Life after closing: who’s afraid of post-deal integration?

June 2016 | SPECIAL REPORT: MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Once the deal is closed and celebrations are over, the investor starts a new life with its acquired target. We hear from our clients all the time how concerned they feel about future integration. Nearly half of them consider a failure to integrate as one of the greatest barriers to a successful transaction. While other concerns, such as changes in the political environment or economic uncertainty, represent factors beyond one’s normal control, a failed integration can often be blamed on the acquirer. Ultimately, the integration of different cultures and business models is a long and challenging – yet very exciting –journey.

When two cultures meet, the resulting mix is profound and rich. Vertical domination of the acquired target is not an attractive option. In fact, recent studies show that horizontal interaction across various offices and departments facilitates innovation and productivity. Nonetheless, it is utterly important to align the entire business around clear global values in order to achieve a high performance culture. Another challenge is to ensure harmony of national regulatory requirements with global ethical and corporate governance standards. Plus, the target company will need to comply with exterritorial regulations extending to all jurisdictions where it operates. Finally, a successful integration assumes internal operational and cost optimisations needed for effective incorporation of the target into the global network.

Lost in translation – do we speak the same values?

A high performance culture is vital for every company, no matter its size or industry. Common values that unite all parts of the business from the US through Europe to China mean that all these parts communicate in the same terms and move in the same direction despite many cultural differences. To instil global values into the target’s behaviour is a crucial task that can only be entrusted to a loyal ambassador of such values, someone with excellent leadership skills and a full awareness of the local context. Some firms create integration committees vested with specific duties to make a smooth transition possible. In each case, the key is to identify true leaders who can and will be followed into the future.

Non-compliant provinces – a threat to every empire

Private businesses in most jurisdictions enjoy a flexible regulatory regime and it is fairly manageable to extend global corporate standards to the acquired business. A number of companies profit from public corporate governance principles and successfully apply them to the private sector as an immediate follow-up measure after an acquisition, to improve transparency. In particular, management structures tend to be more complex, independent directors and board committees are becoming a common trend for private players, and internal rules and procedures – for example, on professional conduct and directors’ duties – are becoming more sophisticated.

Meanwhile, achieving compliance with extraterritorial regulations is a far greater challenge. Legislation such as the Foreign Corrupt Practices Act (FCPA) or UK Bribery Act demand that businesses enforce their provisions everywhere they are active. Part of these provisions is refusing to do business with local entities that do not correspond to a company’s compliance and anti-bribery policies, which normally include due diligence on potential contractors. In certain jurisdictions, this may cause concern in terms of competition regulations. In particular, having completed an acquisition in Russia, it may be difficult to avoid contracting certain counterparties with reference to compliance concerns based on a foreign legal act, as it may be seen as an unfair restriction of competition – especially if a refusal comes from a company holding a considerable share or a dominant position in the market. In such circumstances, it is prudent to work with national regulators to agree on new contracting policies and to make such policies completely transparent, and to reject suspicious contractors by referring to specific, reasonable and justified tender requirements.

International economic sanctions may be another headache for an international acquirer of a local business. Depending on the jurisdiction, market sector and type of a deal, many investors and entities under their control are prohibited or restricted from doing business with persons listed on various sanctions lists. Compliance with sanctions has already become part of every due diligence exercise. All problematic transactions identified during the due diligence should be resolved before closing. Nonetheless, the acquirer may face difficulties enforcing sanctions regulations in the post-deal era, as sanctioned persons are often prominent market players operating via a significant number of companies and affiliates across various economic sectors. Investors should apply a cautious approach, follow the recommendations of their own domestic regulators and thoroughly structure business operations abroad. Sanctions concerns are commonly associated with transactions involving such countries as Russia, Belarus, Venezuela, Iran, North Korea and certain other countries.

Always room for perfection – in a search of an optimal structure

The internal reorganisation of the acquired business is, in most cases, an inevitable process. While it is primarily tax and business advisers who play a key role at this stage, there are two important considerations that a lawyer should deliver. First, a reference to the acquisition documentation should be taken as it is vital not to lose the contractual protection the acquirer has under the purchase agreement. Many sellers demand to be freed from warranty claims if they are triggered by certain buyer’s actions post-closing. An internal reorganisation initiated by the buyer may affect a particular warranty statement – for example, a tax warranty, if accounting policies were significantly reviewed or a specific entity in the supply chain was liquidated in a manner that resulted in additional tax payments.

Second, a lawyer’s opinion must be given in relation to all reorganisation steps of the plan. Most post-deal reorganisations are tax driven, but legal issues play a great role in terms of enforceability and timing of the integration roadmap. Keeping a company dormant for some time might be more efficient than a fast liquidation in the years after the merger. There might be certain legal restrictions and specific regulatory requirements around intra-group transfers of employees, assets, contracts, licences and so on. Transfer of clients and core agreements may be a serious impediment for a business and should always be approached cautiously. Certain actions would require notifications of creditors and regulators with mandatory waiting periods and an immediate effect on timeline.

Time to tell a secret

Every deal is individual and every group is specific; it is not a secret that there are no universal solutions. However, the secret to a successful integration is very simple: be exceptional. An acquisition is a great chance to create a unique synergy and move ahead of the competition. The time to integrate is the time to become different, show true leadership qualities and make a real breakthrough.

Oxana Balayan is managing partner of the Moscow office at Hogan Lovells. She can be contacted on +7 495 933 3000 or by email: oxana.balayan@hoganlovells.com.

© Financier Worldwide

Oxana Balayan

Hogan Lovells