3 Questions with Chris Dargie: Mergers and Acquisitions in 2022

Bernstein Shur’s Chris Dargie answers questions about new opportunities for investors and lenders as global merger and acquisition volumes hit a record high.

How can businesses evaluate whether a merger or acquisition is right for them?

Whether and when to do a deal depends very much on whether you’re on the buy side or the sell side. For owner managers, it’s often the age of the principal that drives the timing of a sale, whereas for growth companies, it can be much more of a complex business analysis involving market prospects, cash position, capital markets, valuation multiples and stockholder pressure. Some sellers are motivated to sell for tax reasons, although it is rare for tax to be the sole reason to sell. There are also special situations that frequently spur a sale, like owner disputes and deaths. Finally, there are distressed sale situations, such as when the company’s creditors are forcing a sale. Each case is different and brings with it a different set of considerations.

Unicorn situations are rare outside of the newspapers, and the most financially successful exits tend to be those that have been in planning for at least 5 years. The planning process typically involves specialized M&A, tax and estate planning lawyers working closely with the company’s CPAs, M&A advisors and other professionals. It takes a lot of work. The professional team is accustomed to working together to help management maximize enterprise value and minimize taxes on an exit. They frequently open up doors that management never considered and sometimes never even knew existed.

For their part, M&A buyers are as diverse as M&A sellers, and they enter the market for different reasons. In some cases, the buyer might be the senior management team or an ESOP (Employee Stock Owner Plan). In others, the buyer might be a larger competitor looking to make a strategic acquisition or a private equity firm looking to add to its portfolio. In still others, the buyer might be an individual with means that is looking to make a lifestyle change. The type of buyer heavily influences the flow of the transaction and whether the buyer or the seller drives the transaction process. Regardless of the type of buyer or seller involved, it is essential for each party to get experienced deal counsel involved early in the process in order to minimize transaction risk.

How do you define success for your client in an M&A deal?

This also depends on whether we’re on the buy or the sell side. For buyers in non-distressed deals, a successful deal is usually one that minimizes risk through a combination of pre-closing due diligence, thoughtful and informed negotiation of liability provisions in the definitive purchase agreement, and preservation of business goodwill during and after the sale process.

When we represent sellers, the definition of success varies by seller. For example, many family companies are motivated to protect their employees from post-closing layoffs. In those cases, the definition of success might be reasonably fair deal terms and some level of post-closing job security for employees. For growth companies and private equity firms as seller, a successful deal is generally one that maximizes returns to investors and minimizes the potential for post-closing purchase price clawbacks.

All things being equal, we seek to foster conditions that will lead to a fair and smooth transaction, regardless of whether we are working on the buy or the sell side. Smiles and handshakes at closing are a good measure of success in this regard. That said, some deals are simply not destined to close, and in those cases the definition of success is much more closely linked to contract language that was previously negotiated by the deal lawyers.

How do client goals affect your approach to handling a merger or acquisition?

Client goals are the number-one factor in how we approach deals. We counsel deal participants of varying levels of experience, and part of our job when representing deal participants that are new to the deal world is educating them on what their goals and priorities should be. At a base level, a seller’s primary goal is to maximize price and to minimize post-closing liability, and a buyer’s primary goal is to fully realize the benefit of its bargain. However, it’s almost always more nuanced than that due to unequal negotiating leverage. Differences in leverage arise through complex sets of factors, and one of deal counsel’s most important jobs is to accurately evaluate the leverage playing field and, depending on the client’s position, to try to narrow or exploit asymmetries during contract negotiations. When the parties don’t share equal negotiating leverage, which is very often the case, it pays to have an expert negotiator on your side.