2011: Checklist for successful acquisitions in US

By Adam O. Emmerich & Robin Panovka, Wachtell, Lipton, Rosen & Katz

Cross-border M&A volume increased in both absolute and relative terms in 2010, representing not only an increasing portion of both US and global M&A, but also including a more diverse variety of industries, target countries and sources of acquisition capital than in prior years. Almost 42% of the US$2.7 trillion of M&A in 2010 was cross-border, compared to less than 27% of US$2.2 trillion in 2009. Emerging markets are driving an increasing share of crossborder activity, particularly in the natural resources and financial sectors, but also in acquisitions of household names and of sophisticated industrial enterprises in developed economies. At the same time, protectionist attitudes continue in many markets, and the difference between success
and failure often depends on a well thought-out strategy and impeccably executed tactics.

In the United States, despite a few well-publicized examples of thwarted deals, sophisticated market participants have come to understand that most acquisitions can be effected through careful advance preparation, strategic implementation, and deal structures that anticipate likely concerns. The most notable exceptions to the general rule are the defense sector and other highly-
sensitive areas, such as sophisticated technology sectors. However, the US remains fundamentally an open market that welcomes foreign capital and investment.

As with purely domestic transactions, cross-border deals involving investment into the United States are more likely to fail because of poor planning and execution than due to fundamental legal restrictions or requirements.
Following is our updated checklist of issues that should be considered in advance of any acquisition or strategic investment in the US Of course, each cross-border deal is different, and implementation of the checklist will depend on the facts, circumstances and dynamics of the particular
situation:

• Political and Regulatory Considerations. Even as concern over high levels of US indebtedness and joblessness, and perceptions of declining American competitiveness, continue to fuel concern and political upheaval, foreign investment in the US remains generally well received and has rarely become a political issue in the context of specific transactions. Nevertheless, prospective non-US acquirors of US businesses must undertake
a comprehensive analysis of the US political and regulatory implications well in advance of any acquisition proposal or program, particularly if the target company is in a sensitive industry or if the acquiror is sponsored or financed by a foreign government.

It is imperative that the likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties be thoroughly considered and, if possible, addressed strategically prior to any acquisition or investment proposal becoming public. Similarly, the potential regulatory hurdles require sophisticated advance planning. In addition to securities and antitrust regulations, acquisitions
may be subject to CFIUS review (discussed below), and acquisitions in regulated industries (e.g., energy, public utilities, gaming, insurance, telecommunications and media, financial institutions, transportation, and defense contracting) may be subject to an additional layer of approvals. Regulation in these areas is complex, and political opponents, reluctant
targets and competitors may seize on any perceived weaknesses in an acquiror's ability to clear regulatory hurdles.

• Transaction Structures. Acquirors should be willing to consider a variety of potential transaction structures, especially in sensitive deals. Structures that may be helpful in particular circumstances include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase to greater ownership or governance over time; making the acquisition in partnership with a US company or management,
or in collaboration with a US source of financing or co-investor, such as a private equity firm; or utilizing a controlled or partly-controlled US acquisition vehicle, possibly with a board of directors having a substantial number of US citizens and a prominent American as a non-executive chairman. Use of preferred securities (rather than ordinary common stock) or structured debt securities should also be considered.

Even more modest social issues, such as the name of the continuing enterprise and its corporate seat, or the choice of the nominal acquiror in a merger, can affect the perspective of government and labor officials.

• CFIUS. Under U.S. federal law, the Committee on Foreign Investment in the United States (CFIUS) - a multi-agency governmental body - has discretion to review transactions in which foreign acquirors could obtain "control" of a US business or in which a foreign acquiror invests in US infrastructure, technology or energy assets. Four useful rules of thumb in dealing with CFIUS are:
- first, in general it is prudent to make a voluntary filing with CFIUS if the likelihood of an investigation is reasonably high or if competing bidders are likely to take advantage of the uncertainty of a potential investigation;
- second, it is often best to take the initiative and suggest methods of mitigation early in the review process in order to help shape any remedial measures and avoid delay or potential disapproval;
- third, it is often a mistake to make a CFIUS filing without advance  scussions with US Treasury and other officials and relevant parties. CFIUS is not as mysterious or unpredictable as some fear - consultation with U.S. Treasury and other officials (who generally want to be supportive and promote investment in the US economy) and CFIUS experts will generally provide a good sense of what it will take to clear the process; and
- fourth, a comprehensive and coordinated communications plan is essential so that in addition to discussions with U.S. Treasury and other CFIUS agencies and officials, appropriate outreach can be made to various members of Congress and their staffs.

• Acquisition Currency. While cash remains the predominant (although not exclusive) form of consideration in cross-border deals, non-U.S. acquirors should think creatively about offering US target shareholders securities that allow them to participate in the resulting global enterprise. For example, publicly listed acquirors may consider offering existing common stock or depositary receipts (e.g., ADRs) or entering into dual-listing arrangements. When target shareholders will obtain a continuing interest in an acquiror or surviving corporation that was not already publicly listed in the United States, the board and management of the non-US party should expect greater focus on the corporation's governance and other ownership and structural arrangements - relative to non-U.S. jurisdictions - including heightened scrutiny on large shareholders, especially any de factocontrollers or promoters. That said, it is important to note that non-U.S. companies listed and traded in the US are frequently not exposed to the full panoply of U.S. SEC and stock exchange rules applicable to domestic companies and that listing, liquid trading and access to the capital markets in the US  
continues to offer a variety of advantages. Bottom line, while the use of equity in cross-border transactions can raise significant logistical and market-acceptance issues, we expect that the same forces which will likely
lead to a greater prevalence of domestic stock-for-stock transactions will also lead crossborder merger partners to explore stock transactions. To the extent cash is part of the acquisition currency, given the time necessary to complete a cross-border transaction, appropriate currency hedging should be considered.

• Collaboration. Most obstacles to a deal are best addressed in partnership with local players whose interests are aligned with those of the acquiror. If possible, relationships with the target company's management and other local forces should be established well in advance so that political and other concerns can be addressed together, and so that all
politicians, regulators and other stakeholders can be approached by the whole group marching in tandem.

• M&A Practice. It is essential to understand the custom and practice in U.S. M&A transactions. Successful execution is more art than science, and early involvement by experienced US advisors will be important. For instance, understanding when to respect - and when to challenge - a target's sale "process" is critical. Knowing how and at what price level to enter the discussions may make or break a proposal - in some situations it is prudent
to start with an offer on the low side, while in others offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues. In sensitive transactions, hostile
maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to make something happen. US takeover regulations differ in many respects from those in non- US jurisdictions; for example, the mandatory bid concept common in Europe, India and other countries is not present in US practice. Permissible deal protection structures, pricing requirements and defensive measures available to US targets also
may differ from what the non-US acquiror is accustomed to in deals in their home countries.  Acquirors must also be sensitive to the distinct contours of the target board's fiduciary duties and decision-making obligations under U.S. law.

• Distressed Acquisitions. Given the opportunities to acquire distressed companies or assets that still exist in certain sectors, potential acquirors should familiarize themselves with the legal frameworks that apply to bankrupt or insolvent companies and the accompanying risks and benefits. This is particularly important in the US, where distressed M&A is a more fully-developed specialty, with its own well-developed sub-culture of distressed-sophisticated investors, lawyers and financial advisors. When evaluating a
distressed target, acquirors should consider the full toolbox that may be available, including acquisition of the target's fulcrum debt securities that are expected to become the equity through an out-of-court restructuring or plan of reorganization, acting as a plan investor or sponsor in connection with a plan, backstopping a plan-related rights offering, or participating as a bidder in a court-supervised "Section 363" auction process, among others.
Acquirors also need to consider the differing interests and sometimes-conflicting agendas of the various constituencies, including bank lenders, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection. During the middle part of the last decade, many loans and other credit products that previously would have remained on the books of a small group of the issuer's relationship
banks were instead syndicated to large numbers of investors, or securitized. By severing traditional bank/borrower relationships and multiplying the number of interested parties, these practices have made restructuring and rescue-investment negotiations far more complex in the current environment. Prepared and well-positioned acquirors can operate at a significant strategic advantage by proceeding with speed and agility with respect to a distressed target. (See our Distressed M&A Outline for a detailed discussion of these issues.)

• Financing. Ongoing volatility in the credit markets has increased scrutiny on the financing aspects of transactions. Important questions to consider include where financing with the most favorable terms and conditions is available; how committed the financing is; which lenders have the best understanding of the target's business; whether to explore alternative, non-traditional financing sources and structures, including seller paper; and how comfortable the target will feel with the terms and conditions of the financing. Note that under US law, unlike the laws of some other countries, foreign acquirors are not prohibited from borrowing from US lenders, and they generally may use the assets of US targets as collateral. Likewise, the relative ease of highly-structured financing in the US market should be a benefit to the incoming acquiror, with both asset-based and other sophisticated securitized lending strategies relatively easy to implement and available in the market.

• Litigation. Shareholder litigation is routine in transactions in the US and is generally not a cause for concern. In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation is settled for relatively small amounts or other concessions, with the positive effect of foreclosing future claims and insulating the company from future
liability. Sophisticated counsel can usually predict the likely range of settlement costs, which should be viewed as a cost of the deal. In all cases, the acquiror, its directors, shareholders and domestic reporters and watchdogs should be conditioned in advance to expect litigation and not to view it as a sign of trouble.

• Tax Considerations. Tax issues may be critical to structuring the transaction. Non-US acquirors contemplating a dividend stream flowing from the US target should structure with a view toward withholding tax requirements and should consider the possibility of utilizing a subsidiary located in a country that has a favorable tax treaty network or other tax attributes that will minimize the taxes imposed on the dividends as they cross borders.
The relative proportions of debt and equity will be important from a tax perspective, as will obtaining US interest deductions on acquisition in debtedness. In tax-free (stockfor- stock) acquisitions, special rules applicable to foreign acquisitions may be relevant.

• Disclosure Obligations. How and when an acquiror's interest in the target is publicly disclosed should be carefully controlled and considered, keeping in mind the various ownership thresholds that trigger mandatory disclosure on a Schedule 13D under the securities laws and under regulatory agency rules such as those of the Federal Reserve Board, the Federal Energy Regulatory Commission, and the Federal Communications Commission. While the Hart-Scott-Rodino Antitrust Improvements Act does not require disclosure to the general public, the HSR rules do require disclosure to the target's management before relatively low ownership thresholds can be crossed. Non-US acquirors have to be mindful of disclosure norms and timing requirements relating to home country requirements with respect to cross-border investment and acquisition activity. In many cases, the US disclosure regime is subject to greater judgment and analysis than the strict requirements of other jurisdictions. Treatment of derivative securities and other pecuniary
interests in a target other than straight common stock holdings also vary by jurisdiction and have received heightened focus in recent periods.

• Understanding the Market. Few US public companies have one or more controlling shareholders, a circumstance which renders shareholder approval, where required, a key variable. Understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other important market players - and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene - can be pivotal to the success or failure of the contemplated transaction.

• Integration Planning. Deals sometimes fail to achieve their promised benefits due to poor post-acquisition integration, particularly in cross-border deals where multiple cultures, languages and historic business methods may create friction. If possible, the executives and consultants that will be responsible for integration should be involved in the early stages of the deal so that they can help formulate and "own" the plans that they will be expected to execute. Too often, a separation between the deal team and the integration/execution teams invites slippage in execution of a plan that in hindsight is labeled by
the new team as unrealistic or overly ambitious. However, integration planning needs to be carefully phased in as implementation cannot occur prior to the time most regulatory approvals are obtained.

• Corporate Governance and Securities Law. US securities and corporate governance rules can be troublesome for non-US acquirors who will be issuing securities that will become publicly traded in the US as a result of an acquisition. SEC rules, the Sarbanes- Oxley and Dodd-Frank Acts and stock exchange requirements should be evaluated to ensure compatibility with home country rules and to be certain that the non-US acquiror will be able to comply. Rules relating to director independence, internal control reports
and loans to officers and directors, among others, can frequently raise issues for non-US companies listing in the US Non-US acquirors should also be mindful that US securities regulations may apply to acquisitions and other business combination activities involving non-US companies with US security holders.

• Antitrust Issues. To the extent that a non-US acquiror directly or indirectly competes or  holds an interest in a company that competes in the same industry as the target company, antitrust concerns may arise either at the federal agency or state attorneys general level. Although less typical, concerns can also occur if the foreign acquiror competes either in
an upstream or downstream market of the target. Pre-closing integration efforts should also be conducted with sensitivity to antitrust considerations. Home jurisdiction competition laws may raise their own sets of issues that should be carefully analyzed with counsel.

• Due Diligence. Wholesale application of the acquiror's domestic due diligence standards to the target's jurisdiction can cause delay, waste time and resources, or result in missing a problem. Due diligence methods must take account of the target jurisdiction's legal regime and, particularly important in a competitive auction situation, take account of local
norms. Making due diligence requests that appear to the target as particularly unusual or unreasonable (not uncommon in cross-border deals) can easily cause a bidder to lose credibility. Similarly, missing a significant local issue for lack of local knowledge can be highly problematic.

International capital flows, multinational enterprises and cross-border M&A and investment activity have become ever-larger and more multi-faceted parts of the global economy. With advance planning and careful attention to the greater complexity and spectrum of issues that characterize cross-border M&A, such transactions can be accomplished in most circumstances
without falling into the pitfalls and misunderstandings that have sometimes caused significant problems for cross-border deals that otherwise make good business sense. As with most complex endeavors, advance planning dramatically increases the chance of success.