With over $5tn in deals signed in 2015, it was a record breaking year for M&A deals. However, 2016 does not appear to be following suit. Over the first eight months of this year global M&A dropped to $2.2tn with 28,720 deals compared to $2.9tn with 30,894 deals at the same time last year.
In fact, 2016 appears to be a record year for broken M&A deals instead. Between Brexit concerns and antitrust regulations in the US, an increasing number of deals are breaking down before they become official.
M&A deals are complex events that require overcoming a hefty number of obstacles, including corporate governance, form of payment, legal concerns, contractual issues, regulatory approval and tax issues. It is very challenging to fully assess and understand the kinds of contractual risks, restrictions, obligations, and exposure companies will take on after the deal is closed.
Uncovering this information requires many hours of manual contract review work from either a law firm or lower-cost legal service provider. Before reviewing the documents can begin, organisations must find and centralise all the relevant contracts. This may sound simple, but tracking down thousands of contracts, which have been created in varying formats, across different departments, and stored in various locations over the years is an arduous and sometimes overwhelming undertaking.
Once all contractual documents are collected, the real work begins of extracting contract data, and having that data be useful before closing a deal. Legal teams must review a host of provisions, and not fully understanding assignment or change of control provisions can be especially detrimental to the dynamic of M&A deals. If your contracts cannot be assigned or if change of control triggers automatic termination for cause, the strategic value of the acquisition may be called into question, leading to many hours of renegotiation.
In addition to assignment and change of control, here are a few more to consider:
Be aware: Auto-renewal
Many sales organisations work to negotiate auto-renewals and every procurement department dreads tracking auto-renewal provisions. If the goal is to terminate a contract within the specific notification period, you must know which contracts contain the provision and the window for cancellation. A missed auto-renewal can result in hidden costs that most companies will not have considered. One of our customers, a large energy company, discovered they were auto-renewing a lease costing $400,000 per year on property not in use, three years after a takeover.
No nonsense: Non-competes and non-solicits
Monetary damages can also occur if a company breaks a non-compete or non-solicit clause. It’s important to know whether contracts include these provisions, as a non-compete is a promise from both the buyer and seller to refrain from engaging in activities with competitors. A non-solicit clause prohibits a company from trying to lure or hire the other company’s customers or employees, and this is particularly relevant when two companies in the same industry merge, as many of each company’s existing customers or partners are likely competitors.
For more considerations keep on reading.