Seven Top Strategies for Negotiating a Merger and Acquisition Transaction - Ghana
November 15, 2009 By Kimathi & Kimathi, Corporate Attorneys
The article provide seven top strategies to help Board of Directors negotiate an acquisition transaction in order to secure the best value for shareholders.
Introduction
Much attention has been paid recently to the acquisition of Ghana Telecom by Vodafon. Most of this attention has focused on the transparency (or lack thereof) of the transaction. And some of the attention has also been focused on the price paid for the shares, which some analysts, consider to be inadequate. It is reported that some Ghanaians are in court challenging the terms of the acquisition.
In this article, I provide seven top strategies to help Board of Directors negotiate an acquisition transaction in order to secure the best value for shareholders and avoid the brouhaha that surrounded the Ghana Telecom-Vodafon deal.
I. The Board should establish a Special Negotiation Committee
The first strategy a Board faced with a merger and acquisition transaction is to establish a Special Negotiation Committee (the Committee) comprised of disinterested, experienced board members and negotiators to negotiate the price and the terms of the acquisition proposal from any interested acquirers.
It is important for the Committee to bear in mind that the negotiation process is a means to an end and will work best only if they identify their fundamental goals at the outset. The mandate of the Committee should be to secure the transaction offering the best value for the shareholders and the company.
Thus, understanding the basic strategy objectives to be derived from the transaction will make for better decision throughout the negotiations including when to stretch and when to stop on key issues such as price, integration, future investments and governance.
II. Engage Competent Advisors
The second strategy is for the Committee to engage appropriate and competent advisors to assist them in addressing major and sensitive matters. Aspects of this transaction where expertise may be relevant include financial evaluation, due-diligence, valuation of the company, sale process design and implementation, legal, tax, regulatory and compensation arrangements.
The use of expert advisors would be evidence of an effort by the Committee at conscientious, transparent and informed decision making. And the lack of such advisors may be seen as evidence to the contrary.
III. Avoid Conflict of Interest
The third strategy is for the Committee to be independent and particularly sensitive to spotting actual and potential conflict of interests. All individuals and entities working on the transaction with the company should be asked about them. If any conflicts are spotted, they should be carefully considered.
Whether completely avoided or expressly acknowledged when evaluating information or advice, the goal is to demonstrate that the transaction process was protected from bias due to any identified conflict.
Independence of the Committee also means that their decision is based on the corporate merits of the transaction before them rather than extraneous considerations or influences especially from politicians, social and political commentators.
IV. Do a thorough Review to determine the Best Price
The fourth strategy is to get the best price and a good deal. In order to determine whether the price being offered is adequate, the Committee must with the help of its investment bankers, legal and other advisors:
• review historical and present business and financial results of the company;
• review certain information including financial forecasts, relating to the business, earnings , cash flow, assets, liabilities and prospects of the company;
• Conduct discussions with members of senior management on the prospects of the company;
• review the market prices and valuation multiples for the shares and compare them with companies traded on the Ghana Stock Exchange;
• review the projections of the company for the next two to five years, ability to fund related capital expenditures and its core business;
• review business plans, status of research prospects of new products;
• review market or replacement value of assets;
• review management depth and succession;
• consider whether a better price may be obtained now or in the future;
• consider the impact on managers, employees, customers, suppliers and others that have a relationship with the company; and
• consider whether there are any legal or regulatory issues that are raised by the transactions;
On the basis of the foregoing, the Committee should also not hesitate to reject the acquisition offer if in their opinion, the price is inadequate, the timing is wrong, the deal may have an adverse effect on constituencies other than the shareholders or that the potential acquirer refuses to provide enforceable assurances that it will continue to invest in the company.
IV. Use the Closed Auction Strategy
The fifth strategy is to follow the closed auction method in order to obtain the best deal for the company. The Committee should ask all those interested to acquire the shares to make a sealed bid for the shares by a fixed deadline. The Committee with the assistance of its investment bankers and advisors should prepare a descriptive memorandum that is circulated to the prospective bidders.
Prior to the bidding, the Committee should send a draft contract and related documentation to all the prospective bidders. Interested bidders should be allowed to engage in limited due diligence and then submit their bids together with any comments on the draft contract. A closed auction often has more than one round and may involve simultaneous negotiations with more than one bidder.
A significant advantage of a closed auction is that it can be effective even if there is only one bidder. Because a bidder has no way of knowing whether there are other bidders, it can be expected to put forward its best bid. In addition, the Committee in a closed auction can negotiate with bidders to try to elicit higher bids.
VI. Keep Proper Records and apply the Front Page Test
The sixth strategy is to keep proper records and apply the ‘front page’ test. It is not enough for the Committee to do a good job, it must do it properly. The Committee should be aware that its decisions may be challenged in court.
Thus, contemporaneous minutes of the Committee’s meetings represent a primary record of what was done and how well it was done. Minutes should convey a meaningful sense of the subjects discussed, the written and oral material presented, the participation and interaction of the members of the Committee, key advice and recommendations provided and other indicia of the deliberative process in which the Committee engaged.
Good advisors would often prepare financial, legal and other presentations for the Committee to help them make rational well informed decisions. These materials are evidence of due care and can be useful memory aid for the Committee in litigation. These materials should be compiled, on a meeting by meeting basis, and be available to demonstrate the written information that the Committee considered in its deliberative process.
Naturally, the Committee would be faced with many decisions and pressures from the trade unions, politicians and litigants. As a sensitivity test, the Committee often will be well served by applying the ’front page’ test asking themselves whether they would be comfortable if the decision made were reported on the front pages of the Daily Graphic, the Wall Street Journal or The Financial Times.
This is certainly not the same as saying that how the newspapers report the Committee’s decision should indicate what decisions the Committee should make. But it does help to focus on how reasonable people may perceive the decision of the Committee and how the decision will be explained and with what effect.
VII. The Committee should be Vigilant and Stay Focused
The seventh strategy is for the Committee to stay focused. No transaction is done until closing and in some cases beyond. Issues continually arise, even after signing, which can negatively impact particular aspects of the deal or threaten the deal itself. Vigilance and maintaining pressure to move ahead can improve the odds of closing the deal.
Evidently, the tensions occasioned by the sale of Ghana Telecom could have been avoided, if the above strategies were considered and applied.
ABOUT THE AUTHOR: Kimathi Kuenyehia
Kimathi Kuenyehia is a Harvard- educated lawyer and the Senior Partner of the firm. He has been cited as one of the fast emerging smart corporate Attorneys in Ghana making his mark relatively early in his career. This year alone, he has advised on over four high profile acquisition transactions in Ghana worth millions of Dollars.
Kimathi‘s practice involves representing foreign investors in structuring, negotiating and implementing international project financing in Ghana. In the M&A arena, he mainly represents buyers and advises in transactions from larger strategic acquisitions to joint ventures.
He previously worked at the Legal Advisory Section of the International Criminal Court in the Netherlands advising the Court on contractual and commercial issues before setting up a corporate boutique practice in Ghana.
He is admitted to practice law in Ghana and New York and is currently co-authoring a book on Corporate Law and Practice in Ghana.
Copyright Kimathi & Kimathi, Corporate Attorneys
More information about Kimathi & Kimathi, Corporate Attorneys
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
Much attention has been paid recently to the acquisition of Ghana Telecom by Vodafon. Most of this attention has focused on the transparency (or lack thereof) of the transaction. And some of the attention has also been focused on the price paid for the shares, which some analysts, consider to be inadequate. It is reported that some Ghanaians are in court challenging the terms of the acquisition.
In this article, I provide seven top strategies to help Board of Directors negotiate an acquisition transaction in order to secure the best value for shareholders and avoid the brouhaha that surrounded the Ghana Telecom-Vodafon deal.
I. The Board should establish a Special Negotiation Committee
The first strategy a Board faced with a merger and acquisition transaction is to establish a Special Negotiation Committee (the Committee) comprised of disinterested, experienced board members and negotiators to negotiate the price and the terms of the acquisition proposal from any interested acquirers.
It is important for the Committee to bear in mind that the negotiation process is a means to an end and will work best only if they identify their fundamental goals at the outset. The mandate of the Committee should be to secure the transaction offering the best value for the shareholders and the company.
Thus, understanding the basic strategy objectives to be derived from the transaction will make for better decision throughout the negotiations including when to stretch and when to stop on key issues such as price, integration, future investments and governance.
II. Engage Competent Advisors
The second strategy is for the Committee to engage appropriate and competent advisors to assist them in addressing major and sensitive matters. Aspects of this transaction where expertise may be relevant include financial evaluation, due-diligence, valuation of the company, sale process design and implementation, legal, tax, regulatory and compensation arrangements.
The use of expert advisors would be evidence of an effort by the Committee at conscientious, transparent and informed decision making. And the lack of such advisors may be seen as evidence to the contrary.
III. Avoid Conflict of Interest
The third strategy is for the Committee to be independent and particularly sensitive to spotting actual and potential conflict of interests. All individuals and entities working on the transaction with the company should be asked about them. If any conflicts are spotted, they should be carefully considered.
Whether completely avoided or expressly acknowledged when evaluating information or advice, the goal is to demonstrate that the transaction process was protected from bias due to any identified conflict.
Independence of the Committee also means that their decision is based on the corporate merits of the transaction before them rather than extraneous considerations or influences especially from politicians, social and political commentators.
IV. Do a thorough Review to determine the Best Price
The fourth strategy is to get the best price and a good deal. In order to determine whether the price being offered is adequate, the Committee must with the help of its investment bankers, legal and other advisors:
• review historical and present business and financial results of the company;
• review certain information including financial forecasts, relating to the business, earnings , cash flow, assets, liabilities and prospects of the company;
• Conduct discussions with members of senior management on the prospects of the company;
• review the market prices and valuation multiples for the shares and compare them with companies traded on the Ghana Stock Exchange;
• review the projections of the company for the next two to five years, ability to fund related capital expenditures and its core business;
• review business plans, status of research prospects of new products;
• review market or replacement value of assets;
• review management depth and succession;
• consider whether a better price may be obtained now or in the future;
• consider the impact on managers, employees, customers, suppliers and others that have a relationship with the company; and
• consider whether there are any legal or regulatory issues that are raised by the transactions;
On the basis of the foregoing, the Committee should also not hesitate to reject the acquisition offer if in their opinion, the price is inadequate, the timing is wrong, the deal may have an adverse effect on constituencies other than the shareholders or that the potential acquirer refuses to provide enforceable assurances that it will continue to invest in the company.
IV. Use the Closed Auction Strategy
The fifth strategy is to follow the closed auction method in order to obtain the best deal for the company. The Committee should ask all those interested to acquire the shares to make a sealed bid for the shares by a fixed deadline. The Committee with the assistance of its investment bankers and advisors should prepare a descriptive memorandum that is circulated to the prospective bidders.
Prior to the bidding, the Committee should send a draft contract and related documentation to all the prospective bidders. Interested bidders should be allowed to engage in limited due diligence and then submit their bids together with any comments on the draft contract. A closed auction often has more than one round and may involve simultaneous negotiations with more than one bidder.
A significant advantage of a closed auction is that it can be effective even if there is only one bidder. Because a bidder has no way of knowing whether there are other bidders, it can be expected to put forward its best bid. In addition, the Committee in a closed auction can negotiate with bidders to try to elicit higher bids.
VI. Keep Proper Records and apply the Front Page Test
The sixth strategy is to keep proper records and apply the ‘front page’ test. It is not enough for the Committee to do a good job, it must do it properly. The Committee should be aware that its decisions may be challenged in court.
Thus, contemporaneous minutes of the Committee’s meetings represent a primary record of what was done and how well it was done. Minutes should convey a meaningful sense of the subjects discussed, the written and oral material presented, the participation and interaction of the members of the Committee, key advice and recommendations provided and other indicia of the deliberative process in which the Committee engaged.
Good advisors would often prepare financial, legal and other presentations for the Committee to help them make rational well informed decisions. These materials are evidence of due care and can be useful memory aid for the Committee in litigation. These materials should be compiled, on a meeting by meeting basis, and be available to demonstrate the written information that the Committee considered in its deliberative process.
Naturally, the Committee would be faced with many decisions and pressures from the trade unions, politicians and litigants. As a sensitivity test, the Committee often will be well served by applying the ’front page’ test asking themselves whether they would be comfortable if the decision made were reported on the front pages of the Daily Graphic, the Wall Street Journal or The Financial Times.
This is certainly not the same as saying that how the newspapers report the Committee’s decision should indicate what decisions the Committee should make. But it does help to focus on how reasonable people may perceive the decision of the Committee and how the decision will be explained and with what effect.
VII. The Committee should be Vigilant and Stay Focused
The seventh strategy is for the Committee to stay focused. No transaction is done until closing and in some cases beyond. Issues continually arise, even after signing, which can negatively impact particular aspects of the deal or threaten the deal itself. Vigilance and maintaining pressure to move ahead can improve the odds of closing the deal.
Evidently, the tensions occasioned by the sale of Ghana Telecom could have been avoided, if the above strategies were considered and applied.
ABOUT THE AUTHOR: Kimathi Kuenyehia
Kimathi Kuenyehia is a Harvard- educated lawyer and the Senior Partner of the firm. He has been cited as one of the fast emerging smart corporate Attorneys in Ghana making his mark relatively early in his career. This year alone, he has advised on over four high profile acquisition transactions in Ghana worth millions of Dollars.
Kimathi‘s practice involves representing foreign investors in structuring, negotiating and implementing international project financing in Ghana. In the M&A arena, he mainly represents buyers and advises in transactions from larger strategic acquisitions to joint ventures.
He previously worked at the Legal Advisory Section of the International Criminal Court in the Netherlands advising the Court on contractual and commercial issues before setting up a corporate boutique practice in Ghana.
He is admitted to practice law in Ghana and New York and is currently co-authoring a book on Corporate Law and Practice in Ghana.
Copyright Kimathi & Kimathi, Corporate Attorneys
More information about Kimathi & Kimathi, Corporate Attorneys
View all articles published by Kimathi & Kimathi, Corporate Attorneys
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
