GGI FYI M&A News No. 03 Autumn 2022
Latest updates in the areas of M&A and Corporate Finance as shared between members of the GGI M&A Practice Group. #ggi #ggimandapg #ggifyinewsletters
GGI FYI M&A News
No. 03 | Autumn 2022
Disclaimer
The information provided in this newsletter came from reliable sources and was prepared from data assumed to be correct; however, prior to making it the basis of a decision, it must be verified. Ratings and assessments reflect the personal opinion of the respective author only. We neither accept liability for, nor are we able to guarantee, the content. This publication is for GGI internal use only and intended solely and exclusively for GGI members.
Welcome to the third edition of the GGI FYI M&A Newsletter.
I hope you enjoy the variety of articles from our contributors and I look forward to seeing many of you in person in Montréal!
Warm regards
Robert Thompson
Responsible Editor & Global Chair of the GGI M&A Practice Group
Robert is the Head of Corporate at Ward Hadaway LLP, a top 100 UK law firm. He has over 35 years M&A experience and edits “Sinclair on Warranties and Indemnities on Shares and Asset Sales” 11th Edition, regarded as the UK lawyers’ dealmaking bible. Recognised in Legal 500 Hall of Fame. Contact Rob.
Ward Hadaway is one of the largest full-service law firms in the North of England, with a reputation for quality, innovation and a practical approach to meeting their clients’ needs. With 90+ partners and over 450 staff, the firm’s approach of partner-led relationships with all clients is supported by a resource that has real strength in depth.
GGI member firm
Ward Hadaway
Newcastle upon Tyne, Leeds, Manchester, UK
T: +44 191 204 4000
Law Firm Services
M&A outlook for Q3 and Q4 2022 and 2023
Rajesh U. Kothari
Cascade Partners is an investment banking and private investment firm serving entrepreneurs, businesses, and investors active in the middle market. Drawing on the deep management, investment and transaction experience of its principals, Cascade Partners provides the guidance and resources necessary to navigate the complexities of managing growth as well as acquisitions, divestitures, financing, and other strategic initiatives.
Rajesh U. Kothari draws on his over thirty years of experience as an investor, financial advisor, and entrepreneur to assist companies with mergers, acquisitions, divestitures, and other corporate finance strategic initiatives. Rajesh is the founder and a Managing Director of Cascade Partners, a private investment and investment banking firm. Contact Raj.
Will 2022 replicate the 2021 record-setting M&A year? No, but that’s not necessarily a bad thing. 2021’s deal volume wasn’t sustainable – deals moved at a record-setting pace fueled by low interest rates, strong corporate earnings, abundant cash, 2020 carry-over and other factors. 2022 deal volume may be lower by comparison but it’s still higher than in past years and we see it remaining so for the remainder of 2022 and into 2023. However, it’s important not to focus on transaction volumes as an indicator of the overall health of M&A but rather on deal rationale. Investors need to deploy capital and scale existing platforms, and corporations need to temper their desire to grow faster than organic growth permits. These drivers suggest a strong foundation for getting a deal done.
The long-term outlook remains strong. There’s an abundance of corporate and private equity capital available – over USD 1.4 trillion in undeployed private equity, compounded with another USD 450 billion of private debt capital. With corporate cash balances exceeding USD 260 billion – a historic high mark, private equity buyers are not alone.
At the same time, the “Great Resignation” that impacted so many executives, managers and frontline workers is also affecting shareholders. With an increasingly uncertain economic and geopolitical outlook, high inflation levels and higher interest rates, increasing energy and other commodity costs (reminiscent of the 70s and 80s), and constrained labour, shareholders, particularly Baby Boomers, are saying it is time to move on. They survived the Great Recession of 2008 and 2009. They benefitted from over a decade of growth. Adding to their overall wealth was a market that climbed over 200 percent during this time. Now they are beginning to tap out.
When you mix an increasing supply of quality businesses with relatively high valuations, an overhang of capital and challenging organic growth, you get an M&A market that will survive temporary market hiccups, making any slowdown in deal activity short-lived.
The good news is the overall outlook for M&A for the remainder of 2022 and 2023 is positive. It will continue to evolve as supply chain and geographic impact, and ability to adapt to rapidly changing market dynamics will become critical points of value consideration.
GCG member firm
Cascade Partners
Cleveland (OH), Southfield (MI), USA
T: +1 248 430 6266
Advisory, Corporate Finance, M&A
Technology in M&A transactions
Robert Thompson
Ask any senior M&A lawyer how transactional work has changed over their career and most will point to the impact of technology. For the older generation this all started with the demise of the fax in favour of email and electronic documentation. The legal environment has since been subject to a massive sales push with due diligence software and programs, precedent creation software and project management systems all in theory designed to make the working lives of M&A lawyers easier, improve efficiency and profitability as well as meeting ever increasing client expectations in terms of service delivery and integration.
More recently and as a result of Covid the use of technology has significantly increased, firstly out of necessity but latterly out of seeing the benefits that some of the technology has brought to the transaction process. Currently most meetings are being conducted virtually through Teams, Skype or Webex. In person meetings, where possible, are limited to those where an in person dynamic might add value, such as key negotiating or critical due diligence meetings. In the due diligence arena, Litera, A legal tech provider believes some 57% of legal firms are now using some form of artificial intelligence products to automate elements of transactional due diligence work.
In terms of document production preliminary formats can now be produced largely automatically with minor tailoring. Most precedent production platforms come with embedded notes to aid the preparation of a near perfect document by more junior fee earners which then senior fee earners can quickly review, tailor and adapt to produce a very good first draft in a fraction of the time previously needed to be spent on this. This all improves efficiency and substantially eliminates errors of transcription or referencing an incorrect precedent. Most platforms are sold with an update function which means changes in law and procedure are automatically updated, again saving substantial amounts of professional time. Sophisticated clients are aware of these improvements and expect their law firms to invest in this technology and pass the savings on to them.
The number of in person all party closing meetings are also on the decline with the adoption of electronic signatures on legal documentation, which now enable parties to sign legal documents from anywhere in the world from their smartphones with the likes of DocuSign. Despite initial hesitancy in the UK some 61% of closings are now being effected via digital signatures. Savings in print costs associated with electronic closing and bibles versus in person and paper ones are substantial.
For lawyers used to charging on a time spent basis by reference to hourly rates these changes are now impacting adversely on the fees per transaction that they were able to earn before these advancements. This is resulting in changes to the way lawyers charge for these services with many going to a set fee for given parts of the transaction process or even to fixed fees for a given transaction.
Automation and technology only go so far however, the need for critical thinking, careful in context analysis and negotiation can still only be undertaken by skilled lawyers. Their job can however be made that much more pleasant and enjoyable by embracing some of the technologies to remove some of the “drudge work” from their day to day role leaving them to focus on the aspects that require the most care.
The willingness or otherwise of firms to embrace the best of technology within the M&A market also has a direct effect on the attractiveness of the firm in terms of recruitment, particularly for young tech savvy lawyers, who being used to working with a decent precedent production system or the latest due diligence review are not likely to join a firm who does not have these systems.
Technology is even having an impact on payment systems outside of the traditional banking system, where banking systems rely on working days to effect payment. Payment platforms like Lighting Network are making reliance on banking hours a thing of the past and removing the monopoly traditional enjoyed by the banks.
Technology within the legal sector is here to stay, those firms that are able to carefully balance the use of technology as part and parcel of their service offering in order to meet their clients expectations in terms of quality and service delivery at the right price have a prosperous future, those that try and hang on to the past and deploy outdated procedures and practices risk being left behind. An estimated 84% of law firms are set to increase their spend on legal tech over the next 12 months. However it is important to ensure that the legal offering is always tech enabled rather than tech reliant as no amount of tech can replace a skilled M&A legal practitioner.
Robert is the Head of Corporate at Ward Hadaway LLP, a top 100 UK law firm. He has over 35 years M&A experience and edits “Sinclair on Warranties and Indemnities on Shares and Asset Sales” 11th Edition, regarded as the UK lawyers’ dealmaking bible. Recognised in Legal 500 Hall of Fame. Contact Rob.
Ward Hadaway is one of the largest full-service law firms in the North of England, with a reputation for quality, innovation and a practical approach to meeting their clients’ needs. With 90+ partners and over 450 staff, the firm’s approach of partner-led relationships with all clients is supported by a resource that has real strength in depth.
GGI member firm
Ward Hadaway
Newcastle upon Tyne, Leeds, Manchester, UK
T: +44 191 204 4000
Law Firm Services
The Economic Crime (Transparency and Enforcement) Act 2022: A quick fix?
Stephen Grant
The Economic Crime (Transparency and Enforcement) Act 2022: A quick fix?
by Stephen Grant
Stephen Grant is a transactional corporate and commercial lawyer with both academic and industry knowledge of the computing and technology sectors. He has experience in advising clients in a variety of sectors (both public and private) in sizes ranging from listed blue chip companies to sole traders on a broad range of corporate matters. Contact Stephen.
Following Russia’s invasion of Ukraine in February 2022, the Economic Crime (Transparency and Enforcement) Act 2022 (the “Act”) was fast-tracked through the UK Parliament and came into force on 15 March 2022, despite it progressing at a lackluster pace for some years prior.
The Act is divided into three key parts discussed briefly below.
The Register of Overseas Entities (“ROE”)
The ROE, which commenced on 01 August 2022, requires that any “overseas entities” owning property in the UK must register the identity of their beneficial owners at Companies House, the UK’s registrar of companies, before 31 January 2023, and decisively keep that registration up to date. Failure to do so is regarded as a criminal offence which can include imprisonment.
The ROE applies retrospectively so all qualifying existing overseas entities must apply to be included on the ROE unless an exemption applies.
Overseas entities will then have an ongoing obligation to update their registration annually (even if only to notify that there are no changes) and must alert Companies House when a beneficial owner and/or managing officer is required to be removed from the ROE.
Unexplained Wealth Orders (“UWO”)
Unexplained Wealth Orders allow for the confiscation of property without proving criminality by reversing the burden of proof. Whilst UWOs are not new in the UK, the Act introduced substantial changes to make them easier to obtain and enforce.
Scepticism remains rife about the effectiveness of UWOs even with the new changes introduced by the Act.
Sanctions reforms
The Act amends the Policing and Crime Act 2017 and the Sanctions and Anti-Money Laundering Act 2018 by expanding information-sharing powers and crucially removing the requirement that people must have known or suspected that they breached sanctions law to receive a monetary penalty for such breaches.
The UK government has already announced that a bulkier supplement to the Act will follow in 2022/23. Perhaps to plug any hastily created gaps and loopholes.
Wright, Johnston & Mackenzie LLP is an independent Scottish law firm offering the full range of corporate, dispute resolution, and private client services. They are GGI’s sole Scottish member.
Is tech no longer en vogue?
Thomas Parry
Tom Parry is an experienced M&A professional, currently working as a Manager at Regent Assay, having taught Economics and International Business at the University of Nottingham. Contact Tom.
During the Covid-19 pandemic, supermarket shelves gathered cobwebs, cars motionlessly filled driveways, and gym memberships were unceremoniously cancelled. In an attempt to navigate a world devoid of human contact, people turned to technology to maintain a semblance of normality, and the value of technology companies, both public and private, skyrocketed. Fast forward two and a half years, and Apple’s value stands at USD 2.51 trillion (capIQ, July 2022), down from the heady heights of USD 3 trillion that it achieved earlier in 2022. The NASDAQ is down almost a quarter on the year, and private investors are daring to use the “P” word – profitability – having been content to burn through capital for the past two years or so.
Such a shift, twinned with various global macroeconomic headwinds, may be interpreted by some to be a seismic change in the investing landscape. However, it is most likely to be a correction following an unprecedented period of easy money from both private and government sources. Tech speculation during successive lockdowns and the hysteria surrounding new segments such as NFTs, facilitated this surge in valuation based on speculation rather than true potential or earnings. And whilst tech multiples have decreased in past months, the SaaS Median EV/TTM Revenue Multiple having dropped from 8.0x in the third quarter of 2021 to 6.4x in the second quarter of 2022 (Software Equity Group: 2Q22 SaaS M&A Update, p.16), they are still very healthy and the envy of other, more traditional, balance sheet-heavy industries.
Tech is also more diversified than ever, and debatably, not all “tech” is actually “proper tech”. This is a rabbit hole we won’t jump down today but the point can be made that while some subclasses, such as SaaS, have held up well, others, such as Fintech have truly felt the wrath of this market’s correction. Again, this is not all bad news and has led to M&A opportunities within the sector:
It is clear that there has been a major correction in the first half of 2022 and that multiples and share prices have become much more reasonable. However, the value of tech companies in general still far exceeds those of more traditional industries. Tech is still en vogue, just not to the same extent as it once was.
GCG Member Firm
Regent Assay
London, Birmingham, UK
T: +44 121 200 3800
Corporate Finance, M&A
Regent Assay (formerly Assay Corporate Finance) is a unique mergers and acquisitions boutique, with a specialist TMT focused team, looking after the corporate finance and advisory needs of a diversified portfolio of high-profile UK and international clients, supporting transactions in the GBP 5m - 50m deal size.
ESG aspects in M&A, private equity, and venture capital transactions
Philipp Weber
ESG aspects in M&A, private equity, and venture capital transactions
by Philipp Weber
Philipp Weber is a Corporate Partner in FPS’s Frankfurt and Dusseldorf offices and a specialist for M&A, joint venture, private equity and venture capital (cross-border) transactions. Philipp regularly acts for domestic and foreign PE and VC funds, corporations, growth companies and entrepreneurs. Contact Philipp.
The importance of environmental, social and governance principles (ESG) for companies has significantly increased in recent decades. This is due to the growing awareness of society and stakeholders regarding sustainability issues, driven mainly by the noticeable negative effects of climate change. Voluntary initiatives, such as the United Nations Global Compact and the Sustainable Development Goals, and regulatory approaches, like the European Green Deal and the German Supply Chain Act, are setting up new principles, standards, and rules.
These create new obligations and risks for companies and affect areas like governance, reporting, human resources, products and services, and procurement. For example, in January 2020 BlackRock unveiled its commitment to putting sustainability at the heart of its investment process, and in accordance with the Global Sustainable Investment Alliance about 36 percent of all its professionally managed assets currently are “sustainable” investments.
The extent to which ESG factors need to be considered in M&A, private equity, or venture capital transactions depends on their significance to the target, the purchaser and/or the investor. Such ESG considerations can arise from:
- regulatory requirements;
- contractual obligations vis-à-vis third parties like customers or suppliers;
- the impact on transaction/debt financing;
- voluntary ESG policies; and
- other aspects like general business strategy, investor relations communication, etc.
Unless solely regulatory issues (e.g. compliance with environmental laws) are concerned, ESG considerations will most likely be interdisciplinary issues that require appropriate coordination between the different due-diligence workstreams (e.g. technical, financial, HR, and/or legal).
Identified ESG issues or risks, depending on their significance, may lead to the transaction being terminated or may need to be addressed in the sale and purchase, investment agreement, or otherwise, for example, as follows:
- adjustment of the purchase price or company valuation;
- prior carve-out;
- warranties or guarantees;
- indemnifications;
- W&I insurance, if available;
- condition to signing or closing;
- undertaking; and
- post-merger integration item.
When addressing these issues by way of warranties, guarantees, or indemnifications, special attention should be paid to the definition of the term “damage” to make sure that a possible negative impact on company valuation or reputation is adequately covered.
In case an investor does not acquire full control over a target, say in the context of a venture capital investment, the ESG aspects relevant to the investor (e.g. information required to fulfil regulatory fund reporting requirements) may need to be addressed in the shareholders’ agreement as follows:
- information rights and reporting obligations regarding ESG data;
- inspection and audit rights (including 3rd party audits);
- undertakings (e.g. implementation of the investor’s ESG policy); and
- incentive schemes by founders or management regarding ESG goals or compliance.
FPS is one of the largest fully independent German law firms, with four offices in Germany. FPS currently employs over 130 lawyers and notaries. One of the firm’s core areas of expertise is national and international litigation as well as dispute resolution.
GGI member firm
FPS
Dusseldorf, Frankfurt am Main, Berlin, Germany
T: +49 69 95 957 806
Law Firm Services
Data: The remedy to risk
Brad Kerkhof & Arjaan De Visser
Risk in the current environment
Risk, real and perceived, is a critical factor in M&A. Risk informs valuation and drives deal structure.
The market today is full of risk. Factors such as the Covid-19 pandemic, increasing interest rates, inflation, and global supply chain issues have created an unpredictable economic environment. Risk, left unattended, can expand from reality into fantasy and can quickly erode confidence. Determining what is real and what is not is critical to completing a successful transaction.
Data is the remedy
The best approach to minimising risk is to connect the story of the business with robust data. We have found that sharing data early in the process:
- Quantifies identified risks and opportunities;
- Facilitates in-depth discussions based on facts, not perceptions;
- Equalises knowledge between buyer and seller;
- Reduces or eliminates surprises in due diligence; and
- Increases the certainty of closing.
Acquirers approach investments with healthy scepticism based on known and unknown risks. It is impossible to remove all risk, but one must identify, quantify, and minimise known risks.
Good data can illuminate past and current performance, set the groundwork for forecasts, and decrease investment uncertainty.
Example: The logistics industry
With the marked increase in freight rates across North America in the last year, many logistics businesses realised increased revenue and earnings. The risk to acquirers is that these elevated earnings may not be sustainable. To address this pricing risk, parties can quantify the impact of increased freight rates by analysing detailed shipping data.
The first step is to analyse the data and discern trends in key performance indicators such as revenue per shipment, profit per mile, revenue from new customers, and shipments per month which will provide clarity on what has driven the changes in earnings.
Then, supplement the data with a review of macro-economic and historical trends to:
- Contextualise – understand the impact of factors outside the logistics industry;
- Benchmark – compare company figures to industry average; and
- Forecast – review historical results to estimate future sustainability.
Completing this data-driven exercise uncovers the complete story of business and earnings performance in the past, present, and future. Minimising the investment risk comes from understanding earnings and business trends independent of the known risk of fluctuating freight rates.
Conclusion
In today’s market, acquirers are rightfully cautious. Negotiations commence at the very beginning of a sales process, and to get the right valuation with an appropriate structure buyers and sellers must take extra steps to build confidence, reduce uncertainty, and provide support for sustainable earnings. Our suggestion – use data as your guide.
Brad Kerkhof
Arjaan De Visser
Stillwater Capital is a mid-market Mergers and Acquisitions firm established over 20 years ago. Stillwater is a firm known for its integrity, world-class advice, and proven track record of over 100 completed transactions and a 95% closing rate on sell-side transactions.
GCG member firm
Stillwater Capital Corporation
Oakville, Toronto (ON), Canada
T: +1 905 845 4340
Corporate Finance
Financing acquisitions and Dutch tax rules
Edward Hendrickx & Roel Jansen
If a company acquires the shares of another company, it is important to consider the tax consequences. For example, borrowing money (for the purpose of the acquisition) may lead to interest deduction limitations. It is also possible that the acquisition costs are not deductible. We will elaborate on these rules on a high level basis below. In this article, we assume that a Dutch tax resident company is the acquiring party. Also, we assume that the financing takes place with arms-length conditions.
Interest deduction limitations
In general, interest expenses are tax deductible. However, Dutch tax law includes some anti-avoidance rules such as an interest deduction limitation.
Interest deduction limitation for affiliated companies
This interest deduction limitation applies if:
- a Dutch company borrows money from an affiliated company; and
- the loan is related to certain legal acts. One of the legal acts by which the interest deduction limitation is triggered is the acquisition of at least one-third of the shares of a company.
If these requirements are met, the interest is not tax deductible. However, there is a counterevidence provision, which would make the interest tax deductible. This provision requires either proof of valid business arguments, or a fair taxation of the interest received by the lender.
Earnings stripping provision
The earnings stripping provision is a general interest deduction limitation. For this application, the reason for borrowing money and the relation to the lender are irrelevant. The earnings stripping provision limits the deductibility of the net interest expense to 30 percent of the EBITDA or EUR 1 million (whichever is highest of the two). The net interest expense that exceeds that amount is not tax deductible (however, the net interest expense which is not tax deductible in a tax year may be used in following tax years).
Dutch acquisition companies and consolidated tax return
In some acquisition structures, a Dutch acquisition company is established and borrows money (intragroup or third party) for the purpose of the acquisition. This Dutch acquisition company can file a consolidated tax return with the acquired company (if the holding is greater than 95 percent of the shares), and the interest expense on the combined result is tax deductible (if no interest deduction limitation applies).
Acquisition costs and participation exemption
According the Dutch participation exemption (corporate income tax), results of subsidiaries are tax exempt, and acquisition costs are not tax deductible. For VAT purposes the input VAT on the purchase costs may be not tax deductible in the VAT return.
Conclusion
In this article, we have identified a few points of attention when financing acquisitions. The tax rules are extensive and there is a lot of case law which should be considered as well. Therefore, it is recommended that you engage a Dutch tax advisor when setting up an acquisition structure.
Edward Hendrickx is EJP’s Founder, Partner & Tax Specialist. He specialised in international tax advice, mergers & acquisitions, and consultancy on entrepreneurship & for larger SME clients. Contact Edward.
Roel Jansen completed a master’s degree in fiscal economics at Tilburg University in 2021 and has been part of the EJP team since 2019. As an all-round tax specialist, he focuses on international tax and inheritance and gift tax. Contact Roel.
Edward Hendrickx
Roel Jansen
EJP Financial Astronauts are auditors, advisers, and challengers. Their team of 55 consists of auditors, accountants and international tax lawyers that have a wide range of expertise. Their main fields of expertise are Dutch corporate and personal income tax, international taxation, Dutch royalty, interest and dividend withholding tax, estate planning, and wage tax. They have an AFM licence to perform audits for the larger mid-sized companies.
GGI member firm
EJP Financial Astronauts
's-Hertogenbosch, The Netherlands
T: +31 73 850 7280
Auditing & Accounting, Corporate Finance,Tax
Impact of inflation, interest rates, and geopolitical uncertainty on M&A valuations
Raghu Marwah & Anmol Bansal
The trio of inflation, interest rates, and geopolitical uncertainty has had a sobering impact on M&A valuations. Determining the impact in terms of good or bad, positive or negative, favourable or unfavourable varies on case-to-case basis. Examples of healthy valuations which remain largely unaffected are few but do exist, reflecting the fundamental need for sound M&A ideas supported by seamless operations and backed by experienced mentors. On the other hand, the majority of valuations have faced pandemic heat despite 2021 being one of the most bullish years in over half a century.
To reiterate, these recent upheavals have led to a correction of valuations in various sectors, leaving technology stocks hammered. The ripple effects, as a result of the pan tech-enabled universe, are having far-reaching consequences on other sectors.
Macro events such as inflation, interest rates and geopolitical uncertainty have set the stage for a more challenging deals market. The uncertain geopolitical stance just before the Russia-Ukraine conflict hinted towards supply-chain disruptions which led to inflationary pressure and eventually resulted in central banks hiking interest rates. The US Fed to-ing and fro-ing with interest rates, and ECB, Swiss National Bank, RBI, and others hiking rates did not achieve the intended result of keeping inflation in check.
US overall inflation is up by 9.1 percent and energy prices have inflated by over 40 percent in the last twelve months. This is turning out to be very bad for consumers and worse for deals markets. Eurozone’s annual inflation witnessed record levels of 8.9 percent in July 2022 compared to just 3 percent in August 2021, proving lethal for the deals market as confidence in the market takes a dip.
M&A deal value in first two quarters has been low compared to record levels last year. Global M&A deal value has declined 21 percent, and the deal volumes registered a drop of 17 percent, even though the deal value managed to reach a significant total of USD 2 trillion. The year’s second quarter had a higher global M&A value than Q1 despite deal volumes slowing and this made Q2 2022 the third-highest Q2 on record.
Megadeals have been one of the biggest supports for global M&A value and have surged more than USD 10 billion compared to previous times. Europe has remained resilient compared to the US and MENA regions by seeing a drop of only 4 percent in value and 8 percent in volume. Whereas the US has replicated the global numbers, witnessing a 28 percent drop in deal value and 22 percent in volume. The MENA region suffered the most with deal values down 49 percent and deal volume down by 22 percent. India, the only rise amongst the falls, has registered an increase of 124 percent in deal value and a modest increase of 32 percent in deal volume.
Recently, the SoftBank Vision Fund recorded losses of USD 17 billion in the quarter ending 30 June 2022, indirectly recognising the valuations correction and urging unicorn founders to accept lower valuations if they want to continue to raise funds.
Raghu Marwah
Anmol Bansal
Raghu Marwah, a qualified Chartered Accountant with a Bachelor of Arts (Economics), joined the RNM team after having gained experience at one of the Big 4 firms. He specialises in advising and rendering consultancy services to clients in relation to structuring strategic investments, offshore structuring, cross-border holdings, M&A, and valuations. Contact Raghu.
Anmol Bansal, with a BSc (Hons) in Accounting & Finance from University of London, is an Analyst with RNM Capital. He works with startups, incubation centers and family offices in various areas like strategic investments, valuations, M&A and cross-border transactions. Contact Anmol.
Established in 2009, RNM Capital Advisors (RNM) is a mid-market focused boutique investment banking firm. RNM provides advisory services to its clients across sectors and geographies in the area of mergers & acquisitions, joint ventures/collaborations, fund mobilisation, restructuring & turnaround, valuations, due diligence, India entry, family office, alternative investments and other allied corporate finance matters.
International legal implications of mergers and acquisitions in Mexico
Prof Sergio Guerrero Rosas
Prof Sergio Guerrero Rosas, Managing Director at Guerrero y Santana, has over 25 years’ experience advising companies from SMEs to multinationals, as well as individuals, on tax and estate planning. He is also Global Vice Chairperson of the Trust and Estate Planning Practice Group and Latin American Chairperson of the GGI International Taxation Practice Group (ITPG). Contact Sergio.
The extraordinary industrial and commercial development of the last century is based on the extent of economies, the integration of production processes, and the business interaction of related companies. The conjunction of these factors gives rise to an economic phenomenon that could be summed up as: the greater the accumulation of resources, the greater the profits; and the greater the profits, the greater the accumulation of resources. Consequently, it is not surprising that modern business people increasingly pursue the integration and concentration of their companies.
The unification and consolidation of businesses bring more control over the life of companies, and opens up the possibility of new businesses or the fortification of an already established business. Therefore, mergers in forums such as the Mexican market are an excellent instrument to reorganise the business strategies of business people in our country, due to the fact that there are companies not in operation that still represent a fiscal cost as they continue to have informative obligations to the tax authorities.
Another issue of great relevance in Mexico is the acquisition of companies. This situation may be of great interest to foreign investors because there are many companies in Mexico that are called “paper companies”, meaning they are duly incorporated, have tax IDs and bank accounts, but do not trade in the Mexican market. This situation could be attractive for investors because they can purchase a company that already has certain documentation which could speed up commercialisation in the country, as compared to the incorporation of a new company which would take more time in procedures before the tax authorities and would be subject to the whims of a slow financial bureaucracy.
Foreign investment is attractive in the Mexican market, because of its geographical position, its closeness to the US and Canada, its proximity to the Panama Canal and the maritime entrance to both the Atlantic and Pacific Oceans. Mexican cities such as Guadalajara, Monterrey, Puebla, Aguascalientes, and Leon have high foreign investments in electronics manufacturing, automotive, steel, and technology development companies. These investments have benefited from the implementation of strategic mergers and acquisitions models provided by Mexican law, which represent a useful tool in the prevention and mitigation of tax, legal, labour, environmental, and corporate compliance risks.
Guerrero y Santana, S.C. provides its clients with a wide range of tax, legal, and consulting services. The firm helps clients, from individuals and small local businesses to major corporations and multinationals, to achieve their smallest aims and grandest ambitions. They are committed to providing specialised, personalised services to all those seeking reliable and up-to-date tax, legal, and business support.
GGI member firm
Guerrero y Santana, S.C.
Tijuana, Baja California, Mexico
T: +52 333 120 0538
Advisory, Auditing & Accounting, Corporate Finance, Law Firm Services, Tax
Valuation considerations during an increased inflationary environment
Christopher Esterhuysen
Valuation considerations during an increased
inflationary environment
by Christopher Esterhuysen
Christopher Esterhuysen specialises in corporate finance with a focus on mergers & acquisitions and
transactional services (financial modelling, valuations & due diligence). Chris has a duel Honours in Strategy &
Accounting and completed the Advanced Corporate Finance course at Colombia Business School. Contact Chris.
Business owners and investors are understandably concerned about rapidly rising inflation levels, but what does this mean for someone wishing to sell their business? Put simply, the effects of inflation on a company’s value come down to how inflation impacts a company’s current and future cash flows. Three key levers drive this process:
Repricing
What is the ability of a company to reprice its goods or services? A company’s ability to reprice its goods is a function of the size of the total accessible market and its relative market share of that specific market. Companies that can pass on price increases to their customers are better protected from the effects of high inflation and are better able to maintain their operating margins. If increased costs cannot be passed on to customers through higher prices, this leads to a negative effect on operating margins and thus on the value of the company, ceteris paribus.
Cost structure
Cost structure is determined by a company’s relative repricing power and cost efficiencies. Companies that have substantial, inflation-sensitive costs are more exposed to the effects of higher inflation, with the opposite also being true. The question is what are companies doing about it, and have these mechanisms or scenarios been built into expected cashflows?
- How significant are current inflationary pressures? Price increases are a given in any inflationary environment, but companies that consistently address total customer and product profitability are likely to weather inflationary cycles better than those that focus solely on cost changes.
- Does management’s business plan allow for price adjustments based on customers’ willingness to pay, and on product differentiation within an acceptable range?
- Has management identified the products most affected by inflation with the aim of adjusting product sourcing or product design? In other words, addressing materials, packaging, or even product features, in response to elevated production and servicing costs, while maintaining the functionality customers require.
Growth Capital & Investment efficiency
This is a measure of how much investment is needed to grow. Companies with longer term, inflexible investment profiles are more likely to be negatively affected by inflation. For example, infrastructure and manufacturing businesses in general are required to invest significant amounts of capital for longer periods of time than do service or technology companies. Companies with the flexibility and time to pull out of, or delay, investments are better positioned to weather inflationary storms than companies with less flexibility.
The M&A environment is most comfortable with moderate, stable inflation. Historically, the highest valuation multiples are paid in such an environment because the reliability of earnings estimates is high and uncertainty is correspondingly low. Current high inflationary forces are likely to result in company valuations coming under pressure from an earnings perspective, leading to volatile and tightening valuation multiples. It is critical to assess and understand subject company cash flows in navigating such uncertainties, and to understand the company's true value in such an environment.
Nolands is an international auditing firm located in eleven offices in Africa. Nolands employs over 200 people and focuses on building relationships with its clients. The company prides itself on being “not ordinary” and on its ability to integrate services providing the best possible solutions.
GCG member firm
Nolands Capital
Cape Town, Durban, Port Elizabeth, Sandton, South Africa
T: +27 21 658 6600
Auditing & Accounting, Tax
Professionals working together –
one client, one purpose
Anthony J. Soukenik
At GGI’s North American Conference in Washington DC earlier this year, I had the good fortune of presenting on working together with a single purpose when clients are selling a commercial enterprise. Highlights of my presentation were as follows:
- Be transparent on fees and specific industry experience.
- Strategise with your client’s professionals to maximise enterprise value.
- On the sales side, if possible, spend time preparing the company for sale.
a) Consider reclassifying supplies and inventory that were previously expensed by our “tax efficient” clients resulting in an EBITDA adjustment and delivering working capital;
b) Consider the ramifications of the allocation of purchase price – is there a place for an allocation of personal goodwill?
c) Begin the underwriting process for rep and warranty insurance;
d) Discuss indemnification formulas typical to the industry and to the client, as they relate to prior company warranties and call backs with statistical data to support the proposal; and
e) Begin to educate your clients on anticipated audits that might be required during due diligence for GAAP reconciliation, quality of earnings, and Nexus issues.
- Prepare and address the multitude of special considerations that can occur from state-to-state requirements. For example, in Illinois, the Bulk Sale Department of Revenue stop order requirement; 1031 real estate exchange possibilities; collective bargaining agreements which include multi-employer defined benefit plans that result in underfunded liabilities and the termination of benefit plans.
Anthony J. Soukenik is a Shareholder of Sandberg Phoenix & von Gontard and has previously served on the firm’s Executive Committee. Tony is a member of the Business Law Practice Group and a former Practice Group Leader. He focuses his practice on the areas of banking, construction, real estate, corporate law, durable medical equipment, estate planning, real estate, and federal and state taxation. Contact Tony.
With more than 175 attorneys across seven offices, Sandberg Phoenix & von Gontard’s work is concentrated in the areas of business, business litigation, intangible property, health law and products liability. They stand behind their promise to provide superior client service with a rare client service guarantee, reflecting their commitment to quality and broad depth of legal expertise.
Would you like to contribute to the next issue?
Practice Group members are invited to email a topic suggestion to Barbara Reiss no later than 10 January 2023.
(If approved, the final article will be due by 07 February 2023.)
