How To Guard Against Buyer’s Remorse In Today’s Deal Market

Welcome to Legal Tech Matters, a Litera podcast dedicated to creating conversations about trends, technology and innovation for modern law firms and companies big and small.

Welcome everybody to today’s webcast. How to guard against buyer’s remorse in today’s deal market. I am Bobby Ambrose. I’m going to be serving as the moderator for today’s program. I am a columnist for Above the Law, which is one of the sponsors of today’s program, along with Litera the legal technology company. And we are going to introduce the panelists in just a moment.

But what we’re going to be talking about today is the global M&A market, which faced unprecedented levels of uncertainty in 2020, only to recover at record breaking heights this year. But below the surface, the due diligence process has changed substantially.

Today we’re going to talk about is we can take a closer look at this market, what it means for legal professionals. It will be guided in our discussion by a new report just out from Litera. The latter annual M&A report, 2021, which was produced using data provided by Pitchbook.

Our panelists will include the analysts who authored that report into industry experts who are going to share their insights on the report and on the market more broadly.

Other than that we’re going to get going with slides in just a moment. But first, I want to introduce the panelists or rather invite the panelists to introduce themselves. So let me just go around and Chauncey Lane, let me just start with you.

Thanks, Bob. Hi, everyone My name is Chauncey Lane. I incorporated M&A private equity partner in the Dallas office of Reed Smith.

Glad to be here with you today. Thanks, Chauncey. Next up, Jennifer Tsai.

Thanks, Bob. Hi, I’m Jennifer Tsai. I’m the legal knowledge analyst at Care Systems, which is now part of the Litera family. I started my career in New York at a private equity M&A Group and joined care systems in 2015. Right now produce our M&A deal terms and contract studies.

Thanks, Jennifer. And finally, Alex Lykken, thanks, Bob. Hi. I’m Alex Lykken. I am a senior analyst at Pitchbook. I have been here roughly since 2012 with a break in between. And I cover the venture capital private equity and M&A markets, primarily through Pitchbook reports. All right. Thanks, Alex. So as I said, what we’re going to be talking about today is this report out from Litera the annual M&A report 2021, I believe.

Did we get to get somebody to drop the link for that in the chat? If not, somebody will drop the link for where you can get that report in the chat. But we’re going to do before we get into a full discussion, we’re going to have Alex give a little bit of an introduction to the report, talk

about some of the findings and and we’ll go back and forth a little bit with Alex presenting some findings as he was the author of the report. And so let’s let’s kick it off with Alex, and then we’ll get back to a conversation about some of this. Alex, you want to start us off?

Absolutely. Let me see into this slide. So let’s make sure that we are rolling through these. Do we have the slide with the chart on top now? Perfect. So by quarter, this is M&A activity.

This chart should look pretty familiar, or at least not surprising between first quarter of 2018 and fourth quarter of 2019, you’ll notice that it’s remarkably similar things were humming along. Of course, by the second quarter of 2020, things collapsed a bit. It should pause right there to mention that these numbers reflect completed deals, so we’re not looking at announced deals mixed in with completed deals. And when you look at the second quarter primarily, a lot of those deals were transactions that were struck really before the pandemic became a big topic of public discussion.

There were a number of scenarios where buyers tried to get out of it, but the courts were not really sympathetic to act of God types of arguments, so second quarter went down. The third quarter, things started to pick up a little bit during the summer. And then, of course, by the fourth quarter is when things really start to rev up between the fourth quarter of 2020 and the second quarter of 2021. We tallied 8561 deals, which by itself would be a record on an annual basis, just to give a sense of how big the the recovery ended up being.

And broadly speaking, you know, we can’t we can categorize the recovery in into big, big ways at the beginning of the recovery, primarily in the third quarter. There were a number of deals that had already been on the radars of acquirers, but for whatever reason, they were passed on before the pandemic. Perhaps they had a little bit of hair on them. Perhaps there were concerns about valuations once the pandemic struck and things really started to. Things really started to change than all of a sudden those concerns didn’t look quite as bad, so there were a number of deals where acquirers essentially went back to their due diligence records and dusted them off.

And many of those deals were struck with the sense that, you know, socially, the scene was in place, but it wasn’t as big of a deal if they were already familiar with the company. There were some. I heard an anecdote about one acquirer that actually went out and bought a drone and flew it over a facility. I think inside the facility, which I find very amusing. Wish I was a fly on the wall looking at some of that footage, but that requires went to big lengths under quarantine to try and get some of these deals off the ground. But there was a lot of hesitation among buyers and a lot of buyers simply signed like insults and refused to do any deals

On the back half of the year when we start to look at the fourth quarter of last year in the first half of 2021. We’re looking at a lot of opportunism. Strategics. We’re in a place where they really had to figure out where their markets were heading and what to do about it. Many of them took to the M&A market to buy those new capabilities instead of building them organically.

In a lot of cases, they were looking to buy market share and a lot of cases they were looking to buy new capabilities like new technological aspects for their own companies. And there were several high profile deals that were emblematic of how COVID was impacting their future.

We highlighted the Salesforce acquisition of Slack, which came out to 27.7 billion and actually have the the quote here. Slack CEO Stewart Butterfield saw a quote once in a generation opportunity to rethink and reshape how and where we work. So he was being explicit when he was looking to make that deal, but it’s also a very game changing type of deal that’s mentioned very pricey deal. And so in those circumstances, dealmakers were in a position where they had to make decisions quickly but carefully and accurately, especially at the higher end of the market.

And one of the things that we pointed to in the report was that deal timelines are getting even shorter and in the context of due diligence, I wanted us to start there. And back to Bob,

Great. Thanks so much, Alex, for setting the stage there. Let me just let me turn to the let me bring the other panelists in and get their reactions to that. Chauncey, I just wonder if I could. I could start with you based on your experience representing clients in this area.

Did you see that kind of opportunism in? How did it? How did how did you respond to it? How did they respond to it?

Yeah, absolutely. You know, I absolutely saw it. And you know, much to the point that Alex raised with Slack, many, many executives starting to reexamine their business.

During COVID through the latter part of last year, and one of the results of that was focusing on those core assets divesting non-core assets while those non-core assets were being divested created an optimal chance for private equity firms to snap up those divested assets in the form of add on acquisitions to existing portfolio companies.

And so that created, I think this vacuum of assets kind of being offloaded with PE firms quickly snapping up those assets. Quite frankly, some strategics as well, picking up some of those assets that were kind of being afraid for other strategics. So it definitely created a market where things are moving very quickly as people sought to reposition themselves for not only what was happening in the market at that time, but quite frankly, what people anticipated in the market to look like after Covid

After some restrictions started to be lifted, companies were before thinking about Where do we want to be? Whenever we get on the other side of Covid, it right, and one way to do that is to focus on those core assets, pull in other accretive assets that actually increase your competitive advantage.

So when you get past Covid, you’re in a much better position to market. So I think that was very apparent as to what was going on in the latter part of last year and quite frankly, into the first part of this year.

You know, I think PE firms also saw some pressure from LPs. Write it from these wanting PE firms to be more thoughtful about how they would deploy capital during the dog days of the pandemic. Right. And so that pressure calls PE firms to be much more thoughtful about how they would deploy capital.

That led to many PE firms focusing more on add on acquisitions as opposed to platform acquisitions, right? And so we first took on, I think, a very interesting role during the old days of the pandemic or and many were focusing on providing capital to their portfolio companies, right?

And so it was a very different strategy being employed throughout the dog days of the pandemic. And I think that that change in strategy really amped the market and really caused buyers, including strategic, to jump into the market, pick up these assets that they viewed as being accretive to where it was they were doing likely in many

instances, to shareholders. And in the case of PE firms to to appease their LPs who were and who are really applying a lot of pressure at the time. Curious what it meant for you directly, are you personally, I mean, how did it change, how you handled these deals? You’re absolutely right. I mean, I think, you know, when deals are moving at a very, very quick pace, the approach to how we manage the deal process absolutely has to change, right? first and foremost, we have to be much more efficient in how we’re running deals, right?

Because if we really are trying to manage risk, meet client expectations and get the deal done, quite frankly right, I think of the day. And so in order to focus on each of those three areas, we really have to focus on how we running the deal, right? first and foremost, due diligence, right? It’s a tricky area when you have a client that comes to. You had a client says, look, I’m going to get it. I want to get a deal done in 30 days. Right.

And you’re talking about a substantial deal and you’re talking about a target company with a lot of due diligence. You have to think through, how are you going to approach that right? You have to be efficient, how you approach that. Sometimes you have a client who will say, Look, we’re willing to take some risk here, right in the interest of moving this deal along quickly. We’re happy to focus on these certain areas and we’re not even going to bother with these other areas, right?

Then you’re looking at a client management situation because right, as I’m looking at a deal, so I’m evaluating the opportunity for the client. There may be certain times when I have to look at a client to look. I’m not really concerned about that, but you actually really do need to focus on that because that presents a unique risk to your business for the future. And so if I’m going to convince that contacts will stop and look at that, I’ve got to make sure that I’m being efficient and how on approaching that right? And so obviously, one of our panelists here, Jennifer, right?

I mean, with the technology, that absolutely is how you do that right is you have to bring technology into your process, both from a due diligence perspective. And then as we think about how you manage the overall process, right, how do we track this deal?

How do we track the various avenues of this transaction from negotiating the purchase agreements, managing ancillaries, managing due diligence, you know, managing various approvals, be a third party approvals, governmental approvals. You’ve got to have a process in place where you’re able to quickly oversee that, quickly manage that in a way that is efficient.

Well, you could queue it up to Jennifer there with your comment, but Jennifer, you are your expertise is in the technology around handling due diligence. So what’s been your what have you seen and how have you seen people responding to this greater urgency around deals over the last 20 months or so, whatever it’s been?

I think it’s just like Chauncey was saying, this need for timelines to kind of speed up requires has required even more engagement with clients on their risk tolerance. And then, you know, discussions. It’s prompting discussions on the scope of diligence that needs to be undertaken so that everyone understands the impact of of those risks. And with the shorter timelines, it really it leaves a lot more room for those kind of low frequency, high impact risks that can that can occur. And then, like Chauncey was saying, on the flip side, you have to strike that balance between finding those risks and also process efficiency with the consequences being serious.

And that’s where AI can come in so we can review more documents, more contracts and then significantly increase the scope of that diligence at a lower incremental cost that was previously possible. I think another point to that do that it’s becoming more difficult for buyers to back out of deals by citing material adverse effects. So, you know, as we see as we saw an acorn and then more recently with COVID 19 in the ABC case, we’re seeing COVID 19 excluded from many definitions unless there’s disproportionate effect. So it’s really important just to have confidence in that whole due diligence and and management process and make sure that you’ve kind of uncovered any issues that might exist.

Yeah, well, Alex, I wonder if just before we move on to the next segment, just just having based on what you’ve just heard from from Chauncey and Jennifer, if you have any any further comments on what they said or as the data provide any further elucidation on what they were just commenting on.

I think Chauncey hit on the head from a data perspective. I think the only question that I have is going forward and it’s sort of an open ended question is how long these trends continue. You know, there is a need for speed, and strategics have been positioning themselves to get into as good of a position as they can right now before their competitors do. But the longer that this whole scenario plays out, the longer we may see these transformative trends go on. So I don’t know if it’s going to be a it’s not going to be a real quick moment in time where all these transformative deals are taking place.

I think that this has some legs to it and it could be going on for the next two or three years.

Chauncey, any predictions on that? How long is this going to play out?

Yeah, you know, I agree with Alex. I think it’s going to be. I think we’re going to see this continue for a while. And I think for a couple of reasons. I think when there was some after effects of COVID and strategics looking to position themselves in the post-COVID market, sorry.

I think another factor is we’ve seen a lot of changes in the political environment. Those changes, some of which have not actually been implemented, oftentimes drive deal activity as well as strategic and quite frankly, private equity firms are trying to get ahead of some of these implementations. The most notable being tax revolt. Right. I think many people expect that to be on the horizon. That’s going to cause the pace to continue to be pretty swift as companies are looking to get deals done before tax reform actually takes hold.

Another is economic growth. With interest rates being low, that’s going to continue driving activity until interest rates start to stabilize a little bit more. So I think actually, I think we see. I think it’s quite likely this trend will continue for at least another 2-3 years.

And can I add on to that a real quick and almost a follow up question to try and see a lot of these transformative deals that we’ve been seeing and again, highlighting the Salesforce and Slack deal, obviously, that’s at the top of the market where trends tend to be set. How do you see this playing out below, perhaps at the middle market or the lower middle market? Do you see the same trends happening over time, the further down you go?

Yeah, question, I mean, I think absolutely right, I think there’s always hyperactivity at the top of the market with whatever may be going on right.

Many of the trends absolutely bear out very clearly at the top of the market. I think the market, I think, will continue in the middle market as well. I think it will probably not last as long as it may last. At the top of the market, but I absolutely think the trend to continue to grow the market as well, right? And I think some of the same drivers, for instance, it’s interest rates, it’s pending tax reform. And quite frankly, I mean, I think it is as say, other companies are all pulling assets that they determined after their strategic review. They just don’t quite move the needle for them. I think they preach a new series for them in the market as well, and not just the upper tier of the market. So I think it might as well.

All right, thank you, Alex. You want to take us into the next segment of your findings regarding private equity.

Yeah, and Chauncey. Chauncey hit on this with respect to private equity going going back to March, April, May of 2020, private equity really put hit the brakes, which was a little interesting because outwardly they were expressing a lot of optimism that this itself was a once in a lifetime opportunity for private equity to buy a lot of assets at substantial discounts. The data didn’t suggest that that’s what happened, at least not from a platform perspective.

For even through the summer of 2020, you saw a whole lot of hesitation around making new platform investments. And at the same time, whatever appetite there would be for those types of platform investments was almost counterbalanced by the need to take care of their existing portfolio companies.

You know, a lot of PE firms canceled their portfolio company CEOs to tap into existing lines of credit, which they did. In a lot of cases, the private equity sponsors needed to infuse a little bit of capital into them, and that was going on behind the scenes. But there was a dual situation where where we’re exactly where are you going to spend your time? You needed to take care of your own portfolio companies and the opportunity to go and make platform investments was there. But it turned out that appetite wasn’t quite what a lot of people expected it to be.

So in lieu of all that, there is something of a compromise, I suppose, that add on acquisitions became a trend throughout the year. And even though the data didn’t show there is a mind blowing number of them, they were in line with 2019 and 2018 numbers. And as opposed to other transaction types the private equity firms were doing, add ons were pretty consistent across the board. So sponsors were going out and helping their own portfolio companies by market share, buy it, expand geographically and doing everything that they could to help their own portfolio companies in that way.

And they really leaned on the buying build strategy throughout the year. And the other position is that if you were a private equity backed through COVID, you had a bit of a safety net in it in the form of a well-heeled financial sponsor who would be able to come up with solutions for you if you really needed it. So PE backed companies were in a different position than a lot of strategics were throughout the year.

So Chauncey, let me turn again to you and just ask you what your thoughts are, what your observations were with regard to private equity companies and the impact COVID had enough?

Yeah. So, you know, I think what I saw in the market was exactly what Alex just laid out and that touched on a little bit in my earlier comments where I think the focus for private equity for much of last year was really twofold, right?

It was stabilization of existing portfolio companies and focusing on those add on investments, right? And which in some instances were the mechanism to stabilize an existing portfolio, not necessarily just to gain a strategic advantage in the marketplace, right? You know, a lot of portfolio companies saw liquidity issues.

They saw supply chain disruptions right before cash conversion delays, right? You got a lot of inventory sitting on the shelf and you can’t work in inventory to cash, right? I think a lot of portfolio companies realized that they had weaknesses in business continuity plans for any of their existing strategy more broadly.

And so I think as a result of those realizations, many of which were also impacting strategics at the time, I think private equity sponsors really had to step up and had to take a very hands on approach to stabilizing those portfolio companies, quite frankly. And to Alex’s point, many of them ended up serving as providing liquidity to the portfolio companies during that time because, quite frankly, the debt market was really difficult. It was not a very good day the last year, and so we saw a lot of private equity firms providing debt financing to many of their portfolio companies,

Which is kind of an interesting way to see a portfolio. Private equity firms playing. But I mean, it took on that role in the heart of the pandemic. And then when you think about add on investments, right? Much like strategics, private equity firms were also looking at portfolio companies trying to assess what the competitive advantage market is at that time, as well as for the competitive advantage to be once COVID subsides. And so add-on investments were a great way not only to stabilize a portfolio company, for example, if you were bringing in some sort of core function that was previously outsourced as a way to cut costs, but then also to gain strategic advantage.

Right. And you know, I saw this to one degree or another, depending on the industry, right? Obviously, the service industry, restaurants, hotels, entertainment were hit really, really hard last year. Right. And so I think in those industries, you saw a focus of absolute stabilization. Right. I think that was kind of first or foremost was stabilize. And how do we position the portfolio company to make it through this period, right? In other industries, health care, medtech, you know, those industries, technology, quite frankly, those industries were not necessarily hurting as bad. Right. So you didn’t see as much of a focus on stabilization. I but rather a focus on add on investments, right? Taking this as an opportunity, finding opportunities in the current marketplace, leveraging those opportunities and then positioning the portfolio company to further leverage those opportunities after COVID.

Yeah, well, I think it’s interesting that you mention that because I know that the report talks about some of those industries. Industry I follow very closely is legal technology, which is another industry I think that actually did pretty darn well during the during the last couple of years. And you saw it did see a lot of those kind of add on investments that you’re talking about in that area. And actually, Cira, is frankly a sort of an example of that because it was acquired by Lettura during this time and really fits that model well. Jennifer, did you have anything that you want to say on the issue of the PE companies?

Only that, you know, that the need for speed that we were talking about earlier, the you know, that would have applied to these private equity deals to right. So even though sometimes private equity, they do more strategic and targeted diligence, you know, is still important, especially if they’re doing out on transactions to be aware of those diligence issues, just to see if any provisions apply to affiliates. And just be aware of that.

Yeah. Could you just elaborate a little bit more on how technology serves that need for speed interest? I mean, how does it help speed up the process?

Yeah, sure. So AI systems like that use machine learning. They can help surface key provisions faster than you’d be able to do by just a pure manual review. And so and even with that, you know, the ability it provides, the ability to use a tech assisted review. So not to just review what’s traditionally considered to be material, but to have the machine take the first cut of reviewing, you know, if you wanted, like all of the documents, so that we as attorneys can develop a better handle on the risks that come with the shorter timeframes on deal execution. So even so, even with the technology though, right, it doesn’t mean that lawyers will be replaced because you still need human attorney expertise to kind of develop the bigger picture and provide further analysis and color on what the machine actually finds.

So you can develop a better picture of what the legal risks look like for a contemplated transaction.

Mm-Hmm. OK. All right. Alex, you want to again take us into the next segment of your slides here.

Here we’re transitioning back into broader M&A and specifically looking at multiples. At the outset of the pandemic, there were a lot of expectations that it’s multiples. We’re going to have to be impacted. And they did vary by sector and to a lesser extent, by geography and what what we really saw in 2020 was. first of all, the headline multiple did not change from 2019, which could be surprising in a sense. But when you compare the 10.5 X in 2019, the 10.5 X in 2020, it’s a bit of an apples and oranges comparison because at the end of the day, you were looking at a different mix of companies on the market.

2019 was a much healthier normal year, with a broad range of companies that were for sale in 2020. You were really looking at several sectors and several subsectors of the sectors that essentially sidelined themselves and took themselves off the market. We talked about this by talking travel, restaurants, hotels, and entertainment. one of the hardest hit sectors was the B2B subsector that does conference planning, in-person conference planning. That industry basically came to an absolute standstill. So going into 2021, the median multiple through the third quarter is 11.4 X.

And you know, really what a lot of what we’re seeing today is a continuation of a number of companies that had a COVID premium so that they’re not the companies that were actually on the market. Many of them were impacted, but not very much so by COVID, and a lot of them were positively affected by COVID. So you’re thinking software is thinking a lot of remote work. Remote learning e-commerce was a big sector. So think about wraps up at that point. But I mean, there’s a lot to unpack when you’re when you’re talking about multiples, right? So I’m curious what Jen and Chauncey have to say from a more on the boots on the ground perspective as to what what they saw at the at the peak of the pandemic, what kind of market, what kind of companies were coming in to market and what kind of companies were coming in later and how much later in the year where things started to normalize a little bit.

OK. Chauncey, what’s your answer to that? What kinds of companies were you seeing coming in at different points over the last 20 months or so?

Yeah, lots of tech, Alex is quite right. I mean, we saw a redistributed work environment last year and for many companies still right now. Right. And so in order to support the distributed work environment, tech became key, right as she started for a lot more things like cloud computing, software and technology was a main driver behind a successful transition to a distributed work environment.

But then you have the flip side of that and then you got data privacy. You’ve got cyber security, right? And so that kind of led you to the other side of the tech world in order to support. So you had the technology that was necessary to allow people to work remotely, but then you needed to bring in place that technology, make that a safe environment for the company and the data that the company manages. I think those are the types of companies that had immediately experienced a complete Premiere, right? I think interestingly enough, now that we are in queue for 2021, there are some companies who see a whole wave premium still today.

But it’s because, hey, look, we’re doing way better than we were doing last year, right? And so we think that because we are so outperforming what we did last year, we should we should at a premium for that, right? And obviously with that a little bit because you’re pointing to a low period and then claiming because you’ve outperformed from that low period, you’re entitled to a premium. Right? So, you know, and Alex’s other point, right? I was also surprised to see that have multiples stayed fairly steady through much of 2020, right?

I think the reason for that is most of the companies that were being acquired, most of the companies in the market at that time had strong balance sheets, right? Those companies have strong assets, right? Because to another point that Alex made many companies kind of stand on the sidelines.

If they were not yet positioned to get the best value for their business, as many of those companies just took themselves out of contention. And so the deals that were being done or deals with great companies, strong assets right there for cash conversion experience for companies that weren’t experiencing significant supply chain disruptions. So those are companies that were still in a position to demand a higher multiple and they were getting that horrible. And so I think that’s what really multiples higher than what I think many people expected multiples would have been in the height of the pandemic.

Then, of course, I think you had the opposite side of that, right? And that is the ability to get a deal done in that kind of environment. Right, because we have one expectation about as is often the case and what the seller is in terms of its expectation of value, great.

And so those disagreements, I think, really kind of took shape, especially in the upper tier of the market, right? Because you’ve got sellers with overly optimistic revenue projections, right? Because, for example, they are a cloud computing company. And right now, their services are really in demand

Right. And so they come to the table with an overly optimistic revenue projection and a buyer, right, has to assess, well, what is the likelihood that this demand will continue into the future? Or is this just right now? And so it has to juggle with that, right? I think another aspect of that is we saw that we saw a lot of, you know, a really big impact on provisions for material adverse effect provisions as well, right?

And so there was a lot of negotiation over that as well. And so oftentimes that plays into what that value is, right? Because if as a buyer, I’m going to be assuming a significant amount of risk, then probably going to have a different expectation for device businesses because that’s a lot of risk that I’ve got to be compensated for. Right. So and I think that takes us back to a point that was mentioned earlier. And that is, you know, and I think this quarter kind of touches on this right or speed is key. Accuracy and comprehensiveness are at risk because that buyer has to assess that risk, right? Because that is the risk flow into what the value of that business is, right? And so if a buyer is moving typically not closely assessing that risk, you know, a buyer might find itself in a situation where it is expecting a higher value than what is actually really appropriate in that circumstance.

And so assessing what was the real impact of COVID on this business now or in the future, right? Is this real demand or is this temporary demand? So I think the data absolutely reflects what I experience in the marketplace as we were going through 2020 as well as 2021.

I do think that as we go into 2021 and as we’re going now, it’s Q4. I think you’re seeing more businesses coming back in play, right. I really do think that we saw a lot of, for example, telehealth and cloud computing, those other types of businesses who are really getting that Covid premium in 2020.

I think in 2021, you’re seeing a little more stabilization in terms of the types of companies that are able to jump into the market and get a meaningful valuation comparatively to what they were getting in 2019, maybe in 2018.

Does that include some of those industries that that Alex talked about as having been, you know, having lost valuation earlier on in the cold during the pandemic?

I think so. I think those valuations are absolutely rebounding. I think that it is. And then there is a desire to kind of be on the front end of those markets when they fully reopen. Right. Because I think there’s a lot of opportunity because there’s pent up demand, right?

As we talk about demand in the M&A space, with private equity firms having a lot of dry powder or strategics with and they may make significant strategic plays as they emerge from COVID. I think you see consumers wanting to get back and travel right. And I think that that is going to drive a lot of demand as we see the Covid restrictions subside and all of that. I think sellers in those industries feel that they’re in a position now to demand higher valuations for their businesses because of that demand.

Yeah. To those of you who are watching the webinar, just a reminder that there is a queue in a box in the lower left hand side of your screen and we welcome you to submit questions or even just if you want to comment and and contribute to the conversation about what we’re talking about here today. Welcome you to do that. We will be taking questions. Jennifer, do you have any what are what are your thoughts on on what would Alex and Chauncey we’re just we’re just talking about you have any further thoughts on that?

Yeah, I mean, I think with what Chauncey was saying, we’re seeing with the valuations. And as the report says to you, with the valuation and multiples being so high, it’s, you know, it’s an indication that doing more complete diligence can help buyers have more confidence in the valuation being an accurate reflection of the company’s actual value. All right. So it’s just increasingly important to be uncovering those risks and find what you can with the technology that’s available. And you know, the accuracy is improving all the time. The machines don’t get tired, so it’s becoming a lot easier to get that done in the timeframes that clients are demanding. So yeah.

how much how much did you how much of this was done, you know, sort of boots on the ground before COVID? And to what extent did COVID have changed the whole workflow around handling these deals and require them to be done virtually to a greater extent than than previously?

Yeah, from my perspective, I mean, I don’t see much of the business due diligence was done on the ground right before COVID. I think it was quite common for both in the private equity space and the venture capital space for due diligence to be done basically on the ground, getting to know the business operators really kicking the tires on business. When we moved into the Covid world, I think absolutely you saw a change in how the diligence was being conducted, due diligence was being done entirely remotely right. I mean, we even heard stories of a buyer flying drones over a target’s warehouse.

And just to take a look at kind of the condition of a warehouse or flying a drone to look at inventory on shelves or something like that. So I think you saw buyers have to get very creative with how they were conducting diligence in the heart of the pandemic. And quite frankly, I think that we will see those changes really continue into the future. Right. I think that we really have seen kind of a transformation of how due diligence can be conducted, right? And I think you only saw that exacerbated when you think of their cross-border transaction. Right?

Think of a buyer acquiring a target that has operations in three or four different countries. Well, you know, given travel restrictions in one country, different requirements for an individual to go to that country and so on. And so as a result, I think if you saw a transformation, due diligence was done. And I really do think that much of those changes will continue to.

The reason they write, I think I think I think buyers probably realized that they can be quite efficient and still conduct effective due diligence without necessarily being there, boots on the ground.

What are most actually handling the deal documents the closing, the signatures, all of that. I know, you know, virtual dealer rooms have been around since before COVID was. But has there been a greater reliance and use of those kinds of technologies for managing the workflow and the documents around these deals?

I think the process for managing a transaction for many years has been done with the heavy use of technology. Right. You look at a closing engine in a purchase agreement. I think it’s rare to see a closing provision that has an address for holding. It’s going to take place, right? I mean, I think much of this has been done, and I think that it’s very much the expectation.

I think you have seen a proliferation of deal management tools. As the volume really increased and advisers were really having to juggle a much, much larger volume of transactions at one time. And so even for myself and at my firm throughout the pandemic, we were relying pretty heavily on deal management software in order to manage each transaction. What stages the transaction, which action item is with which person? And quite frankly, it made us more efficient in terms of how we manage the transaction and met the constant deadlines.

Yeah. What about in the use of e-signatures versus what signatures? Did you see a change there?

I think we were really using e-signatures quite a bit even before the pandemic before. But I think it is probably fair to say that there was a greater reliance on things like that just on the pandemic. I mean, I think that was just the nature of what was happening, what was taking place. But again, I don’t know that the change in reliance on e-signatures was all that great, largely because I think many people were already kind of transitioning anyway before the right.

Jennifer, does that resonate with what you’ve seen?

Yeah, exactly. And just with the accelerated timelines, you know, it’d be something that would be really difficult to roll back once we can really get through this. And so like Chauncey was saying that the role of technology has a big part in supporting M&A deals. So not just in diligence, but in other areas of practice like Chauncey was mentioning, so e-signatures, tracking just other transactional logistics. So like closing checklists and getting closing rooms ready. So, yeah, I’m sure even five years from now, things are looking a whole lot different than they do today.

Alex, there was a question that came in, and I don’t know if your data, how up-to-date your data is or there’s a question from somebody who said they had heard that deal activity has dramatically slowed down in just the last four to six weeks.

Have you seen anything on that? I don’t know whether the last four to six weeks sound like our data could be slightly different from if those numbers didn’t come from Pittsburgh, they could have come from a poor provider that includes announced deals, which we don’t do. We only capture close deals. I don’t know one way or the other about the last four to six weeks. I’m sorry.

No, no worries, it’s fine.

Yeah, yeah. I’m not observing a lot of deals that are kind of being thrown out there that are getting done. I will say I think that, you know, there were a number of deals that had been signed where closing was kind of put a little bit for various reasons, some of which may have been pandemic related, some of which may have been related to a change in presidential administration and so on with the change in agency heads.

So I think there may be something there in terms of deals that were signed, but deals that have not yet been closed and whether some of those deals that are signed but not yet close, actually close remains to be seen. But on the whole, I’ve been observing a slow down for the last six weeks

And I would only add to that that if there is a slow down going on right now in the past four to six weeks, I think it’s understandable from a human perspective. I mean, there have been a number of articles and anecdotes that have been coming out that deal teams, especially going down to the associate and analyst level at private equity firms. People are absolutely exhausted. You know where we highlighted the three quarter window between Q4 2020 and Q2 2021 in and of itself, that window is higher than any year that we’ve ever recorded, and it’s not only from an M&A perspective, but that also carries through on the private equity side. So there’s only so much that you can do as a PE firm, perhaps as a serial acquirer.

People are busy, they’re exhausted. We’re getting into the holiday season after, I mean, we’re closing in on the two year anniversary of a global pandemic on top of everything else. So I wouldn’t be surprised to see some kind of slowdown. At the same time, I wouldn’t be surprised that it hasn’t slowed down just because of the nature of the business. But just from a human perspective, I think people are pretty exhausted on the dealmaking side of things right now.

We’ve got about ten minutes left in the program, so if you have a question, now is your time to drop it in there and give it to our panelists. Alex, I wonder if it’s something you’ve alluded to a couple of times. I wonder if you could talk a little bit more about how geography played into this, particularly cross-border geography and transactions outside the United States or cross-border?

Yeah, it’s interesting. We did look at cross-border transactions in the report and whatever trends were impacted by COVID in the overall market were exacerbated on the cross-border side of things. So on the one hand, there were a number of scenarios where acquirers were looking to get a toehold in other parts of the world. We actually highlighted… with me in just a second on track it down.

We highlighted a deal between Just Eat Takeaway, which is actually based in Europe, where they acquired Grubhub in June of this year for $7.3 billion. That was an opportunity for just takeaway to come in and get a presence in the U.S. market was a major player in Grubhub. But there were a number of other scenarios where if you did have plans on acquiring internationally and trying to grow your presence now wasn’t necessarily the time. I mean, you’re talking about international travel coinciding with social distancing regulations, and there was a hesitation on the part of a lot of firms to if they were going to acquire companies that were going to do something locally and they were going to do something that was a little bit easier than a cross-border transaction.

On the other side of things, even if they did want to, especially over the last two years, there are security regulations in place, chiefly in the US, CFS, the Committee on Foreign Investment in the United States, I believe, and a lot of those deals will undergo scrutiny from a security perspective. So there are just so many headwinds facing cross-border transactions that it’s not surprising to see that those COVID related impacts were even harder on cross-border M&A.

I think the question is when that really starts to rebound, and I think that that will probably rebound slower than the overall M&A market.

Chauncey, any thoughts on the cross-border market.

Yeah, sure. I mean, I think what Alex just kind of touched on is exactly what they’re trying to achieve first before many countries institute controls on foreign direct investment from Ireland, Spain. I mean, we saw it all across the globe and a lot of it was just in the form of protectionism, right? I mean, it’s as bad as some valuations for really declining. A lot of companies became targets for just easy acquisition. And so you saw a lot of countries looking to kind of protect against that. And so a lot of regulations were implemented Some of them were implemented pretty quickly. Others were implemented on a temporary basis and then became more permanent. And so that was certainly a pretty big case with respect to a cross-border deal.

Another headwind was currency risk. Right? Currency risk is always president. A cross-border transaction in the middle of a pandemic and currency risk was a much, much bigger issue. And how do you manage that currency risk at a time when you don’t meet the currency risk is present in the US? It’s present in Europe. I mean, it was present across the globe, right? And so there’s also in addition to the travel issues and other access issues that were created during the pandemic.

Yeah. Jennifer, any comment on that?

Yeah, it’s just echoing the sentiments of Chauncey and Alex and like a lot of the issues with cross border have to do too, with rate data transfer and data privacy issues and the regulations surrounding that right, like we saw the privacy shield governing the the the transfer of data between the EU and the US go away last year still kind of waiting for a replacement.

A lot of companies are not sure what to do with that, so it kind of complicates the transactional space more

So the title of this webinar was avoiding buyer’s remorse, wondering what, what, what the takeaways are from what we’ve been talking about here, what the lessons are, especially given that a lot of people in the audience are professionals involved in M&A deals themselves. What are your thoughts on? Chauncey, what should we be learning from these trends and what should we be doing going forward to respond to it.

Yeah. You know, I think Jennifer will appreciate this first one, and that is integrate technology better, right? And don’t wait until the next pandemic comes along. Work on integrating that technology into your process now from deal tracking your management to due diligence. integrated into your process now. So it’s already there. If we see this again, or let’s say there, a recurrence of COVID.

You know, I think another thing that’s important to keep in mind is that in the due diligence process, much like buyers were affected by COVID, so sellers were affected by COVID. Right. And so when we’re conducting due diligence on a seller, it’s thinking about how is the seller impacted by COVID?

Right? So thinking through in these material contracts is a seller currently in breach of a terror contract because of how it’s been affected by Covid. Right. And so I think the way that we conduct due diligence in the way that we analyze these agreements changed a little bit. Right. I mean, we weren’t just looking for things like a sign ability and consent and notice requirements. We were aware of the things about what are your obligations under this contract? And have you breached entity’s obligations because of the impact of COVID on your business, right?

So I think we had to take a slightly different look at some of the due diligence materials in order to better manage the risk. Uncover the risk, manage the risk and then make sure that the risk was appropriately addressed in the purchase agreement, right?

And again, I think that takes us back to technology, right? Relying on the AI and due diligence process can help you uncover those types of issues quickly and then allow you to pretty quickly assess whether it’s a material issue to start or not.

So I really do think that’s the bottom line is, I think, you know, a little speed is very important, especially in this very competitive landscape right now where you’ve got a lot of pent up demand, you’ve got a lot of dry powder and everyone is docking for that market share.

And I think that you really have to balance the desire for speed with efficiency because I think it is between those two things that you uncovered, the risk and you probably manage the risk. I think that is how go about it

Yeah. Is it your role as an attorney to kind of push back against the velocity of some of these deals at any point?

Yeah, absolutely. Right. I mean, I think I will likely touch on that a little bit earlier. There is certainly a client management component to this, right, because it comes up. And look, this was crazy before COVID. Where you have a client who wants to get a deal done. And, you know, there’s a legal risk. Right. And it’s my job to present a legal risk to the client and present solutions for how the legal risk can be managed. Right. But I have to be efficient in how to do that because I want to have to cover the legal risk early.

I can’t wait until the deal is finished and then present a legal risk to me. So I’ve got to be efficient in covering that legal risk. Presumably a risk to a client and having that trust between myself and a client at this point will understand that. Look, if he’s telling me that this is a material witness to me as a buyer, I’ll probably need to soften this and work with legal counsel.

Jennifer, what about you? What are the takeaways, what are the lessons, what are the actions that legal professionals should be considering going forward from here?

Yeah, I mean, I think we’ve seen in the last 20 months that huge increase and the reliance on technology in, you know, in in M&A deals. So I think that’s going to continue to become even more ubiquitous in a similar manner that has for, say, like eDiscovery or litigation matters.

And so for those of us, like working in the legal tech space, we are working on improving the tax accuracy all the time and expanding what the AI can actually find can find more provisions than ever and is now even starting to answer questions based on what it finds. So there’s a real impetus for us to work on continuing to improve that and to support lawyers and in using that technology to make their deals more successful.

Yes. The only thing I have thoughts on. Yeah, go ahead.

The only thing I would add to that and I think over the past two years, I think a lot of people sort of took for granted the value of dinner, you know, having dinner with folks and building that trust from a personal standpoint. In lieu of that, there’s had to be a rush of technology solutions to sort of fill that gap to make sure that trust is still being built, that everything is still getting done. And it’s not going to replace that interpersonal part of a deal making, you know, having a two or three hour conversation over food or over drinks, talking about where you really see the company going over the next three to five years.

And so it’s going to be interesting again over the next three to five years, how those two things interact once social distancing, distancing requirements are scaled back and people can start really interacting on a more personal basis again, because it’s going to be a slightly different mix, it’s going to be more in-person, a little bit more back to normal. But then on the other hand, there’s also going to be a lot more technology solutions at the ready.

So it’ll be interesting to see what kind of changes happen going forward to the deal making process itself.

Well, thanks to all of you, I’m trying to determine whether the link was ever provided. Was the link provided for the download of that M&A report? Yes, OK, the link was provided, so you in the audience should have received that link. If you’d like to download the full report that we’ve been talking about here. It’s a good read, and thanks to Alex for putting that together. Thanks to all the panelists for participating today. And thanks to Litera and Above the Law for producing and presenting today’s webinar and thanks to everybody in the audience for participating and listening. Stay well, that does it for today’s webinar.

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