Given uncertain organic growth prospects, relatively inexpensive capital and more competition, corporate strategists increasingly see mergers and acquisitions (M&A) as the right tool for entering adjacent markets. But as organizations pursue these strategies, is the legal department well-positioned to play an effective role in both deal governance and enablement?
The ability to execute frequent transactions offers companies a strategic competitive advantage. This will only grow in importance as deals become more complex and receive more scrutiny from investors, governments and consumers.
So how does a legal department effectively support opportunistic M&A in these conditions? Legal departments must make five shifts.
Shift 1: Increase in-house capacity
High M&A volume suggests it is worth increasing in-house capacity. If M&A is a core component of strategy, in-house expertise can save money and better secure deal synergies. To diagnose whether you need to shift resources in this way, ask yourself:
- Is M&A key to overall corporate strategy?
- Is your industry transforming? How is your company’s market position changing?
- Is legal spending more of its budget on M&A?
- If you had the in-house capacity, would you already manage more M&A work?
Beyond resources, simple deal playbooks, templates and formalized processes clarify when participants should engage in the M&A process and ensure smooth handoffs between internal stakeholders (e.g., legal, finance and investor relations) and external stakeholders (e.g., law firms and banks). These tools and frameworks also serve as a corporate repository that codifies best practice and corporate M&A expertise.
Shift 2: Create agile deal teams
With the advent of increasingly complex and variable deals, a static deal team may no longer be effective. Acquisitions outside the industry require different valuations, deal teams and due diligence.
Legal must provide expertise to match the type of business or company being acquired, such as its risk profile, customer base, product lines and profit centers. Fortunately, M&A — with its discrete stages and deliverables — lends itself to agile methodology.
The key is ensuring you assess the legal expertise and skills needed for specific M&A activities and deliverables on a specific deal. Understand and designate subject matter experts in advance so lawyers can bring the necessary legal skills to a defined, circumscribed set of work — and let others on the deal team handle steps where legal doesn’t need to be involved.
Shift 3: Strengthen cyberprotection
The due diligence process must adapt to manage the risks of new-in-kind acquisitions. Failure to identify potential problems early can lead to liabilities down the road. At a minimum, due diligence should account for cyber, privacy and data management practices:
- Include privacy and IT risks in M&A risk appetite.
- Test the target company’s cybersecurity and assess its data management practices.
- Expand the privacy and cybersecurity clauses in M&A contracts.
- Review data collection notices and evaluate the target company’s compliance with representations.
- Evaluate data privacy coverage
Shift 4: Improve value capture
Given the complexity of deals, the value of successful and efficient post-close integration will continue to increase. Gartner research finds that 68% of corporate strategists believe poor integration is the primary source of lost deal value. For legal, this means less exclusive focus on deal terms and contracts and more effort on reducing variability in M&A value capture. Make sure to:
- Perform due diligence to inform culture fit and mitigate friction for employees. Consider contract structure for target company executives and team-building exercises for more junior employees.
- Conduct synergy assessments by deal type (channel, scope, scale, technology) and assign executive ownership for key revenue synergies to ensure value is not lost during integration.
Legal departments have a broad view into overall corporate operations. As companies make acquisitions, integrating core decision-making processes is critical to realizing deal value.
Shift 5: Clarify the deal narrative
Investors, governments and employees all need to be sold on the merits of M&A. Find and stick with a compelling deal narrative to maintain trust — now and in the future — among these groups. Anchor all messages around the deal’s rationale, the employee value proposition and the associated change story.
For general counsel, this means working with investor relations and HR to provide realistic and consistent messages to investors, governments and employees. A deal’s merits will be more readily accepted if the messaging is realistic and consistent.
Learn more: New risk management strategies
This article is excerpted from the 3Q19 issue of the Gartner Fi.r.st. Journal.