Beyond Mergers and Acquisitions — Alternative M&A Structures to Maximize Value

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By Matthew Lawson, Foreign Legal Advisor and Scott Colvin, Lawyer

Ask anybody: working in M&A is a lot like working in fashion.

The two are defined by their trends — last season’s highlights are yesterday’s news, and the market is always ready to pick up and move on to the next big thing.

On the runway at the moment, we continue to see deal activity escape the confines of straight mergers and acquisitions and move into alliances, joint ventures, partnerships, minority investments, and other alternative structures.

The reasons for this are multitude and are worth considering as you develop (or advise on) corporate strategy.

First: agility.

Agility sounds like something of an overused buzzword, but it has always been imperative for companies to be fast-moving if they want to succeed — or at least faster than their competitors. This has never been more true than now with the compression of timelines for industry development, the emergence of new technologies, and the capacity for companies to reposition themselves.

Alternative M&A structures can save tremendous amounts of time in the post-deal integration phase, where valuable time can be lost in ironing out the wrinkles on the morning after the night before. A captured entity without a change in ownership is allowed to continue ‘business as usual’, all the while funneling value to the ‘acquirer’. Contrast this with the burdens of integration teams, transition committees and joint-strategy briefings — new partners trying to relearn an old dance ungracefully together.

Second: retaining expertise.

Many M&A deals have inherent retention issues. Personnel losses post-acquisition will perhaps always be inevitable as people prefer to find an exit than stay with new owners.

In a time of rapid developments in industries and markets, as well as low barriers to entry, expertise (even on an individual level) is capital of greater value than ever before. This should be viewed in the reverse, as well: having the brains on your side means they do not serve your competitors. This is the exact reason for the famous benefits at corporate giants such as Google, LinkedIn, and other high-profile enterprises.

This is reflected in a recent KMPG report, which found that corporates are increasingly looking to partner with founders in order to trap their specific expertise, knowledge and passion for the product.

Third: separate but together.

Alliances have proven successful means of acquiring the competitive advantages of a competitor without being wedded to all of their shortcomings. Consider the proliferation of ‘alliance’ arrangements in the airline industry, where the three biggest alliances control upwards of 60% of global commercial passenger flight. Each member does not need to worry about maintaining a fleet able to service such a market share, and emerging competitors (and markets) can be captured quickly and effectively without significant downside risk.

The same principles apply in different ways to joint ventures and partnerships. And the effects are only amplified where the circumstances surrounding the target increase the risk profile of the transaction, for example where the target sits in a foreign jurisdiction unfamiliar to the acquirer.

Acquisitions are very expensive. This is (in part) because you are capturing the whole of the target’s enterprise value, rather than the specific slices you might actually be interested in. By drilling down and capturing the value you particularly desire, you maximize the value drawn from a transaction.

Fourth: divestment as a key strategy.

The corollary of agility in acquiring and building business is ensuring the option of efficient exits. As in life, relationships must sometimes come to an end before greater success can be found elsewhere.

A company with an underperforming business on its books may suffer substantial migraines as it considers the best way to deal with that failing asset. This is not the only reason for divestment: as strategies evolve or are executed, portfolios should be regularly re-evaluated to determine whether they still deliver on the proposed way forward. What entities a company holds, how much free capital is around to fund other acquisitions, and avoiding stagnation are also important drivers that should be considered.

Conclusion: the proof is in the value of the pudding.

We do not anticipate M&A alternatives replacing ‘traditional’ M&A. Mergers and acquisitions will long remain our stock in trade, and continue to present a number of key advantages over alternative deal forms in many circumstances.

However, where the situation is right, an alternative deal structure may increase the value of a transaction. Analysis by Bain suggests that joint venture deals, for example, now produce returns similar to equivalent share acquisitions. Of course, this can only be true where the right structure is chosen for the transaction dynamics at play.

Anecdotally, we are seeing our more successful clients cleverly seize the initiative in their particular markets by moving quickly and effectively to capture value. The reasons for their success are clear: transactions can be affected quickly, key staff retained, value maximized while risk lessened, and underperforming assets efficiently moved on.

Sophisticated corporate strategy should consider these transaction profiles as part of a holistic review, rather than necessarily defaulting to traditional M&A.

To do otherwise is to risk the value and future of your business.

Mills Oakley recognizes the need for clients to grow, both with respect to existing market share as well as with respect to emerging markets. We support our clients by advising them on the best and most efficient ways of doing this.

For further information, please do not hesitate to contact us.

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