New Zealand’s mergers and acquisitions scene has recently been dominated by number of high value transactions often completed in short timeframes involving offshore private equity buyers. Such sales have generally been conducted through competitive bid, or auction process to drive high levels of interest for quick and successful sale at the best possible price. As market conditions remain unchanged, it seems likely this activity will continue at similar levels for some time yet.
During sales process the role of the board of directors is critical. At these times directors use the tools that are available to them to ensure good governance is maintained, and the best outcome for stakeholders is achieved. In this context, key outcomes for stakeholders include:
•A correct decision to sell at the “right time and for the right reasons”;
•A successful sale at the best price;
•Minimal residual risk;
•A quick and full return to stakeholders.
Good decisions require an informed understanding of the opportunities and risks facing the business before going to the market, and the ability to be proactive (not reactive) in setting the sales environment. It also requires the ability to juggle the competing interests of the various interested parties involved in the business. Whilst well-run auction process can maximise price, it also places considerable strain on management and the board to commit to an often public, time consuming and expensive process. Once committed to, it becomes vital the right result is achieved as, whilst failure to conclude deal is bad indicator to the market, “poor deal” is even worse.
So, how does board achieve this “information nirvana”? Increasingly, the market is seeing the use of due diligence reports prepared, and paid for, at the request of vendors, with the intention of such reports being made available to potential bidders. These reports are seen to encourage robust sales pro-cess by ensuring high level of bidder participation, shortening of the sales process and decreased management effort. From governance perspective, such reports provide the board with an independent source of information on which to make its decisions, both before and during sales process. In particular, vendor due diligence will:
•Identify potential road-blocks to the sale occurring, or which may impact price. Corrective action can be taken to address these, or decision made to delay the process, before going to the market;
•Assist the board to assess the value of what is being sold, and identify both price positives and negatives;
•Provide the board security when providing warranties and signing off on acquisition documents;
•Allow the board to resist or anticipate (and thereby mitigate) any likely request from bidders to retain portion of the purchase price or seek specific indemnities that may hinder quick and full distribution of funds to shareholders;
•Allow the board to maintain greater control over the pace of the process by anticipating and resolving issues, and imposing timetables that suit the vendor;
•Reduce the amount of management time committed to the process, thereby allowing management to run the company.
The potential advantages to board in having full information when facing bidders, or indeed in making the decision to sell, cannot be underestimated.
It is often said that by the time bidders have completed due diligence they often have better understanding of the business than the vendors. But why should that be? Vendor due diligence is an effective way of managing that risk and levelling the playing field.
Private equity itself adds unique challenges for boards. This is especially true where bidder offers equity to senior managers. This situation leaves boards exposed, as those they have previously relied on for key managerial information, have sudden conflict of interest. Also, when it comes time to negotiate agreements, boards may have to take more active role than would otherwise be desirable. Again, having the comfort of well prepared reports will give greater confidence in these situations.
The recent developments highlighted above place greater pressure on boards in some respects (including time and cost). However, the availability of comprehensive vendor due diligence reports now provides boards with more effective tools to be able to manage the risks apparent in sales process and, more importantly, to ensure the best outcomes for stakeholders.
Chris Parke is senior associate at law firm Kensington Swan.
