Where is the Best Place to do Mergers & Acquisitions?

Economic Attractiveness as Related to Law

Thomas Straub* and Georges A Cavalier**
In a Doing Business report published by the World Bank, the following statement was suggested: From the economic point of view, common law is more efficient than civil law. The objective of this research paper is to weigh two legal systems (French civil law and the US common law) and analyze the results of the economic analysis of the law of Mergers and Acquisitions (M&A). This is done by quantifying the impact on long-term performance. To carry out this research, a methodology was developed, and the results were evaluated. Two legal structures for M&A transactions were selected: the purchase of shares (share deal), and the purchase of assets (asset deal). Each of these acquisition structures was then subdivided into 11 stepsfrom preliminary information, letter of intent, due diligence, stock or asset purchase agreement and closingto litigation with formal summons. Performance was then measured by taking into account time, cost and satisfaction factors. Time was broken down into person-days and the number of days, weeks, or months required to complete each step. French and US respondents were asked to fill out a questionnaire for a specific M&A transaction. Radar charts were used to compare the mean of each performance factor; an inter-factor analysis was carried out to check for correlations. The findings showed that a share deal in France is cheaper than in the US. Also, French participants express a greater degree of satisfaction than their US counterparts. The findings varied however, for the time factor. The authors conclude that the application of civil code and common law does not reveal substantial differences in either country for M&A transactions. One reason may be that in both France and the US, these transactions are carried out according to similar procedures.

Introduction
The Doing Business report published by the World Bank suggests that, From the economic point of view, common law is more efficient than civil law. Is this somewhat alarming message also valid for Mergers & Acquisitions (M&A) transactions? This paper compares the economic attractiveness of common law (US) versus civil law (France), as related to these transactions. Because countries are competing more and more to attract business, this is an important aspect to consider. History shows M&A volume moves with stock market variations. Since the market is in a crisis, M&As could be on the threshold of a new boom (Figure 1). Does the law favor M&A transactions in France or in the US? The research is divided into two subparts: first, to compare the legal performance of Share Deal (SD) between the two countries, and second is Asset Deal (AD). It is therefore essential to quantify the impact of the French and the US legal systems on the long-term performance of SD and ADs.
* ** Professor, Strategic Management & Entrepreneurship, School of Business Administration Fribourg, Fribourg, Switzerland; and is the corresponding author. E-mail: thomas.straub@hefr.ch Associate Professor of Law, University of Lyon, Lyon, France. E-mail: georges.cavalier@univ-lyon3.fr 49

Where is the All Rights Reserved. 2011 IUP Best Place to do Mergers & Acquisitions? . Economic Attractiveness as Related to Law

Figure 1: History Shows M&A Volume Moves with Stock Market Variations
US M&A Volume and S&P 500 Levels ($ bn) S&P 500 (x%) M&A Volume Peak to Trough 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Morgan (2009)

US M&A Volume Annualized Volume $2,500 C 61%

US Recessions: A 1990-1991 B 2001 C 2007-Present

B 72%

$2,000 $1,500 $1,000

A 61% $500 $0

This paper measures the economic performance of time and the cost of legal operations. Several authors have demonstrated that for complex transactions such as M&A, other variables influence the long-term performance of a company. In general terms, recent change in the environment of companies, that is to say rules and regulations, play an essential role in a companys choice of strategy and determines the consequences of decisions. In measuring performance time as such may be too vague. For instance, five persons can accomplish a task in one day, but the same task may be carried out in five days by one person only. Dividing the time factor into person-days and step-time therefore, brings further clarification: person-days measure the working hours and step-time measures the bureaucratic procedure of how long a process takes. The paper introduces an additional measurement of economic performance, which is satisfaction. Time (person-days and step-time) and cost are also important but not sufficient for measuring economic performance. For instance, in purchasing a company, the transaction may be fast and cheap, but the legal quality and security are unsatisfactory and could lead to complications. In economic and social science, the degree of satisfaction is evaluated by interviewing business leaders and M&A specialists (Veiga et al., 2000). Quantitative research that includes a large number of responses is required to obtain statistically representative and objective results. In order to fulfill these objectives, the model designed by the research team is detailed below.
50 The IUP Journal of Business Strategy, Vol. VIII, No. 2, 2011

Methodology
Three legal methods for implementing M&A transactions were identified: the purchase of shares (SD), the purchase of assets (AD) and the merger. In the US, a merger is considered as a type of SD. In comparing France and the US, a distinction must therefore be made between a SD and an AD. In a SD, the buyer is purchasing stocks representing assets and liabilities, whereas in an AD, the buyer isin principlepurchasing assets only: the risk inherent to purchasing liabilities (debts) is therefore excluded. These two methods (SD versus AD) were divided into eleven phases: (1) preliminary information; (2) letter of intent; (3a) financial audit; (3b) legal audit; (4) share or asset purchase agreement; (5) ancillary documents; (6) regulatory authorizations; (7) closing; (8) postclosing; (9a) litigation without formal summons; and (9b) litigation with formal summons. Details of these phases are provided below. The preliminary information phase includes (1) contact with the acquired company (Target), business lawyers, investment bank, setting a timetableup to the execution of the confidentiality agreement (included). The letter of intent phase includes (2) formalizing the confidentiality agreement, discussion on the external communication plan, legal implications, deal structureup to the letter of intent (included). Due diligence starts with posting the request list, including the investigating process in the data roomup to the share/asset purchase agreement (excluded). In the due diligence phase, the research team distinguishes the financial and the legal steps. The financial due diligence process (3a) includes accounting verification, financial audit, balance sheet and profit and loss account validation. The legal due diligence process (3b) concerns the audit of contracts, litigations evaluation and environmental issues assessment. The share or asset purchase agreement phase (4) starts with the negotiation of the agreement and includes discussion of drafts, andwhen relevant negotiation of the representation and warranties, indemnification period, schedules, execution timetableup to consulting the unions and the execution agreement (included). The ancillary document phase (5) starts with the negotiation of the ancillary documents, which include escrow and shareholder agreements, minutes of the shareholders meeting, finance and labor contracts and intellectual property licensesup to execution (included). To complete the transaction process, the regulatory approval phase (6) requires obtaining the antitrust authority and other regulatory approvals. The closing process (7) starts a week preceding the closing date, at which time certificates or other documents are delivered and payment/share/assets are transferred.
Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 51

 Post-closing (8) is the phase after the closing date: this is typically where price adjustment (earn-out) occurs and indemnity requests are formulated. Disputes are not included in this phase; see 9a and 9b which are dedicated to dispute assessments. The litigation phase (9a and 9b) includes any disputes which occurred after the deal transaction. Two types of disputes are identified: disputes without formal summons before a court or an arbitration court, and disputes with formal summons. The first set of questions (9a) evaluates whether disputes without formal summons occurred; the second set of questions (9b) evaluates disputes which occur with formal summons. The performance is measured by evaluating the above phases in relation to cost, time (person-days and step-time) and satisfaction (Veiga et al., 2000). The responses are reflected on a Likert scale, numbered 1 (low) to 5 (high); each number corresponds to the respondents perception, detailed M&A secondary information1. Research shows that selfperception measures are dependent on the quality of the informant (Nayyar, 1992). The following questions were formulated: What is your estimate of the number of working days (person-days) to complete this phase? What is your estimate of the time needed to complete this phase (days, weeks, or months)? What is your estimate of the cost Euros () to complete this phase? How satisfactory was this phase for you? The respondents were asked to reply in reference to a specific transaction (deal) closed between 2000 and 2004, and where both the acquirer and the target were privately held companies located in the US or in France. Transnational deals, or deals where the Target was listed on a stock exchange were not included. In order to develop the questionnaire two pretest phases were performed: a sample of over one thousand informants in the US and in France selected from The Leadership Library2 and professional associations3. The quality of the data is highly dependant upon the competency of the informant and is reflected by tenure and position. Most informants were attorneys (partners or associates), C-level managers, and/or heads of M&A4 and therefore highly competent;
1

2 3

Primary information allows the reader to access original and unedited information. It requires the reader to interact with the source and extract information. Secondary information is edited primary information, that is second-hand versions. They represent someone elses thinking. For instance, authors writing about the merger between Mercedes and Chrysler are providing secondary information about the merger. Primary information about the merger would be information from the merging companies themselves. See http: //www.leadershipdirectories.com The French Society of General Counsels (Association franaise des juristes dentreprises) (<http://www.afje.org>), and the French society of Business Attorneys (Association des Avocats Conseils dEntreprises) http://www.avocatsconseils.org In the US, 80% of the respondents to the questionnaire were partners of law firms and 40% in France. The IUP Journal of Business Strategy, Vol. VIII, No. 2, 2011

52

over 70% had worked for their company for more than six years and were highly involved in M&A transactions. Over 60% were even much or very much involved in M&A transactions. In both the US and France, the characteristics of transactions carried out within the same time period were similar and therefore comparable. 41 responses were registered from the US and 34 from France. The response rate was 5.4% of the sample population. No significant non-response bias was identified that could have affected the results of the survey. In the following paragraphs, the research findings are presented. Radar charts present the results and identify all phases of the transaction process and are abbreviated as follows (see Figure 2):
Figure 2: How to Read the Results
Asset Deal Euros AD1 PrelimInfo 3 2 AD9 Dispwithout 1 0 AD8 Post-Closing Steps AD7 Closing AD6 RegApprov AD4 PurchAgree AD5 AnciDoc - - - USA _____ France AD3 FineDueDil Countries

Scale: 0 = dont know Scaling (Five-point Likert-type) AD9 Dispwith

AD2 LOI

AD3 LegalDueDil

PrelimInfo (step 1): preliminary information; LOI (step 2): letter of intent; FinDueDil (step 3a): financial audit; LegalDueDil (step 3b): legal audit; PurchAgree (step 4): share/asset purchase agreement; AnciDoc (step 5): ancillary documents; RegApprov (step 6): regulatory authorizations; Closing (step 7): closing phase;
Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 53

 Post-closing (step 8): post-closing phase; DispWithout (step 9a): dispute without formal summons; and DispWith (step 9b): dispute with formal summons. As mentioned above, results were scaled from 1 to 5, where the result 1 indicates very low and 5 indicates very high. For instance, 5 is a high score for satisfaction, but is low for cost and time (person-days and step-time) factors. The results were reported on radar charts, using a hyphened line (- - - - -) for the US and a straight line (_______) for France. The main results (Figure 3) compare M&A legal performance in France and in the US, irrespective of the deal structure. The detailed results are then discussed based on the transaction structure (see chapter Detailed Results Based on the Transaction Structure) that is, the comparison of the performance of ADs and SDs in France and in the US. An interfactor analysis (regression) was carried out to test the accuracy of the results (see chapter Interfactor Analysis).
Figure 3: Research Findings Summary: Person-Days, Step-Time, Cost (Euros) and Satisfaction
Person-Days Step-Time 1 PrelimInfo 1 PrelimInfo 9b DispWith 4.00 3.00 9a DispWithout 2.00 1.00 8 Post-Closing 0.00 3b LegalDueDil 3a FinDueDil 2 LOI 9b DispWith 9a DispWithout 8 PostClosing 4.00 3.00 2.00 1.00 0.00 3b LegalDueDil 2 LOI 3a FinDueDil USA FR

USA FR

7 Closing 6 RegApprov

4 PurchAgree 5 AnciDoc

7 Closing 6 RegApprov

4 PurchAgree 5 AnciDoc

Euros 1 PrelimInfo 3.00 2.00 9a DispWithout 1.00 0.00 3b LegalDueDil 3a FinDueDil

USA FR 2 LOI 9b DispWith 9a DispWithout

Satisfaction 1 PrelimInfo 3.00 2.00 1.00 0.00

USA FR

9b DispWith

2 LOI 3a FinDueDil

8 Post-Closing

8 Post-Closing

3b LegalDueDil

7 Closing 6 RegApprov

4 PurchAgree 5 AnciDoc

7 Closing 6 RegApprov

4 PurchAgee 5 AnciDoc

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The IUP Journal of Business Strategy, Vol. VIII, No. 2, 2011

Results and Analysis

The objective was to compare M&A transactions, irrespective of their legal form. The comparative analysis of both countries provided the following results: In general, results show that M&A transactions in France are cheaper and require less person-days. However, there is some variation, for example M&A transactions in France need fewer person-days for all steps, except for the dispute without formal litigation phase (9a) where person-days are about the same in both the US and France. As for cost, M&A transactions in France are significantly cheaper for all steps except for dispute with formal litigation (9b), where costs are almost equal for both countries. The results for satisfaction and step-time are not uniform. Satisfaction for steps starting with the exchange of preliminary information (1) up to the drafting of ancillary documents (5) is approximately the same in both France and the US. This is also true for step dispute with formal litigation (9b). However, satisfaction is notably higher in the US from step regulatory approvals to dispute without formal litigation (6 through 9a). With respect to step-time, the results show that neither country has an overall advantage in the time required to complete each step. The US requires less time for drafting the purchase agreement, the ancillary documents and closing (steps 4, 5 and 7). In France, the step-time is shorter for the exchange of preliminary information, drafting and negotiation of the letter of intent, due diligence and disputes (steps 1, 2, 3 and 9). In summary, the results can be summarized as follows: No significant difference could be identified in the legal performance of M&A, civil law versus common law. M&A appear cheaper in France, but this difference could be explained by the size of transactions. The detailed results of the study are shown according to the transaction structure.

Detailed Results Based on the Transaction Structure

The results are detailed depending on whether the transaction is structured as a SD (1), or as an AD (2). Note the different distribution of the deal structure percentage: The majority of deals were structured as SDs in both countries. However, the number of ADs in France (9%) is significantly lower than in the US (36%). Figure 4 shows the response population for each deal type (AD and SD) in the two countries.

Share Deal
Figure 5 shows that a SD tends to be slightly more expensive in the US; and there is a greater amount of satisfaction in France than in the US. However, for person-days and step-time, results vary. A SD in France requires fewer person-days for the exchange of preliminary information, negotiation and drafting of the letter of intent, purchase agreement and ancillary documents (steps 1, 2, 4 and 5). However, for due diligence
Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 55

Figure 4: Deal Structure: AD and SD

USA 36 AD SD France 9

64

AD SD

91

Figure 5: Research Findings for SD: Person-Days, Step-Time, Cost (Euros) and Satisfaction
Share Deal-Euros SD 1 Premilinary Info SD 9b Diputing b SD 9a Diputing SD 8 PostClosing 3.00 2.50 2.00 1.50 1.00 0.50 0.00 SD 2 Phase Surround SD 3a DueDiligence SD 3b DueDiligence b SD 4 Asset Purchase SD 5 AnciDoc SD 7 Closing SD 6 RegApprovals USA FR Share Deal-Satisfaction SD 1 Premilinary Info SD 9b Disputing b 4.00 3.00 SD 9a Disputing SD 8 PostClosing 2.00 1.00 0.00 SD 2 Phase Surround SD 3a DueDiligence

USA FR

SD 7 Closing SD 6 Reg Approvals

SD 3b DueDiligence b SD 4 Asset Purchase SD 5 AnciDoc

Share Deal Person-Days SD 1 PrelimInfo SD 9b DispWith SD 9a DispWithout SD 8 PostClosing 3.00 2.50 2.00 1.50 1.00 0.50 0.00 SD 2 LOI

USA FR

Step-Time SD 1 PrelimInfo SD 9b DispWith SD 9a DispWithout SD 8 PostClosing SD 7 Closing SD 6 RegApprov 4.00 3.00 2.00 1.00 0.00 SD 3a FinDueDil SD 3b LegalDueDil SD 2 LOI

USA FR

SD 3a Fin DueDil SD 3b LegalDueDil

SD 7 Closing SD 6 RegApprov

SD 4 PurchAgree SD 5 AnciDoc

SD 4 PurchAgree SD 5 AnciDoc

(steps 3a and 3b), the US requires fewer person-days. For closing, post-closing and disputes (steps 7-9b), the number of person-days is almost equal. As for the length of each step, a SD in France is shorter only for the beginning of the transaction process (steps 1, 2, and 3). Lengths for all other steps are shorter in the US.
56 The IUP Journal of Business Strategy, Vol. VIII, No. 2, 2011

Therefore, the following conclusions were reached: There is no radical difference between France and the US in the legal performance of SDs; SDs tend to be slightly more expensive in the US; SDs are more satisfactory in France; and Time to complete the SD transaction is about the same in France as in the US.

Asset Deal
In both countries, the radar diagrams for ADs do not have the same shape as they do for SDs. An AD in France is cheaper but generally requires more person-days and is subject to lengthier step-time. Also, ADs require a greater number of person-days in France for all steps, except financial due diligence (3a) and dispute with formal litigation (9b). The length of each step is longer in France for all steps except for the disputes (9a and 9b). Although ADs in France require more person-days and longer step-time, satisfaction is greater for all steps, except for disputes (9a and 9b). An AD in France is cheaper but generally requires more person-days and is subject to lengthier step-time. Also, ADs require a greater number of person-days in France for all steps, except financial due diligence (3a) and dispute with formal litigation (9b). The length of each step is longer in France for all steps except for the disputes (9a and 9b). Although ADs in France require more person-days and longer step-time, satisfaction is greater for all steps, except for disputes (9a and 9b) (Figure 6). Therefore: ADs are generally faster to complete in the US. Radar diagrams for ADs do not have the same shape as they do for SDs; SDs tend to be slightly more expensive in the US; and ADs are generally more satisfactory in France.

Interfactor Analysis
Interfactor analysis was carried out to verify the accuracy of the above conclusions, in order to cross-check for bias with regard to the origin of economic performance. This analysis was made using regressions, but also by comparison of averages (Churchill, 1999). The following potential side-effects were tested: Relationship between cost (dependent variable) and company size (independent variable) was tested via linear regression; Relationship between satisfaction (dependent variable) and cost (independent variable) was tested via linear regression; and
Where is the Best Place to do Mergers & Acquisitions? Economic Attractiveness as Related to Law 57

Figure 6: Research Findings on AD: Person-Days, Step-Time, Cost (Euros) and Satisfaction
Asset Deal Person-Days AD1 PrelimInfo AD 9b DispWith AD 9a DispWithout AD 8 PostClosing 3 2 1 0 AD 2 LOI AD 3a FinDueDil USA FR Asset Deal Step-Time AD1 PrelimInfo 5 4 AD 9a DispWithout 3 2 1 AD 8 Post-Closing 0 AD 3b LegalDueDil AD 3a FinDueDil USA FR

AD 9b DispWith

AD 2 LOI

AD 3b LegalDueDil

AD 7 Closing AD 4 PurchAgree AD 6 RegApprov AD 5 AnciDoc AD 7 Closing AD 6 RegApprov AD 4 LegalDueDil AD 5 AnciDoc

Asset Deal Euros AD 1 PrelimInfo AD 9b DispWith AD 9a DispWithout AD 8 PostClosing 3 2 1 0 SD 3b LegalDueDil AD 3a FinDueDil AD 2 LOI

Asset Deal Satisfaction USA FR SD 1 Premilinary Info AD 9b DispWith AD 9a DispWithout 4 3 2 1 AD 8 Post-Closing 0 AD 2 LOI AD 3a Fin Due dil AD 3b LegalDueDil USA FR

AD 7 Closing AD 6 RegApprov

AD 7 Closing AD 4 PurchAgree AD 5 AnciDoc AD 6 RegApprov

AD 4 PurchAgree AD 5 AnciDoc

Comparison of person-days regarding the deal type was tested via comparison of averages. The results showed that a significant positive relationship exists between cost and company size (+0.34/6.64). This demonstrates that the cost to complete a deal is relative to the company size. Further, the authors observed that satisfaction has no significant relationship to cost and is therefore not a function thereof (0.04/0.66). This result shows that measuring only the cost of a deal is not sufficient to evaluate the economic outcome; other factors must be evaluated as well, such as satisfaction. Satisfaction is therefore an important measurement in this study. Another result showed that an AD (2.9) takes more person-days than a SD (2.2) in both countries. This could be explained by the fact that an AD requires (1) identifying the assets; and (2) applying a particular set of transfer rules to each asset. Therefore, an AD is more complex than a SD, which does not require identification of existing assets and needs only one set of legal rules.
58 The IUP Journal of Business Strategy, Vol. VIII, No. 2, 2011

Conclusion
The research findings demonstrate that on an average, neither legal system has a fundamental performance advantage. One example is the similarity shown in the shapes of the main radar diagrams. The results based on the structure of a transaction indicate a preference for SDs rather than ADs in both legal systems. However, ADs are four times more frequent in the US (36%) than in France (9%). Research Limitations: Additional determinants and dimensions that might affect M&A performance were not taken into account for this study, factors stemming from other disciplines such as social and economic sciences. Moreover, the study did not capture all the interrelations among the variables. It was concentrated on a limited number of companies, two countries, and a specific sample of informants. General limitations of the statistical methods and the survey design, for example, variables in order to measure performance, may represent additional limitations to this research. Future Research: Because mergers and acquisitions are an interdisciplinary phenomenon, the authors recommend developing new models including further disciplines (Straub, 2007). Effects are not mono causal, and it is therefore interesting to check for interrelations, i.e., how one discipline impacts the other. Additional research could broaden the geographic focus of the present study. Moreover, the difference between asset and share deals could be explored further, for example by taking other variables into account. A verification of industry effects with a cross-industry analysis could also be considered. The same study could be repeated to compare other countries. Researchers could replicate this analysis within the same context to confirm the stability of these findings.
Acknowledgment: The authors would like to thank Professors O Morteau (Louisiana State University) and Y Reinhard (University of Lyon) for their support and direction, together with C Baker, Esq., and X Legendre, Esq. for their valuable input.

References
1. Churchill G A (1999), Marketing Research: Methodological Foundations, Vol. 7, pp. 768-769, Harcourt, New York. 2. Doing Business (2008), Changed, to Some Extent, the Methodology, Doing Business, French Version, p. 72. 3. Morgan J P (2009), Dealogic Enterprise Static, Thomson Reuters, as of May 31, 2009.
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4. Nayyar P R (1992), On the Measurement of Corporate Diversification Strategy: Evidence from Large US Firms, Strategic Management Journal, Vol. 13, p. 219. 5. Straub T (2007), Reasons for Frequent Failure in Mergers and Acquisitions A Comprehensive Analysis, Vol. 1, pp. 9 and 192, Deutscher Universittsverlag, Wiesbaden. 6. Veiga J, Lubatkin R, Calori R and Very P (2000), Measuring Organizational Culture Clashes: A Two Nation Post-Hoc Analysis of a Cultural Compatibility Index, Human Relations, Sage Publications Ltd., Vol. 53, p. 539.
Reference # 33J-2011-06-04-01

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