M&A in Emerging Markets - Structuring Tips
I thought I would share some best practices from personal experience of transactions in emerging markets, starting with efficient transaction structuring. In an uncertain environment, it is essential to ensure the structure is adapted to the key challenges faced.
Why does it matter? The last thing you want after closing a transaction is to realize you created a big problem like large unpaid tax bills or the loss of key contracts. Many issues can be minimized with a suitable transaction structure. This is especially critical for transactions in emerging markets with often greater uncertainty (less standardized, readily available and reliable information) and risk (regulatory, political, currency, liquidity etc.).
What is structuring? It covers the basic parameters that shape a transaction:
- What is the target perimeter? Can I carve-out specific assets or liabilities? How precisely is the perimeter defined? Is the target company local or international, operating or a holding company?
- Am I acquiring assets (such as buildings, equipment, contracts – “asset deal”) or shares in one or several companies (“share deal”)? When information is imperfect and estimated risks are high, it is often advisable to favor an asset deal rather than a share deal because it typically carries fewer unknowns, though it can create more transition issues and costs.
- Is it a straight sale/acquisition or a partnership? Does the seller contribute significant value to the target through skills, reputation, connections etc.?
- Who is the acquirer? Does it have the required licenses/permits? Where is it incorporated and can it efficiently receive dividends or sale proceeds?
- Other important parameters to consider include legal jurisdiction, payment terms, currency and financing. Pay specific attention to the nature of the seller: is it a local independent or a large international group? Does it operate under high compliance standards? How actionable are seller indemnities and guarantees?
So what are the best practices? Some practical tips from personal experience are:
1) Think early about the adequate structure – it forces you to ask the right questions from the start, to plan the transaction process accordingly and to request the right information.
2) Raise the difficult issues rather sooner than later – though not always easy or comfortable, by flushing out the key issues early, one can determine the right structure from the start, direct due diligence and guide documentation drafting efficiently while optimizing transition.
3) Ensure the structure is adapted to each situation by focusing on the following aspects (in the following order of priority):
o First and foremost, identify the key issues that may impact the business and operations after the transaction. Assess the level of risk in each area (operational, legal, tax, environmental, HR, IP etc.) and analyze how structuring alternatives can minimize the risks. For this, always ensure you can rely on people with local knowledge to understand the effective level of risk and the local practices;
o Second, analyze how the contemplated structure impacts the anticipated execution risk and timing, especially required approvals from third parties and local authorities;
o Lastly, analyze the impact on transaction costs, particularly taxes and duties payable at closing (for example, stamp duties payable by the buyer and capital gains tax payable by the seller) which can be significant in certain jurisdictions and create tension between parties.
These are just a few simple tips from my own transaction experience – I hope you find them helpful. Do you have other advice or different experience?
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