How to avoid your Kraft-Unilever moment
Earlier this year, it was reported that Kraft Heinz had entered into negotiations to acquire Unilever. Almost overnight, however, the deal sensationally collapsed. Interesting as this story was, it brings into focus some of the perils of aborted deals and steps that can be taken to minimise the pain.
Confidentiality is extremely important in safeguarding your businesses interests in a proposed deal. If your company is the target in the proposed transaction the purchaser will seek information about the company, including financial details, as part of their due diligence process. This can be an uncomfortable part of the process for business owners who are giving outsiders, including possibly some of their competitors, access to a wide variety of information which is vital to their business. It’s a tricky balance! As part of the process, and to give vendors some peace of mind and protection, purchasers should, in all cases, be asked to signs a confidentiality agreement, otherwise known as a non-disclosure agreement or NDA.
However, it is important to highlight that an NDA does not remove the risk. It should be viewed as limited and NDAs should be used alongside other practical mechanisms such as phasing the release of information or redacting.
Once preliminary negotiations have begun, or in some cases prior to entering into discussions, the purchaser should request that the vendor grants a period of exclusivity to the purchaser so they can evaluate and negotiate the proposed transaction without having to compete against other prospective purchasers.
Nobody wants to be gazumped. Conducting negotiations and due diligence is a time consuming and expensive exercise therefore you want to ensure that the vendors are not undertaking the same process with numerous other parties.
If you are the vendor, you may not wish to enter into such an arrangement as it minimises your options, and reduces your bargaining position, but many purchasers will insist upon it before negotiations can take place. If an exclusivity agreement is entered into, the length of exclusivity should be considered carefully to ensure that you are not placing all of your eggs in one basket!
A termination or “break-up” fee could be agreed between the parties. These are not tremendously common but are seen in transactions from time to time. There are many ways of structuring, but a typical example would be for the party who walks away from the deal to pay. The fee then acts as a compensation payment for the other party who has invested time and money into the now abandoned deal. This mechanism, as well as protecting the purchaser if the vendors change their mind, protects the target company by minimising the risk that a purchaser will pull out of the deal at the last minute leaving the perceived reputation of the target as “damaged goods” and after having had access to a considerable amount of the target’s confidential information. Having a termination fee can help to focus minds and gives the parties some comfort that both sides are genuinely keen to do the deal.
Overall, the most important aspect of any deal process is constructive and open dialogue between the parties. Without this, even with other mechanisms in place, the deal is likely to collapse as negotiations will break down if both parties are not willing participants.
Every deal is different and it is important that you know all of your options before entering into negotiations. Deal negotiations can take up a considerable amount of time and money and should not be entered into without expert advice.
This article was co-written by Rebecca Cox.
At MacRoberts, our team of corporate experts has considerable experience in advising clients, across all sectors and at all stages of the process, on mergers and acquisitions from both the vendor and purchaser perspective, so please do not hesitate to contact us.