Global M&A activity saw an increase in 2017. We are fortunate to members of MSI Global Alliance. Through this association we can provide our clients access to 250 law and accounting firms around the world. Our member firms are actively working in advising businesses on both sides of the transactions. Here is the latest M&A newsletter from our association.
Welcome to the first edition of the MSI Mergers & Acquisitions Newsletter!
Following the opening of the group at the International Conference in Paris and regional meetings in Copenhagen and Nashville, we decided that in addition to our group meetings and telephone conferences, it may be helpful to exchange information by way of a newsletter.
This is the first newsletter for the MSI M&A Special Interest Group and we would like to thank all members who have contributed. The success of the newsletter depends on active contribution by members of the M&A group.
The key benefits include:
- Promoting member firm and individual’s M&A experience
- Sharing M&A updates, insights and knowledge
- Encouraging collaboration within the MSI network
Submissions can include, but are not limited to:
- Opinion pieces
- Thought leadership
- Current or previous deals members are working on or have worked on
- Articles/updates relating to mergers & acquisitions skills, tools or strategies
We are also keen to learn about your suggestions to improve future newsletters as well as the activities of the MSI Mergers & Acquisitions group. Please submit your contributions and suggestions to Georgina Laery.
North America and European Group Chairmen – Gaurav Malhotra, Carsten Heuel and Rui Almeida
Ownership Succession Planning with an Employee Stock Ownership Plan
Levenfeld Pearlstein, LLC, Chicago, Illinois
An employee stock ownership plan (ESOP) is a qualified retirement plan which is designed to hold stock of the company which sponsors the plan as its primary asset for the benefit of the company’s employees. According to the ESOP Association, there are over 11,500 employee-owned companies in the United States covering approximately 10 million employees with more than $600 billion in employee asset value. The significant majority of these companies are closely held, privately owned businesses that formed an ESOP as a vehicle for ownership succession, as opposed to public companies that implement employee-ownership programs as a pure employee benefit and retention tool. Although ESOPs have been around for decades, favorable tax laws and numerous success stories have increased their popularity.
The first thing any business owner needs to do when thinking about ownership succession is to determine what his or her objectives are in initiating a sale of the company. A business owner may want to get top dollar from the sale of his company and may not be concerned about what happens with his business and employees after they sell it, such as the company being gobbled up and integrated into a larger company with the resulting job losses by longtime employees or relocation of the business and the effects on the local community. In those cases, selling the business to a competitor or a financial buyer like a private equity firm may be the best alternative.
Current transactions of Ahlers & Vogel
Ahlers & Vogel Rechtsanwaelte PartG mbB, Bremen & Hamburg, Germany
Ahlers & Vogel has a strong and very active M&A and transactional practice which does not only include national but also international transactions. In particular, the M&A transactions in which Ahlers & Vogel, under the lead of Carsten Heuel, was involved in the last weeks included inter alia:
- Ahlers & Vogel advised the sellers of one of the largest German event catering companies (with one of the sellers being one of the largest multinational beverage companies) in the sale of their business to one of the major multinational catering company (a US publicly listed company). This was a quite complex deal with anti-trust filing as well as large earn-out components.
- Ahlers & Vogel represented a German chemical company which looked into the acquisition of a smaller chemical company in the Detroit area. We worked on this in cooperation with Kerr Russel (Eric Lark).
- Ahlers & Vogel represented a majority shareholder of a large special chemical company in the acquisition of the shares from the minority shareholder in a complex transaction which was under the condition of a EUR 40 million investment into the company.
- Ahlers & Vogel advised a Canadian publicly listed company both in (1) the acquisition of a stake in a German target company followed by the acquisition of all of the assets by the target company from the insolvency administrator of the predecessor company of the target company (involving complex negotiations with state agencies in relation to public state grants and state sureties) as well as in (2) setting up a substantial executive participation model for one of its German subsidiaries (including a complex shareholders’ agreement).
The New Legal Regime for the Hydrocarbon Market in Mexico
RVA Abogados S.C, Mexico City, Mexico
The Energy Reform approved in 2013 developed a new legal regime for oil and gas exploration and extraction activities as well as the electric sector. The two main state-owned companies: Petroleos Mexicanos (PEMEX) and the Federal Electricity Commission (CFE) became State Productive Companies (EPE), which means that they have commercial nature and autonomy over their budgets, however, they maintain a limit of public debt and remunerations controlled by the Mexican Government. The reform to Mexican Constitution reaffirms the principle that the Mexican Nation is the owner of the hydrocarbons and ratifies that the exploration and extraction of crude oil and other hydrocarbons are strategic activities exclusive to the Mexican Government, likewise, this energy reform represent an opportunity for investment participation for the private sector, including foreign investors.
The Mexican Government may carry out the activities of exploration and extraction of crude oil and other hydrocarbons through three variants: (i) allocations granted to PEMEX by the National Hydrocarbon Commission (CNH) within the new legal framework, (ii) Contracts with PEMEX and individuals and (iii) PEMEX associated with individuals.
Lower Middle Market and Case Study
Holsinger P.C. / SteelGate Advisors, Pittsburgh, Pennsylvania
SteelGate Advisors, a multi-discipline investment bank and sister company to Holsinger P.C., located in greater Pittsburgh, Pennsylvania, USA, provides comments on the lower middle market and a current case study.
Lower Middle Market
The Lower-Middle-Market (“LMM”) is often defined in a variety of ways, but it generally includes businesses with enterprise values between $5M and $50M or annual revenue between $5M and $100M. The SBA estimates over 125,000 US companies fit into this large and growing category.
SteelGate has over 75 years of combined experience in the M&A field, and based on our size, location, and knowledge, focus on deals with enterprise value greater than $5M. Companies/deal of this size are not always easy to work with compared to larger companies, so investment banks are generally unwilling to engage these clients. Clients of this size may lack a strong management team (often relying on a single owner), lack developed financial budgets / projections, operations are often not diversified, and other unique circumstances. The LMM often produces “hairy” deals that many bankers avoid at all costs.
Difficult Deal Factors
SteelGate is currently engaged to provide sell-side representation to a machine shop (the “Company”) that services the nuclear energy industry, has approximately $7M of annual revenue, one location, and its one customer (95% of revenue) is currently in Chapter 11 bankruptcy
Swiss Industrial Holding Company Transaction
Schoch Auer & Partner Rechtsanwalte, St. Gallen, Switzerland
From October 2016 until July 2017, Schoch, Auer & Partner, Attorneys-at-Law, St. Gallen, Switzerland (in short “schochauer”) provided legal support to a large Swiss industrial holding in its divestment of one of its group divisions. The entire transaction involved five sub-transactions which included preparatory legal work as well as share and asset deals (including the sale of loan receivables, consignment stocks and intellectual property rights) with counterparties from various European countries. This and the fact that the group division to be divested included various affiliates on almost every continent led to a variety of foreign and cross-border legal questions which had to be dealt with in the course of the respective transactions.
The division of the large Swiss industrial holding was offered for sale in four distinct parts for various reasons. For each part, the seller invited potential purchasers to a bidding process. Prior to selling these parts to selected bidder, inter alia, a Swiss holding structure was established which included the hive-down of foreign subsidiaries in view of the collective sale of these subsidiaries to foreign and Swiss buyers. Where an affiliate in the People’s Republic of China (PRC) was involved, conflicts between Chinese and Swiss commercial laws arose which could hardly be dissolved (cf. “Commercial law aspects” below).
A Story of Diligence
Lucas Horsfall Accountants & Advisors, Los Angeles, California
At Lucas Horsfall we have had a busy 2017 working on Quality of Earnings (Q of E) engagements and helping our clients prepare for an exit. Following is a summary of one of our Q of E engagements this year. To protect the identity of the client I have changed names of people and places, everything else is factual.
National Payroll Company
A banker who I have known for three years gave our name to a Search Fund started by Steve. Steve had graduated from Stanford and worked for several international investment banks before deciding to start his own fund. This was a big decision for Steve to leave the security of a job and dedicate 100% of his efforts to find a target for acquisition. Coincidently I had known two investors in Steve’s Search Fund for at least a decade. These investors are directors at a national Private Equity (PE) firm with whom we have a long working history. When Steve was looking for an accounting firm he got our name from a banker in Los Angeles and a PE firm in Boston. We were ahead of the competition right out of the gate. Steve wanted us to jump on the job right away and get it done in the space of two weeks. This would be tough because Steve was acquiring two Companies. One in Montana and the other in Texas. We gave a range of fees with the assumption that everything would go smoothly. We were hired. Things hardly ever go smooth in a M&A transaction. To make things interesting a third party had made a crazy offer to buy the business in Texas? This put extra pressure on us to get our work done quickly. Our buyer wanted to get to the finish line first.
The Importance of Working with Company and Transactions Databases
Moneris Group, Lisbon & Faro, Portugal
Our clients are increasingly getting access to more information in the internet regarding business valuation models, which will allow them to understand fairly quickly how to value their business during the M&A process. What they lack is relevant experience and market intelligence gathered from that experience, being this the ultimate reason on why our clients would want to hire M&A advisors.
Company and transaction databases provide information such as the behavior of a certain sector, investors financial capabilities, oriented target screening, closed deals and market multiples. Having access to this information in a blink of an eye aligned with the relevant experience of a M&A advisor will be the difference between a successful and a unsuccessful transaction.
Throughout the M&A process, we at Moneris use one company database (SABI Bureau Van Dijk) and the Damodaran database, to get a better understanding of a sector’s economic, financial and transactional behavior and, in this sense, provide our clients with a solution that truly fits our client’s needs.
Letters of Intent and the Covenant of Good Faith and Fair Dealing
Michael Best & Friedrich LLP, Salt Lake City, Utah
We as practitioners understand the purpose of a letter of intent (LOI) as a unique and useful instrument in conducting business transactions. Commonly used in proposed acquisitions, LOIs permit the parties to a transaction to document key points of an agreement and express their expectations before entering into a binding agreement. However, an LOI can also be an inherently contradictory exercise, particularly regarding whether the instrument or certain parts thereof are legally enforceable. If properly drafted, an LOI can effectively protect the interests of both parties and provides the opportunity to explore a potential business relationship while avoiding the binding obligations imposed by a formal contract. Alternatively, if an LOI is ambiguously construed, parties may find themselves on the wrong end of a lawsuit arising from a document they thought was unenforceable.
Fortunately, the risk of litigation can be significantly reduced through careful drafting. Paying attention to the language of an LOI is critical both in establishing the expectations of the parties and in avoiding liability in the event the contemplated transaction is never effectuated.