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1

How to layout M&A risk in the initial structure?

What are some differences between M&A, JV, synergy risk?

What are some differences between M&A, JV, synergy risk?

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Ok, all of these are similar and related. But there are some nuances...

First: JV does not necessarily mean M&A - so some risks pertaining to M&A (getting to that later) will not apply to JVs

M&A risks I would call those directly related to the transaction. There could be myriads:

  • No shareholder approval
  • Financing falls apart
  • Regulatory / anti-trust approval is withheld or comes with very strict obligations (i.e. to divest a certain business, see Bayer <> Monsanto deal)
  • Change of control clauses in key supplier or customer contracts
  • No sufficient take rate for the acquisition offer to achieve a squeeze-out
  • In the case of (hostile) acquisitions, some poison pill move by the acquired company
  • Insufficient due diligence, so you buy at a high price due to some skeletons in the closet (pending class action lawsuits, some wrongdoing, ...)

Synergy risks I would characterize as those risks to achieving the projected synergies that ultimately justify the acquisition price:

  • Longer / more expensive integration of organisations, systems etc.
  • Key people leaving
  • People not leaving / more expensive lay-offs
  • Key customers leaving / shifting their buying strategy (i.e. because they don't want to be dependent on a single supplier)
  • Better bargaining position towards customers or suppliers does not materialize
  • Culture Clash
  • ...

JV risks are similar in flavour to both (some related to the transaction, such as anti-trust) and some related to the operation of the joint company. I'd add a few more:

  • Governance: Decision making slow / unclear due to shareholder involvement
  • Intellectual property transfer (see China JVs)
  • No equal contribution from JV partners...
  • Your people don't want to work for the JV
  • Balance sheet consolidation: If it was a goal to get a certain business off your balance sheet (financing at-equity) then that may not happen if you set up the JV wrong / don't find a suitable partner

There are tons more, but these are some examples.

Ok, all of these are similar and related. But there are some nuances...

First: JV does not necessarily mean M&A - so some risks pertaining to M&A (getting to that later) will not apply to JVs

M&A risks I would call those directly related to the transaction. There could be myriads:

  • No shareholder approval
  • Financing falls apart
  • Regulatory / anti-trust approval is withheld or comes with very strict obligations (i.e. to divest a certain business, see Bayer <> Monsanto deal)
  • Change of control clauses in key supplier or customer contracts
  • No sufficient take rate for the acquisition offer to achieve a squeeze-out
  • In the case of (hostile) acquisitions, some poison pill move by the acquired company
  • Insufficient due diligence, so you buy at a high price due to some skeletons in the closet (pending class action lawsuits, some wrongdoing, ...)

Synergy risks I would characterize as those risks to achieving the projected synergies that ultimately justify the acquisition price:

  • Longer / more expensive integration of organisations, systems etc.
  • Key people leaving
  • People not leaving / more expensive lay-offs
  • Key customers leaving / shifting their buying strategy (i.e. because they don't want to be dependent on a single supplier)
  • Better bargaining position towards customers or suppliers does not materialize
  • Culture Clash
  • ...

JV risks are similar in flavour to both (some related to the transaction, such as anti-trust) and some related to the operation of the joint company. I'd add a few more:

  • Governance: Decision making slow / unclear due to shareholder involvement
  • Intellectual property transfer (see China JVs)
  • No equal contribution from JV partners...
  • Your people don't want to work for the JV
  • Balance sheet consolidation: If it was a goal to get a certain business off your balance sheet (financing at-equity) then that may not happen if you set up the JV wrong / don't find a suitable partner

There are tons more, but these are some examples.

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