Exclusive Q&A with Steven De Schrijver On Mergers & Acquisitions

Can you talk us through the current M&A landscape in your jurisdiction?
 
Belgium’s strongest industrial sectors are the food and beverage industry (chocolate, beer, biscuits), manufacturing (automotive, carpet industry), transport and logistics (logistical centre of Europe, highly developed transport network and presence of international hubs of major logistics companies), the services industry (financial institutions, consultancy) and the  TMT sector (characterized by a lot of start-up companies and an excellent network infrastructure).
 
Belgium is a country with a lot of small and medium-sized companies, many of which are family-owned. These shareholders often prefer to have a majority share, or be at least a ‘reference’ shareholder, in order to be able to keep the control over their company. When, at a certain point in time, these reference shareholders are no longer able to make the necessary investments to support their company’s growth, they often prefer to sell their participation rather than to see it become diluted in the context of a capital increase, where another shareholder takes over control of the company. As a result, there are generally a lot of interesting investment opportunities for both industrial and financial investors.
 
Have there been any recent regulatory changes or interesting developments?
 
No noticeable regulatory changes occurred in the past few years in relation to M&A. A number of tax measures, however, may have had a slight impact on the M&A market.  The Act of 29 March 2012 introduced a 25.75% capital gains tax on the sale of shares by a Belgian company if the shares are sold within one year from their acquisition. The tax does not apply to physical persons selling shares. In addition, as from 1 January 2013, a tax of 0.412 % is levied on capital gains resulting from share sales, even if the shares were held for more than one year. These capital gains were previously entirely exempt. The tax, however, only applies to large companies and not to small or medium-sized enterprises.
 
Are you noticing any trends in terms of deal size, volume and/or sectors?
 
In 2014, there were approximately 190 Belgian M&A transactions (both domestic and cross-border). This represents a slight increase compared to the period 2011-2013, with approximately 170 M&A deals per year. Whereas in the first years after the 2008 economic and financial crisis, buyers were most often industrial players and private equity deals were hampered by a lack of available cash and the reluctance of financial institutions to provide funding, it appears that in the last 12 months the deal appetite of Belgian companies has somewhat increased and confidence in the private M&A market is starting to grow  again.
 
Whereas auctions previously were quite rare (only half of the transactions with a value over 100 million euro were auctions), currently three out of four such transactions are auctions. There seems to be a positive correlation between transactional value and the use of auctions.
 
The top sectors where most private M&A deals are traditionally concluded are those of Logistics, Llife sciences, Technology/IT and Food. The most noticeable transaction of 2014-2015 was the acquisition by Perrigo of Omega Pharma, the Belgian leader in OTC cosmetics and pharmaceutical products, for $3.6 billion.
 
What are the key risk areas in an M&A transaction, and what common mistakes do companies make during a transaction?
 
A common mistake made by parties to a transaction is to sign a letter of intent without duly consulting their legal counsel. As a result, letters of intent are often not sufficiently binding (from a seller’s perspective) or too detailed and binding  (from the buyer’s perspective). Parties also tend to forget to establish a clear framework for the negotiations, in which certain important elements are already agreed upon (e.g. price adjustment mechanisms, earn out, data room disclosure, etc.). These elements are often very important to the parties, and if they are not dealt with at the start of the transaction, they may become deal breakers.
 
In addition, parties sometimes tend to underestimate the time and resources that are required to successfully complete a transaction. This translates into incomplete data rooms, insufficient manpower to follow up on the Q&A process or lack of appropriate legal and financial counsel.
 
What is the current status of risk reduction and cost synergy in mergers & acquisitions?
 
As a result of the economic crisis, potential buyers tend to start with a high-level due diligence to ascertain whether the target meets the acquisition requirements and to reduce the initial costs. If the results of the high-level due diligence are satisfactory, a more extensive confirmatory due diligence is conducted.
 
Whereas financial experts used to look at the past track record of a company to determine its value and decide whether or not to proceed with the transaction, most buyers are interested in the future potential of the target and the synergies that can be created following the acquisition. This results often in a more thorough due diligence, that does not only focus on financial and legal aspects, but also on the business, HR and ICT of the company. Although this is a more expensive and time-consuming effort, it allows the potential buyer to get a clear and realistic view of potential synergies and make an early start with the post-acquisition integration process.
 
M&A typically involves a substantial amount of due diligence from the buyer. Given the current climate what aspects of due diligence should be focused on in relation to technology/intellectual property?
 
One of the noticeable trends is an increased focus of potential buyers on data privacy compliance, in particular in the technology sector. As more and more technologies involve the collection, processing and use of (large amounts of) personal data, it is important to carry out a thorough and detailed due diligence of the target’s data processing practices (data flows, purposes of processing and use, access to data, cross-border transfers, privacy policies, information practices, security measures, etc.). In relation to intellectual property, the use of open source or third party software in technology of the target should be subject to careful analysis, in order to avoid any third party claims.

Steven De Schrijver is a partner in the Brussels office of Astrea.  He has 20 years of experience advising Belgian and multinational companies on mergers and acquisitions, joint ventures, corporate restructurings, acquisition financing, private equity and venture capital, debt structuring and secured loans.  He has been involved in several national and cross-border transactions mostly in technology-oriented sectors.

Steven can be contacted by email on sds@astrealaw.be