1.Best Place to Do Mergers

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49Where is the Best Place to do Mergers & Acquisitions?Economic Attractiveness as Related to Law 2011 IUP. All Rights Reserved.

Where is the Best Placeto do Mergers & Acquisitions?

Economic Attractiveness as Related to Law

In a Doing Business report published by the World Bank, the following statement was suggested: From the

economic point of view, common law is more efficient than civil law. The objective of this research paper is

to weigh two legal systems (French civil law and the US common law) and analyze the results of the economic

analysis of the law of Mergers and Acquisitions (M&A). This is done by quantifying the impact on long-term

performance. To carry out this research, a methodology was developed, and the results were evaluated. Two legal

structures for M&A transactions were selected: the purchase of shares (share deal), and the purchase of assets

(asset deal). Each of these acquisition structures was then subdivided into 11 stepsfrom preliminary information,

letter of intent, due diligence, stock or asset purchase agreement and closingto litigation with formal summons.

Performance was then measured by taking into account time, cost and satisfaction factors. Time was broken downinto person-days and the number of days, weeks, or months required to complete each step. French and US

respondents were asked to fill out a questionnaire for a specific M&A transaction. Radar charts were used to

compare the mean of each performance factor; an inter-factor analysis was carried out to check for correlations.

The findings showed that a share deal in France is cheaper than in the US. Also, French participants express

a greater degree of satisfaction than their US counterparts. The findings varied however, for the time factor. The

authors conclude that the application of civil code and common law does not reveal substantial differences in

either country for M&A transactions. One reason may be that in both France and the US, these transactions

are carried out according to similar procedures.

Thomas Straub* and Georges A Cavalier**

* Professor, Strategic Management & Entrepreneurship, School of Business Administration Fribourg, Fribourg,Switzerland; and is the corresponding author. E-mail: [email protected]

** Associate Professor of Law, University of Lyon, Lyon, France. E-mail: [email protected]

Introduction

The Doing Business report published by the World Bank suggests that, From the economicpoint of view, common law is more efficient than civil law. Is this somewhat alarming

message also valid for Mergers & Acquisitions (M&A) transactions? This paper compares

the economic attractiveness of common law (US) versus civil law (France), as related to

these transactions. Because countries are competing more and more to attract business,

this is an important aspect to consider.

History shows M&A volume moves with stock market variations. Since the market is

in a crisis, M&As could be on the threshold of a new boom (Figure 1).

Does the law favor M&A transactions in France or in the US? The research is divided

into two subparts: first, to compare the legal performance of Share Deal (SD) between the

two countries, and second is Asset Deal (AD). It is therefore essential to quantify the

impact of the French and the US legal systems on the long-term performance of SD andADs.


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The IUP Journal of Business Strategy, Vol. VIII, No. 2, 201150

This paper measures the economic performance of time and the cost of legal operations.

Several authors have demonstrated that for complex transactions such as M&A, other

variables influence the long-term performance of a company. In general terms, recent

change in the environment of companies, that is to say rules and regulations, play an

essential role in a companys choice of strategy and determines the consequences of

decisions.

In measuring performance time as such may be too vague. For instance, five persons

can accomplish a task in one day, but the same task may be carried out in five days by one

person only. Dividing the time factor into person-days and step-time therefore, brings

further clarification: person-days measure the working hours and step-time measures the

bureaucratic procedure of how long a process takes.

The paper introduces an additional measurement of economic performance, which is

satisfaction. Time (person-days and step-time) and cost are also important but not

sufficient for measuring economic performance. For instance, in purchasing a company,

the transaction may be fast and cheap, but the legal quality and security are unsatisfactory

and could lead to complications. In economic and social science, the degree of satisfaction

is evaluated by interviewing business leaders and M&A specialists (Veiga et al., 2000).

Quantitative research that includes a large number of responses is required to obtain

statistically representative and objective results. In order to fulfill these objectives, the

model designed by the research team is detailed below.

Figure 1: History Shows M&A Volume Moves with Stock Market Variations

Source: Morgan (2009)

$2,500

$2,000

$1,500

$1,000

$500

$0

US M&A Volume and S&P 500 Levels ($ bn)

A 61%

B 72%

C 61%US Recessions:A 1990-1991B 2001C 2007-Present

S&P 500 (x%) M&A Volume Peak to Trough

US M&A Volume

Annualized Volume

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0


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51Where is the Best Place to do Mergers & Acquisitions?Economic Attractiveness as Related to Law

Methodology

Three legal methods for implementing M&A transactions were identified: the purchase

of shares (SD), the purchase of assets (AD) and the merger. In the US, a merger is

considered as a type of SD. In comparing France and the US, a distinction must thereforebe made between a SD and an AD. In a SD, the buyer is purchasing stocks representing

assets and liabilities, whereas in an AD, the buyer isin principlepurchasing assets

only: the risk inherent to purchasing liabilities (debts) is therefore excluded. These two

methods (SD versus AD) were divided into eleven phases: (1) preliminary information;

(2) letter of intent; (3a) financial audit; (3b) legal audit; (4) share or asset purchase

agreement; (5) ancillary documents; (6) regulatory authorizations; (7) closing; (8) post-

closing; (9a) litigation without formal summons; and (9b) litigation with formal

summons. Details of these phases are provided below.

The preliminary information phase includes (1) contact with the acquired

company (Target), business lawyers, investment bank, setting a timetableup

to the execution of the confidentiality agreement (included). The letter of intent phase includes (2) formalizing the confidentiality

agreement, discussion on the external communication plan, legal implications,

deal structureup to the letter of intent (included).

Due diligence starts with posting the request list, including the investigating

process in the data roomup to the share/asset purchase agreement (excluded).

In the due diligence phase, the research team distinguishes the financial and the

legal steps. The financial due diligence process (3a) includes accounting

verification, financial audit, balance sheet and profit and loss account validation.

The legal due diligence process (3b) concerns the audit of contracts, litigations

evaluation and environmental issues assessment.

The share or asset purchase agreement phase (4) starts with the negotiation of

the agreement and includes discussion of drafts, andwhen relevant

negotiation of the representation and warranties, indemnification period,

schedules, execution timetableup to consulting the unions and the

execution agreement (included).

The ancillary document phase (5) starts with the negotiation of the ancillary

documents, which include escrow and shareholder agreements, minutes of the

shareholders meeting, finance and labor contracts and intellectual property

licensesup to execution (included).

To complete the transaction process, the regulatory approval phase (6) requires

obtaining the antitrust authority and other regulatory approvals.

The closing process (7) starts a week preceding the closing date, at which time

certificates or other documents are delivered and payment/share/assets are

transferred.


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Post-closing (8) is the phase after the closing date: this is typically where price

adjustment (earn-out) occurs and indemnity requests are formulated. Disputes

are not included in this phase; see 9a and 9b which are dedicated to dispute

assessments.

The litigation phase (9a and 9b) includes any disputes which occurred after the

deal transaction. Two types of disputes are identified: disputes without formal

summons before a court or an arbitration court, and disputes with formal

summons. The first set of questions (9a) evaluates whether disputes without

formal summons occurred; the second set of questions (9b) evaluates disputes

which occur with formal summons.

The performance is measured by evaluating the above phases in relation to cost, time

(person-days and step-time) and satisfaction (Veiga et al., 2000). The responses are

reflected on a Likert scale, numbered 1 (low) to 5 (high); each number corresponds to the

respondents perception, detailed M&A secondary information1. Research shows that self-

perception measures are dependent on the quality of the informant (Nayyar, 1992).The following questions were formulated:

What is your estimate of the number of working days (person-days) to complete

this phase?

What is your estimate of the time needed to complete this phase (days, weeks,

or months)?

What is your estimate of the cost Euros () to complete this phase?

How satisfactory was this phase for you?

The respondents were asked to reply in reference to a specific transaction (deal) closed

between 2000 and 2004, and where both the acquirer and the target were privately heldcompanies located in the US or in France. Transnational deals, or deals where the Target

was listed on a stock exchange were not included. In order to develop the questionnaire

two pretest phases were performed: a sample of over one thousand informants in the US

and in France selected from The Leadership Library2 and professional associations3.

The quality of the data is highly dependant upon the competency of the informant and

is reflected by tenure and position. Most informants were attorneys (partners or

associates), C-level managers, and/or heads of M&A4 and therefore highly competent;

1 Primary information allows the reader to access original and unedited information. It requires the reader tointeract with the source and extract information. Secondary information is edited primary information, that issecond-hand versions. They represent someone elses thinking. For instance, authors writing about the mergerbetween Mercedes and Chrysler are providing secondary information about the merger. Primary information

about the merger would be information from the merging companies themselves.2 See http: //www.leadershipdirectories.com3 The French Society of General Counsels (Association franaise des juristes dentreprises) (),

and the French society of Business Attorneys (Association des Avocats Conseils dEntreprises) http://www.avocats-conseils.org

4 In the US, 80% of the respondents to the questionnaire were partners of law firms and 40% in France.


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over 70% had worked for their company for more than six years and were highly involved

in M&A transactions. Over 60% were even much or very much involved in M&A

transactions.

In both the US and France, the characteristics of transactions carried out within thesame time period were similar and therefore comparable. 41 responses were registered from

the US and 34 from France. The response rate was 5.4% of the sample population. No

significant non-response bias was identified that could have affected the results of the

survey.

In the following paragraphs, the research findings are presented. Radar charts present the

results and identify all phases of the transaction process and are abbreviated as follows

(see Figure 2):

Figure 2: How to Read the Results

AD9 Dispwith

AD9 Dispwithout

AD8 Post-Closing

AD1 PrelimInfo

AD2 LOI

AD3 FineDueDil

AD3 LegalDueDil

AD4 PurchAgree

AD5 AnciDocAD6 RegApprov

AD7 Closing

Steps

Scale: 0 = dont know Scaling (Five-point Likert-type)

Countries

3

2

1

0

Asset Deal Euros

- - - USA

_____ France

PrelimInfo (step 1): preliminary information;

LOI (step 2): letter of intent;

FinDueDil (step 3a): financial audit;

LegalDueDil (step 3b): legal audit;

PurchAgree (step 4): share/asset purchase agreement;

AnciDoc (step 5): ancillary documents;

RegApprov (step 6): regulatory authorizations;

Closing (step 7): closing phase;


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Post-closing (step 8): post-closing phase;

DispWithout (step 9a): dispute without formal summons; and

DispWith (step 9b): dispute with formal summons.

As mentioned above, results were scaled from 1 to 5, where the result 1 indicates very

low and 5 indicates very high. For instance, 5 is a high score for satisfaction, but is low

for cost and time (person-days and step-time) factors. The results were reported on radar

charts, using a hyphened line (- - - - -) for the US and a straight line ( _______) for France.

The main results (Figure 3) compare M&A legal performance in France and in the US,

irrespective of the deal structure. The detailed results are then discussed based on the

transaction structure (see chapter Detailed Results Based on the Transaction Structure)

that is, the comparison of the performance of ADs and SDs in France and in the US. An

interfactor analysis (regression) was carried out to test the accuracy of the results

(see chapter Interfactor Analysis).

Figure 3: Research Findings Summary:Person-Days, Step-Time, Cost (Euros) and Satisfaction

9b DispWith

9a DispWithout

8 Post-Closing

7 Closing

6 RegApprov5 AnciDoc

4 PurchAgree

3b LegalDueDil

3a FinDueDil

2 LOI

1 PrelimInfo

3.00

2.00

1.00

0.00

Euros Satisfaction

9b DispWith

9a DispWithout

8 Post-Closing

7 Closing

6 RegApprov 5 AnciDoc

4 PurchAgee

3b LegalDueDil

3a FinDueDil

2 LOI

1 PrelimInfo

3.00

2.00

1.00

0.00

FR

USA

9b DispWith

9a DispWithout

8 Post-Closing

7 Closing


4 PurchAgree

3b LegalDueDil

3a FinDueDil

2 LOI

1 PrelimInfo

4.00

3.00

2.00

1.00

0.00

FR

USA

Person-Days

1 PrelimInfo

9a DispWithout

8 Post-Closing

7 Closing


4 PurchAgree

3b LegalDueDil

3a FinDueDil

2 LOI

FR

USA

9b DispWith

Step-Time

4.00

3.00

2.00

1.00

0.00

FR

USA


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Results and Analysis

The objective was to compare M&A transactions, irrespective of their legal form. The

comparative analysis of both countries provided the following results:

In general, results show that M&A transactions in France are cheaper and require lessperson-days. However, there is some variation, for example M&A transactions in France

need fewer person-days for all steps, except for the dispute without formal litigation phase

(9a) where person-days are about the same in both the US and France. As for cost, M&A

transactions in France are significantly cheaper for all steps except for dispute with formal

litigation (9b), where costs are almost equal for both countries.

The results for satisfaction and step-time are not uniform. Satisfaction for steps

starting with the exchange of preliminary information (1) up to the drafting of ancillary

documents (5) is approximately the same in both France and the US. This is also true for

step dispute with formal litigation (9b). However, satisfaction is notably higher in the US

from step regulatory approvals to dispute without formal litigation (6 through 9a). With

respect to step-time, the results show that neither country has an overall advantage inthe time required to complete each step. The US requires less time for drafting the

purchase agreement, the ancillary documents and closing (steps 4, 5 and 7). In France, the

step-time is shorter for the exchange of preliminary information, drafting and negotiation

of the letter of intent, due diligence and disputes (steps 1, 2, 3 and 9).

In summary, the results can be summarized as follows:

No significant difference could be identified in the legal performance of M&A,

civil law versus common law.

M&A appear cheaper in France, but this difference could be explained by the

size of transactions.

The detailed results of the study are shown according to the transaction structure.

Detailed Results Based on the Transaction Structure

The results are detailed depending on whether the transaction is structured as a SD (1),

or as an AD (2). Note the different distribution of the deal structure percentage:

The majority of deals were structured as SDs in both countries. However, the number

of ADs in France (9%) is significantly lower than in the US (36%). Figure 4 shows the

response population for each deal type (AD and SD) in the two countries.

Share Deal

Figure 5 shows that a SD tends to be slightly more expensive in the US; and there is agreater amount of satisfaction in France than in the US. However, for person-days and

step-time, results vary. A SD in France requires fewer person-days for the exchange of

preliminary information, negotiation and drafting of the letter of intent, purchase

agreement and ancillary documents (steps 1, 2, 4 and 5). However, for due diligence


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(steps 3a and 3b), the US requires fewer person-days. For closing, post-closing and disputes

(steps 7-9b), the number of person-days is almost equal. As for the length of each step,

a SD in France is shorter only for the beginning of the transaction process (steps 1, 2, and

3). Lengths for all other steps are shorter in the US.

Figure 4: Deal Structure: AD and SD

FranceUSA

64

36

ADSD

91

9

ADSD

Figure 5: Research Findings for SD:Person-Days, Step-Time, Cost (Euros) and Satisfaction

SD 9b DispWith

SD 9aDispWithout

SD 8 Post-Closing

SD 7 Closing

SD 6 RegApprovSD 5 AnciDoc

SD 4 PurchAgree

SD 3bLegalDueDil

SD 3a FinDueDil

SD 2 LOI

SD 1 PrelimInfo

3.00

2.50

2.00

1.50

1.00

0.50

0.00

SD 9b DispWith

SD 9aDispWithout

SD 8 Post-Closing

SD 7 Closing

SD 6 RegApprov SD 5 AnciDoc

SD 4 PurchAgree

SD 3bLegalDueDil

SD 3aFinDueDil

SD 2 LOI

SD 1 PrelimInfo

4.00

3.00

2.00

1.00

0.00

Share Deal Person-Days

FR

USA

FR

USAStep-Time

Share Deal-Euros

SD 9b Diputing b

SD 9a Diputing

SD 8 Post-Closing

SD 7 Closing

SD 6 Reg ApprovalsSD 5 AnciDoc

SD 4 Asset Purchase

SD 3bDueDiligenceb

SD 3aDueDiligence

SD 2 PhaseSurround

SD 1 Premilinary Info

3.00

2.50

2.00

1.50

1.00

0.50

0.00

FR

USA

FRUSA

Share Deal-Satisfaction

SD 9b Disputing b

SD 9aDisputing

SD 8 Post-Closing

SD 7 Closing

SD 6 RegApprovals SD 5 AnciDoc

SD 4 AssetPurchase

SD 3bDueDiligenceb

SD 3aDueDiligence

SD 2 PhaseSurround


4.00

3.00

2.00

1.00

0.00


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Therefore, the following conclusions were reached:

There is no radical difference between France and the US in the legal

performance of SDs;

SDs tend to be slightly more expensive in the US;

SDs are more satisfactory in France; and

Time to complete the SD transaction is about the same in France as in the US.

Asset Deal

In both countries, the radar diagrams for ADs do not have the same shape as they do for

SDs. An AD in France is cheaper but generally requires more person-days and is subject

to lengthier step-time. Also, ADs require a greater number of person-days in France for

all steps, except financial due diligence (3a) and dispute with formal litigation (9b). The

length of each step is longer in France for all steps except for the disputes (9a and 9b).

Although ADs in France require more person-days and longer step-time, satisfaction isgreater for all steps, except for disputes (9a and 9b).

An AD in France is cheaper but generally requires more person-days and is subject to

lengthier step-time. Also, ADs require a greater number of person-days in France for all

steps, except financial due diligence (3a) and dispute with formal litigation (9b). The

length of each step is longer in France for all steps except for the disputes (9a and 9b).

Although ADs in France require more person-days and longer step-time, satisfaction is

greater for all steps, except for disputes (9a and 9b) (Figure 6).

Therefore:

ADs are generally faster to complete in the US.

Radar diagrams for ADs do not have the same shape as they do for SDs;

SDs tend to be slightly more expensive in the US; and

ADs are generally more satisfactory in France.

Interfactor Analysis

Interfactor analysis was carried out to verify the accuracy of the above conclusions, in

order to cross-check for bias with regard to the origin of economic performance. This

analysis was made using regressions, but also by comparison of averages (Churchill, 1999).

The following potential side-effects were tested:

Relationship between cost (dependent variable) and company size (independentvariable) was tested via linear regression;

Relationship between satisfaction (dependent variable) and cost (independent

variable) was tested via linear regression; and


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Comparison of person-days regarding the deal type was tested via comparisonof averages.

The results showed that a significant positive relationship exists between cost and

company size (+0.34/6.64). This demonstrates that the cost to complete a deal is relative

to the company size.

Further, the authors observed that satisfaction has no significant relationship to cost

and is therefore not a function thereof (0.04/0.66). This result shows that measuring

only the cost of a deal is not sufficient to evaluate the economic outcome; other factors

must be evaluated as well, such as satisfaction. Satisfaction is therefore an important

measurement in this study.

Another result showed that an AD (2.9) takes more person-days than a SD (2.2) inboth countries. This could be explained by the fact that an AD requires

(1) identifying the assets; and (2) applying a particular set of transfer rules to each asset.

Therefore, an AD is more complex than a SD, which does not require identification of

existing assets and needs only one set of legal rules.

Figure 6: Research Findings on AD:Person-Days, Step-Time, Cost (Euros) and Satisfaction

Asset Deal Person-Days Asset Deal Step-Time

AD 9b DispWith

AD 9aDispWithout

AD 8 Post-Closing

AD 7 Closing

AD 6 RegApprov AD 5 AnciDoc

AD 4 PurchAgree

SD 3bLegalDueDil

AD 3aFinDueDil

AD 2 LOI

AD 1 PrelimInfo

3

2

1

0

AD 9b DispWith

AD 9a DispWithout

AD 8 Post-Closing

AD 7 Closing


AD 4 PurchAgree

AD 3bLegalDueDil

AD 3a FinDue dil

AD 2 LOI


4

3

2

1

0

Asset Deal Euros

Asset Deal Satisfaction

FR

USA

FR

USA

AD 9b DispWith

AD 9aDispWithout

AD 8 Post-Closing

AD 7 Closing

AD 6 RegApprovAD 5 AnciDoc

AD 4 PurchAgree

AD 3bLegalDueDil

AD 3aFinDueDil

AD 2 LOI

AD1 PrelimInfo

3

2

1

0

AD 9b DispWith

AD 9aDispWithout

AD 8 Post-Closing

AD 7 Closing


AD 4LegalDueDil

AD 3bLegalDueDil

AD 3aFinDueDil

AD1 PrelimInfo5

4

3

2

1

0

AD 2 LOI

FR

USAFR

USA


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Conclusion

The research findings demonstrate that on an average, neither legal system has a

fundamental performance advantage. One example is the similarity shown in the shapes

of the main radar diagrams.

The results based on the structure of a transaction indicate a preference for SDs rather

than ADs in both legal systems. However, ADs are four times more frequent in the US

(36%) than in France (9%).

Research Limitations: Additional determinants and dimensions that might affect M&A

performance were not taken into account for this study, factors stemming from other

disciplines such as social and economic sciences.

Moreover, the study did not capture all the interrelations among the variables. It was

concentrated on a limited number of companies, two countries, and a specific sample of

informants. General limitations of the statistical methods and the survey design, forexample, variables in order to measure performance, may represent additional limitations

to this research.

Future Research: Because mergers and acquisitions are an interdisciplinary phenomenon,

the authors recommend developing new models including further disciplines (Straub,

2007). Effects are not mono causal, and it is therefore interesting to check for

interrelations, i.e., how one discipline impacts the other. Additional research could

broaden the geographic focus of the present study. Moreover, the difference between asset

and share deals could be explored further, for example by taking other variables into

account. A verification of industry effects with a cross-industry analysis could also be

considered. The same study could be repeated to compare other countries. Researcherscould replicate this analysis within the same context to confirm the stability of these

findings.

Acknowledgment: The authors would like to thank Professors O Morteau (Louisiana State University)

and Y Reinhard (University of Lyon) for their support and direction, together with C Baker, Esq., and

X Legendre, Esq. for their valuable input.

References

1. Churchill G A (1999), Marketing Research: Methodological Foundations, Vol. 7,

pp. 768-769, Harcourt, New York.

2. Doing Business (2008), Changed, to Some Extent, the Methodology, Doing Business, French

Version, p. 72.

3. Morgan J P (2009), Dealogic Enterprise Static, Thomson Reuters, as of May 31, 2009.


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4. Nayyar P R (1992), On the Measurement of Corporate Diversification Strategy:

Evidence from Large US Firms, Strategic Management Journal, Vol. 13, p. 219.

5. Straub T (2007), Reasons for Frequent Failure in Mergers and Acquisitions A

Comprehensive Analysis, Vol. 1, pp. 9 and 192, Deutscher Universittsverlag, Wiesbaden.

6. Veiga J, Lubatkin R, Calori R and Very P (2000), Measuring Organizational Culture

Clashes: A Two Nation Post-Hoc Analysis of a Cultural Compatibility Index, Human

Relations, Sage Publications Ltd., Vol. 53, p. 539.

Reference # 33J-2011-06-04-01


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