The past couple of years in private M&A in the Nordics have seen a shift from a predominantly seller-friendly market to a purchaser-friendly market. The reasons underlying the change are numerous, however availability of financing, valuation expectations of the parties and strategic fit traditionally lie at the heart of the dynamics of M&A.
While there have been no fundamental changes in the expansion strategies of businesses as a whole, arranging financing for an acquisition on commercially reasonable terms has become increasingly challenging.
Additionally, the general economic downturn has impacted on valuation expectations – particularly from the point of view of prospective purchasers – which businesses contemplating a divestment have not always been prepared to accept. All of the foregoing have contributed to more complex transaction dynamics.
Looking at the shift toward a purchaser- friendly market from a legal perspective, we have seen the emergence of additional elements in the traditional M&A model that work to facilitate deals in the current challenging M&A environment.
One product that was originally introduced in the 1980’s and which has been re-emerging especially in the Nordic M&A market over the past couple of years is M&A insurance. M&A insurance can take a number of forms, including indemnity insurance or insurance tailored to cover a specific risk (for example an environmental risk). However the most prevalent type of M&A insurance seen in the day-to-day transactional context is R&W insurance, which covers the risk associated with the representations and warranties of a sale and purchase agreement (SPA).
This insurance product is very versatile as it can be set up as a sell-side or buy-side policy covering the risk of seller or buyer in relation to representations and warranties, respectively. A further possibility – especially in a competitive auction process – is to arrange seller-facilitated R&W insurance, which is essentially a pre-negotiated policy covering the representations and warranties proposed by the seller in the SPA draft.
Used appropriately, M&A insurance can have a significant impact on the willingness of the parties to conclude a deal, as the product allows them to agree on sharing the risk of a particular issue with the help of an insurance company. For example, R&W insurance may allow the seller to give a more comprehensive set of representations and warranties than would otherwise be the case – a feature that is typically highly valued by the buyer. For a private equity sponsor the product creates an avenue for an exit without the associated liability tail.
The cost of R&W insurance in the Nordic market is currently reasonable (typical price range being 1-2% of the insured liability), and is usually a matter of commercial discussion between the parties. In an ideal situation the parties are disposed to share the cost in the execution of a smooth deal.
Another element of a structured sales process that has undergone a significant change during the past couple of years is a legal vendor due diligence report. Currently, the market does not appear to place much value on a legal vendor due diligence report in the traditional sense, as buyers invariably want to conduct a legal due diligence within their stipulated scope and not the scope determined by the seller.
Thus, a full legal vendor due diligence report may be perceived as a relatively expensive product given its limited practical application. However since there are very tangible benefits to be achieved when a seller has completed careful preparatory work in relation to the data room ahead of the process (systematically compiling material, conducting sanity check reviews of the materials, etc.) and since the purchaser should be able to benefit from such preparatory work to the largest extent possible, the market has seen an emergence of a lighter version of a legal vendor due diligence report.
The product has a number of variants, all of which aim to give the purchaser a view of the basic elements of the target and the key contents of the data room. Such legal data room fact book or guidance reports can be seen as greatly beneficial factors especially in relation to a complex target with numerous layers of corporate and business structures. In an ideal scenario the guidance report will provide the purchaser and its advisors with a guided tour of the relevant materials and will highlight the potential issues and their implications to the target, allowing the purchaser to conduct a focused and efficient due diligence evaluation.
Ideally, the seller can seize the initiative and present its views on potentially problematic issues in a guidance report to deliver a pre-emptive strike against prospective purchasers’ concerns, resulting in the optimal handling of the issue in the context of the transaction.