How are the current market conditions, with high prices favoring sellers, having an impact on negotiations and deal terms in M&A?
It is a sellers’ market, and that means that as a lawyer on the buy side you have to be really careful to stay disciplined. Whether you have concerns about a business or about risk, you may lose out and somebody else may prevail because the pricing or the risk allocation has simply got to a place where you’re no longer comfortable. You have to constantly challenge your judgment as to what terms really matter.
Representations and warranties insurance is a real push point at the moment when it comes to negotiations. That insurance has been prevalent in Europe and emerging markets for some time, but it’s increasingly becoming a standard topic of discussion in M&A transactions with private equity sponsors on the sell side. The sponsors are increasingly offering no post-closing cover on reps and warranties, and instead they are saying to buyers, “If you want that cover, go buy it from an insurance company.”
That’s an area where our legal team has taken the lead and developed, directly with large insurers, the technology and learning to help our teams utilize the product where appropriate to get deals done. I can think of at least two situations where the insurance solution has directly impacted our ability to close a deal.
Does a large asset manager such as TPG seek to impose standard deal terms when entering transactions worldwide?
I wouldn’t say that we start from the beginning each time, but it is also important that we realize that we are dealing with bespoke transactions. In other words, you can’t anchor to what you did before because what if it’s not appropriate for this transaction? So you have to come to each transaction with a fresh perspective.
It’s more about giving honest advice to our clients, employing judgment and making collaborative decisions as a firm about risk.
How is the TPG legal function structured so as to maximize support to the deal teams?
We have aligned our legal team with TPG's business units, so there are lawyers who are dedicated transactional lawyers for each of our platforms. That model has two principal advantages over relying solely on outside counsel: the internal lawyers are both more familiar with their clients' business and more available, because they are sitting within the walls of the firm.
Our lawyers are an embedded part of the transaction team, so they work closely with TPG's investment committees, deal teams, and other areas of TPG, to become very well integrated into the business.
Where are the biggest opportunities for the legal team to add value on M&A transactions?
We are far better positioned to tailor due diligence and terms than outside counsel alone, to achieve a competitive advantage in M&A. We scope the due diligence on every single deal, and integrating our law firm partners stategically, tailor the work plan to the particular business.
We spend a lot of time making sure we have very bespoke diligence for each transaction, and that’s a competitive advantage because it allows us to spend the majority of our time on the issues that are most relevant to the deal, allowing us to be more efficient with our time and more efficient for the target company. For example, we want to use our potentially limited time with management to ask the highest impact questions we can ask based on our investment team's goals and objectives as oppoosed to merely going through a law firm's standard “legal due diligence checklist.”
I like to think we are “thought partners” in developing effective governance, where we are partnering on a transaction with a management team or entrepreneur, or where we are putting two businesses together. On the legal side there’s a lot we can do in that situation to deliver innovative technology. For example, we worked on a transaction where we were partnering with a non-profit, which was very complicated on the governance side. We have since been able to leverage that technology on other deals to get to better agreements with our partners.
How is globalized merger control having an impact on costs and considerations in cross-border M&A?
Global antitrust regulators are increasingly co-ordinated and the enforcement dynamic is very active, which leads us to think much earlier about where in the world approvals might be required. You can no longer make a decision in a vacuum, and then think about filing in China and then what to do in the EU. Those decisions have to be made very early on and considered together now, not one at a time, and can add significant uncertainty to the deal.
I spend a lot of time monitoring enforcement trends, and how exposed we are to those trends. I’m looking at businesses for us to invest in in the US that have significant overseas operations, and I’m looking very early on at the merger control risk. You can’t underestimate the US aspect – the US antitrust environment right now is very hard to predict, as both the Federal Trade Commission and the Department of Justice have been blocking a number of deals and taking an assertive stance. That has a tremendous impact on our business, and as we evaluate strategic combinations, our investment committee is very focused on antitrust risk. Certainly if we are on the sell side, selling to strategics, that is one of the very first things we think about.
What are you witnessing in terms of trends on deal structures?
Special purpose acquisition companies (SPACs) have been around for a while but they seem to be taking on momentum, and coming up more and more. They provide investors with liquidity for certain types of transactions where private equity has traditionally lacked liquidity, so I can see the appeal for investors.
We are in a very high-price environment in the US right now and a lot of people are trying to sell assets, at a time when there is also good availability of debt financing. So the prevalence and volume of buyouts, minority investments, SPACs, PIPEs (private investments in public equity) and carve-outs is being influenced by high equity markets and availability of debt. When the business cycle turns over and asset prices come down, you might see more PIPEs and more minority investments, to reflect companies’ needs for capital.
Nasdaq has been considering some reform of the rules around PIPEs, so we will see if the exchanges start adopting a more flexible view for private investors in public companies, though I don’t expect a great deal of movement.
Finally, how do the legal issues that you encounter on M&A transactions vary across the many jurisdictions in which TPG is doing deals?
Going back to due diligence, if you are looking at investing in a business that has significant operations or touch points in high-risk countries from either a sanctions or an anti-bribery perspective, then you have to be really careful to do a thorough due diligence exercise.
You need to document everything you do in terms of due diligence, and then your follow-up, because if you own that company you have to show that you are monitoring anything that you think should be remediated or improved. You have to watch the company, check in, and talk to the management team to show that you understand what is happening.
While these are best practices in any investments, if you’re in a high-risk jurisdiction, you absolutely have to focus on it.
This article is sponsored by Deloitte. It was published in the September supplement with pfm magazine.