Editor: Please describe your practice at Weil.
Gilroy: I am a partner in the M&A group at Weil. I sit in the New York office and have a diverse practice working with strategic corporate clients and private equity clients doing cross-border and domestic transactions. I usually work on large- to mid-cap-size deals.
Editor: Are you seeing strategic deals to a greater extent than you are seeing financing-type deals?
Gilroy: There is a general increase in activity and more competition for transactions from both strategic players and financial sponsors. However, I am seeing a distinct increase in financial-sponsor deals, especially with high-yield and bank loan markets getting more robust. As compared with several years or even months ago, when you might have had one bidder for a target company, now there are a number participating in a robust auction.
Editor: I assume you are no longer seeing any of the mega-deals of former times.
Gilroy: We are not seeing anything similar to the mega- deals of the 2007-2008 vintage, when there were mega-multibillion-dollar financial sponsor LBOs often combining the resources of several sponsors. And while the majority of deals today are smaller LBOs or smaller partial acquisitions and investments, we did see a few big deals in 2012 and expect to see a few in 2013 as well.
Editor: What about distressed companies? Are you seeing those being purchased at bargain basement prices, as was true a couple of years ago?
Gilroy: In my experience there has been a decline in that area from two years ago. Most of the companies that were really in trouble have dealt with their issues through refinancings or sales or by other means.
Editor: What types of financings are you seeing for those financial deals – senior debt, seller debt or combinations of common stock and debt?
Gilroy: What we are seeing is a mix of high-yield and bank debt as the typical financing structure in a transaction.
Editor: What level of equity is now required by financing institutions in 2012 deals as compared with deals done in 2010 and earlier in the recession?
Gilroy: A couple of years ago you could get deals done with 30 percent equity and 70 percent debt, but now I am seeing a ratio of debt-to-equity in the range of 50/50 in financial-sponsor deals. The levels of leverage have come down. There’s more equity in deals today than in the past.
Editor: How have macroeconomic circumstances affected the terms of transaction documents? Are indemnities and holdbacks longer as well as escrows larger?
Gilroy: In my experience, there is still a valuation gap between buyers and sellers, although it is narrowing. As long as 18 months ago, valuations were so far apart that you couldn’t get deals done. Now those gaps are narrowing to the extent that deals can get done. Nonetheless, the financial terms of deals are still pretty tight, and in my experience clients are very focused on all the deal provisions that could impact the ultimate economics of the deal – not just price. Another common practice is for buyers to look at ways to defer payment of the full purchase price, such as using hold-backs or earn-outs. These arrangements allow the buyer to pay a portion of the purchase price up front but delay payment of the full purchase price for the target company until certain financial or other important milestones are met. This gives buyers comfort that they are only paying full price for the target company if the benefits of the acquisition are fully realized. For example, I have one client in the healthcare space who has offered a structure whereby he would make an initial partial investment in the target company combined with an option to buy the remainder of the company at some point down the road, once certain milestones occur and the value proposition for the company is realized. In the past my client might have paid the whole amount up front and then taken all of the risk on whether or not the milestones were achieved. That’s just one example of the creative structuring that gets done in this type of macroeconomic environment.
Editor: In terms of the interim operating covenants in today’s deals, I assume you’re seeing much tighter protections.
Gilroy: Absolutely. When valuations are tight, buyers want to squeeze out every last dollar of value on the transaction. Buyers will use more strict interim operating covenants to make sure the target company is operated as expected during the pendency of the deal and that the bargained-for value is delivered at closing. For example, once a deal is signed, the buyer wants to be assured the target company is not permitting any extra capital expenditures or acquisitions outside the ordinary course. These items, which may not be an issue in a better environment, can become real value issues in a deal because you’re so tight on the price that you can’t have any leakage.
Editor: In what industries are you seeing the greatest activity in M&A?
Gilroy: Right now, healthcare is predominant on my list. We recently announced a transaction involving Medicis Pharmaceutical Corporation in a $2.6 billion sale to Valeant Pharmaceuticals International over the Labor Day weekend. Also, other clients in the healthcare space have been active in M&A. Energy is also quite active with the explosion of interest in gas and oil well fracturing. I’m surprised there are not more deals in the financial services sector as a result of recent legislation favoring acquisitions of smaller firms. Our client, Leucadia National Corporation, just announced this week a merger with Jefferies Group Inc., a large investment bank. Leucadia has a long history with Weil. Last year the firm handled their purchase of National Beef Packing Company, and it is currently involved in their representation in the Jefferies transaction. We worked on that deal during the recent hurricane, drafting in dark rooms and running from outlet to outlet to recharge our cell phones to conduct conference calls.
Editor: What particular due diligence steps should a U.S. client take in a cross-border merger in terms of FCPA and other regulations governing the acquired target?
Gilroy: In any cross-border deal the FCPA is always an issue for clients. U.S. clients are very focused on it, being concerned about the liability and the reputational issues associated with any FCPA violation. I think the answer is that you need to do specific and targeted due diligence that is customized, depending upon the business that you’re buying and the jurisdiction that you’re in. Obviously some jurisdictions raise a lot more issues than others, so you need to know the jurisdiction you’re dealing with. My recommendation is that you ask specific questions regarding potential FCPA issues early on in the process and bring issues to the forefront so they get addressed properly. Try to avoid finding out about problems at the last minute that you then have to struggle to solve. One of the other hard things about FCPA due diligence is that the questions that you have to ask are often tough questions about sensitive matters on sensitive issues for a company to disclose, so you have to be able to do that in the right way to get the results and the answers you are looking for. (As you probably know, additional guidance on the FCPA was released on Wednesday, November 14, for which Weil has issued an advisory.) For example, there are potential FCPA issues on a transaction I am currently working on. We’re asking the questions and getting to the bottom of the issues as soon as we can because if you find something questionable, that could end the deal pretty quickly if you don’t structure around it or find the right solution.
Editor: How has the global recession and uncertainties affecting particular areas such as the Eurozone impacted the volume and magnitude of M&A?
Gilroy: Uncertainty means fewer deals. Uncertainty on the part of buyers and on the part of sellers just means that it’s tougher to find agreement and have a transaction. My particular practice has ebbed and flowed this year right along with the headlines on the financial crisis and issues in Europe and around the world.
Editor: What areas of the world are the most active in terms of M&A?
Gilroy: I think emerging markets tend to be busier – Latin America, for example. In addition, the fact is that due to the current global economy and debt issues, all governments are spending less money on infrastructure projects, yet these projects have to get done. This may lead to the use of private money either alone or in partnership with governments for building infrastructure, such as toll roads or bridges. For these projects we could see more M&A activity in the infrastructure area.