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EDITION
CHAPTER
2
Practices of the |Best
Dealmakers
BEST
PRACTICES
OF
THE
BEST
DEALMAKERS
THE CEO
AND GLOBAL M&A STRATEGY
INTRODUCTION
he 5th edition of the Best Practices series, Dealing with The CEO,
is focused on the increasingly important role that M&A is playing
in corporate growth strategies for companies around the world
during this era of globalization. With Chapter 2, The CEO and Global M&A
Strategy: Quest for Growth in an Interconnected World, we explore the CEOs
role in the art of dealmaking.
How does a mid-market company like Horizon Global frame its overall
M&A strategy? Zeffiro says he has a set of thesis questions that must be
satisfactorily answered before proceeding on any deal. First, the deal has to add
value or extend the companys footprint either domestically or globally. Each
potential acquisition must be either related to growth, to higher profit margins,
or to opportunities to increase productivity through technology. The thesis
questions include:
1. Does it give us regional leadership for a product or marketspace?
2. Does it give us product leadership in our existing marketspace?
3. Does it enable us with respect to ecommerce, either business-to-business
or business-to-consumer?
4. Does it give us overhead or structural cost synergies? How much?
5. How does it affect your existing and future product costs? Is it a margin
accretive action or not?
6. Does this target have an opportunity to increase sales prices?
7. For technology, is it new technology? If so, that has a different degree of
risk.
8. Does the target have better technology than we have?
9. Or does the target give us a better way to approach the channel
distribution aftermarket sales, OEM, etc. . . . ties to the growth-related
effort around ecommerce?
Ecommerce is very important for us going forward, Zeffiro says. The OEMs
prefer distribution through ecommerce, and the retailers have proven that you
can ship almost anything in the world practically overnight. Ultimately, the
OEMs and the retailers are going to squeeze out the poor guys (wholesalers) in
the middle. Ecommerce is a key strategy, and I want us to be on the winning
end of it.
small but growing share of clients out of Europe, Asia, Australia, and South
America.
Raman says he is a one-stop window for working with external advisors,
lawyers, bankers, and accountants: We have very specific tasks that we want
them to do. I supervise all of those
What Does Global Mean Now?
activities. He adds that having local
By Marshall Sonenshine
advisors in cross-border acquisitions
The reader of this chapters stories of global
is especially important, particularly in
executives will know that the business
the legal arenas. There are a number of
world today is essentially global. Horizon
boutiques (advisory, legal, and banking) Global, a US components manufacturer,
and Sutherland Global, a business process
that specialize in specific industries
outsourcer, are each globe trotting to do
such as health care and insurance,
deals in Europe, Latin America, Asia and
he says. In general, he suggests that
Africa. This is global M&A today, in the
having an established relationship with
CEOs office, up close and personal and
a full-service law firm and accounting
global. But what is unique about todays
concept of global business and of the
firmWeve had the same accounting
firm for the last 13 yearsis preferable somewhat shopworn term, globalization?
to working with multiple firms because
In the first half of 2016, global M&A
the learning curve is shorter, although declined almost 20% to $1.7 trillion versus
$2.1 trillion for the first half of 2015.
having counsel in foreign jurisdictions
Many factors contributed to this trend,
on an as-needed basis is often necessary including continued anemic economic
because of complex legal, regulatory,
growth, Brexit, continued slowdown and
rising indebtedness in China, increased
and/or tax issues involved in specific
geopolitical and security concerns, tax
deals.
reform of inversion deals, and new
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additional risk factors. But cross border deals that extend a companys reach
and mitigate regional risks may generate much higher business enterprise
value in the end.
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clients come from abroad. Most of the time, I am helping clients invest into
the country. Typically, I will be dealing with a client or a law firm or multiple
law firms at a time. The deals are in all sizes most $100 million-plus, some a
few billion dollars as well, he says.
Hallake observed: Today almost every Fortune 500 company needs to be
global, so almost all of our clients spend a lot of time thinking about and
executing transactions globally. It is so very important for our firm to be
positioned globally. You might be a US company acquiring a company in
Germany. In addition, the target German company might have subsidiaries
in places like China, India and Brazil. So, in addition to US and German
lawyers you probably need counsel in China, India and Brazil. Were so often
dealing with teams of M&A lawyers in our offices all over the world on M&A
transactions that it might at first appear as bland as an acquisition of a
German company by a US company. I think that all of the clients that we see
today, which tend to be multinational companies or financial institutions, have
or should have global strategies. Its very unusual for any successful and large
company to operate in only one geographical market anymore. As a perfect
example, Hallake cites his own firm. Jones Day was originally a local law firm
in Cleveland, OH. Today is a global leader with 44 offices worldwide. We
were strong locally in Cleveland in the 1950s and 1960s representing large
industrial, midwest corporations. Then those corporations began developing
nationally and we expanded first into Washington, New York and Los Angeles
and then grew to become the largest law firm in the United States with
about 1,600 lawyers in the US in offices in virtually all of the major domestic
markets. In the last 25 years or so these corporations have expanded globally
and Jones Day has followed our clients international expansion with 2,500
lawyers now in 44 offices all over the world. All of this was in response to our
clients growth strategies. Through our own growth you can virtually see the
international growth of corporate America in the last fifty years.
Foreign investors rely on local counsel like Jhunjhunwala and Hallake
because they are experienced and intimately familiar with the nuances of the
cultural, legal and regulatory issues in their countries. Indias legal fraternity
is developing, says Jhunjhunwala. It is not as mature a market, as in the US
or England. Typically, when you do a transaction with lawyers from a mature
jurisdiction, the first cut of any transaction document itself is fairly balanced.
While in India the first cut drafts are very often one sided and quite aggressive,
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The first priority for the CEO and the corporate development
leadership should be to select good advisors that they trust. It is
imperative to put together a good team with whom they have
the highest comfort level. ~ Marcello Hallake
that can result in cumbersome negotiations and sometimes an unpleasant
process. I like to create a fair document it is more efficient and in the process
I see many more deals close. I have also seen business leaders or client advisors
who say no, we have to be aggressive and do it our way and then we meet midway - quite often these deals do not get done. CEOs and advisors have to learn
that the more efficient and quicker the deal process, there is a higher likelihood
that the deal will succeed.
Hallake says having local counsel in cross-border deals brings valuable skill
sets to work on across industries and sectors, as well as borders. You need to
have different types of people in place, he says. The strategies may be similar
but the due diligence, work and comfort level will be very different, especially
in the first instance when youre going into a new country. You have to become
familiar with the laws, regulations and people. You have to be comfortable that
your product will sell. And, for cross-border M&A novices, particularly in
emerging markets or in highly regulated or unstable environments, he adds:
The chances that they will at some point give up are pretty high. When they
start looking at the deal they may assume that its what they expect at home
more or less. Once they start talking to the lawyers and getting reports about
the local landscape and risks they get nervous. Many times they will just be
scared off. This is normal. The role of the experienced cross-border M&A
lawyers of course will be to explain things so as to give more comfort to the
client that things will nonetheless be able to get done, even if differently than at
home.
What can local counselors like Jhunjhunwala and Hallake provide todays
multitasking CEO in the way of value-added advice and service in crossborder deals? Jhunjhunwala says good local counsel provides neutral third
party insight into M&A transactions. Using ones prior experience, the
complicated issues involved in M&A are similar and they will overlap, he says.
With the experience of advising several clients on cross-border global M&A
deals, one can predict the situation and the solution. An outside advisor is in
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a unique position to handhold on the risks and provide strategic insight to the
CEO or corporate development team. They tend to think more out of the box
and bring practical insight as well. The CEO should not be averse to listening
to new ideas. Anecdotally, Jhunjhunwala says he often draws intriguing stares
when the first question he asks a potential client is which lawyer or firm will
be representing the other side in the deal. Most lawyers first ask the size of
the transaction, he laughs. But I want to know how tough the negotiation
is going to be. I get that purely through experience dealing with many, many
attorneys. He adds that the best example of a superior strategic CEO he has
dealt with was someone on the other side who changed his lawyers because
I advised him to do so, not because we wanted a friendly set of lawyers, but
we could see the deal was falling away. We consulted with their investment
banker, and they found another set of lawyers, and the deal happened. The
CEO realized the value and the need for a fresh set of eyes.
When representing buyers, Hallake says he and his colleagues at Jones Day
sometimes deal directly with CEOs, except at Fortune 100 companies where
the contact is more often the CFO, the general counsel or the business
development team. But in the cross-border world, even if the company has a
very large in-house legal department, they will almost always rely heavily on
outside counsel on sophisticated M&A transactions. The internal team will
not be comfortable with other jurisdictions. They will want boots and brains
on the ground. Collaboration between CEOs, corporate development teams
and outside advisors is crucial to getting the best outcome, he adds. Hallacke
maintains The first priority for the CEO and the corporate development
leadership should be to select good advisors that they trust. It is imperative to
put together a good team with whom they have the highest comfort level.
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opportunity to improve on the deal. You dont have to keep the whole original
M&A team involved but you need some continuity throughout the process. As
an industry, we all could get better at doing this.
Tilley works with both strategic and financial company CEOs, primarily in
the UK and Europe. He recently advised a health care sector business that was
bought by a private equity firm. Their aim is to expand from the UK business
base into Europe, Tilley says. Part of the CEOs strategy ongoing is to enhance
European operations through M&A and to build out the European footprint.
In time they could become a global player. The main challenge this strategy
faces is the differing nature of health care markets across Europe. This is not
an obvious thing to do because heath care markets do differ, Tilley says. The
UK market is one of the more developed markets for this particular type of
health care service so its the application of best practices in other markets. Its
an opportunity to enter other European markets to leverage skills and knowhow and to make a difference. You can go at this process by the greenfield
method, which is slow, or you can go at it through M&A. This company is
using M&A predominantly. He adds that the greenfield method would be
applicable in less well-developed markets such as Poland, which has few
businesses of scale for M&A, but from a Europe wide perspective, M&A is the
preferred solution.
How can the CEO be the most effective in leadership through M&A? Tilley
says: Establish a clear strategic vision. Clarity is vital. Set a cultural tone.
Instill corporate values. Its vision, mission, values. This minimizes the risk
of corporate culture clashes. In addition, CEOs need to build and nurture
a cohesive international leadership team with clear lines of authority and
accountability. And stakeholder communication is a further critical element of
effective leadership. Communicating with stakeholders is absolutely critical,
he emphasizes. If its private equity, your shareholders will be on your board.
If you are going to pursue international M&A you must bring them along and
explain why it is that this really expensive thing can be great for the company.
Most advisors give due respect to CEOs and the demands of their jobs, but
advisors also recognize that even CEOs are fallible. Theres a perception that
the CEO has all the answers, but the reality is he or she does not, particularly
when it comes to international M&A, says Tilley. But the last thing a CEO
wants to do is to fess up to his investors or board that he doesnt have all the
answers. So how do you put in place a structure for success? You turn to
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your trusted advisor or advisors. You have them challenge you in your way
of thinking about which countries we should be going into and whywhich
companies and how much do we pay for them? Tilley adds that in order to
gain that trust, an advisor should have a clear understanding of the clients
corporate strategy and the critical success factors for the business in question.
You can assist with market mapping, identification, and prioritization of
acquisition targets, Tilley says. You should support and challenge the CEO
in his evaluation of M&A opportunities. You should be a sounding board and
a sparring partner. The most valuable advisory relationships for the CEO are
his or her most trusted relationships. M&A can actually be destructive if all
potential outcomes are not considered. So having a trusted advisor is a really
important thing.
A best practice in Deloittes advisory business is to always recommend
bringing in local counsel on cross-border deals. Some companies Ive worked
with in the past have struggled with the geographical variations involved in
global M&A transactions, says May. They have a hard time understanding
regulations, taxes and cultural differences. Labor laws vary greatly from
country to country, as well as talent management issues. For instance, in India
they expect rapid promotion and you have to keep them motivated/inspired or
you can lose a lot of top talent quickly. In France or Germany, simply trying to
consolidate two existing offices a few miles apart into one, could require work
council approval; and strict limitations exists on where you can or cannot
store employee data. So one of the best practices we always recommend is to
bring in local subject matter advisors (SMAs) and we leverage Deloittes global
footprint to do just that. We also advise our clients to at a minimum deploy
some of their internal resources at the regional level (EMEA, South America,
Asia), if they cant afford to have presence in every single country involved
during a large global M&A transaction. May adds: The playbook is different
for domestic and cross border deals. You dont need to build a spaceship to
do a domestic deal. But you need to add experts and talent for cross-border
deals. Finally, CEOs need to recognize that cross border deals absolutely are
more costly and time-consuming. CEOs and boards need to take that into
consideration. Theres a real education process that takes place with a client
that is not common practice in domestic M&A.
But the rewards of education in cross-border M&A strategy are worth it.
According to Tilley, You will develop a more diverse business. You will find
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CONCLUSION
The CEOs leadership in successful M&A begins with setting the strategy and
building a strong M&A team. This is particularly critical in todays crossborder M&A, which has grown to be essential for continued growth for
establish companies. CEOs say they are taking an increasingly hands-on role
in the execution of the M&A strategy, particularly in the middle market. And
they are relying on trusted advisors, in some cases a consigliere for outsidethe-box thinking and push-back if needed. In cross-border deals, employing
competent local counsel can make or break a deal. CEOs and corporate
leaders need to educate themselves on regional and local cultures in addition
to laws, regulations, and tax schemes. All agree that global M&A opens new
opportunities for growth and value creation, but it comes at a higher cost than
traditional domestic transactions, both in money and time. And while global
M&A may be down during the first half of 2016 from its torrid pace of 201415, the number of cross-border deals continues to take a bigger share of the
overall M&A pie.
In the next chapters of Best Practices of the Best Dealmakers (fifth edition),
we will be sharing insights from CEOs, corporate development officers, and
top M&A practitioners on negotiations leading up to letters of intent, due
diligence leading up to closings, and navigating the post-closing integration
in todays cross-border deals. Readers are invited to share their views and
experiences on those topics.
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Similarly, and more recently, late twentieth and early twenty first century
financial market growth and integration have further driven growth in
cross border dealmaking. These growth drivers include newly global equity
markets, international bank markets and not only US but increasingly non
US subordinated debt and alternative lending markets all growth. Global
institutional research and investment services have further supported
international risk taking. Stock exchange integration has facilitated IPOs
and equity trading that can be as global as the underlying businesses that
companies wish to own.
Finally, in todays global financial world, commodities that drive business
from oil to agricultural to financial risk management are more efficiently
and globally priced than in previous periods. Even derivatives, once the
scourge of modern finance, are now traded more reliably, so it seems, in
the brave new world of financial regulation, with its higher capital ratios,
improved disclosure rules and centralized clearing houses. Companies
from Royal Dutch Shell to Boeing to Barclays Bank can price and hedge
commodities and financial resources. As a result Tidus, CEOs and other
corporate executives can think and act and transact deals globally with
confidence.
Thus, when one reads in the present chapter about components
manufacturer Horizon Global or business process outsourcer Sutherland
Global, both mid market companies, globe trotting for acquisitions on
multiple continents, one is reading the ever unfolding history of global
business. The current news cycle includes new trade agreements, currency
wars and new protectionism. As those political pendulums swing to and
from, right and left, the net vector will remain the same as always: the
economic world is global, and CEOs know this and act accordingly.
Marshall Sonenshine
Chairman, Sonenshine Partners
and Lecturer in Law, Harvard Law School
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CONTRIBUTORS BIOGRAPHIES
Jack Butler is the Chief Executive Officer of Birch Lake
Holdings LP. One of the most highly regarded and renowned
dealmakers and thought leaders in restructuring, corporate
reorganization and M&A communities, Jack has been
credited as one of the principal architects of restructuring
solutions for companies across a diverse range of industries,
including Delphi Corporation, Kmart Corporation, Sprint Corporation,
Xerox Corporation and on behalf of creditors in the American Airlines
reorganization and merger with US Airways Group, Inc. He co-founded the
corporate restructuring practice at Skadden, Arps, Slate, Meagher & Flom
LLP and previously served on the executive leadership team at Hilco Global.
Jack was inducted into the M&A Advisor Hall of Fame and the Turnaround,
Restructuring and Distressed Investing Industry Hall of Fame. He is a recipient
of the prestigious Ellis Island Medal of Honor, which is awarded to Americans
who exemplify outstanding qualities in both their personal and professional
lives. A founder and past chairman of the Turnaround Management
Association, Jack has served in leadership positions for many other industry
organizations, including the American Bankruptcy Institute, American
Board of Certification, Commercial Finance Association and its Education
Foundation, INSOL International, and New York Institute of Credit. He is also
a Fellow in the American College of Bankruptcy and International Insolvency
Institute. Jack received an A.B. from Princeton University and a J.D. from
the University of Michigan Law School. In addition to serving in leadership
positions with numerous civic and charitable organizations, Jack officiated
high school and college football for many years and is a lifetime member of the
American Football Coaches Association.
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The M&A Advisor was founded in 1998 to offer insights and intelligence on
mergers and acquisitions through the industrys leading publication. Today,
the firm is recognized as the worlds premier think tank and leadership
organization for m&a, restructuring and financing professionals, providing a
range of integrated services including:
M&A Advisor Forums and Summits. Exclusive gatherings of global thought
leaders.
M&A Advisor Market Intelligence. Comprehensive research, analysis, and
reporting on the industry.
M&A.TV. Reporting on the key industry events and interviewing the
newsmakers.
M&A Advisor Live. Broadcasting live on the key M&A trends.
M&A Advisor Awards. Recognizing excellence of the leading firms and
professionals.
M&A Advisor Connects. Direct connection service for dealmakers, influencers
and service providers.
For additional information about The M&A Advisors leadership services,
contact lpisareva@maadvisor.com.
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