Both sides must take methodical approach to get success with deal

Acquirers these days are more likely to take a qualitative approach than a quantitative one.

They want deals that will deliver value over the long term, and are willing to look past the shortterm havoc caused by coronavirus and Brexit.

A more focused M&A strategy and level of diligence, therefore, comes into play – but there are many possible pitfalls for companies.

An acquisition can swiftly become an expensive and fruitless process if preparation and clear objectives are lacking at the outset.

Early engagement with professional advisers in terms of legal, tax and financial input – in addition to robust commercial analysis in the boardroom – is essential.

After a possible acquisition has been identified, the bones of any deal should be committed to writing in a heads-ofterms document which will serve as a roadmap for the legally binding contracts to follow.

More time spent here thrashing out detail can often save time and ensure everyone truly is “on the same page” regarding the terms of the transaction.

Legally binding exclusivity for the prospective buyer is key – without that, the likely significant investment in professional fees and management time and energy could be wasted.

Also, discussions with potential deal funders should progress from inception of the project.

Organising funding takes time, even though committed terms will not materialise until much further on in the process.

At the heart of any deal is the due diligence exercise, which is the buyer’s detailed investigation of the target business, “warts and all”.

The nature of the target business will dictate the key areas of due diligence interest. Typically high on the agenda will be the likes of corporate structure, the nature and ownership of intellectual property rights, the terms and conditions of key employees, key contracts, occupation or ownership of business premises, any litigation or claims, environmental matters, pension obligations and statutory compliance.

Acquirers will also wish to investigate issues related to Covid-19, such as compliance with regulations, use of the Coronavirus Job Retention Scheme and/or the Coronavirus Business Interruption Loan Scheme, and generally the deferral of liabilities such as rent or tax. On completion of satisfactory due diligence, the parties will move to the negotiation of legally binding transaction documents.

A buyer will wish to ensure they have the benefit of suitable warranties and indemnities to support the acquisition price.

Careful consideration should be given to the extent of non-compete and non-dealing/solicitation provisions on the vendor and to what extent key employees in the target business are tied in.

Anyone considering an acquisition should perhaps bear in mind the legal principle “caveat emptor” – let the buyer beware. But robust early analysis, planning and professional advice will greatly assist a new owner to navigate the M&A course safely.

From a seller’s perspective, the first hurdle for an owner-managed business tends to be the emotional one. This is natural but for those with strong ties it can lead to a tendency to do nothing – which is the worst course of action.

As always, engaging professional advisers at an early stage is crucial.

A disposal may take several forms. It could be part of succession planning within a family, a management buyout or a business being exposed to the market for sale.

Due consideration should be given as to what is most likely to meet the vendor’s objectives but, in each case, the valuation and structure of the deal is key – as is tax advice.

Once the due diligence process is up and running, momentum is key – and from a seller’s perspective being able to provide accurate information promptly is imperative.

Advisers have all seen “deal fatigue” set in – as a rule the longer the sale process runs, the higher the chance of something going wrong.

Proactive management of the transaction is a necessity. Negotiation of the legally binding transaction documents will put the flesh on the bones of the heads of terms and it’s fair to say “the devil is always in the detail”.

The nature of the target business will dictate the key areas of due diligence

The rate at which businesses are bought and sold is a good barometer of the nation’s confidence in the wider economy.

Last year was a year of mixed confidence for obvious reasons and arguably is a story of four quarters.

At the start of the year, UK mergers and acquisition (M&A) activity was set to reach record levels, only to be abruptly halted in midmarch as many deals were aborted or paused.

Confidence remained low until June because of widespread uncertainty which saw deal volumes drop by almost a third in the first half of the year compared to 2019.

The summer months signalled a recovery driven by sectors least affected – and in some cases strengthened – by the pandemic, such as healthcare and technology, and by short-term reactive activity to protect or generate cashflow, survive and to mitigate risk.

Activity in Q4 continued to rise to levels not seen since the end of 2018, despite added complications arising from Brexit, which may have been partly due to the catch-up of deals put on hold earlier in the year.

The result was that by the end of 2020, deal volumes had fallen short by only 15%.

The 2020 experience has meant those businesses that have survived are now more resilient, more efficient due to a closer scrutiny on costs and more advanced in terms of technology adoption which has led to more flexible and agile operations.

These factors, combined with a clear strategy and supported by confidence that the economy will recover following a successful vaccine programme, are likely to result in deal activity reaching historic levels by the end of 2021.

The signs are already

there, but this is sector specific and is influenced by business owners rushing to conclude deals before the Budget to avoid the risk of potential changes to capital gains tax.

However, there is speculation that changes won’t come into effect until the autumn statement, which may mean that activity will continue to be high throughout most of the year.

Tayside’s flourishing gaming sector is a good example. Gaming activity is increasing at a rapid rate due to continuous improvements in technology and increased accessibility and awareness during lockdown.

At the higher end of the market, Electronic Arts’ acquisition of Codemasters, the publisher of motor racing video games, at a 28% premium to their rival Take-two Interactive’s bid, demonstrates the buoyancy of the sector.

Two recent local transactions are the acquisition of Ruffian Games by Rockstar Games

and the acquisition of Yoyo Games by Opera.

Both deals involved foreign buyers, which highlights the confidence overseas buyers have in the UK. The value of the pound is currently low, which makes the UK an attractive place to invest.

However, with heightened government intervention, there are signs of protectionist moves against cross-border deals.

Another driver for growth in 2021 is technology. Not only will there be consolidation in the sector, but large corporations will acquire tech companies or products to enhance and improve their business and service offering.

In the oil & gas sector there is a trend towards energy transition and the companies that can diversity into renewables or other more carbonfriendly or neutral activities will be most attractive to a buyer.

Valuations took a dip in the middle of last year but

have since recovered to record levels, a sign that the M&A market in the UK has been resilient despite the challenges of Brexit and the Covid-19 pandemic.

Private equity buyers have been active throughout and are paying equivalent prices to trade buyers. The availability of significant funds will mean that private equity will be a dominant force in driving deal activity in 2021.

Brexit and Covid have had an impact on risk assessment, which will be factored into the process in terms of heightened due diligence.

So, 2021 is shaping up to be a bumper year for deal activity with significant investment into companies to support growth ambitions.

Combined with government support, this active market will – most importantly – have a positive impact on jobs.

Communications technology will help both vendor and acquirer to negotiate the disruption caused by the coronavirus pandemic.

Dundee’s Ruffian Games, best known for Crackdown 2, was acquired in October.