World View: The International M&A Podcast

Alice Gardner 

Welcome to the TLT podcast series on international M&A.  I'm Alice Gardner, a corporate partner at TLT who specialises in international M&A with over well 18 years of experience of doing this job now.  Today we're going to be looking at the US M&A market, particularly at key themes that have impacted the market over the past couple of years., emerging trends and also anticipated changes.  I am delighted to have Tory Matese and Steve Cade from Foley & Lardner joining us, who are both based in the US.  Tory regularly represents a broad range of clients on US domestic and international mergers, PE deals, project financing and general corporate and contract counselling.  Welcome to the join us story.

Tory Matese

Thanks Alice.

Alice Gardner 

And Steve represents clients and a range of corporate law and transactional matters with a focus on mergers and acquisitions, supply chain counselling, commercial transaction and venture capital financings.  Welcome, Steve.

Steve Cade

Thank you Alice.

Alice Gardner 

So great to have both of you with us today  Over the past few years, the UK M&A market has been really volatile and shifting due to many different changes, not least interest rate and inflation rises.  The war in Ukraine, the cost of living, the pandemic supply chain uncertainty and geopolitical change.  And that's not even mentioning the dreaded Brexit word.  So there's been a huge amount of change, and Tory, it'd be great to hear from you a bit first, can you talk us through some of the key factors affecting the US M&A market over recent times and your thoughts around anything that's changed the shape of your deals?

Tory Matese

Absolutely.  Thanks, Alice.  In the US, the market has been particularly volatile in the last couple of years as well.  You know, we are heading in the US into an election year next year and that always sort of raises the considerations from the political perspective like you mentioned, interest rates have been going up, fewer deals are being done unless.  The buyer has cash on hand and doesn't need to go get a loan.  Also, you might have seen in the last few months non competes in the US are a real hot button item and certain administrations are less favourable in terms of non competes and that's certainly something that we see as structuring transactions in the US we often see a five year sell or non compete.  We see employment based, non competes in certain states and we really had to focus on whether those can be enforceable and how to craft them in a way that will ensure or give us the best shot at them being enforceable.  That's been something on our minds.

Alice Gardner 

That's really interesting because in the UK a non compete is a very well settled area of law.  And you know, you will see normally non compete normally for not something that is five for about three years, but it's very much just given as part of the structure.  So that must be proving a bit challenging in terms of any uncertainty around non competes especially for buyers.

Tory Matese

It is and it is kind of a murky area from a sellers perspective too, because some sellers may say, oh, well, non competes are being thrown out I should not have to sign a non compete and that's not quite true.  So it involves some detailed counselling from the buyer and the seller perspective in terms of how to get a non compete to be enforceable.  With a deal flow down, I will say that rep and warranty insurance is becoming extremely affordable, relatively speaking, and we are seeing rep warranty insurance on deals we used to see it really only on very large transactions and now we are seeing in deals of really all sizes, sellers are sometimes requesting walk away deals where the only backstop is the rep and warranty policy.  So we are seeing a good bit of that and like you said, the interest rates are certainly affecting how many deals are being done.

Alice Gardner 

Yeah, it is something we see in the UK a lot at the moment and even when speaking to my German colleagues the other day, they were also saying about the increase there as well.  Steve, it would be great to get your thoughts on this question as well.  What are those key factors in your opinion affecting the US AMA market at the moment?

Steve Cade

Yeah I mean, I think what Tory mentioned and which you had mentioned I think is particularly true, particularly the credit markets.  I think the credit markets are really impacting M&A.  The interest rates are rising, and I think capital is not as easily attainable as what it once was.  So we are seeing a bit slow down on the M&A market in particularly on the private equity side, I think a lot of private equity buyers are a little bit slower to pull the trigger given the credit markets.  Also just giving the shift from more of a seller’s market to a buyer’s market, I think that a lot of buyers are being a bit more cautious in terms of doing deals, right?  They are kicking the tyres a little bit harder, checking over the hood a little bit more.  I think back in 2020, after the initial surge of COVID, the M&A markets were on fire, right?  We were doing a lot of deals in 2020 on the back half of 2020.  You know that continued through 2021 and you know 2022, but it has slowed down since then and it's certainly shifting to become more of a buyers’ market these days.  And you know conversely though even though the market has slowed down, what I'm saying is, and you know that the that we had talked about just before getting on the phone, right, like certain strategic buyers, those buyers that have really strong balance sheets that have a lot of cash, right, a lot of you know good credit already built up, they seem to be in prime position now to hit a lot of targets.  They  were previously competing against private equity, you know, some say or some of these, you know, buyers may be overpaying, maybe, right but that's the leverage that they have as compared to, you know, private equity buyers once did.  So it is an interesting time, the market is extremely dynamic, I mean, I would be interested to see how this plays out in 2024.  But 2023 is certainly a mixed bag, it has been up and down for sure.

Alice Gardner 

Yeah, I think that's what we've been experiencing in the UK as well.  And kind of moving on to that around time frames and like the dreaded question you always get asked as a lawyer, how long is this deal going to take to go ahead and you are like, it is always close to our hearts and clients hearts that kind of deal time frame question, you know and Steve, you talked about it a little bit already.  How long are you feeling that deals are taking to get across the line at the moment?

Steve Cade

It is extending.  You know, I think that when was M&A was extremely hot that deals were getting done very quickly, right?  And, you know, to Tory's point, right, the use of rep and warranty insurance was certainly helping that.  So you no longer had to negotiate very difficult rep and warranty positions because for the most part, you know, rep and warranty insurance was a good backstop to both the buyers and sellers.  Particularly you know when we had non-recourse deals where literally sellers were walking away with zero risk.  You know from that perspective a lot of sellers frankly you know did not have much interest in negotiating reps and warranties which you know as you know are a huge part of the deal and shifting of risk.  Now that we've shifted away a little bit from non-recourse deals and sellers having to have a little bit more skin in the game, I think deals are, you know, taking a bit longer, right.  And that's just on the negotiation side between the buyers and sellers other you know regulatory considerations.  Like HSR, the heart, Scott Rodino Act right for larger transactions and getting regulatory clearance.  I think we are seeing that the regulators in the US are intervening more and asking more questions about these deals instead of letting the applicable waiting periods just lapse in the case of HSR it is a 30 day waiting period and would typically see those periods lapsing you know after the 30 days.  I have seen at least in my deals, at least getting more informal inquiries, if not formal inquiries from regulators which extend the time period significantly.  You know, particularly if you get a second request.

Alice Gardner 

Yeah and what about you, Tory?

Tory Matese

Yeah, I echo Steve's thoughts, especially when you are dealing with an international deal where there may be multiple waiting periods.  We have done US, Canada transactions, US, Canada, Mexico, you have to keep in mind that maybe 2,3, 4 timelines as well.  So we always try to give a client you know a realistic estimate of how long it is going to take.  We hope that the periods will just lapse and they will proceed to closing, but particularly in certain industries, the governments have been asking more questions than usual.  I will also say we are approaching year end now, we have a lot of deals or reorganisations that want to be effective 12/31.  You know at the end of this year and I say with respect to reorganisations, it is on my mind to do things earlier and earlier as the years have gone on.  The various states if you have to do any state filings, the states get backed up at the end of the year, and if a 12/31 date is very important to you for purposes of a merger or a roll up or a dissolution or a liquidation, anything that needs to be filed with the state, I say do it as early as possible and just have the effective date be 12:31, that is something that you know, I am already starting to think about.

Alice Gardner 

We have a similar thing with regulators here that they have only got a certain amount of resource in a lot of these teams and there has been a lot of activity and just regulatory pools can take a lot longer than people expect to come through.  For us, in particular, our Financial Conduct Authority is particularly as the timeline has extended, you know a couple of years ago, I would be saying to a client that would come through in like 30 days, can take up to six months now to get that through.  And that is a lot to do with bandwidth for the regulator.  And as you, Steve, were talking about asking a bit more questions, just pushing things a little bit more.  I don't know whether that is a bandwidth thing in terms of to try and get it parked off your desk for a little bit longer.  But it is kind of what we're finding in the UK as well at the moment.

Steve Cade

Yeah, I mean, I think it is really based on, you know, the administration that is in place, right.  You know, for lack of a better phrase, big business is bad.  The larger you get, right, the more I think regulatory attention you get.  And I do not think that is necessarily true depending on who is sitting in the place, place of control for certain administrations, right.  And I mean, currently the Democrats are in administration and they are a little bit more for you know, government control, government oversight less so when we get, you know, Republican Party in control.

Alice Gardner 

And what about in the US, around trends around structure of pricing of deals and timings of payments.  Tory, have you got anything you want to comment on around that at all?

Tory Matese

Well, I will say with respect to interest rates being what they are, I think that buyers are looking for some creative ways, unless you are one of the fortunate ones like Steve said in a good position with a strong balance sheet and plenty of cash, you can get a little bit more creative now in terms of purchase price consideration.  And we are seeing, you know, promissory notes that will be paid over time to a seller, you see earn outs.  I have my own personal thoughts about earnouts.  I do not know that I have been in a single transaction where the earnout has not been disputed.  So if you like a sure thing I and we are, we are very risk averse, we are attorneys, we are type A.  We like things to go according to plan, so that is probably my own personality peeking through.

Alice Gardner 

I always suck my teeth a bit when I hear there is something with an earn out because you are like great ok, because not only have you got to get the contracts exactly right in terms of the what's but the metrics and being measured and how it's then going to be tested through the period.  It always is to my mind always something that is always as you were saying leasing a little bit more open for negotiation on further down the line potentially.

Tory Matese

Certainly, traditional hold back or escrow obviously hold back is the most buyer friendly where they get to keep the cash in their pocket for a time and in escrow you know the buyer has to pony up the money at that time anyway.  You might have an escrow for the working capital adjustment period, which is, you know, 90/120 days and then you may have, depending on if you're using rep and warranty insurance and indemnity escrow for 6/12/18 months up to 24 months I guess on the long end but yeah.  The buyers are just having to come up with ways to creatively handover purchase price in a way that makes sense given the interest rates right now.

Alice Gardner 

What about you, Steve?  What do you see?

Steve Cade

Yeah, I think that is the same, right.  I think that you know again given the shift in the market from being more of a seller friendly market to more of a buyer friendly market.  I think that valuations have gone down and to bridge that gap of purchase price, we are just seeing a lot of earn out a lot of rollover equity.  Ways to incentivize sellers to say, ok well, if you think that your business is valued at this much prove it right.  Stand behind it by taking some sort of, you know, earn out or taking some sort of rollover consideration and you know we have been seeing rollovers for you know obviously a very, very long time.  So that is nothing new but like both of you mentioned earlier, right, the earn outs always give me pause.  The business folks always think like that is a great way to handle it but you know, as we lawyers now it is right for dispute.

Alice Gardner 

It is, isn't it?  But I think it is an important way of bridging a gap on a deal, and especially in this kind of slightly fluctuating market that we have had over the last year or so where you have got, you know, sellers who in 2020-2021 pricing was at kind of that absolute high and the activity was just unprecedented wasn’t it in terms of the level of activity and deals and there a lot of really tired looking lawyers who have not had much sleep at all to now the more kind of volatile market and changes that we have been in for the last well in the UK probably since March 2022, it started with the war in Ukraine and then you know kind of the changes politically that we have had.  It is very similar in terms of I think sellers want to get there and get a deal away and for us also we have got a potential change in government that may or may not happen in October next year, which again will create that kind of uncertainty around that that bridging of valuation gap as well.  So kind of looking forward to that future, I think we would all love to have a crystal ball, wouldn’t we or have somewhere looking to the future.  But are there any kind of new laws or anticipated market changes that we can be thinking about for the US M&A?

Tory Matese

Yeah, I mean, if you find a crystal ball, I would love to borrow it.  But in the absence of that, I think that a modest recession is still assumed for the first half of 2024 in the US we're hopeful for a continued soft landing and but we note that inflation has not quite yet been tamed in the US.  So I understand that the Fed is likely to increase interest rates at least one or two more times into Q1 of 24.  So with that in mind, you know money is still going to be expensive to borrow for the foreseeable future.  I also think it's somewhat interesting and this is maybe just in the US, but I'd love to hear about it in the UK too, in the US, people are having fewer and fewer children.  You know, I only have two, I think the average was two and half and I don't know I feel like it's probably steadily trending down.  So when you think about family owned businesses, there are fewer people in line to be a successor to a family business so those families that are seeking an exit, seeking retirement and estate planning support they will probably look to a third party buyer so there will be a lot of attractive targets I think in the next 10/20 years.  I mean that's a large runway, but I think that's something to really be on the lookout for.

Alice Gardner 

I agree with you as well, I think it's not so much the traditional approach now that a founder will just be looking to pass that business over to their family because often that family are the next generation, as it were, who might not be interested in participating in that business, they may have other ideas for their own career path and what they want to do, and you know, especially with kind of the younger generations coming through at the moment is very much that approach to be entrepreneur or do something different than what their family may have actually had lined up for them.  So, I agree with you I think it's interesting in terms of that change and dynamics at home in terms of what we may then see on deals and what about you Steve as well.

Steve Cade

Yeah, no, I mean, I agree with that yeah, I think succession planning is really an issue, you know, I do think that.  You know one thing that's talked about a lot and I'm not sure how it's going play out, right.  But you know ESG, right?  How is that, you know, environmental, social governance issues, how are those going to impact M&A in the future, right?  I mean I think that you've seen some activity in certain industries and certain markets like chemicals or manufacturing, right, you know, certain of those regulated type industries, you know you've seen some of those considerations play into M&A, right?  And most of it's from just like a, I would say you know, a risk allocation perspective just managing risk.  But I do feel that in certain industries, particularly like renewables, right, like solar wind like, say, chemical, et cetera.  I think there's an opportunity to create some value on those transactions, particularly on the sell side and people talk about it.  It's certainly like, you know, a thing that's very, I guess, in vogue and right people are very interested in it but I haven't yet seen it play out practically, in M&A I mean I haven’t seen ESG really impact valuations or other risk allocation considerations other than what you know has typically been captured on these deals, right?  Making sure that there's no, you know, significant environmental liabilities, right, but nothing from like an ESG perspective is necessarily stuck out to me quite yet, so I'm interested to see how that's going to play out going forward.

Alice Gardner 

Yeah, agreed.  I think it's on a lot of people's minds and clients minds at the moment and I think we're all kind of navigating our way through and how it will affect deals and how it all gets, you know deals structured, you know recently in the UK we've just had some guidance from the Law Society in terms of how we should as lawyers be advising in relation to climate change, which is all really interesting and so important, and so the right thing to be doing.  But it's interesting to see how that will kind of play out into details.

Steve Cade

Yeah, absolutely.  I mean, you know, like food and beverage, right, and I mean climate change, right?  Like there's a huge issue in terms of, you know, getting raw materials and getting, you know, crops and things that go into the food and beverage industry, so really interested to see how buyers are going to evaluate those issues, you know, for targets going forward.

Alice Gardner 

I'm really interested in it because it’s a topic that's close to my heart, but again, it's going to be how it plays out in terms of in transactional work, in terms of ESG due diligence.  How does that fit into overall time frames?  Does that add more to the time frame pressures we were talking about earlier and how can it be properly addressed and not just being provided lip service to as well at the same time?

Steve Cade

Agreed and yeah.  No, I mean, I think rising sea levels are really going you know, climate change is really going to have an impact, you know, on certain industries.  So I think I think it's going to be a hot topic.  I mean, it already is a hot topic, but I think we're going to see more than just talking about it coming up some.

Alice Gardner 

Yeah, it's got to be action, hasn't it?  It's got to be action related.  So thanks very much for your input today it's been really interesting to hear from both of you and your thoughts and Tory what would be your one key takeaway you would offer to the listeners?

Tory Matese

I would say things are changing.  Markets are volatile and it's important to seek support from a trusted adviser to hold your hand through this process.  You know, we don't have that crystal ball, but I would urge business owners, business executives, to talk to their counsel frankly and tell them about what their concerns are, their real world concerns about growth of their business, succession planning of their business and let's work together to come up with some creative solutions, it's not all doom and gloom.  A lot of deals are still getting done.  People are walking away from the closing table happy.  I think that there's a lot of room for good deals to be done, so we're happy to help in any way that we can and thanks, Alice, for having us on today.

Alice Gardner 

That's all, I think as lawyers, we're just more than always just lawyers, aren't we?  We're more, you know, for clients and more just part of the deal team and what we can add commercially as well to any transaction and what about you, Steve?  What's your one key takeaway?

Steve Cade

Yeah, I think similar to Tory, I think the market is so dynamic right now that I think the more successful transactions are buyers and sellers who are a little bit more intentional about M&A and doing deals.  So I think having your ducks in a row, having your processes established and understanding from the top to bottom in your organisation, what are the key goals in doing M&A, whether you're on the buy side or the sell side, I think you're going to be critical over the next, you know, 6 to 12 months just given how dynamic the market is so I think that, you know, like you had mentioned having you know advisers internally and externally set up and aligned in terms of your M&A strategy, I think it's going to be key just given how dynamic the market is these days.

Alice Gardner 

Great, well, thanks, both.  So this brings the podcast to an end.  I want to say thanks so much to Steve and Tory for contributing their fascinating insights into the US M&A market and thanks for listening.  If you found this podcast interesting please remember to like and subscribe with your usual podcast provider.  If you'd like to listen to our other podcasts in this international M&A series, looking at the Japanese and German M&A markets, please visit tlt.com.