as part of the corporate strategy and actually feasibility you go into the country and you look at just acquiring company public company private and so forth in some countries not so much sometimes you'll say that okay here we'll do a joint venture Scott what's any any thoughts on when companies and you know drawing into your experience and living and practicing actually in the number of countries how should people think about full acquisition versus joint venture versus maybe minority investment something else sure yeah and I in the experience I had both in my current role and at McDonald's a lot of experience with joint ventures and I can tell you that most amor not pleasant you know and and these were joint ventures that were in place that I ended up inheriting and managing that had been put in place early on and I would seamlessly for McDonald's as entries to certain markets where they wanted to get access to the consumer base didn't want to you know I didn't really have the assets on the ground or the the resources on the ground to do it so finding a local partner who for example in with McDonald's a lot of it was about real estate and location so was finding a local partner who who you know had the bandwidth who had the experience and the connections in the local market to find locations to establish restaurants and while on the front end of that process very positive also a way to get in the market the right way for them over the long term I think the experience I would say is largely negative in the sense that especially in emerging markets less mature markets they experienced a great loss of control over the brand and the way that the business was run in those markets and to the point where you have someone who's controlling the real estate and and and keeping it making it very difficult for the multinational to come in and and do what it wants to do with the brand so I think that you know my view on that is that I think there are I would almost take the position in today's environment that you're better off going in with a direct investment buying than you are doing a joint venture especially in emerging markets unless you're really prepared to take the risks around the loss of control the way the your local partner is going to run the business in that market and what the what the structure and the legal structure is like in those markets because not surprisingly certain emerging markets it doesn't really matter what you write in your joint venture agreement you're not going to you know you're gonna have a very difficult time enforcing it particularly exit particularly exit provisions and trying to buy out partners much more difficult than than what's written in those agreements particularly in you know depending on the jurisdiction you're in so my current instinct and feeling is that you're much better off with a direct investment because it gives you the control it gives you the the ability to control your brand and what you're doing in that market as well as you know I would add to that piece as well the compliance risks again in today's environment you've got someone operating and representing your brand in those markets where you don't again necessarily have that day-to-day control over what they're doing so while I think there are some positives I would say largely you know my view and I think what we've been doing in my experience the last few years is a lot more direct investment than then you know then a joint venture structure and on some of these challenges that you just touched on Scott when you were actually negotiating joint venture what works what doesn't work what should people keep in mind when they actually go into negotiating a joint venture yeah well I think you know I think one of the biggest things is in in negotiating is how does it how are you gonna wind it down what's it gonna look what's the time horizon what's that gonna look like and what are the mecca of the levers you're gonna put in there to to you know exit out of that investment at the time you know at the appropriate time and while you know we've negotiated various buyout formulas appraisal appraisal processes all of those things I think it's important to to think about what would work would be you know exit strategies on the timeline that you're looking at using as much as possible independent arbiters of the value of that business in a way that's removed out of that jurisdiction out of the local jurisdiction or market where you're at so that you feel like you're going to get some level of Independence to that to that to that process and then I also think you know if you find the right partner I mean and that to me is that what works is is spending the time on the front end of that process finding the right partner doing spending the time to do the due diligence find the right partner when you do that negotiating in from an operating standpoint what how are you gonna you know leveraging that parties strengths but doing it in a way that doesn't necessarily dilute your control over the over the business so you know I think playing into the your counterparty strengths and and structuring the agreement in terms of the operating piece that way is also a positive and that that's that's actually you know very similar to my experience in joint ventures where it's so important to think at the front of the process as to what it is that we're trying to achieve who the partner is and then actually as painful as sometimes it may be negotiating the nitty-gritty the details of the partnership going forward and the interesting you think here is not so much even legal issue or business development issue it's a psychology right when you have a partner you like and both partners are going to the joint venture thinking that well this is great we're going to live together for the next several decades it's a joint enterprise let's not worry about these details right let's not worry you know we'll we'll figure out how we're going to operate it or we'll figure out why do we need to talk about exit why do we know I'm not planning to exit and the partner is not planning to exit why we should even spend time talking about it the unfortunate thing is that once you get to operating or once you get to an exit sometimes the exit may be a year way sometimes the exit may be fifty years away at some point there will be an exit not negotiating it upfront would mean a lot more pain down the road may be the only other thing I would say is in these negotiations also it's to some extent when you buy and sell there is a finality to the partners thinking the buyers thinks well we're gonna sign this deal we're going to close and move on the seller thinks the same way in joint ventures sometimes people pay less attention to how we can actually form the joint venture and what goes into you know what people refer to as formation agreement you can call it contribution agreement but it's basically how how the assets are going to come into into the joint venture and you know that's another piece that is very important to pay attention to I can tell you we were negotiating a joint venture it took us about eleven months to negotiate we signed it there was no doubt in anybody's mind that we will close three weeks later our counterparty said they're not closing and so then all of a sudden what's in the formation agreement the legal obligations in the formation agreement and what the consequences of not complying that becomes very very important and that's where everything that's been negotiated gets under the microscope in that particular transaction we actually brought the arbitration claim took three years to arbitrators and I can tell you as a transactional lawyer sitting under the microscope for three years were each word in that agreement is been is been reviewed it's a it's a quite quite a process but at the end you know we prevailed we won we established that the other party should have closed we collected very significant amount of the damages for the client because the counterparty did not close but the only way you can do it is when actually during the process you have very focused on negotiating things that otherwise may feel like well we don't need to spend time on it switching from joint ventures to different deal structures so cash transactions versus stock transactions John do you want to talk a little bit about how people should think about it particularly in cross-border context is stock a realistic deal structure is it more likely you know parties will use cash I mean I think generally speaking cash is easier than stock and the same issues you have domestically with a stock deal you have internationally even more so because they they may or may not be familiar with your stock or your business and so that you know the the reverse due diligence required in order to do a stock deal would just slow you down and and it's hard you know it's a negotiation on how to value your own stock to begin with so we haven't really even considered it right all of our deals been cash okay have you guys yeah you know but probably there is quite a bit of experience and concerns about where sits right these days there is for us companies in particular there is a lot of cash that's trapped abroad would have been great to bring it back or somehow use it how do you guys deal with it do you find that you can use your cash outside of the US or yeah I mean that's it's a huge selling point for the cross-border deals with our CFO is we've used cash-strapped overseas to do these acquisitions so it's definitely it's definitely a benefit to doing a cross-border deal you know that that Japanese steel we were able to use cash flows trapped in Korea the cash was actually in Korea but you were using it for the deal in your hand yeah yeah it's similar with our European deals it's not always in the UK but we've done to UK deals and I think it was in Luxembourg so again tax department and CFO like to use the trap cash so it's been a benefit same situation with us that you guys would prefer to do it just happened to be an advantage just and the deals we've completed in the last couple years we might have the cash over in your own stock deals maybe just to elaborate a little bit not going into technicalities of securities laws but needless to say whenever you use stock right you need to then go through some equivalent process equivalent to us registration right where you need to qualify that stock in the country where you're going to be distributing stock and it may be not even when in one country it may be of multiple countries so thinking about that and planning for that and planning in terms of the timeline for that is important and also once you start valuing stock that's trading in different currencies you start running into so how you exactly agree on the exchange ratio and how you then adjust the exchange ratio so you you would have quite a few issues around stock gels there are plenty of cross-border stock deals they are done it just it's you know slightly different planning and you need to assume a different timeline for for those transactions you also need to assume that there will be different accounting requirements different requirements for financial statements overall in some jurisdictions you will need to have accountants do very close diligence on the numbers and actually sign off more so even than on us-style audited financial statements so - in some countries you actually need to have accountant sign off on the numbers you put in in your press release about the deal if you are starting to highlight those numbers so those are those are the type of things to to pay attention to and I would just add to that our experience we've modeled that in a few transactions that we try to do recently and where it made a lot of economic sense and actually I think would have made the deal very attractive just but we found it ends up being a direct weave end up it ends up being a derailleur and you know not you're dealing with a counterparty that's very super paired to really do the diligence and look at it the right way it ends up really it's it's slowed down our process and we've ended up having to you know ended up going back just to cash deals for the most part right right going to some other aspects of deal structures and you know what it is that we are seeing in deals and sometimes by the way it's fascinating when you go in into a particular jurisdiction all of a sudden you know you realize that the market quote-unquote what is market in that jurisdiction is very different from the US or some other jurisdiction you may have dealt with some of the issues come up in things like when you shift actually risk so in the u.s. we're accustomed to that title passes at closing right so you sign the deal you may spend multiple month sometimes getting your regulatory approvals and then only at closing the risk actually shifted or the risk of change in value shifts at that time not so much in some other jurisdictions Brian do you want to talk about some structures like for example lockbox some people may have heard about it some people may not have yeah so in I think increasingly in the in the European market particularly private equity owned businesses they're moving more to what's called a lockbox structure where you value the business based on a balance sheet as a particular date say June 30th that's your purchase price and then any fluctuation within the debt in working capital throughout the period between when you sign the purchase agreement when you close or actually between that balance sheet date and the close is it just is what it is as long as there's no sort of kind of funny business you have taken cash out of the business and yeah that's much different than what we're used to in the u.s. in terms of having a purchase price and then a working capital or in that debt target where you'll adjust some period after closing and in our case where we've accepted that in a couple of deals I think it's been advantageous to us because it's something that the the sellers want to do they prefer the certainty of you know getting their money not having to fight with the buyer about you know what you know what the working final working cap is to go through that prolonged process and waiting for the rest of their money okay and the lockbox is a structure that's actually is considered to be market structure in Europe right so in the UK for example but even in continental Europe it's very much a prevailing structure yeah and along with that because you're basically buying the business as of that date and they the the view of the sellers is that the risk transfers during that date they're very reluctant to include any sorts of you know closing conditions or a Mac out or anything like that they're there their basic philosophy is hey the only condition is whatever regulatory approval needs to come through and yeah you bought it as of that date so we've had a lot of a lot of difficulty in getting a sort of additional closing conditions pushed in couple cases where we have had some success I wouldn't necessarily be just a general Mac out they've actually been more receptive to putting some sort of a number around it just so they'll know hey if there's something that yeah as a four or five million dollar impact that you know we can quantify it we're okay with that as a closing condition so that's where we've been able to kind of get around that reluctance right and so the main difference between lockbox and how we accustomed to doing it in the u.s. is that effectively the cellular quote unquote sold the business not even at the time of signing sold the businesses of the time when the lockbox financial statement wasn't repaired right so you may sign today in September right but the financial statements were as of June 30 right and and so you sold the business as of that time now for the seller and that's the reason why actually this structure evolved in Europe for the seller it's of Dasia structure because they basically say here's a set of financial statements you'd buy a value these financials would not not just financial statements you value on the business plan do your evaluation as you need to do it we agree that the price for the value for this businesses in the price that's going to be paid is X and effectively you the buyer both the business as of that time which to Brian's point goes not only to value shift so if something changed maybe short of fraud or some major major events but even ma II which we can touch on even May II will not likely fall into that category that the deal is not gonna close or the value will shift right and then if you know you're basically waiting to get your condition satisfied you go through the regulatory process closing comes money changes hands but the business actually the risk for the business shifted as of that time now as a legal and financial matter but then you need to do is you negotiate as to what is the cash in and cash out of the business right what happens because lockbox effectively means that you're truly locking that box the business is closed and whatever earnings are coming out of the business they are sitting at the company for the benefit of the buyer whatever the expenses are at the buyers expense so you spent quite a bit of time negotiating what the seller may or may not do with respect to the business what kind of cash they can take out and if they take it out then you obviously adjust what can expenses they should run but otherwise you know the business is is locked other value issues John that you come across and you think about when you negotiate the cross-border deal yeah so we've not used the lockbox I think that's that's interesting in our UK deals it's been proposed but we've been successful in negotiating traditional working capital mechanism so I you know I think it's it just depends on the situation one thing that thinks is interesting is this transaction that we're in LOI and for the UK company we're gonna use warranty and indemnification insurance which you know the UK version of reps and warranty insurance and there's a there appears at least through our lawyers we got six different brokers to submit bids for a sixty five million dollar deal so there seems to be a pretty vibrant market in the UK for that insurance and and it's in this transaction it's a nice mechanism for us and the seller agreed to split the premium with us fifty-fifty right right brand going back to things like ma e right what's your experience and you know we can compare our experiences on this panel with ma how its negotiated what role it plays in in other jurisdictions well yeah fortunately it's never been implicated in any deal that we've done but as I mentioned a little bit before the way we've tried to get around the sellers kind of flat reluctance on having any sort of standard yeah ma e clauses to have something in there that gives us some protection right that if there's an event that results in a loss of business or the damages of X amount then we'd have have the ability to walk away from the deal so it's it's not perfect but at least it you know helps us sleep a little bit better at night and unfortunately the the deals that we've done we haven't had a long period between you know sign and closed or you know any issues that would draw that out so that's that's how we you know my experience is that you know in the US with um a II as sort of last resort and very unlikely that a Delaware Court for example will find enemy right all the case law shows that even in some extreme circumstances it was not enemy still but you know if we look at the UK market dynamic or continental Europe there you would probably find it even more cellar friendly so it isn't you know less likely that the court will find enemy and in the lockbox structure going back to lock box very often the market expectation and so accordingly the sellers expectation would be that ma II is not closing condition right so actually as a US firm coming Oya as a US practice coming with us client into UK to negotiate a deal you actually will have an uphill battle arguing that MA should be a closing condition they would say well no lockbox so you you you have it right there is no mie and so once in a while you may be able to get there just negotiation dynamic but you know the expectation would be actually not to have it so then maybe some other closing conditions Scott do you want to talk about some other things that you may have seen in closing conditions what what the expectation would be what the typical seller outside of the US would want to not want yeah I mean well my experience generally has been you know that it's a lot less than more in most of the jurisdictions outside the US because of I think the the general view that that you know as you mentioned on the continent the the lockbox market practice and that was that was my experience as well as with you and one deal I did recently in the UK where we were able to get a dollar excuse me a pound a sterling figure on a couple of a specific events that gave them some comfort but very difficult I I've had a difficult time negotiating other closing conditions beyond just any regular beyond just regulatory approvals sometimes you know depending on the nature of the business we've had a deal that we did last year in the UK we had a couple of major contracts that had changed control clauses in them that required certain consents that we absolutely had to have because of the business was gonna go if that customer business was going to go away as a result of this acquisition then the business wasn't going to you know wasn't going to run the way we wanted it to so we had one we had a major deal almost fell apart as a result of this but we had we held firm on the need for these consents prior to closed from these customers which we were able to get without a lot of heartburn one one obviously negotiated in some increases in the in their and their purchase price and structure their contract but we absolutely had to have those in order to close so beyond specific dollar value or pound value euro value events my experience has really been mostly around consents in terms of those closing conditions otherwise it's been a not not a lot not the same way it would be in the United States right and in general going along the same issue that we discussed before where it tends to be more Procellarum less in terms of conditions in deals outside of the u.s. particularly in Europe so for example you know sometimes what we take for granted in the u.s. in the u.s. we would probably negotiate about bring-down of reps and warranties only sort of how do you qualify them and it's it's really not much to say we view it as boilerplate you go to to the UK or to continental Europe they would actually say no well there is no such thing as bring-down why would we what they call repeat the warranties at the time of closing and you look at them and look well but we do need to know that they are true right and again the expectation and that's that's actually one of the fascinating things about cross-border deals is the the fact that people are coming from completely different perspectives and different experiences they would say well no yeah we will not quote unquote repeat warranties it at closing by the way I used the term warranties because even there you have cultural difference and market difference actually even legal difference in the u.s. we call them representations and warranties in one breath and it means one thing although technically you could argue that 200 years ago maybe there was a distinction if you go to the UK actually they will not call it representations and warranties they will call them warranties and the reason for that is that if you call something representation and that representation is breached it has a very different legal consequences on the English law as opposed to under the US law so even there you will you will see a little bit of a difference now generally we wouldn't we're not going to spend a lot of time on reps warranties and how the agreement is written otherwise but you will see differences even in how the representations and warranties some of the covenants are written in agreements I'll touch very quickly on public deals and not going to spend a lot of time this is a topic in itself when US companies are looking at public deals outside of the US that's that's the area where you need to be particularly mindful of the that things would be very very different in other jurisdictions so for example in the u.s. we effectively have two main structures right it's either long-form merger meaning the two companies agreed on a merger right and then there is shareholder vote and the merger happens and we are done or we use what's called a two-step transaction there is a tender offer and typically in the u.s. you go for majority in the tender over 50% plus one vote so that you get it and then you can do you're effectively squeezed out of the remaining 49% of shares in a very simple process particularly in Delaware right not so in any other part of the world I can think of actually in most of the jurisdictions you need to go first of all merger as a concept exists and when you talk to practitioners on continental Europe for example they will tell you yes there is merger as a structure that's not the merger as we understand the merger the only merger that continental European law recognizes is a true fusion right it's and the French term for it actually is fusion which which is a stock for stock transaction where the shareholders of the two companies become shareholders of the combined company that's the only merger they recognize none of the cash mergers were or some different consideration that shareholders of one of the companies may may receive and and accordingly this this structure actually is very rare in in Europe the typical structure would be a tender offer but guess what they are also there is a significant difference because there is no back end merger so you cannot go for 50 percent plus one share you typically need to go in France for example for 95 percent tender for you to be able to do the squeeze out of the remaining minority excuse me minority shareholders in some countries you might get to 90 in but you will never be at the low threshold as as in the US no again you know showing the differences in France actually you can squeeze out the remaining 5% so when you get to 95 95 percent only if the company is listed in France so you there are a number of companies that actually are public companies but they are not listed on Euronext Paris they are listed in the US right if they are listed in the US and not in France you actually will not be able to do this result the only reason I'm giving these examples is whenever you are going with public deals outside of the US it's going to be a completely different ballgame and it's very important to go back to the basics and sometimes if you're working with local lawyers and there is no international firm that's involved they may not think that they need to raise these issues with you so ask the question right ask educate me on your process and how it works because again our expectation will be very different from the way the market dynamic works needless to say that when you do public deals if you go hostile outside of the US it's it's yet another completely different dimension going into some of the regulatory challenges other type of consents third parties we need to deal with Scott a little bit about antitrust approvals and you know what people see in kind of antitrust approvals these days sure yeah I think that the first thing I would say about that is is to Brian's point I think key in terms of understanding those antitrust approvals is really having the right local advisors on the ground in the market that you're dealing with because while many you know you've got and I think about it in three buckets of and I'll speak just outside the US Europe Asia Africa very different experiences in all of those markets in many ways while much of their legislation is patterned but for example in Asia and Africa much is patterned off of EU and US antitrust law and their processes are similar typically the lead times and the process times are much longer the level of sophistication isn't quite the same and they're also pulling in a lot of extraneous considerations which don't really fit into the to a typical antitrust analysis so for example in China you know my experience has been there's a lot there's a lot of extraneous discussion and analysis of whether something's in the public interest or in the national interest and how you try and how you try to probe to address that I think it's critical so that so in China for example trying to formulate that strategy on the front end of the process so that you can really understand what are the kinds of issues that are going to come up as a multinational going into that jurisdiction and seeking that kind of approval is is critical because it isn't necessarily always going to be you know a strict traditional antitrust analysis same thing with I did a deal several years ago in South Africa it was the same similar thing and it was critical for us to have a local adviser there who could sit down with the Ministry of Commerce and really talk about what the economic and frankly tax benefit was going to be to the local authority there of this of the particular deal that we were doing that ultimately helped us get across the line and shorten the process so I think that I would say you know particularly in China and in Africa for example my experience has been there be the processes are becoming more sophisticated becoming more lengthy and more detailed than perhaps in the past and so I think it's critical really makes sure that you're building that timeline into your overall deal process and I know particularly at my company now with our CEO he very you know when we were ready to start doing a deal he sets very very short timelines and it's very important to sort of manage that expectation upfront about the fact that in these emerging markets you know you can't expect that the process is going to move the way it is and I would I would add to that as well in certain jurisdictions in Africa for example trying to manage currency control restrictions as well that's something else that in addition to antitrust is something we've had to address as well as how we're gonna get money in and out of that market do we have to go on the front end and get approval what is that going to look like how are we going to structure and position it so all those sorts of considerations are important to making sure you know you're setting the right timeline for when you're gonna get your try back and about currencies it's just just a funny anecdote in some countries you can actually cannot actually give the shareholders local shareholders any foreign currency right so in one transaction believe it or not in one transaction we had public shareholders small small set of public shareholders who were holding Zimbabwean Depositary Receipts in the company so we needed to figure out how we're going to give them proceeds because they are not allowed under the law in them to receive those proceeds so we had to create a whole structure around it in some countries and we're not going to spend a lot of time and they see also we need to go through foreign investment approval right so shows Scott touched on it in some countries is actually mandatory in some it's less mandatory but maybe I we are tight on time Brian do you want to talk a little bit about something outside of the government works Council so labor approval right again something that you know in this country we are used to dealing with labor unions and we know that sometimes it can be challenging and sometimes in deals it can be challenging but what was the experience in in other parts of the yeah sure so our experience primarily in Europe in Germany and in France most recently we've had transactions that in order to close you need to get the opinion and advice of the works council before your name enabled to close the transaction and it's interesting because it the opinion doesn't mean that they have to give the transaction a thumbs up or a thumbs down they just have to issue what they think about the deal right so and in some cases the the timing for this can be very open-ended it can be you know two weeks or it can be three months depending on how easy or how difficult the works council is so it's important to kind of get out in front of that process have your story together on when you convene the works council meeting so you can tell them you know how the transactions going to benefit the employees what the changes are going to be and answer any questions that they may have so our our goal is always to have that the initial consultation such that we could actually take a vote at the end of it and that we we all end up in a situation say where they say thanks for the presentation we're gonna think about it and we'd like to schedule another meeting next month right so what you want to do is have you know clear talking points put together and we've also worked collaboratively with buyer and seller so that we both present at the meeting and getting all that stuff out there in the open hopefully gets you to a point where you can get the approval at that first meeting or shortly thereafter and works council is a whole other area we're going particularly into Europe right it's so important from the outset to figure out how you're gonna be dealing with works Council and the process will be different sometimes we think that Europeans sort of came together and within you everything is the same it actually not an works council process in particular is significantly different from country to country for example in Germany and in the Netherlands you can actually sign agreement then go and do your consultation with works Council in France it's a criminal offence criminal offence to have an agreement signed right and only then go to works council so if you sign in execute you sign a an executed version of the agreement for the sale of the business and you did not go through consultation people who signed an executive of the business I can go to jail in France so need to be extremely careful and that's where it's so important to focus on these things upfront and again works council may be simple or it may be complicated and as Brian said most importantly in most of the jurisdiction you actually do not have to do what what they are telling you they want but you need to go through the consultation process it's always better to start out with a thumbs up versus exactly on the works council to it if your plan is to get rid of some of the employees right you're you're you're gonna have to work through the workers the work council as well right and it can elongate your process to offload those employees post close right right right John so so maybe can you talk a little bit about so works Council is one it's sort of legal but it's also a cultural difference right yeah but switching to some of them may be a softer topic like cultural differences in in doing cross body deals what what would you say you know your your experience in doing deals in different parts of the world yeah I think it surprised me how much passion that the employees have for their businesses it at least our experience has been that even employees who don't make a lot of money have a lot of passion for the company and so we've had to be really careful and the degree we integrate you know the German company we acquired they were resisting against even basic sort of nuit new ERP system let alone you know changing anything else on their business so I think it's it's important to really think about how much the people care about their business and and the owners as well that's Brian in terms of negotiating negotiation process and generally you know buying sometimes in Europe you you run into these family businesses that have been around for a couple centuries what's the dynamic layer it takes patience and you know in one instance you know it was probably a year and a half before you know we got to the got to the meeting that I got to go out to to negotiate the terms of the deal right it was just hey getting getting the sellers to agree to sell so it was you know four or five trips over there with our business development and our operations folks just you know cultivating that relationship you know before we got to the stage that they were ready to sign up the deal and then even then I think you know when you're dealing with a family seller that's had the business for many many years you know what people say is hey this is market kinda goes out the window right then you're going back and forth well we think we we should have a 10% hold back and is it no hold back back and forth forever and so you do have to make I think some some judgments there because if you really want this business you know that they're not going to let go of it unless yeah they get the get the right deal so it's it's an interesting dynamic there and a lot more face-to-face negotiations and then we'd have you know at my old law firm we probably did deals 10 20 50 times that size yeah just over the phone an email right exchanging drafts whereas here you know you're sitting across the table you know for a couple hours you know going through it line by line and you know sharing a meal with everybody afterwards so it's a much more social process right right Scotty about Asia your experience you know China Singapore you live in Singapore what what's the Asia negotiation dynamic duel dynamic overall cultural issues that you come across yeah it's interesting I mean I think that um it's sort of a built-in irony in the sense that Brian was talking about sort of the face-to-face across the table negotiations in in in Europe and you still have that in my experience in Asia but at the same time a lot of those a lot of the issues actually get done behind the scenes because there's a lot of I mean it's there's a lot of there isn't as much I think tolerance and and and value in direct contact negotiate direct you know conflict in terms of negotiation so a lot of times there's a lot of positioning that goes on behind the scenes and that's where again the use of local advisors particularly the financial area has been it's helped us be very successful in the work that we've done there is trying to manage that dynamic and a couple of different in a couple of different buckets and also I think the pace the one thing I've found too is the pace there in Asia tends to be as fast in the US if not faster at times setting aside the regulatory issues you have to deal with but in terms of dealing with you know an arm's length transactions I found that the pace and the willingness to move quickly is is is there as opposed to certain other places and also just the issues of I think some of the differences in terms of how these how the transactions are documented very not not nearly as much documentation very light on that and light on a lot of details so it's it's been there's been certainly in my experience with with with my clients there's been some a lot of hand-holding a lot of change of management's had to go on to get people comfortable with how we were going to make those investments and and and go into business with those counterparties and your experience in in Asia anything I think I guess that the one thing that for personal experience a lesson learned really is that yeah it's always important to know kind of who the decision-maker is when you're negotiating an agreement and we found it it's been a little more hierarchical and there's certain cases where you think that you've agreed on something and say ok you know move on to the next point when he turns out you get the next version back and it's completely different and then you learn that okay means you know we'll we're thinking about it you've got to go back and check with the Chairman versus this is what our deal is so it's that yeah I've seen quite quite a bit of that as well so sorry no I've seen that quite a bit as well you negotiate for a week and you think that you've made a lot of progress and then all sudden they come back on Monday and say this is good this is good this video like well but this what we gave right and everything else is not great because because the hierarchy did not approve it Latin America Africa we don't have a lot of time and huge continents right but any any interesting experiences in some of the less developed economies it's got you know Africa yeah yeah you know doing I've done a couple transactions in Africa one a couple in South Africa and one in Morocco and and in both circumstances I'm so there's a very big difference between North Africa and in South Africa but but you know a much slower pace a lot of you know again a lot of diligence that had to go on in those and those markets that made that slowed the pace of the transactions down trying to understand the parties the structures trying to get the counterparties comfortable with the structure we were proposing for acquiring their business and getting it in place so it was a lot of educating not only of some of the local advisors but also the counterparties themselves which I think you know tended to slow things down and also tended to make it a little bit more complicated and then also you know from a government a regulatory standpoint just that can be very challenging depending on the market that you're not just from the actual you know for example like a moth calm version of you know moth calm in South Africa but but just the general government itself and its view towards multinational investment tends to also create another another work strain that you have to put in place in terms of getting the government comfortable with what you're looking to do yeah and my experience in Africa and Latin America also is that the government involvement whether it's formal regulatory approval or just government there behind the scenes is something that we need to be very mindful of because in some countries it's actually it's it's a good process and maybe there are some regulatory approvals that are a little bit tougher but overall it's it's a process that we would be accustomed to or at least comfortable with in some countries you can actually get into serious strong-arming and you know getting pressure from the government to do things that we're actually well there are some things that we will never do right but there are some things that it's actually truly putting pressure on on the foreign investor coming in and in some country you know what one deal in Latin America a couple years ago we had couple billion dollars at stake and we had a standoff with the government for 1112 month and then ultimately got to a settlement and was good outcome for for the European client we were representing but that dynamic you know puts a lot of pressure and completely different spin on the on the entire transaction absolutely when you've got a counterparty who knows that that's another way to leverage right who's got those connections another way to leverage pressure on you to either increase the price or other conditions it's a it's a big challenge if you want to stay in that market and sometimes you're in and this goes you know goes probably in a lot of developing countries some things you can take for granted some things you cannot write some things you can take at face value of what people are telling you sometimes you need to really ask serious deep questions we don't have the time to talk about corruption and what kind of corruption diligence you need to do right but you know in some of these jurisdictions that's you need to be very very careful because one thing is that they are doing right and so you may not want to just get anywhere close to that business what's even worse you buy that business and you don't know that it's actually what's happening right or you were not paying attention then we own the hook right the company the buyer that came in the multinational is you know on the hook in the US on the hook under the bribery act in the UK and it's a whole range of other in other jurisdictions we are running out of time if I were to ask each of the panelists to say if there is one thing that you would kind of give us a suggestion it you know food for thought for for the audience before we open for questions Brian any advice yeah a suggestion I would just say if you're doing a lot of these in-person negotiations on these deals you know plan ahead and try to whittle down the number of open issues that you have I mean I never like to take a trip overseas when you have you know potential you know deal killer or walk away points still open because any leverage that you have kind of goes out you know goes out the window once you're sitting there in the room because they kind of all know that my boss wants me to come back with a deal right and so if there are things like that make sure that you get them taken care of before you book your flight Scott I would just say the two biggest things for me are the right team on the front end understanding the resources you're gonna have to have on your team for that particular jurisdiction both here in your in your home market as well as in that market and also setting the right expectations about timeline and understanding what that's going to look like and what your build your strategy on the front end of that taking into account some of the complexity of those markets so it's it's really about team and having local expertise in that market that can help you and setting the right timeframe yeah yeah I think you know what's been important for us is having the right legal counsel and and in our instance we've had to use financial advisors as well for diligence even for small deals just because you know the accounting is different and the financials are not as as mature as we'd expect so it's really lining up the right advisors to help you get the transaction done and then on the backend just you know if you have a culture of aggressive integration I think you'll need to reconsider how aggressive you are if you've bought a company from from overseas or at least in the early days and on my end I would probably say be mindful of mirroring as a psychological matter right we're all human accustomed to think that what our experience is that's the way it is in other parts of the world it's not right and so avoiding mirroring which means go back to the basics right you come into the country you our culture you don't know about go back to the basics and and sometimes ask whether it's a local Advisors or its business people ask the most fundamental basic questions that you would never think asking doing a deal here ask because you will often find that the answer is different from the way you would expect would that help you to answer questions I think we are almost out of time right conditions and lockbox verses closing accounts etc what thought do you give to dispute resolution mechanisms because I find that we have the most beautiful agreements you've gotten the client comfortable with all these foreign concepts and processes and then at the end of the day you some you know you may have UK law Singapore arbitration but ultimately are you giving thought to you know if things go south where you are and what sort of mechanisms and if there are any tips that you have on that because I find that's something that is it's always on page 95 of the agreement it's an afterthought nobody reads that far I'm happy to to tackle and contribute a lot of thought actually goes into it the deal that I mentioned where we went into arbitration three years in arbitration it was English law ICC arbitration panel consisted of two UK former UK judges one former US judge general speaking the way we look at it is that for cross-border deals the two legal systems that I'm most used it's either New York law or it's English law some of it were it's New York law English law depends really in which part of the world you are doing it so in Latin America is going to be a likely New York law in Asia it's about 50/50 between English law and New York law in continental Europe you actually very often would find that unless it's a pure local deal where you do it or it's a public deal where you have to do it under whatever German French law you may find yourself doing under New York law so those two I would say I'm more likely to be the governing law right in terms of the dispute resolution it's actually an interesting question because sometimes what we found was in jurisdictions where we would have thought we will just rely on local courts the advice we got was not so I'll give an example we were doing a deal in Finland and we are working with our co-counsel a Finnish firm and we are saying that well Finnish courts right it's a developed economy there is no reason not to use Finnish courts for dispute resolution and our Finnish lawyers are saying no don't because it's going to be too long it's going to be too complicated it's going to be too bureaucratic let's do international arbitration the answer that go into mirroring I would not have expected by any measure right whereas in some other countries actually you know our experience in Chile for example with Chilean courts was very positive not necessarily that I would say let's put in a cross-border agreement Chilean courts as the courts to solve disputes but I would say from my own experience Chilean courts were actually very good very fair you know process was streamlined but you know maybe good guys what's your your experience I've more often than that I would say nine times out of ten would go for for an arbitration offshore in a neutral jurisdiction with neutrals you know negotiating what the who the neutrals are going to be or the characteristics of the neutrals along with certain rules that would apply to that and that's right that's where we've been most comfortable both of McDonald's and my current company just in terms of you know the uncertainties around the local the local legal structure particularly in Asia we pretty much always opted for an arbitration ICC arbitration in Singapore with neutrals from different jurisdictions in English law I think almost nine times out of ten we had English law apply and we ultimately had I had a deal fall apart there with an Indonesian partner where we where we arbitrated in Singapore over that for a good it was probably a good year and a half and you know there are betray ssin presents its own challenges but I think it creates a little more certainty than having to deal with the local core particularly in some of the Asian Juris day in particular when you're a multinational similar experience we've sold a business in Japan and South Korea last year and I think advisors advice was to use arbitration as well and I think partially too it's almost just from the perception it just seems to be you know less confrontational having it in there yeah an arbitration clause versus a you know resort to the courts and you know we hate to go to court on these things if we can avoid it right so I think by having an arbitration clause in there it's just maybe it's mental but I just think it gives the parties an opportunity to say hey let's work this out so we don't have to invoke either one of those things and it also helps depending on the level of sophistication I mean in if you're dealing with you know IP related disputes mean you want you're gonna need some sophisticated jurist in order to understand the issues and really look at it the right way so I think it also helps depending on the subject matter of the business that you're dealing with any other questions if not thank you I think there's excellent session please join me with a round of applause [Applause]

Channel: Transaction Advisors Institute

Views: 852

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Keywords: M&A

Id: H5o5DrBHJKw

Length: 62min 50sec (3770 seconds)

Published: Tue Sep 19 2017