‘Crash Course’ in M&A Discusses Deals, Details and Tech

Silicon Flatirons panelists discuss the current tech market and future

Chris Weigand of Hogan Lovells talks about how AI could help in diligence work. / LAW WEEK, AVERY MARTINEZ

What happens if you have a tech company in the middle market approach you for advice about selling their business, which was started in a backyard? They have a small staff in one location and employees based in another country. Where do you start?

Those were some of the topics covered by a panel of professionals in the “crash” course “Getting Deals (and Getting Deals Done) in the M&A Market” by Silicon Flatirons and the University of Colorado Law School on Feb. 26. The panel discussed some of the trends in M&A transactions both domestically and internationally, and the current state of private deal activity in the Mountain West region.

The panel discussion was moderated by Mark Kurtenbach, a partner at Hogan Lovells, and included perspectives from Eric Martin, managing director at SRS Acquiom, Jackie Rodriguez, deal advisory director with KPMG, Christopher Weigand, senior associate at Hogan Lovells and Eric Lentell, VP and deputy general counsel for Fitbit. The keynote speaker was Adam Haynes, managing director of GLC Advisors & Co., an independent investment banking firm in Denver that offers  comprehensive services in debt advisory and financing, restructuring and recapitalization, fairness and valuation options and mergers and acquisitions. 

Breaking down the entire M&A market from trade terms to a walk-through of the process, the event covered topics such as times to sell, international sale challenges, confidentiality, offers and bids.

“M&A is usually a transaction where folks are exiting, are paying liquidity and new buyers are coming in to take over the company and take it a different direction to build it where they want to go,” Kurtenbach said.

The panel covered trends in deal structures and terms and industry sectors active currently. It was for all business people, service providers, entrepreneurs and anyone who wanted to learn more about M&A markets and help entrepreneurs to plan for future transactions.

Kurtenbach said an important distinction exists between proprietary and nonproprietary transactions in the market. Whereas a proprietary is a single buyer buying from a single owner, and a nonproprietary is essentially a seller going to market with its’ business to sell to numerous potential buyers before selecting a group to sell to. 

The panel discussion began at the start of a sale or acquisition situation and followed it step by step from start to finish.

“What we tell people is that the entrepreneur 99.9% of the time knows when the time is right to sell the business,” Haynes said. Further, unless confidentiality is beyond important to the sale situation, Haynes said he saw no reason not to go out to at least 250 people to gain the highest sale.

But before the bids and sales pitch, records, details and organization on the legal side of the transaction can help the process go smoothly and professionally.

Sometimes companies can neglect their own store after focusing on customers or updated rounds of financing, which can become very complicated, Martin said. And before approaching a closing, it is important to get those details straightened out and organized.

On the legal side, understanding the background of corporate organizational structure and how it operates and who owns it is “paramount,” Weigand said. These details will serve the basis of how much money is going where and to whom.

“Having that tied at the outset is really mission critical for going into the process well prepared,” he said.

Especially with tech transactions, understanding the chain of title for intellectual property is critical. When a group of people begin their business in a garage, and didn’t have money for legal services at the outset, and may think the company owns the intellectual property central to the business, Weigard said it may not be documented correctly. He asserted that it’s a relatively simple process to go through and figure out what documentation is there, and corrections may be needed at the front end prior to engaging in M&A discussions.

Once an exclusivity point is reached, records kept in order are vitally important, as the diligence done by a buyer during exclusivity will be thorough and deep, Kurtenbach said. Some of that diligence can include a buyer reviewing the seller’s information in HR, financial, legal, industry-wide or more. According to Kurtenbach, this review is one of the most expensive and important steps of the process.

However, technology itself could limit some of the challenges associated with cost in diligence work.

In terms of technology for the diligence process, there is  the possibility that artificial intelligence tools could take over looking at the documents, Kurtenbach said. One such example is the Kira system, which monitors contracts.

Kira uploads countless numbers of contracts and returns search results for certain provisions. However, the science is not perfect yet, Weigand said. As the legal side of these transactions is constantly being asked to find innovative ways to reduce the cost of diligence, AI could be an answer. While the tools may not be perfect now, in five years they could be revolutionary. 

However, Lentell said he doesn’t believe AI will eliminate jobs, only free up some workers to do more important work instead of spending time poring over a certain number of bids, offers or other documents when some of these tasks can be automated.

But changes in the global market could affect transactions through buyers, governments, requirements and mandatory filings.

Differences between the European Union and United States in trade laws are another major part of the process in a tech transaction. Due to anti-trust requirements by the Department of Justice and Federal Trade Commission, and the international requirements, the difficulties of dealing with these requirements are in the back of tech companies minds, Lentell said.

With the FTC now having the ability to review non-reportable transactions of Apple, Amazon, Google, Microsoft and Facebook, each of these tech companies will have the past decade of transactions reviewed in detail  by the FTC in an educational study, Weigand said.  The purpose of the study is to determine if the antitrust regulatory environment is doing what it should in the tech space. 

The current threshold for transactions valued at $94 million or greater must be filed, currently non-reported transactions fall below that threshold, which is updated every year, he said. As a result, the smaller tech transactions should be held to a greater transaction threshold.

Heightened scrutiny is out there, Lentell said.

If a company has non-United States operations, that can add extra steps and length to the process, Kurtenbach said.

In prior years, filing with the Committee on Foreign Investment in the United States was voluntary for foreign investment, but is now required. The interagency committee investigates foreign investment into the U.S., whether with private, foreign buyers or foreign governments, which can take as long as three to six months for approval. This type of regime exists in many foreign countries, and subsidiaries and foreign operations in other jurisdictions would be under that sort of organization, Weigand said.

Kurtenbach said the E.U. doesn’t have a single-file system, which in turn could require multiple filings.

One question from the session revolved around the FTC regulation review of post-close transactions, and how that would change innovation and shift the bigger companies from acquiring tech companies at an early stage.

“I think at the end of the day, it may change the regulatory environment, but tech is still catering right now,” Weigand said. “I think you’re going to see tech companies that are continually interested in the gains … that tech offers. If that means there are more regulatory hurdles that they need to jump through to do that, that might be the case.”

However, legislation was the end goal if the FTC wanted change, and that would be years from now, Weigand said.

– Avery Martinez

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