Download full Board Memo 2021
Technological resilience will be critical to success through the recovery era, and many companies see M&A as the best way to build their tech capabilities. However, tech acquisitions are not like traditional deals, with their value tied to a different set of factors and a complex array of regulatory issues combining to heighten execution risk.
Rather than hard assets or contracts, tech deals are typically driven by intellectual property, data and people. Boards looking to buy a tech company therefore need to understand what IP the target holds and how to secure rights over it, along with how the company collects personal data and moves it across borders. It’s essential to scan the horizon for evolving regulations that could impact future plans, as well as ensuring that the individuals who have driven the company’s success to date remain on board after closing. Here there are legal structures that can offer protection, but broader considerations such as cultural fit (particularly where people are moving from a startup to a corporate environment) will also play a part.
As with any deal it’s crucial to get under the skin of why the business is being sold and how it’s being sold (i.e., is it a merger, a tender offer or an asset purchase?) as well as assessing the deal terms against market norms. Then there are considerations in relation to fiduciary duties and whether there are any conflicts of interest for board members or senior executives, something that will be closely scrutinized if the acquisition is challenged in court.
From a regulatory standpoint, governments have been carefully reviewing the national security impact of technology transactions in recent years – not only because the innovations so sought after by businesses (artificial intelligence for example, or robotics) are also critical to military supremacy, but also because of the potential for acquisitions of things like large pools of personal data to pose a security threat. As its name suggests the Committee on Foreign Investment in the United States analyzes the security implications of acquisitions by foreign buyers. However, it’s no longer just buyouts the committee cares about – minority investments that give foreign persons even observer seats on the board of a US target, and joint ventures between US companies and overseas businesses, are now also in their sights. While CFIUS pays particularly close attention to Chinese investments, foreign deals (including from “friendly” countries) targeting sensitive US technology, data and/or infrastructure could also be subject to conditions or blocked, depending on the profile of the investor and the sensitivity of the target. And the same is true for US companies bidding for technology assets overseas, with national security front of mind for regulators across the world.
Antitrust authorities, too, have turned their attention to tech, with the Biden administration set to usher in increased antitrust enforcement which, when combined with a new era of international antitrust cooperation, will have a major impact on technology transactions. Many such deals involve large tech companies buying startups that could have become competitors had they remained independent, yet in the past these acquisitions have often flown under antitrust the radar because they were too small to trigger notification requirements (as is the case in Europe), or because the enforcement agencies simply chose to let them through (for example in the US). Now, however, with tech companies growing more powerful through the pandemic and widespread desire to protect consumers hit hard by the economic fallout, these so-called “killer acquisitions” will be reviewed to a much greater extent and are increasingly likely to be challenged. The European Commission has announced that it will now scrutinize deals which previously were too small by investigating any deal referred by a member state whether or not it crosses the reportability threshold, while we expect much closer engagement between the US antitrust agencies and their European counterparts as they look to align on “theories of harm” that will give both sides more chance of exerting their influence over deals.
What this means in practice is that boards of bidding companies (as well as startup founders and investors looking for an exit) will need to conduct a much more thorough antitrust risk assessment from the outset of a transaction and put in place contingency plans to deal with any regulatory challenges. Likewise, this increased execution risk must be reflected in the deal terms.
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