Anywhere in the world, we happen to encounter common mistakes in mergers and acquisitions (M&A) sometimes just because the parties are unprepared, sometimes due to lack of knowledge or sometimes just out of sentiment. We, as lawyers, cannot prevent these kinds of circumstances from happening every time but at least we can be helpful to manage risks arising from such situations and to overcome negative results emerging from these risks with least damages.
If we believe that a client, who is on the edge of breaking the table due to the emotional burden of selling their cherished company, is not genuinely intending on damaging the table, we can facilitate a successful continuation and conclusion of the transaction by considering the client's interests and communicating our observations and findings.
Even if the mistakes are inevitable, it is critically important to engage advisors who have been able to prevent such mistakes from happening, corrected them or have the capacity to prevent them from out of experience. Trying to move forward without consulting any advisor even though s/he lacks knowledge and experience cannot prevent one from falling down thinking lifting the rock up, like Albert Camus' Sisyphus.
Based on our experience, while starting with a M&A transaction, during its negotiations, before closing or post-closing, we can name the most common mistakes as follows.
- Not being prepared to sell the company: In fact, during its lifecycle every company should operate as prepared to sell its business even on the next day. Indeed, the preamble we put on contracts for defining a company’s good standing as “duly incorporated in accordance with the applicable laws and existing” makes a meaningful sense while commencing a M&A transaction. Particularly, the seller should be able to demonstrate through variable instruments while bidding with the potential acquirers / investors that it is duly incorporated and validly existing, it kept its commercial books appropriately in accordance with corporate and commercial laws, it is compliant with the legislation from administration and tax perspective, it took required measures and legal actions in compatibility with the liability rules of law. Such kind of a demonstration will turn into a representation and warranty to be given as part of the transaction document. Moreover, we frequently advise sellers to undertake “internal due diligence” conducted by the seller's lawyers (referred to as seller's due diligence). This approach has the potential to yield significant advantages for sellers throughout the negotiation process. With such a diligence, the seller will be able to provide faster and more effective answers to the questions that may arise as a result of the due diligence to be conducted by the buyer, and will be able to demonstrate that the risks identified or put forward by the buyer are not actually risks, and if there is such a risk, how it can be reduced or eliminated without wasting time in the process.
- Selling on a rainy day: A tendency, especially in insolvent companies, is to consider the option of mergers and acquisitions in order to leverage new investment, taking into account the loss of the company's share capital.A unique clause under the Turkish Commercial Code encourages this, however in order to prevent the insolvent company's value from declining even more, operational, legal, and tax measures must be implemented. Therefore, alternatives that legal, financial, or tax consultants may recommend improving the valuation should be taken into consideration, even if the negotiation starts on a relatively weak footing when the company is insolvent. One should not ignore elements of the corporate assets or other issues that may increase the value of the company that have not been seen by the company's management due to operational blindness.
- Being caught up unprepared not to miss out on a good opportunity: Even if the company or business is extremely valuable, there are situations when a seller may wish to move quickly to expedite negotiations with an investor or potential buyer without first determining the company's actual worth or its legal, financial, and/or tax position. This is especially the case if the seller deems a good offer too good to refuse. Making hasty decisions without doing the necessary planning frequently ends in losses. This is because, as we stated at the outset, if the seller is not ready to sell her/his business the next day, s/he might pay a high price for her/his eagerness toward the buyer, regardless of how good the offer is, if s/he chooses in a rush whether s/he can afford the risk taken.
- Unbalanced allocation of responsibilities: In merger and acquisition transactions, there are unavoidably obligations incurred by both sides.In cases where only one of the parties remains standing, although it is assumed that the selling party has sold the company and exited, its financial responsibilities continue for the period of time agreed under the transaction agreement. The allocation of responsibilities of the transaction parties, who will manage the acquired company together after a certain transition period, is highly related to their performance during the negotiation of the transaction agreement. The fact that these negotiations are conducted by specialized legal, financial and tax advisors have a significant impact on how and to what extent these responsibilities are allocated.
- Longer integration period than assumed: Whether the buyer continues to manage the company jointly after the merger and acquisition or continues on its own after a period of support from the seller for a smooth transition, it is important to accurately predict the integration period that the buyer will have to endure until it gets used to the company and to calculate its cost. This is so because the costs incurred during this time also have an impact on the buyer's purchase price for the M&A deal. If the integration process takes longer than anticipated, the buyer may not pay a portion of the transaction price or may even cancel the transaction altogether if the payment of the sale price or additional premiums is contingent on the successful completion of this process. Although every effort is made to avoid annulment in practice, it is not an unprecedented situation.
- High credit burdens: When selling an entity, one of the most crucial factors to take into account is negotiating a sale with high credit obligations. Companies frequently loan money from banks to pay for running expenses or investments. In many businesses, utilisation of loans has become a routine, and even in cases where cash flow is adequate, the outstanding debt from loans with varying terms is attempted to be settled using the interest income received from the principal amount of other loans. It is a circumstance that some banks actively promote in order to retain their customer base and sell loans. This may be a major disadvantage during the acquisition and significantly decrease the company's worth. Furthermore, in many transactions, the buyer is left in charge of closing the loans. As a result, investors and/or buyers who are unaware of the company's past and sensitive issues tend to overlook the negotiations with banks and financial institutions, fail to consider options for restructuring of the outstanding loan and repayment with lower interest rates, and attempt to negotiate a lower purchase price for the business based only on haphazard calculations. This, of course, is to the detriment of the seller, especially in a high inflationary environment. This occurs when a loan is granted at an earlier date with lower interest rates, and the repayment is scheduled for a later date with higher interest rates. In such cases, it doesn't make sense to borrow Turkish lira at an earlier date with a lower inflation rate.
- Country risk and compliance: When operating the funds, they supply for the realization of the merger and acquisition transaction, foreign investors who act as middlemen in mergers and acquisitions, or banks and credit institutions that multinational corporations in the role of buyers borrow for investment, are required to incur specific costs. These cost components are also calculated with consideration to country risk. Specifically, the high cost of debt and bond purchases that are utilized in investments made in inflationary situations, like Turkey, inherently lowers the value attributed to the corporation that is taking on the country risk.Even while a corporation cannot overcome a cost such as country risk on its own, this situation highlights the significance of compliance standards from a legal, financial, tax, operational, and commercial standpoint. In the long term, a company that operates according to the book and not the cover will undoubtedly find a buyer who values the business more.
- The currency to be taken as basis for the payment of the merger and acquisition transaction fee: It is important to determine the currency in which the consideration to be paid by the buyer to the seller within the scope of the merger and acquisition transaction will be paid, or in cases where it is mandatory to pay this currency in Turkish lira, the exchange rate on which date will be taken as the basis. Unless there are special circumstances, the consideration paid in Turkish lira for merger and acquisition transactions must be made in Turkish lira if both parties are Turkish, even though the law in effect in our country permits determination of consideration paid in foreign currency. In order to avoid exchange rate risk in payments to be made in Turkish lira, it is preferable to consult with expert advisors in order to ensure that options such as payment of the transaction price abroad, delivery to a trustee or payment against certain debts and bonds are not illegal, do not lead to tax loss or create higher costs than expected in the long term.
- Possible supply chain breaks: Because M&A transactions involving businesses with a broad network of suppliers, dealers, or distributors have a significant impact, it is critical that the chain that generates this network remains undamaged.The fact that the M&A transaction starts in every country where a multinational company has a presence (subsidiary, affiliate, branch or business), that it is carried out simultaneously, that it is publicly disclosed by the legislation after a certain confidentiality process, the importance given to transparency and confidentiality until the closing of the transaction, the planning of the integration process, the time required for notifications to or permits from regulatory authorities, and many other important issues bring the importance of compliance to the forefront and can prevent possible ruptures at every level from the top to the end of the supplier chain. The importance given to suppliers as well as employees will inevitably have an impact on the success of an M&A transaction.