Etiqueta: fusiones y adquisiciones

It is no longer marginal. The introduction of sustainability criteria in M&A transactions has become a strategic issue for companies in all sectors worldwide. Companies have overwhelmingly come to the conclusion that adopting corporate sustainability commitments helps to bring the merger or acquisition process to a successful conclusion. And, in the long run, it contributes both to achieving their strategic objectives and to improving compliance with the United Nations Sustainable Development Goals (SDGs).

In today’s challenging regulatory environment, companies with a Corporate Responsibility and Sustainability strategy have a competitive advantage and are less vulnerable to changes in social, environmental or governance regulations.

A challenge for sellers and buyers/inverstors

The integration of sustainability criteria when evaluating a transaction provides greater certainty in estimating the value. However, it is essential that the seller provides a comprehensive assessment and conveys it accurately to the buyer or investor. Fine words are not enough. It is necessary to use mechanisms such as public domain searches or the use of business intelligence tools, which help to verify the required information with certainty.

The potential buyer now also faces a new challenge: to find a target that is not only attractive from a strategic and financial perspective, but also aligned with its own environmental, social and governance criteria.

Sustainability issues are embedded troughout the M&A process

Today, any M&A transaction involves an in-depth analysis of the asset that goes beyond the traditional legal, tax and financial issues. The influence of ESG (Environmental, Social and Governance) criteria is transversal throughout the entire process:

• In the due diligence phase. Analyses should now also include compliance with inclusion, diversity and equity policies. It is also necessary to identify potential legal risks on social and governance issues. Including how the target can provide its stakeholders with continuous monitoring of these issues. In addition, the strengths and weaknesses of the company’s sustainability agenda should be analysed and identified.

• In the structuring, negotiation and closing of the transaction. Corporate Responsibility and Sustainability metrics and objectives should be incorporated into the valuation process. Also consider the impact of environmental, social and governance factors on the market. And foresee the future evolution of regulatory conditions and the different regulatory scenarios that could occur. Because purchase or investment agreements should be adapted to mitigate the risks arising from the level of compliance with the ESG criteria of the target. For example with the inclusion of representation and warranty assurances, closing conditions and post-closing obligations. Aspects that must be maintained before and after completion of the M&A transaction are also increasingly included in contracts. For example, the so-called Harvey Weinstein clause, whereby the seller must indemnify the buyers or investors if any of the target’s management is exposed or involved in sexual harassment and abuse.

An added difficulty

In short, the generalised inclusion of sustainability criteria in M&A transactions is an added complexity factor throughout the negotiation process. The Confianz M&A advisory team is ready to accompany your company throughout this process.

Seeing the details of an M&A (merger and acquisition) process published in the press can greatly complicate negotiations. In any M&A transaction, it is essential to maintain confidentiality throughout the entire process until the M&A transaction closes with the signing of the sale and purchase agreement in front of a notary. And yet, a recent report by the global strategic communications advisory group H/Advisors reveals that one in three M&A deals of $2 billion or more is reported to the media before it has been officially announced.

After analysing 267 transactions in 2022, the study shows some clear trends as to which M&A deals are most likely to leak to the press:

• By region, deal negotiations in Western Europe and Asia-Pacific are more likely to leak before they are officially announced than deals taking place in the United States.
• By sector, the sectors with the highest leakage rates are aerospace, defence and consumer goods, with companies owning high-profile brands.
• Depending on the volume, large transactions with a value of USD 25 billion or more are leaked up to 80 per cent of the time.

At Confianz we cannot stress enough the importance of being prepared for this eventuality during an M&A process. These operations are complex events and any leak can have a negative impact on the negotiation. For this reason it is necessary to foresee a quick and professional response.

3 reasons why confidentiality is crucial in M&A processes

When handling any M&A transaction, confidentiality on the part of all parties is crucial. The reasons for this are manifold and include:

• Prevent competitors from taking advantage of any leaked information to try to take customers away from the company for sale.
• In the case of listed companies, to avoid falling share prices and speculative movements.
• Keeping partners and employees calm, so that they are not assailed by uncertainty, demotivation and/or talent drain.
• Protect the corporate reputation of all parties involved.

Relying on a single advisor is the best way to ensure confidentiality

Hiring a single law firm to handle the entire merger or acquisition process exclusively and carrying out all actions through it is the best way to avoid the publication of leaks in the press.

This exclusivity allows, among others:

• Ensure confidentiality. Because the fewer people who know the details of negotiations, the less chance there is of unwanted leaks.
• Optimise all efforts. Because if several intermediary parties are involved, it is easy to end up with contradictory conclusions.
• Work with a fluid and fast flow of communication. Because by limiting the number of actors in the negotiation, it is much easier to transmit information between all of them.

Having a specialised M&A advisor such as Confianz throughout the entire process is the best basis for a successful transaction.

Choosing the right advisor in an M&A transaction can be complicated. In such complicated negotiations, the human factor becomes fundamental. It is always best to turn to experienced professionals such as those at Confianz, who guarantee maximum discretion, absolute trust and impeccable professionalism. The studies and experience of our team, the satisfaction of our clients and our previous success stories are our best business card.

The year 2023 started with subdued M&A expectations due to rising interest rates and fears about the onset of a possible recession. Nevertheless, the number of transactions in the first six months has surpassed the pre-pandemic levels of 2019. Will the second half of the year see changes?

M&A market forecasts for the remainder of 2023

For the second half of the year, the market is showing signs that more interesting and transformative M&A opportunities will emerge. After a difficult start to the year, many things have changed in recent months: inflation and rising interest rates are slowing down, the US has weathered the debt ceiling crisis and artificial intelligence has emerged as the next big technological revolution.

Executives will continue to use M&A activity as a tool to reposition their businesses, drive growth and generate lasting results. For three reasons:

• The fall in the value of listed companies will create investment opportunities.
• Corporate restructuring will continue to pick up, which may lead to mergers and acquisitions of distressed companies. Retail, FMCG, real estate and industrials are the four sectors where most restructuring is expected.
• More stable interest rates will reduce uncertainty and make it easier to price transactions.

The rise of the mid-market in the second half of the year

The M&A market for the remainder of the year will be dominated by mid-size deals, which are more feasible in the current regulatory and financing environment. Executives are favouring mid-size deals because they are less affected by market volatility and face less regulatory scrutiny. They can also be transformational and accelerate growth if they are part of a well-planned strategy.

The push for artificial intelligence

By sector, the most active sector in the first half of the year was technology, media and telecommunications, which accounted for 28% of deals. New technologies are key to the transformation of companies; and artificial intelligence will create opportunities in the M&A market for both corporate groups and private equity funds.

In terms of value, the energy, power and natural resources sector led the ranking from January to June, with 23% of the total. Companies are increasingly looking to reduce their impact on the environment and are committed to zero net emissions strategies. The energy transition is already a reality and is generating enormous changes that open up opportunities for M&A transactions.

Tips for undertaking an M&A transaction now

Macroeconomic conditions will lengthen the negotiation periods for transactions and will make it necessary to deepen due diligence processes. The business situations that will emerge in the M&A market will be more complex and challenging for all parties.

In order to close a transaction and avoid price reductions, sellers must assume that buyers and their financing sources will devote more time and effort to analysing and studying the transaction. However, a common mistake we see quite often is that sellers and their banks set very aggressive sales terms. This can cause the transaction to fail.

We end with a word of advice: companies with strong balance sheets and liquidity would do well to seize the moment to make acquisitions now that difficult financing is reducing competition. At Confianz we are specialists in M&A transactions and can advise you throughout the process.

On 1 September, the new Royal Decree 571/2023 of 4 July on foreign investment will come into force. This antiopas regulation fixes some of the temporary measures that were approved during the pandemic to prevent the purchase of national strategic assets by foreign capital.

The main novelty is that administrative procedures are reduced and streamlined. Thus, the resolution period for authorising or vetoing investments is halved from six to three months. This period also includes consultations with the administration, which will have 30 working days to respond.

The antiopas shield

Let’s look back at how we got here. To do so, we must go back to March 2020, when the Executive implemented the so-called «antiopas shield». In this way, article 7 bis of Law 19/2003 established the obligation of prior permission from the government for non-EU investors intending to invest more than 500 million euros or to acquire more than 10% of a strategic company listed on the stock exchange. The reasons given were security, public order and public health. The aim was to prevent foreign capital from taking advantage of the stock market crashes that occurred during the COVID-19 pandemic to take over strategic Spanish companies.

In November of the same year, this measure was complemented by a transitional provision which established that the government should also authorise foreign direct investment by EU and EFTA companies in listed companies or even in unlisted companies if the investment exceeded 500 million euros. The aim was to prevent investors from circumventing the restrictions by simply setting up companies on EU territory.

Inflation and rising interest rates have meant that this regulation has been successively extended to the present day.

What’s new in the Antiopas Law 2023

Now the Executive has modified and developed the regime for foreign investment in Spain and, in particular, the investment control regime. These are some of the main novelties:

• The deadline for approving or vetoing investments is reduced from six to three months. This reduces and speeds up administrative procedures, one of the main complaints of companies and investors.
• It formalises the system of voluntary consultation which had already existed in practice. Through this voluntary procedure, investors can receive a confidential and binding response as to whether or not a given transaction should be subject to authorisation. The authorities will have 30 working days to respond. Otherwise, the interested party may submit an application for authorisation.
• The possibility of using the simplified procedure of 30 working days for transactions of less than EUR 5 million is eliminated.
• Internal restructuring within a group of companies and increases in shareholdings by investors already holding at least 10% in the Spanish company are not subject to the control mechanism if such increases are not accompanied by changes in control.
• In the case of investment through private equity funds, the person obliged to submit to control as the owner of the investment will be the management company, provided that the shareholders or beneficiaries do not legally exercise political rights or have privileged access to the company’s information.
• All investments of less than €1 million are no longer exempt. The threshold now varies depending on the sector of the company in which the investment is made. The energy sector, electronic communications, mining, strategic raw materials, etc. are particularly regulated.

Conclusions

Overall, we believe that this new regulation takes up in writing some interpretative criteria that were already being applied by the authorities and offers greater legal certainty in the market.

It is becoming increasingly common in M&A transactions between Spanish companies to take out a manifest and warranty insurance policy, also known as W&I Insurance in English-speaking countries, where these policies have always been more popular.

Its advantage is that this type of insurance allows the transfer to the insurance company of the risk derived from the obligation to indemnify the buyer for the possible lack of truthfulness and accuracy of the representations and guarantees given by the seller.

Let’s look at it in detail.

How responsibilities in mergers and acquisitions are assigned

From the date on which the actual transfer takes place, it is most common in an M&A transaction for the buyer to assume all the business risks inherent in the acquired business.

For his part, the seller is liable if he breaches agreed obligations, such as the non-competition obligation. Also for the lack of truthfulness and accuracy of the representations and guarantees that he has given in favour of the buyer in the contract of sale.

What is manifestation and warranty insurance

In contrast to this default allocation of responsibilities that is established by default in any merger or acquisition, manifestation and warranty insurance introduces a solvent third party, the insurance company, which assumes part of the risk.

The most common type of W&I Insurance policy is one in which the insurer assumes the risk arising from the seller’s obligation to indemnify the buyer for the lack of truthfulness and accuracy of the representations and warranties given by the seller.

What exactly are these representations and warranties? They are a set of statements concerning certain circumstances relating to the seller himself, the shares/shares being transferred and the business conducted by the company being transferred.

Transactions in which M&A insurance is frequently used

The first thing to do is to anticipate the need to take out an insurance policy for demonstrations and guarantees. In this way, we will be able to integrate it as another element within the negotiation. These are three of the cases in which it may be advisable to take out a policy of this nature:

• On the seller’s side, when the seller is a private equity fund looking for a clean exit and does not want to assume any liability for past contingencies.
• On the buyer’s side, in competitive processes, where several aspiring buyers submit their purchase proposals to the same seller. The introduction of a manifestation and warranty insurance in the offer can be an important advantage that can tip the balance in favour of one of the potential purchasers.
• In the formation of joint ventures, this type of insurance allows the new partners to neutralise the emergence of potential conflicts.

How to take out manifestation insurance and guarantees

Any insurer will require a thorough understanding of the transaction to be covered. To do this, it is best to first carry out a thorough due diligence on the business being bought and sold. In the absence of this step, the insurance company will require at least an analysis of the areas about which it does not have sufficient knowledge. Otherwise, it will exclude these areas from the policy coverage or may even refuse to underwrite the policy.

On the other hand, it should be borne in mind that drafting an insurance policy of representations and warranties requires a precise definition of certain concepts. For example: the concept of damage, the quantitative and qualitative thresholds of limitation of liability, the claims procedure, etc. To this end, it is essential to have  legal advice from a legal expert in M&A transactions involving representation and warranty insurance.

To talk about reverse mergers, we have to start at the beginning. There are two ways in which two companies can be merged: takeover and merger:

• In a takeover process one of the two companies (the absorbed company) disappears and is fully integrated into the other (the absorbing company).
• In a merger process two companies merge to create a new company. As a result, the two initial companies cease to exist as independent companies.

The big fish doesn’t always eat the little fish

In corporate practice, as in the natural world, it is most common for the big fish to metaphorically eat the little fish. Thus, in both cases it is usually the company with the larger assets that ends up controlling the resulting company. The company with smaller assets does not necessarily lose its legal identity, but becomes subordinate. However, there are exceptions.

What is a takover or reverse merger?

A reverse merger is a merger of two companies in which the smaller company takes control of the new company. It is rare, but sometimes it is the larger company that disappears or moves to a subsidiary position.

Such reverse mergers are neutral in accounting terms, irrespective of who acquires whom and irrespective of the name, registered office or majority shareholding of the resulting company. Nor can they have any tax implications. It would be tax evasion if as a result of a reverse merger the resulting company were to pay less tax than if it had carried out a conventional merger.

Strategic reasons for opting for a reverse takeover

In practice, there are many reasons why takeovers and acquisitions are sometimes carried out in a manner contrary to what is usually done:

• Legality and taxation. In cases where the smaller company has its registered office in a location where there is a legal or fiscal framework that is more beneficial to the activity of the company resulting from the operation.
• Geography. When the smaller company is closer to the centres of power, to customers or suppliers, to logistical centres…
• Competitiveness. In sectors undergoing major change, it may be that the smaller company nevertheless has more commercial potential in the medium to long term.
• Reputation. Sometimes the company with less equity has a better brand image and offers more potential from a marketing point of view.

Are transactions between subsidiaries and parents reverse mergers or improper mergers?

There is much confusion as to the true nature of reverse mergers and how they differ from so-called improper mergers. For example, stricto sensu, we cannot speak of a reverse merger when it involves operations in which a subsidiary takes control of its parent group. A practical example of this would be the recent merger of Ferrovial’s parent company with its subsidiary Ferrovial International SE.

These types of vertical operations fit better under the definition of improper mergers. This is also a problematic denomination, because although the law allows for such operations, they are called «improper» because they are not really mergers.

It should be borne in mind that parent and subsidiary are already from the outset companies of the same group and share a common shareholding. Thus, when a subsidiary takes control of the parent company, it is more an internal reorganisation than a merger or takeover per se.

At Confianz we are specialists in M&A. Contact us and we will advise you to make your transaction a success.

The increase in distressed transactions is a growing trend in the field of mergers and acquisitions in Spain. Political and economic uncertainty is giving rise to an increasing number of distressed M&A transactions.

On the one hand, there is liquidity in the market and investors with an appetite for risk, such as the Special Opportunities divisions of funds and investment entities. On the other hand, there are plenty of opportunities for companies with proven reliability but which are in financial trouble due to the global economic situation of the last few years. These are companies that are not financially viable but are economically viable. In other words, their real problem is not operational but stems from excessive indebtedness.

What are distressed operations

In distressed transactions, the selling company is experiencing financial difficulties and its shareholders are looking for corporate transactions that provide them with liquidity and/or viability alternatives to maintain part of the business and meet their financial liabilities. For this reason, these companies or some of their production units or business branches are now available at lower prices.

On the other hand, the buyer has sufficient financial capacity to afford the transaction and is looking for medium to long term profitability. In the case of Spain, these buyers tend to be local and international investment funds.

Distressed M&A transactions are usually bilateral, with no competitive sales process.

Fast procurement, earn-out and anti-embarrasment clauses

Distressed transactions are usually quick, mainly because the seller or the target company has a cash flow urgency that does not allow them to extend the deadlines. This speeds up the whole process, including due diligence, which entails a certain added risk for the buyer but also facilitates downward negotiation.

In terms of pricing, the price is usually linked in part to the company’s future performance. This is known as an earn-out clause. Anti-embarrassment or «anti-shame» clauses are also common, whereby the seller ensures a price increase if the company is restored to health in the short term and the buyer sells his stake at a higher price.

Payment is usually deferred at least partially.

When is it best to undertake a distressed transaction: before or during the insolvency proceedings?

In most of these types of transactions, the strategic decision of when is the best time to carry out the transaction: in a pre-insolvency or insolvency situation? There is no single answer either from the point of view of the target company or from the point of view of the acquirer.

• In a pre-insolvency scenario the acquiring party has to assume certain termination risks.
• In an insolvency scenario, it may seem that the seller has less room for negotiation, but the insolvency administrator and/or the commercial court will put pressure on the seller to obtain a reasonable exit for certain assets in order to provide liquidity to the insolvent company.

Advantages of acquiring a distressed company

Investment funds are attracted to distressed deals because the price is often much lower. But this is not the only reason. This type of M&A is also a way to gain risk-minimised access to an interesting sector or geographic area.

Difficulties of distressed M&A 

The main difficulty to be faced when undertaking such a transaction is that it involves not only the buyer and the seller, but also the interests of the sold company’s creditors. This entails the need to negotiate and execute the sale and purchase and the debt restructuring in parallel.

High inflation is driving up operating costs and drastically reducing the margins of insurers in Spain. This is particularly true for those specialising in motor insurance. The insurance sector has shown great resilience during the last crises, but in recent months it is struggling to overcome the increase in the number of claims, supply problems and rising repair costs.

For this reason, M&A operations in the insurance sector are expected to multiply in the coming months. The first to come to the market is the Spanish subsidiary of the American group Liberty Mutual, a transaction that could move around 1.4 billion euros.

Price hikes and job cuts in insurance companies

Uncertainty is widespread. To cope with the difficulties, insurers are preparing a generalised increase in the price of policies, and three leading companies have already implemented or announced workforce restructuring to improve efficiency and profitability. Between 2021 and 2022 Mapfre took early retirement for almost 600 employees. At the end of last year, Catalana Occidente initiated a process of voluntary departures for up to 550 workers. For its part, France’s Axa has just announced its intention to carry out an ERE in its Spanish subsidiary.

Possible takeover bid for Línea Directa 

The insurance industry is highly fragmented. There are some 200 insurers in Spain, and policy increases and staff reductions will not be enough for all of them. Some will have to look for new partners.

The aforementioned case of Liberty Seguros may soon be joined by one of the benchmark companies in car insurance: Línea Directa. After its flotation on the stock exchange in April 2021, the company’s shares have lost more than 35% of their value. This continued decline has triggered rumours that investment funds and other insurers may be preparing a takeover bid.

To protect itself against the possibility of a hostile takeover bid, in recent weeks Línea Directa has attracted two new major shareholders to its capital structure. They are the management company Candriam, owned by the insurance company The New York Life, and the owners of the pharmaceutical company Rovi. Candriam has taken 3% of the capital, while the López-Belmonte family has taken 4.32%.

A global trend worldwide

In Spain, the latest major acquisition in the insurance sector was by Mutua Madrileña, which acquired 8% of El Corte Inglés for EUR 1.105 billion at the end of 2021, thus becoming its exclusive insurance provider.

Internationally, insurance mergers and acquisitions set an all-time record last year. A recent report by global law firm Clyde & Co puts the number of deals registered in 2022 worldwide at 449. This is 31 more than in 2021. The Americas remained the most active region in 2022, with 236 mergers and acquisitions. Europe saw 127 transactions; Asia-Pacific, 60; and the Middle East and Africa, 24.

There were 19 large deals worth more than USD 1 billion, and the number of mega-deals is expected to grow among large companies in the insurance sector in 2023. Because mergers and acquisitions are the best way to grow fast.

As of 12 October, a merger control and foreign direct investment analysis will not be sufficient for M&A transactions. An analysis will also have to be carried out as to whether the transaction must also be subject to European Commission approval under the new foreign subsidy rules. This will inevitably lead to longer lead times and higher transaction costs.

We tell you about it in detail.

New regulation on foreign subsidies distorting the internal market

On 23 December last, Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies that distort the internal market was published in the Official Journal of the European Union. Known by its acronym FSR (Foreign Subsidies Regulation), its content is inspired by European regulations on state aid and merger control.

The new regulation provides that any foreign subsidy to European companies may be subject to investigation by the European Commission. The Commission will have wide-ranging powers to carry out information requests, inspections and market investigations in specific sectors. For this reason, all companies receiving any such subsidies will have to collect information both for the five years prior to 12 July 2023 and on a recurring basis in the future.

How the FSR affects mergers and acquisitions

In this way, the EU wants to avoid distortions in the internal market and in the level playing field. This is particularly the case if these subsidies are subsequently used to finance M&A transactions in whole or in part.

The FSR has a direct impact on M&A transactions for companies that have received foreign subsidies in the three years prior to 12 July 2023 and beyond.

As of 12 October 2023, M&A transactions will be subject to the same merger control and FDI analysis as before. In addition, however, an analysis will have to be added as to whether the transaction must also be subject to the condition that the Commission authorises it under the foreign subsidies rules.

Which operations are subject to notification

• Those where one of the participating companies is established in the EU and generates a turnover of EUR 500 million or more in the EU.
• Whether the following companies have obtained from third countries in the previous three financial years combined financial contributions of more than 50 million euros.

Notification procedure

For M&A contracts affected by the FSR, prior authorisation must be sought from the European Commission.

This notification must be made by the parties involved:

• In the case of a merger: jointly by the parties to the merger or acquisition of joint control.
• In the case of an acquisition: the person or undertaking acquiring control of all or parts of one or more undertakings.

The Commission has 25 working days from receipt of the complete notification to decide to initiate an in-depth investigation. It will do so if it sees indications of foreign subsidisation that distorts the internal market. This in-depth investigation can take up to 90 working days before the Commission takes a decision.

The Commission can adopt three types of decisions:

• With commitments, such as repayment of the subsidy, reduction of market presence, refraining from certain investments, etc.
• No objections.
• Prohibiting the concentration operation.