By Nathan Banks
UAE legal expert Nathan Banks, managing partner at Banks Legal, advises SMEs on critical stages of a successful M&A transaction
According to the latest EY Capital Confidence Barometre, nearly 80 percent of regional SMEs have shown interest in portfolio transformation.
Included in the reasons given for their interest, SMEs stated they were exploring mergers and acquisitions (M&A) options to prepare themselves for the future while simultaneously becoming more equipped to deal with potential market volatility in the future.
Despite the underwhelming success rate of global M&A transactions, regional SMEs remain confident, with 37 percent actively pursuing M&A activities over the next 12 months.
The UAE accounted for 65 percent of all Middle East M&A deals during the first six months of 2018, according to a recent report by multinational law firm, Baker McKenzie. The same report showed the UAE was the most attractive target country in the region for overseas investors in the same period, with a total of 34 inbound M&As valued at $6.6bn.
Despite the growing number of M&As, many SMEs fail post-transaction due to the complicated nature of the process.
Harvard Business Review recently reported that 70 to 90 percent of M&A transactions fail to meet expected synergies. Some of the most common errors businesses make when undertaking such transactions include not carrying out sufficient due-diligence, mismanaging the transition process, setting unrealistic performance expectations and failing to optimise synergies.
It is prudent for anyone considering an M&A transaction to be aware of the mechanics of a number of vital key phases:
Before proceeding with an M&A transaction, it is recommended both parties sign a non-disclosure agreement (which may also include exclusive dealing and non-circumvention provisions) to ensure details of the deal and related discussions remain confidential and bargaining interests are protected.
In most cases, the next step is to enter into a negotiation phase to determine the type of deal. The key here is to identify if parties are looking for a merger or an acquisition.
Once this is identified, this will form part of a termsheet or memorandum of understanding (MOU) – which includes other key facets, such as the process or key terms of the deal – to start the acquisition or merger process.
The MOU is a critical document as it records such items as key commercial terms of the deal, to the extent that these have already been identified leading into the due-diligence phase; the process or roadmap for the parties’ negotiations and conduct over the initial phases of the transaction; key documents to be put in place; an overview of the acquiring entity’s commercial objectives, and other factors to consider as the deal progresses to the next stage.
Additionally, it may be appropriate for the parties to undertake a structuring exercise to identify the current corporate framework and the structure that will need to exist to achieve post-transaction success.
Factors to be considered include a review of licenses, the identification of whether an entity will need regulatory approval, as well as consideration of the structure and documentation required in case the ensuing transaction requires local shareholding. Some of this may be done in parallel with the due-diligence and negotiating phases.
The purpose of due- diligence is to qualify the prospective deal’s value proposition and identify future risks that may affect or devalue the M&A.
These considerations include proposed shareholding, possible amendments to commercial licenses, employment issues, contracts, potential litigious and IP issues, as well as debts and ban guarantees.
The documents that parties may be required to execute differ for mergers and acquisitions and also depend on the form and extent an investment may take.
Some of the transaction documents that may be relevant for an acquisition transaction including those related to restructuring, such as share transfer or share subscription documents, as well as amending authorised signatories of bank account and seeking regulatory approvals and filing forms local government authorities.
Other documents may include short to medium-term business plans, updated compliance and AML policies, and contracts and agreements to transfer assets or assume liabilities.
Once negotiations are completed during the due-diligence phase, appropriate documents need to be drafted to transfer ownership of assets of an acquired business. This will allow parties to make immediate use of resources to carry on with business without interruption.
Signing powers of attorney, authority letters and other instruments, to consolidate managerial powers. This is relevant and must be completed as soon as share transfer takes place. Power of attorney is a key document that may be required to sign and execute new commercial contracts, employment agreements and IP agreements. Websites and marketing material may also need to be updated.
The post-completion phase of the process focuses primarily on the delivery of projected synergies and transformational opportunities to achieve growth and revenue targets.
Depending on the scope of the merger and acquisition, one must also take into account how to maximise human capital, respond to employment issues – such as re-negotiated compensation structures – as well as compliance policies and integration plans.
M&A transactions are comparable to assembling complicated puzzles with hundreds of unique pieces. UAE companies should define a strategy that aligns with their growth plan.
Legal advice is strongly recommended in the initial phases to minimise risks. Detailed integration and change management plans provide the necessary structure to achieve targets and ensure financial security throughout and after the transaction process.
Mergers and acquisitions have the potential to be the most powerful and versatile growth tools available to UAE SMEs from all industries. A well-timed and well-managed acquisition or merger can boost both short-term as well as long-term outlooks for many organisations in the Gulf.