Financial crisis, we hardly knew you. Over the past 18 months, merger and acquisition transactions have returned full-force, particularly for U.S. businesses. However, it's not just U.S. businesses that are acquisition targets, as cross-border M&A has risen to staggering heights recently. According to Baker & McKenzie's 2014 report “Going Global: Strategy and Execution in Cross-Border M&A,” businesses conducted 4,785 cross-border deals in 2013, the largest annual volume since the end of the global financial crisis. And, based on the first six months of 2014, that trend does not seem to be subsiding any time soon.
These numbers mean that many in-house counsel, no matter the industry, may be receiving a heavier dose of M&A work than ever before. Michelle Warner, corporate vice president, deputy general counsel and secretary at Motorola Solutions, Inc., believes that the increase is the result of a “snowball effect” that has developed in multinational corporations in the past several years.
“It's very unusual to find any sizable company that does not have global operations,” Warner said. “As companies themselves grow more globally, they get more comfortable with acquiring globally. You have the infrastructure in place to be able to take on employees in Canada or the U.K. or Japan, whereas if you weren't global to begin with, you might be entering a new market and may not be as willing to acquire where you are not operating”
As the volume of those transactions continues to rise, in-house lawyers must perfect the efficiency of the practice in order to help facilitate an increasing number of deals—and guard against pesky litigation that can arise as a result.
The communication plan
In-house M&A experts and outside M&A counsel agree that for a global transaction to occur smoothly, the parties must realize that transactions in the U.S. and abroad don't always work the same way. Seem obvious? According to Matthew Gemello, a partner with Baker & McKenzie based in M&A-heavy Silicon Valley, it's easier said than done.
“So much of the U.S. economy and legal structure is set up to facilitate business, transactions, and freedom of choice,” Gemello explains, “whereas a lot of foreign regimes, particularly in European countries, have quite a heavily regulatory overlay component that requires some tough navigating through the right path to get to completion.”
Lily Hughes, vice president and associate general counsel, corporate, M&A and finance at Ingram Micro Inc., says that building this communication between the two sides of a transaction is just as important as understanding the laws, especially in light of regulatory concerns.
“You need to take a step back and see a complete picture of the various countries and the antitrust timelines so you’re setting the right expectations internally as well as with the target company,” Hughes says. “They might say, ‘We want to do this in a month.’ Well realistically, we can't do it because of all these other constraints. It's good to have that dialogue at the very beginning so you’re setting up the right expectations.”
Team building exercise
So you have the lines of communication open, and you’re understanding laws in the relevant geographies. What's next? In-house counsel need to develop a supporting staff to bring the deal to fruition, a staff that Gemello says should follow two distinct mantras: lean and diverse.
“I like the team small… they have to be nimble and flexible,” Gemello says. “The ‘U.S. way’ of doing things doesn't work in most cases; it takes a little bit of creativity to figure out how you protect against the concerns or the risks that you have while ensuring that you’re going to realize the full benefit of the asset or opportunity.”
One key member of that team that many in-house lawyers forget about, says Hughes, is the tax professional. “One thing I always run into—and I think people always think about it last as compared to bringing them in from the beginning—is tax questions and tax structuring in the most efficient way… you just don't know unless you’ve done it, and you’ve seen it.”
According to the Baker & McKenzie study, an uncertain tax environment is the number one regulatory challenge for acquisitions motivated by industrial assets, and for deals with the Middle East as the target market, 43 percent of lawyers cited an uncertain tax environment as the top regulatory challenge.
In addition, adds Claudia Higgins, a partner at Kaye Scholer focusing on M&A transactions, every team should have someone familiar with the inner workings of regulatory agencies, which can become invaluable in the case of future problems.
“I have some counsel on the other side of deals from me who are very fine antitrust lawyers analytically, but half of the transaction antitrust review is figuring out procedurally how best to work with the investigation and investigators,” Higgins says. “That depends on understanding how the agency works. It doesn't have to be that you know the particular person, but you have to understand their viewpoint intrinsically.”
Dealing with the litigation problems
Even with a thoughtfully constructed team and top-notch communications, litigation is still possible. That's the nature of global M&A transactions when a business inspired rush to complete the deal often collides head-to-head with a need for time to ensure proper regulatory controls. In order to combat this, says Higgins, honesty in the best policy when it comes to post-deal litigation.
“Frankly, the antitrust agencies are pretty good at talking to enough people that they’ll figure out the truth,” Higgins says. “And if they ever find that you didn't give the full answer, that will make the agency investigate your client even more meticulously. A merger investigation is filled with evidence, but the evidence isn't as detailed as you find in a real courtroom. There's a lot of room for the investigator and defense lawyer to develop a sense of trust so you don't have to prove 100 percent of what you say.”
Gemello says that in-house counsel should think about the long-term goals instead of short-term gains. “Recognize that regulators outside of the U.S. have an ongoing relationship with the business or a company in a way that's different than a single transaction-based approval,” Gemello advises. “You certainly want to avoid scorching the earth, because more often than not, whether it's an antitrust or a competition filing, you’re going to be back before that group in the future.”
One the largest problems that arises comes in the labor and employment space. Only 8 percent of transactions cited in the Baker & McKenzie study cited “access to human capital” as the key deal driver, and as a result, labor can often take a back seat. But as Warner says about labor laws, “They’re different everywhere. In some countries it's a lot easier when you buy a business, because all of the employees transfer by operation of law. In others, employees are entitled a severance. You have to know that going in, because it could be a hidden expense you weren't aware of.”
Hughes says that “everybody loves M&A,” but that doesn't mean everybody is an expert. Even at a large company such as Motorola, only Warner and one other lawyer have primary M&A responsibilities. At Ingram Micro, it's just Hughes. This means that, especially if a company is undertaking a big deal, having lawyers who understand global M&A principles—even if that's not a primary job function—is crucial. The trend isn't going away any time soon, and more lawyers will soon need to join the company's M&A ranks.
“Everybody wants to expand,” adds Hughes. “There is a lot of cash at companies, and people are looking at opportunities. If you don't play, you get bought by somebody else. If you don't play and you’re the biggest, you become a dinosaur.”