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Dec 29, 2022

Tough M&A climate brings focus on compliance and creativity, lawyers say

‘There are great M&A opportunities out there and boards know that’

Lawyers say it’s important to be creative and keep a close eye on compliance issues to get M&A deals done in a difficult economic climate. They expect the challenging market conditions experienced in 2022 to continue into 2023 and say deal teams need to do extensive due diligence to ensure transactions achieve their required aims.

Data from S&P shows deal numbers plummeted in 2022, although this trend could be reversed in 2023 as distressed assets hit the market.

Lawrence Mendes, partner with law firm Baker & McKenzie, says given the tougher M&A environment compared to 12 months ago, there is unprecedented focus on compliance when boards consider potential deals. ‘We have had several recent instances of buyer boards pulling away from M&A opportunities where target compliance issues are identified early.’

Overall, he says, boards are generally moving more slowly on transactions, which reflects the heightened risks in the economy. 

Lawrence Mendes

Laura Turano, partner with Paul, Weiss, says when the economic climate is more challenging, deal teams need creativity and extensive preparation to get deals across the finish line.

‘Boards are asking for creativity,’ she says. ‘My clients are looking at different deal structures than they would have in the past as a result.’ These include partnerships, collaborations, seller-financing, minority purchases and spin-offs.

Turano says going in front of the board and advocating for a deal has always required extensive preparation, but she comments: ‘Boards are asking management to explain why now – [given] the challenging equity and debt market and antitrust environment – is the right time to pursue a deal.’

Given so many uncertainties in the trading environment, such as interest rates and skyrocketing energy prices, the macroeconomic environment is one of the most pressing risks with which boards and deal teams are grappling. Antitrust risks in the US and abroad are also top-of-mind for boards.

Cyber and privacy breaches, compliance and ESG are some of the other issues that are a focus for boards doing deals. ‘These all have significant legal components to them. These topics are among the first to be discussed in transactions,’ Mendes says.

Outside these subjects, buyers’ boards are very concerned with an asset’s ability to be accretive. ‘Boards are keen to understand how legal risks may impact growth, revenue sustainability and their strategy for the target,’ he adds.

Laura Turano
Laura Turano

In a tough M&A market, boards of target companies are conscious of business risks being shifted to them by buyers in legal transaction documents in a way that impacts the value the transaction delivers to their shareholders.

Although it’s not new, Mendes says there is no substitute for detailed due diligence, whether on the buy side or the sell side, to get a deal done. ‘On larger transactions, we are seeing committees of specialist staff and advisers carrying out detailed analysis for reporting to boards.’

In order to achieve a successful outcome, Turano recommends anticipating all the ‘warts’ in a deal and looking for creative and practical solutions early. ‘Make sure you have an appropriate deal structure and all documentation is prepared correctly,’ she says.

Turano adds: ‘There are great M&A opportunities out there and boards know that. What I see boards asking their management team and advisers about is how to make it happen.’