Navigating complexities in asia 30 Aug 2016 Tips for a successful merger or joint venture

I have worked on more mergers, acquisitions and joint venture transactions than I can count, many of which were  worth billions to my client. During that time I have seen many pitfalls that could have been avoided with a bit  more due diligence, a little more caution and a constant willingness to reassess the transaction as negotiations progressed (even when a great deal of client time and money had already been invested).

It can be extremely difficult to create a joint venture that is successful over the longer term and not getting it right can result in significant time and resources being expended on resolving issues that could have been addressed up-front, restructuring the business and, in the worst cases, unwinding a venture that took significant time, effort and money to create. All of this distracts the parties from what they should be focusing on – growing and developing the business.

In my experience, the most spectacular failures in mergers or joint venture arrangements are caused by a misunderstanding (or refusal to understand) the goals, motivations and objectives of the other party.

For parties considering entering into a merger or joint venture arrangement, these are my top 11 issues to address.

1. Pick the right partner.

Mergers and joint ventures have a lot in common with a marriage. You need to ensure that you are compatible with  each other. Just as you and your spouse probably discussed religion, family circumstances, and your hopes and dreams before deciding to tie the knot, so too should you be  discussing your future business partner’s goals, objectives  and reasons for entering into the alliance. Are you doing this  just for an injection of capital? Is this a path to an IPO? Is this a long term strategic arrangement that is key to other parts  of your business? How key is the other party to the success of the venture? Do you need to do the deal in order to satisfy regulatory requirements in a new jurisdiction? Why is the  other party interested in doing a deal with you? What do  they hope to achieve from it? And what are they willing to  contribute to it? Is that consistent with what you want to achieve or expect them to contribute? 

You need to ensure that your goals are not inconsistent with their goals. For example: they may want to build the business and then exit through an IPO but you see it as a long term strategic business opportunity that that you want to develop together with them over many years. Unless both parties are forthcoming about their goals and objectives, and those goals and objectives are aligned, you should probably not proceed with the deal – At least not in the form of a merger or joint venture. 

2. Consider whether an acquisition is more appropriate

Transactions in which one party is clearly taking control and ownership of the other are usually significantly more  straightforward and prone to longer term success than a  merger or a joint venture. Research suggests that this is  even more likely to be the case where there is a high degree of overlap between the two parties. That is not to say that  mergers and joint ventures can’t and don’t succeed or that they are never the most appropriate transaction structure. But too often parties don’t want to “upset” the other party and so do not even consider that a possible buy-out of the other may be a more appropriate transaction. I have been involved in as many purchase arrangements as I have been joint ventures and, while in an acquisition feathers may get ruffled, it means a lot of the hard decisions are made up front. Acquisitions tend to require a number of issues to be dealt with at the outset – they simply cannot be postponed. People and systems issues, such as what terms of employment staff should move to or which IT system to use, are relatively straightforward (or at least less controversial), there is no need for any tip-toeing around choosing who will be given senior roles, financial decisions are easier to make, and decisions affecting the future of the company can be made nimbly. There is also no question of who is in charge. 

Unfortunately these issues are often deferred in joint venture discussions, to be something the parties will “sort out” once the deal is signed. This is often because the issues are deemed too difficult or too sensitive during the negotiations because they may damage the relationship at what is perceived to be a delicate phase in its early development. Unfortunately, these issues usually remain just as controversial after the deal has been signed! 

3. Engage in the due diligence process

It may not be the most exciting or exotic part of the transaction but due diligence is key to its success. Due diligence will enable you to constantly test and reassess the transaction and to ascertain what will be required to combine the parties’ businesses and the likelihood of success. It is much more than a box ticking exercise. 

You should take note of your adviser’s due diligence report(s). These can be hundreds of pages in length and, let’s face it, you may not find them the most interesting or inspiring of documents to read. Your advisers are paid to find problems and detail risks during due diligence. But this doesn’t mean you should discount a report (or multiple reports) detailing a raft of issues with the deal and/or identifying risks. I encourage you and your in-house legal team to pay careful attention to the due diligence reports and make a reasoned and informed view of their contents. Don’t get caught up in the romance or excitement of the deal, or the fact that you are “too far along”. Don’t allow yourself to be infected by the deal fever that will no doubt surround you. I have seen many high profile deals that have been seriously questioned in hindsight because key risks and issues were dismissed during the diligence and assessment period. It’s not too late to avoid a catastrophic deal until you sign on the dotted line. And there will always be another deal. 

Of course, whilst due diligence will often continue until right before the agreement is signed, you should engage with your advisers, and request draft or interim reports, throughout the process. If there is a major issue then you should consider it early, before you feel you are locked in to proceed with the deal. Don’t feel that it’s “this deal or no deal”. And don’t treat the diligence process as a mechanical process that is simply intended to validate a decision that has already been made. I have seen these approaches lead to disastrous results. Money spent on detailed due diligence, even if it convinces you not to proceed with the deal, is money well spent.

4. Understanding the market in which you are operating

I have handled a large number of matters involving new or  relatively inexperienced entrants to Asia. All too often I have seen significant risks dismissed on the basis that it is simply “the way things are done in Asia”. I’m here to tell you that if the risks are high, it is not just “the way things are in Asia”. It’s true that things are not always the same in parts of Asia as they are in Australia, Europe or the US. But a bad deal is a bad deal, no matter where in the world it takes place. Generally if the risks seem high then it is because the deal is risky. If a deal wouldn’t fit your risk appetite in your home jurisdiction, that will not change simply because the deal is in another jurisdiction. It still will not fit that risk profile. This doesn’t mean that you shouldn’t do a riskier deal. It does mean you should not simply accept such risks without understanding them and properly considering whether they are necessary. It may be that your company has a different risk appetite for certain deals, but if that is the case then it should be openly acknowledged and the transaction should be assessed in that context. Yes, things are sometimes done differently here, but all too often I see that fact being used as an excuse for not properly assessing the deal, the market and the risk. difficult to read online.

5. Prepare for negotiations

On a number of occasions I have seen large teams of negotiators assemble in large, ornate conference rooms to commence negotiations, only for it to become apparent that they are completely unprepared, have not read the documents or formed a consistent view on their position on key points. 

In order to get the best possible outcome from your negotiation, it is essential to be fully across the proposed terms AND to understand the position that those on the other side of the table are likely to take. It is crucial to understand not only what your “must haves” are, but also what you are trying to achieve from them. If you are expecting your lawyers to play a role in the negotiations, then they need to understand what your real objectives are. For example, what do you expect to achieve for your company from this transaction? Are there long term strategic objectives or is it merely a shorter term financial transaction? In addition, you should find out as much as you can about the other party. What is their motivation for this deal? What is their history with similar transactions? Are there economic factors which are unduly affecting the positions they may take? How does your preferred outcome impact on the tax position of the other party? 

To maximise your chances of reaching a successful outcome you need to understand the logic behind every position that you wish to take, and you need to be able to explain it and justify it. If you do this, and you understand its impact on the other party, then it will be much easier to justify your position effectively, or to agree to acceptable compromises, during a negotiation.  

6. Have a senior team member from your internal team present during negotiations

This can be extremely important when you need someone to make that “big picture” decision, or decide to suspend negotiations. If you don’t have someone involved in negotiations who has authority to make decisions, then it will not be a very productive or successful negotiation. In Asia in particular, I often see junior “negotiators” who have simply been given a list of five “must haves” and a corresponding list of “must not agree tos” – usually determined by a very senior person who doesn’t necessarily understand all of the detail of the transaction. It is usually easy to spot when this has happened: the negotiator fights for a point that doesn’t actually matter or benefit their side of the transaction, and if you work out what their lists contains, you should be able to get everything you want. 

You should also ensure that your deal team is empowered to call for a reassessment of the transaction. 

I’ve been in negotiations where someone on our side was senior enough to suspend the negotiations and call for a reassessment. I’ve also been in negotiations where it was clear to me the transaction should have been suspended, but there was no-one able to make that call or comfortable raising it to a senior level in their organisation – so the negotiation team proceeded to spend weeks negotiating a deal the Board was never going to approve. 

If you can’t have someone senior on the deal team then make sure they are contactable and approachable. Of course this doesn’t necessarily mean the most senior person must be involved in the routine negotiations, but having someone with authority and the respect of the others involved is crucial. 

7. Have a detailed business plan outlining both start-up and business-as-usual phases

If you decide to proceed with the deal, ensure that you and your soon-to-be-partner agree on a detailed business plan. I’ve seen many business plans which didn’t provide any real guidance on the operation or requirements of the venture. If there is no detailed business plan then the minute there is any disagreement, the business will lose direction. The initial plan needs to cover the start-up phase and some period of normal operations. If it doesn’t, you’ll find yourself left without a plan and without a direction. Many ventures have provisions which allow the business plan to “roll over” if the parties can’t agree how it should be updated, but you can’t roll over plans designed for initial start-up periods once that time has passed. 

Similarly, I have seen several ventures in which the parties have been unable to agree on how to update or revise the business plan and this has led to years of disputes. 

8. Never delay making the hard decisions

I have heard too many times “we don’t need to deal with that issue right now” and “we can work that out after the deal is done”. Here is my advice: you should, because you won’t. 

Tough decisions need to be made during negotiations. If left until after the deal is done, politics will invariably get in the way and the leverage will have disappeared. I have seen the allocation of senior positions and resolution of control issues remain unresolved for five years, because no one was prepared to take the political hit needed in order to make the hard (and correct) decision upfront. I have also seen ventures operate with diverse, inconsistent strategies for years because making a decision to focus on one area, or to jettison another, would have upset stakeholders on one side of the venture more than the other. Staff and customers see through it, it undermines the company’s ability to perform effectively and ultimately impacts on financial performance and shareholder confidence. If you feel that addressing these issues upfront may undermine the prospects of doing the deal, then perhaps it’s a deal that shouldn’t be done because your views are not aligned. 

If you take away only one thing from this article it would be this point – spend the time up front. If you do, you will maximise your chances of a successful joint venture or merger. Without spending time initially to take some hard decisions, I would suggest your chances of a successful venture are around 20 per cent. Sure – it might limp along for a few years, but it won’t thrive.

9. Beware the CEO wanting to "leave a legacy"

I’ve been involved in deals where the CEO wanted to make his/ her mark or leave his/her legacy before disappearing off into the sunset and leaving others to deal with the aftermath. Ego has no place in a merger or joint venture, but it is sometimes an unavoidable aspect. If you are the in-house legal counsel on such a deal, your role is to recognise when a CEO, Company Chairman or senior executive is determined to push through a “landmark” deal for reasons that have more to do with his or her personal pride, legacy or promotion prospects and less to do with the overall benefit to the company. If this seems to be the case, your role should be to point out the reasons not to do the deal. You can only try. 

10. Never underestimate the importance of culture

So you’ve considered all the points above and you’ve decided to proceed with the transaction. Before you do, consider the compatibility or otherwise of your respective company cultures. Incompatible cultures can undermine any management attempts to make the marriage work. Staff can become disillusioned and confused about the venture’s direction. Good staff can easily find jobs elsewhere and will leave to avoid an uncomfortable and confusing workplace, and you’ll find yourself left with mediocre talent. 

Culture is generally something that people don’t focus on because it is considered too nebulous or “touchy-feely”. If you can’t describe your culture now, you need to find out what your culture is. No two company cultures are the same and within a single company there can exist multiple cultures. 

Simply looking at a company’s published set of high level Value Statements is not enough. Believe me, I have seen proposal documents which say that there are no significant cultural differences between the parties because both parties have Value Statements that say something like: “We strive to increase shareholder value by delivering high quality products to our customers”. That is not a culture. 

Culture is a much more intrinsic and fundamental part of an organisation. It includes the way things are done and the way people think about things. It depends on all levels of management, as well as historical factors, local/geographic factors, HR policies, investment policies, expectations of how staff are treated by management and much more. It includes how staff and management interact with each other and the expectations put on staff. 

How does your culture fit with the culture of the other party? What are the similarities and differences? If there are differences, how important are they, can one party “giveway” on their culture, are the differences insurmountable and, if not, how will they be addressed or managed? Before implementing the deal, you should have a detailed understanding of the differences and similarities and a detailed plan to either address or manage those differences. 

11. Use your advisers wisely

First of all, you need to be comfortable with your choice of advisers: Have you worked with them before or are you familiar with their working style? Have they done deals of a similar nature, magnitude and complexity? Do they have resources within their network that they can draw on as needed? Are they people you trust? Do they give commercially sound advice? The answer to all these questions needs to be yes, otherwise you should reconsider your choice of advisers. 

I’ve seen a number of transactions where a party’s advisers and negotiators were clearly in over their heads. A frequent trait for these advisers and negotiators is to bluster their way through a negotiation using threats, focus on immaterial minutiae, use stonewalling tactics such as saying they have not read the key transaction document, maintain an untenable position on the, often incorrect, assertion that “this is how it’s always done”, claim that they are not aware of or did not understand their client’s commercial position, and waste time on insignificant or irrelevant issues. 

The best advisers and negotiators are generally ones who are reasonable and want to get the deal done as quickly and smoothly as possible with a favourable outcome for all concerned. Make sure your lawyer is one of those, and doesn’t negotiate by trying to strong-arm the other side with hackneyed approaches to negotiation. It only wastes your time and money and prolongs getting the deal done. I’m yet to see such tactics result in a better outcome for either side. It generally just highlights the incompetence of the other team. 

To be an expert in this space not only do you need to have been involved with a lot of (relevant) deals, but you also need to have seen how certain strategic issues have been worked through in the past and what has happened subsequently – after the deal has been implemented. I have seen many times what happens in joint ventures when they break down and how deals done many years ago can play out in those circumstances many years later. Parties can often be caught up in deal fever and can be reluctant to consider that the venture may have difficulties, however your advisers can have an enormous amount to offer here and I would encourage you to take advantage of that – otherwise you are not getting full value from them. 

In short, the only reason to enter into a merger or joint venture is if it makes good business sense, if both sides have consistent objectives and reasons for doing the deal, if both sides have agreed a detailed business plan, if the hard decisions are made up front leaving no surprises in the future, and if the due diligence and analysis support the deal. 

If all of those things are in place, congratulations – you’re on your way to a successful venture!