2nd IBA Virtual Entrepreneurship Conference: Innovation and entrepreneurship in the next normal

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Natalija Lacmanovic
Lacmanovic, Zagreb; Co-Chair, IBA Creditors' Rights Subcommittee


Session four: The next normal in M&A, finance and governance for small and medium enterprises

Lead Committee

IBA Closely Held and Growing Business Enterprises Committee

Supporting Committees

IBA European Regional Forum, IBA Latin American Regional Forum, IBA Women Lawyers’ Interest Group, IBA Corporate and M&A Law Committee, IBA Law Firm Management Committee, IBA Technology Committee and IBA Young Lawyers’ Committee


Dovilè Burgiene  Walless, Vilnius; Vice Treasurer, IBA Corporate and M&A Law Committee

Alejandro Payá  Cuatrecasas, Barcelona; Senior Vice Chair, IBA Closely Held and Growing Business Enterprises Committee


Gabriella Covino  Gianni & Origoni, Rome; Chair, Corporate Governance Subcommittee, IBA Corporate and M&A Law Committee

Felix R Ehrat  former General Counsel Novartis Group and independent board member in various companies, Zug

Miguel Tornovsky  Pinheiro Neto, São Paulo; Special Projects Officer, IBA Latin American Regional Forum

Noreen R Weiss  MacDonald Weiss, New York; Membership Officer, IBA Closely Held and Growing Business Enterprises Committee


In this session, the speakers exchanged their views about current and possible future M&A trends and players. They concluded that 2020 was an unpredictable year and that the situation has been very similar throughout the world.

The end of 2020 was marked by a surprising increase in volumes of M&A deals, driven by pharmaceutical sector, technology, MedTech, logistic, e-commerce, infrastructure and telecommunication. Bankruptcies have been avoided, or at least significantly delayed, due to positive effects of these sectors and even more due to abundant state interventions. Private equity (PE) and venture capital (VC) funds have been significant market players. Governments are expected to make strategic invests, as a way of supporting economies.

In 2020, use of SPACs (special purpose acquisition vehicles) exploded in the United States as a faster way of exit. Environmental, social, and governance (ESG) criteria are an increasingly popular way for investors to evaluate companies in which they might want to invest. In the US, ESG initiatives are left to the private sector, whereas the European Union has already adopted regulatory framework dealing with ESG standards. M&A lawyers are advised to be on the watch out for the signs of inflation which might adversely affect M&A activity and are cautioned to add restructuring expertise into their teams.

Following new deal trends, cyber security, data privacy, intellectual property (IP), IT and tech matters will become paramount in due diligences and closing of deals. Compliance and anticorruption are still very relevant.

Under the influence of political and macro-economic trends, foreign direct investment regimes are becoming more restrictive across the globe. In the future we may expect even more uncertainty.

Adopting new skills, especially related to technology, will be the paramount for keeping up with the new trends and staying in the game.

M&A activity in 2020 in different regions: deal numbers and volumes

The session began with an overview of the M&A activities in 2020 in different regions of the world.

Miguel Tornovsky shared his view from the Brazilian perspective. In March, many deals which were in the pipeline were stopped due to uncertainty brought by the Covid-19 pandemic, but, by June, the overall volume of the deals increased. The increase was more prominent in certain industries. Other industries, which were more affected by Covid-19 pandemic, consolidated to survive. PE and VC funds took the opportunity to purchase the businesses which went on sale. As a result, 2020 was a much more active year than expected. The result was consistent with the previous years, but not much better than 2019. Very low interest rates led to boom of initial public offerings (IPOs), the proceeds of which were used for additional acquisitions.

According to Gabriella Covino, the situation across Europe was very similar to the situation in Latin America. In the beginning of 2020 M&A acquisitions stopped. In the second quarter acquisitions in certain sectors, led by the digital economy, increased. Overall, in 2020 there were fewer transactions but deal volumes were significantly higher, especially at the end of the 2020, led by telecom and technology sectors. There were less cross-regional deals and more local and regional deals.

Noreen R Weiss pointed out that the US is following trends in Europe and Latin America. Business activity stalled in second quarter 2020 but began accelerating in the summer and the trend continued. In fourth quarter the deal volume went up two per cent and valuations went up 18 per cent compared to the prior year, and up to 17-20 per cent as compared to the first half of 2020. Digital transformation is driving deals and a lot of healthcare-related deals. There is an increase in special-purpose acquisition vehicles (SPAC). Low-interest rates and lots of available cash are creating competition for companies and are impacting valuations.

In terms of specific Covid-related issues that have impacted M&A deals, governments introduced the pay-check protection program (PPP) loans, which impacted deal terms and timing and caused some deals to fail. Small business administration (SBA) gets involved on behalf of the government and adds even more complexity. When PPP loans are not forgiven the funds are escrowed and the SBA may need to approve loan terms of the financed deal.

Bankruptcies as a trend or not

When asked about insolvencies and restructurings that were expected, Miguel Tornovsky replied that, surprisingly, the wave of insolvencies was avoided. This can be attributed to the fact that banks were not willing to let companies go bankrupt, state aid (either to business or poor population), which together with a large volume of M&A deals and IPOs resulted in unexpectedly low bankruptcies and distressed M&As. This trend continues in 2021.

Most active clients and sectors

According to Miguel Tornovsky even established and traditional companies are turning to delivery systems, digital marketing, apps and e-commerce. There is increase of Fin Tech, distance learning, distance meetings and investments in digitalisation, all of which have been accelerated due to Covid. In terms of players, VC funds are becoming even more active than before. Traditional PE funds are making VC similar deals. The crisis has affected different industries disproportionally.

Gabriella Covino stated that situation is similar around the world. The most successful sectors are pharmaceutical, technology, MedTech, logistic, e-commerce, infrastructure and telecommunication. In Italy, the leisure, hospitality and entertainment industry were seriously affected by Covid crisis. There has been a high level of activity in the real estate market, VC and PE funds, and distressed M&A deals. Italy did not see many bankruptcies. A lot of countries adopted suspension provisions, due to which the distress has been postponed. Gabriella Covino envisages that, by the end of 2021, the distressed M&A market will become more active.

Felix R Ehrat addressed two aspects of the issue related to upcoming sectors and players. First aspect is the sector-specific – major sectors which are expected to further develop are healthcare and pharmaceuticals. This is not specifically Covid-19 related, it can be rather attributed to healthcare digitalisation, which was only accelerated by Covid. In Europe, a lot of activity in renewable energy sector, which is heavily supported by governments, tech sector, increasingly important is also shareholders activism and driving M&A activities. Second, upcoming trends are to be observed from the macroeconomic perspective. Valuations are up for 20 per cent. 50 per cent of all M&A activities are value destructive (according to the research in the range between 40 per cent and 60 per cent), being on the side of acquiror or acquiree. The remaining M&A deals create value. Higher valuations are not impacted by growth, which is declining in Europe and in the US (depending on the sectors). Cheap money is driving the value up and is contributing to the bubble, but it will not go on forever – the question is when this will stop. Heavy state subsidies will also go away, that is why it is advisable to start adding restructuring, but not necessarily bankruptcy skills and expertise.

Environmental, social and corporate governance

In the US it is interesting to observe how the concept of ESG has moved from the niche market, across a whole range of different markets.

ESG started about ten years ago by a small group of asset managers. Funds were being offered to retail investors with marketing names like the ESG fund, and sustainability and impact fund. The valuation of this distinct niche is about $500bn of the $80tr financial market. The data indicates that the performance of this sector is very good.

Today, we see asset managers across the board wanting to integrate ESG principals across their entire product line, and we are seeing that trend across the entire $80tr market. ESG is also present in the debt market is in form of ‘green bonds’ – here is the use of proceeds bonds to fund specified ESG-linked expenditures, and key performance indicator (KPI) and sustainability linked bonds (SLB) that have interest rate impact if the entity does not hit the metric. Metrics must be independently verifiable. In 2020, ESG debt exceeded $1tr. 

There are two approaches to ESG market. One approach is coming from the private sector. In the US, the Sustainability Accounting Standards Board (SASB), an independent non-profit organisation that sets standards to guide the disclosure of financially material sustainability information by companies to their investors) is leading the charge to set disclosure standards that are responsive to investors. They set industry-specific standards in 77 industries along five metrics, including:

  • environment;
  • social capital (community, data security);
  • human capital (labour, diversity and inclusion);
  • leadership and governance (ethics, compliance); and
  • business model and innovation (product design and lifecycle management, supply chain management, materials sourcing, physical impacts in climate change).

There is much progress, but it is still in the early stages of structuring.

Another approach has been to develop legal framework.

Europe has taken the lead with its regulations because it can impose harmonised rules in all Member States. The Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy regulation are both relevant for financial market participants/investors.

Key markets are developing mandatory disclosure requirement about climate: Japan, New Zealand, Taiwan and the United Kingdom are all supporting climate disclosure with respect to the Task Force on Climate-related Financial Disclosures (TCFD), which has 11 recommended metrics.

The IFRS Foundation in Europe is promoting sustainability reporting and is pushing to create a Sustainability Standards Board which was met with enthusiastic support across the financial industry. Recent speeches in the SEC give a clear indication that a voluntary framework is insufficient. The SEC is under increasing pressure from investors for high quality ESG information, and the EU regulation impact US companies because, for example, the SFDR and the EU Taxonomy regulation were designed to start with investment product disclosure, such as a fund, and that disclosure requirement would then apply to all the portfolio companies held by that fund, regardless of where the co is domiciled – so a large cap EU fund, for instance will catch companies all over the world. Investors are coalescing around the TCFD and SASB as foundational tools. The SEC seems to be prioritising climate activism, although investors are clamouring for a comprehensive ESG approach. There are debates about whether the disclosure standards should be single (financial materiality) or ‘double’ (meaning they should address financial as well as societal value). EU seems to be taking the double route, while the US are taking the single route.

We will not achieve one global standard as jurisdictional approaches to legislation are not compatible, but the goal is to come up with a coherent approach that works across jurisdictions. 

Sellers’ or buyers’ market?

Miguel Tornovsky pointed out that in all previous crises the trend was clear in terms of who is dictating terms and condition of the deal, buyers or sellers. The current crisis has had an unequal impact, which has depended on a particular market and how that market was affected by Covid-19 (eg, hospitality and tourism markets got frozen, FinTech is the sellers’ market. Valuations are super high and bids are very competitive.)

Possible return of inflation, how would it affect the current M&A boom?

Felix R Ehrat warned about the threat of inflation and how would the inflation influence M&A transactions. No one expects economic growth anytime soon. Many economists predict this is just the start of something that might have severe macroeconomic consequences. Increase in the money supply can result either in economic growth or inflation.

Since no one expects growth, the question is how inflation would affect capital markets. A possible remedy could be decreasing money supply, which would lead to higher interest rates. Higher costs of acquisition would discourage buyers from buying. Interest rate earnings would get higher and valuations would go down. Valuations are mostly based on the discounted cash flow method. Higher interest rates result in lower valuation. Theory is that higher interest rates are bad for capital markets and M&A activity. Advice to M&A lawyers is to pay close attention to the economic situation and inflation because it might have a direct impact on the daily work.

Market players’ trends: PE and VC funds, governments as strategic investors and SPACs

Gabriella Covino believes that PE, VC and distressed M&A funds will play an important role. This is the time for opportunistic buyers.

State interventions are provided in the form of financial support and in the form of investments. The form of the state interventions will depend on the sector. Governmental investments will be mostly in the sectors strategically important for the state (eg, energy and telecom). New restrictive FDI rules can be also expected.

Miguel Tornovsky noted rises in PE. Funds investing in smaller tickets and smaller businesses. In Brazil, the government didn’t have such an important role for businesses. It had granted support to poor citizens but not too enterprises, except insignificant tax breaks for businesses. Policies in some countries will lead the transfer of certain industries to other countries. Government might strategically invest in some sectors (eg, vaccine production).

Noreen R Weiss explained the emergence of SPACs and the reasons why targets and buyers find them attractive. These are shell companies without underlying operating business or assets other than cash and limited investments, including the proceeds from the IPO. SPAC uses the IPO proceeds to acquire a target, which merges into the SPAC. In case of reverse merger, the target becomes the public company. IPO proceeds must be used within 18-24 months to enable SPAC to find a target. Shareholders vote to approve the acquisition. If no target is approved, shareholders get their money back. In reality the investor is buying the SPAC management team. This trend is exponential.

More SPACs were listed in 2020 than in all the prior years in the history of the financial markets combined. 2020 had 200 SPACS and raised $82b. In just two – two-and-a-half months in 2021 we had 64 deals raising $90bn – a third of 2020s total in just two and a half months. We can say we were witnessing an absolute frenzy. SPACs are especially popular with PE firms. In today’s Covid world, the lack of road show fit right in.

Companies like SPACs as they are a faster way to exit. It only takes three to five months to go public and there is no road show, in comparison with over a year for a traditional IPO. It enables the companies to get a better valuation than a strategic M&A deal. SPAC sponsors can give the target more street credibility. Overall cost may not be lower because the SPAC usually negotiates a discount. The buyers (like PE firms) like them because they have a modest outlay of capital. Also, usually the SPAC is sponsor, like a PE firm, and only buys two to three per cent of the shares. The PE is raising capital from public investors, easier and more in control than raising with LP investors. It is likely that the SPAC trend will slow at some point.

Right now, there are over 400 SPACs chasing targets, and SPACs can buy company that is three to four times their size, so the hunt is on for $3.5tr of acquisition targets. Not all companies are good SPAC targets. There are only so many ‘SPAC ready’ targets because they need to be scalable businesses, and there is a limit to the amount of capital that investors will put into a SPAC. Investors will want to see ROI. We will probably start seeing fewer first-time sponsors. Sponsors are determining the criteria for the target, which may or may not also imply geographical location. There are also SPACs looking for targets outside the US.

In the opinion of Felix R Ehrat, the SPAC obsession should be over in two to five years. According to some studies there is 34 per cent leakage of the money invested in SPACs. There will be a big range between SPACs creating value and the others destructing value. Economic model is made just for a few targets (ie, fast-growing, scalable companies).

Deal terms and processes

In the experience of Gabriella Covino deal terms did not change significantly. Buyers have been seeking to revise MAC to include general adverse market conditions, which otherwise would not fall under MAC. Deal uncertainty and coping with social distancing – for the 2020 and 2021 have been very tough for M&A lawyers in Italy, where body language is extremely important, and it is difficult to close the deal without physical meeting. Hopefully, we will be back to physical meetings and combining them with video conferencing.

According to Miguel Tornovsky, certain issues which are novel to M&A lawyers became paramount in due diligences and negotiations of the deal terms. These include cyber security, data privacy, IP, IT, tech matters. Compliance are anti-corruption are still important.

Alejandro Payá pointed out that we are experiencing new protectionism in the three areas: state aid, foreign direct investment (FDI) control and sanctions regimes. This general trend was present before Covid, but the pandemic accelerated them.

Felix R Ehrat agreed that the protectionism is not the consequence of Covid. Instead, it can be attributed to political and macro-economic trends. World is being divided into two poles. The US is leading in the field of sanction regime because dollar is reserve currency of the world. This is here to stay and might further increase. Europe following the US example.

Corporate governance trends

In the US, the ESG agenda of boards, who are becoming concerned about corporate culture, environmental and social aspects more than governance per se. Shareholders are caring about board diversity that includes race and not just gender. NASDAQ proposed to require a company to have at least one woman, and one minority or LGBTQI+ person, on its board. The SEC guidance encourages disclosure about how a board or nominating committee includes diversity in its decision making.

ESG is making its way into Europe, where the focus is mostly on gender diversity, and, following the US example, also ethnicity. This process is likely to continue.

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