Best Practices for Private Equity Mergers & Acquisitions

Private equity mergers & acquisitions (M&A) are highly complex transactions that require varied sources of expertise. Such deals require the help of key experts in legal, business, human resources, intellectual property and financial issues. Parties on both sides of the transaction need to thoroughly understand the issues that frequently arise.

Due to the multiple parties and thousands of documents that are involved, it's best to use a deal room to market and close deals.

M&A Deals Take a Long Time to Market, Negotiate and Close

The entire process for an M&A deal to complete can be lengthy. To begin with, M&A valuation is negotiable. It can be difficult to determine whether a buyer's offer price equals or exceeds the value of the company. The benchmarks aren't always clear, and negotiations depend on multiple factors. Buyers rarely make their best offers upfront, and it's totally acceptable to put a counteroffer on the table.

It's common for private equity M&A deals to take a long time to complete. Typically, it can take four to six months from inception to closing. The time frame depends on several things, including the buyer's motivation to perform due diligence and complete the transaction and how well the selling company manages multiple bidders. An important thing that can help is to place all key contracts, financial statements, patents, corporate records and other materials in an online data room from the start of the process.

Buyers Are Expected to Perform a Significant Due Diligence Investigation

The due diligence process is of the utmost importance because the buyer needs to know what it's buying and what obligations they will be subject to. They'll be interested in the nature and extent of the seller's liabilities, problem contracts, legal risks and intellectual property issues. Sellers have to dig a little deeper for information for private company M&A deals where the selling company hasn't yet been subject to the scrutiny of the public markets.

Sellers usually get the best deals when multiple buyers are involved where they can leverage the competition and get a higher price, better deal terms or both. Buyers may request a 'no-shop' agreement that limits the selling company to speak with other potential buyers. Selling companies can set up an auction or competitive bidding process to encourage additional bidders.

Legal and Financial Experts Value

Selling companies generally hire outside legal counsel teams that specialize in private equity M&A deals. An outside legal team may include other areas of specialty such as tax, compensation and benefits, employee matters, intellectual property, data privacy, real estate, cybersecurity, antitrust or international trade. Competent outside legal teams are skilled negotiators, draftspeople and advisors who have demonstrated that they've successfully closed similar deals. Legal teams that specialize in M&A come with a substantial cost, but the costs are easily offset by identifying significant risks early in the process and negotiating solutions for them.

Experienced investment bankers also bring considerable value into deal rooms, where they provide independent advice, drive the process forth, and partner with the board and management teams.

Intellectual Property Is a Key Component of Private Equity M&A Deals

Selling companies should anticipate that buying companies will request an extensive list of all intellectual property and related documentation that's material to the business. Buying companies aren't required to complete an acquisition where intellectual property representations and warranties are untrue. Buying companies may be entitled to be indemnified after a closing for damages that arise from misrepresentations around intellectual representations and warranties that are untrue.

Negotiate the Letter of Intent Properly and Use a Well-Drafted Acquisition Agreement

Buying companies may request that the selling company sign a letter of intent that isn't binding and doesn't include key details about deal terms. Large buyers often try to pass their letters of intent off as a mere formality and encourage them to sign them in haste to get the M&A activity started. This is one of the biggest mistakes that selling companies can make, as it can limit the selling company's bargaining power.

In addition to an honest and detailed letter of intent, selling companies should ensure that they present the buying company with a well-drafted acquisition agreement that protects the selling company as much as possible. It's common for the selling company's counsel to prepare the first draft of the acquisition agreement.

Consider the Impact of Employees & Benefits After the M&A Completion

M&A transactions can take an emotional and financial toll on a selling company's management and other employees. They're bound to be concerned about their employment and other benefits, and this can be a sensitive part of an M&A deal. Both parties will need to explore the impact of decisions about employee stock options, vesting acceleration, re-vesting options or rollovers, carveout plans, retention agreements and severance packages.

Diligent Corporation offers virtual deal rooms that provide granular, file-level restricted access, file encryption and accessibility to data and secure communications through any browser.

Private equity M&A and corporate development teams need the capability to gather large numbers of documents to support due diligence. Diligent's virtual data rooms make it possible to bulk-upload, auto-index and structure vast amounts of data so that the necessary parties can access it to negotiate and close the deal.

A virtual deal room makes it possible for selling teams to deal with multiple bidders and control the segregation of parties so that it's an efficient process and buyers can get their questions answered. Selling companies also have access to controls over which documents can be printed or watermarked.

Sellers and investment bankers have the ability to see who has been visiting the data room, how often they visit it and the specific dates they entered it. Potential buyers who spend lots of time visiting the data room are serious contenders. The type of information that they're seeking gives selling companies a hint as to the issues that are most important to the buying companies. Virtual deal rooms provide the best and most cost-effective resource for M&A deals where best practices can prevail.