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I'm Doug Jackson, Co-Head of
M&A at Mizuho | Greenhill.
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And with me today is Bill Kucera,
Head of Global M&A at Mayer Brown.
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Bill, we've had the pleasure of knowing
each other for 25 years now,
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and really had the pleasure of working together on a variety of both public and private transactions.
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Thanks for joining me today.
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Well, thanks for having me.
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I thought we'd touch on a variety of current
topics in the M&A landscape,
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both from a market and,
importantly, a legal perspective.
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Think of it as a bit of an M&A
lightning round, if you will.
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Why don't we ease into it with a bit of
thoughts on the current M&A environment.
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In particular, I think you'd have to accept
and everybody would acknowledge
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that the M&A market is alive
and well and thriving.
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M&A volume is up over last year and
the year before meaningfully,
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but it's not an evenly distributed market.
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Large cap strategic transactions are
really dominating M&A volume
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and they have a disproportionate
amount of the deal activity.
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From your perspective, what about the current environment is driving that dynamic?
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Yeah, well thanks, Doug.
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First of all, the macroeconomic
headwinds are certainly well known.
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You've got geopolitical tensions, you've
got tariffs, the list goes on and on.
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So that certainly is impacting
the broader M&A market.
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But as you say, the largest strategic
deals, the so-called megadeals,
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have stayed relatively active
despite these headwinds.
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And I think there's really two reasons for that, both of which are perhaps obvious in the name.
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First, they're large deals.
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And so with a bigger deal, there's
frankly more room for error.
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To use deal parlance, the materiality
bar tends to be higher.
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And so when you have more room
for error, you can get through
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more headwinds and tensions in the market.
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And second, and I think importantly,
these deals do tend to be strategic.
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And strategic deals tend to have
a longer-term outlook.
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This is combining two companies in kind of a
'1+1 = 3' strategic vision, so to speak.
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And that's in contrast to smaller deals
and deals between financial sponsors,
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in which really the goal of that deal
is to maximize near-term value.
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And so those deals get more hung up on smaller issues in the market, smaller blips.
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I'm working on a transaction right now,
not the biggest deal around,
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but it's well into the nine figures,
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and the parties are haggling over a $5 million difference in purchase price.
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And I think they'll get past it, but the
deal may break over $5 million,
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which is not a lot of money in this business.
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And so that shows the difference between
these large, big strategic deals
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and maybe the smaller,
non-strategic sponsor deals.
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You bring up financial sponsors.
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I mean, I would imagine there's still tremendous pressure on the sponsor community
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to get transactions done.
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How are they adopting in terms
of trying to get DPI?
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For one, there's no doubt that the private equity market is facing challenges right now.
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I saw a KPMG report not too long ago that had the statistic on number of PE deals in the first quarter
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of '25 versus the first quarter of '26, and the number of PE deals is down about 20%.
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So right there is evidence of
a softer private equity market.
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And then more anecdotally, I heard an interview with the Co-CEO of Thomas H. Lee Partners
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the other day in which he said that the PE market was the hardest or the most challenged
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that he's seen in his career.
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I think it was his 45-year career.
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So there's no doubt that PE is facing some headwinds because of these more macro levels.
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And so, you know, what does the
PE market do in that regard?
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It's harder to exit because
there's valuation challenges
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and just harder to get buyers to the table.
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Certainly the IPO market,
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which has been really soft over the last
several years, is thawing, I would say.
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And so that is an exit that certain portfolio companies can take advantage of,
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but far more prevalent and really a major
trend in the private equity world
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is the continuation funds, continuation vehicles.
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I think it was 20% of private equity
exits are through CVs now.
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And so that is, you know, a tool that private equity sponsors are using to get some liquidity
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for its LPs, but put off the ultimate
exit until the time is a little better.
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When a fund is transferring or
selling from one existing fund to a CV,
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is there anything different about that transaction from a legal standpoint, from your standpoint,
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or is it a regular way deal from the
lawyer's standpoint?
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You go out of your way to make
it a regular way deal,
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and you want it to be arm's length
and show that it's arm's length.
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You typically would get fairness opinions on both sides of the deal to show that the consideration
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both on the buy side and the
sell side is quote-unquote "fair".
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But the fact of the matter is it, is a,
you know, a related or an affiliate deal.
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So you do have to be a little careful to make sure your T's are crossed and your I's are dotted
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and make sure that there's a propriety of
arm's lengthness, I guess, is the way to put it.
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I think we see that as well when we're
in the financial advisory capacity.
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For those deals that are getting
done in the marketplace,
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do you see it more of a buyer's
market or a seller's market?
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First of all, it's a buyer's market if you can get through an auction and to the table.
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Auctions are softer than they have been.
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I'm working on one now which was launched four or five months ago that, you know, I thought
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there was going to be a frothy auction,
going to be lots of interest.
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To say that we're limping to the
finish line is an understatement.
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There's maybe one buyer left at the end.
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And so it's from that standpoint and the buyer that emerged has quickly figured out that the auction
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largely broke and that buyer, of course,
has some deal leverage.
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And so from that standpoint, if you're a buyer
that's willing to transact in this market,
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there's definitely some leverage.
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But once you get past that and to the table, the biggest dynamic — and this is really a more macro
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change to the M&A world since me and you started doing deals 25 years ago — is rep and warranty
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insurance has really changed the game.
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It just has.
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And it's definitely the biggest change in
M&A deals and processes in our careers.
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And there's two sides of that coin.
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At first, and most obviously, it is
a huge win for the sellers.
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Rep and warranty insurance has allowed for sellers to have limited, or in many instances, no
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post-closing exposure on the deal, which 15 years ago would have been unheard of for sellers.
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And so from that standpoint, it's a
big win from sellers.
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And you go into the deal with
a seller-friendly deal term.
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But the flip to that is that the quid pro quo for a buyer agreeing to having no real recourse against
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the seller is the seller generally agrees to what I'll say is a fulsome set of representations
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and warranties that it gives to the buyer.
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And the reason that's good for the buyer is because that supports the buyer's representation
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and warranty insurance coverage.
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And so while rep and warranty
insurance is obviously good for sellers,
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it's also good for buyers too, because it's
facilitated these fulsome reps.
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Is there a particular reason why the industry hasn't standardized a rep and warranty package
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for an insurance policy?
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Because the rep and warranty insurance
market hasn't mandated that.
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And the reason it hasn't mandated that is
because it's so competitive now.
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It's become so lucrative that more and
more market entrants have come in.
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And there's been candidly a little bit
of a race to the bottom on terms.
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And premiums down, retentions are down.
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Policy terms are incredibly insured-friendly.
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I mean, it's to the point where whenever you
do a new policy, you'll go back to your last
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fully negotiated policy with that insurer.
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And we'll say, "we'll start there".
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And those terms are already very insured-friendly.
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And so while you would think that the insurance would move a little bit based on the type of reps
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you're giving, in deal practice that doesn't happen as the insurer really just insures over it.
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Do you see a bifurcation between strategics and financial sponsors in terms of the use of
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rep and warranty insurance?
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I mean, certainly nearly 100% of financial
sponsor sellers will require it.
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But in terms of buyers, are the strategics getting more and more comfortable with it as a product?
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They are.
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And that's really because they have to.
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And you're right.
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The early adapters of the rep and warranty insurance products were sponsors.
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And they really moved the market at the beginning.
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Strategics were slow to adapt,
like they often are,
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until they really got to the point where
they couldn't avoid it anymore.
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And the reason for that is, if not every sell-side auction, 99% of sell-side auctions are hardwired
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such that the seller will have little, if
any, recourse through the deal.
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Those are the terms.
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No buyer is going to be competitive if they say, “no, no, I want a traditional indemnification package.”
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So if you're planning an auction, you pretty much have to accept a limited recourse scenario.
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And limited recourse scenarios, you've
got two options as a buyer.
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One is you can go to the rep and
warranty insurance market
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and procure this great new product.
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Or second, you can self-insure and
effectively take the risk.
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And while I think there was a time when strategics were trying to figure out which was the better route
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there, because of the softness in
the rep and warranty insurance market,
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there's more rep and warranty insurance
capacity than there is M&A deals to insure.
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And that has led to, as I mentioned a minute ago,
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you know, pricing coming down
and terms coming down.
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Are there any new developments or particular
focus on deal protection mechanisms
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that are worth highlighting?
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Yes, certainly in the public deal world, the recent change of the tender offer rules, in which, for
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certain tender offers, not all, but if you meet the conditions, cash deal, a competing offer hasn't
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emerged, etc., the minimum offer period that
you have to keep the tender offer open
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has been reduced from 20 business
days to 10 business days.
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And that's pretty material for
both the buyer and the seller.
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On the buy side, back to your deal protection, you know, buyers want to get their deal done as quickly
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as possible to eliminate the deal risk.
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Is somebody jumping the deal?
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So reducing from 20 business days to 10
business days is certainly an attractive
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deal protection mechanism that a
buyer would think about.
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And it's attractive on the sell side, too, simply because stuff happens in the world.
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And so sellers want as little market risk or “stuff happening” risk out there as possible.
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So getting closed sooner rather
than later is better for the seller.
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So this change in the tender offer rule,
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if you've got the right fact pattern for your public deal, is pretty valuable and pretty game changing.
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Bill, maybe this is a good opportunity to pivot
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to talk about the subject matter that dominates all the headlines, which is AI and the use of AI.
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How has the M&A process changed
from a legal perspective
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with the introduction of viable AI models?
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So it is absolutely here.
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It is absolutely changing M&A in real time.
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Deal process.
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The use cases are varied.
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They're exciting and they're evolving.
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The most obvious is on the
due diligence side, document review.
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The things that young M&A lawyers
used to toil all through the night reviewing
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hundreds and hundreds of contracts.
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In the old days, literally in a physical
data room with boxes.
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And I know you remember those days.
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I do indeed.
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And now you put the contract into an AI tool and it says if a consent is required or not.
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So that is a pretty interesting change.
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But there's been some other ones in my practice quite recently that have gotten my attention.
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And I'll just give a couple of examples
because I find it interesting.
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We're doing, on the buy side, a fast moving deal to acquire a pretty complicated tech company,
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which candidly, most of the lawyers and the
laymen around couldn't describe
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easily about what this company did.
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I know you know the type of
companies I'm talking about.
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And so here we were faced with having to come up with the definition of the restricted business
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for the sell side non-compete, and
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“what can the seller not do?”
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and we're like, “uh-oh, we don't even know
what the business does”.
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So how do we say–
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How do we define it?
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One of my younger partners says, "I have an idea".
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We'll take the banker's offering memorandum and put it into Harvey, which is the legal AI tool,
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and ask it to disseminate, cut
through the information
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and spit out a definition of restricted business.
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Five minutes later, there was a definition of restricted business, which we put in front of our
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client, who, of course, did know what the target company did because they were buying it.
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And the client said, "Looks great",
didn't change a word.
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So that's one example of using AI to solve problems and make things go faster.
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The second example, which is perhaps even nearer and dearer to my heart and probably yours
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as a former M&A, young M&A lawyer, we
were working on another deal recently,
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which, as sometimes happens,
it started off as a stock deal.
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And we dutifully prepared a
stock purchase agreement.
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And, of course, the deal pivoted to a merger.
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And so, uh-oh, we need to change a stock purchase agreement to a merger agreement.
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And in the old days, that would entail a fifth-year associate with a lot of blood, sweat and tears,
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typically over an overnight period, turning that agreement from a stock purchase into a merger.
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But in this case, “Hey Harvey, can you turn our agreement from a stock purchase into a merger?”
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And in whatever it was, 10 minutes,
out came a merger agreement.
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And so there are some real-time examples
of how AI is changing the M&A process.
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And that's obviously the tip of the iceberg.
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And that's more anecdotal.
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But it is definitely being used in the M&A process.
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The hiring needs for the legal profession is
outside the scope of this conversation,
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but it does have interesting implications
to the labor market.
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But as it relates to AI, what are some
other issues that we should be cognizant of,
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whether that's, you know, recording conversations, conference calls, the prompts,
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you know, I'll call it a search history,
but the prompts using AI?
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Are there any ramifications from a
confidentiality attorney-client standpoint
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that clients should be aware of?
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You bet.
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And this is not surprisingly an
evolving area as we speak.
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But there have been a couple of recent cases
on this topic in which, in the M&A context,
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and I'm sure in other contexts as well, the question about search histories and AI prompts
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and whether those are legally privileged
or could be discoverable,
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have been front and center to pretty
significant M&A disputes.
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There was one earn-out dispute in which AI prompts was front and center.
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And so lawyers are creating various
provisions for nondisclosure agreements,
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for the purchase agreement, that talk about the protection of AI searches and AI outputs
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and making it legally privileged and
who can use it and who can't.
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So I would encourage deal professionals, both bankers, lawyers, to frankly pay attention
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to this and make sure you've got policies
and procedures on your deal team
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in place so that it's at least thoughtful.
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You don't want to get ahead of it and find
out later, wow, those AI prompts that says,
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“How do we breach this contract?”
is later discoverable.
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That's a bad thing.
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Thanks, Bill.
00:17:01:11 - 00:17:03:10
What about some parting thoughts?
00:17:03:10 - 00:17:09:04
If you had to pick one area where
clients are still underestimating risk,
00:17:09:04 - 00:17:11:14
is there an area that you could
highlight for our viewers?
00:17:11:23 - 00:17:16:23
It's a really good question, and it was very thought-provoking when we were preparing for this.
00:17:16:23 - 00:17:21:11
The thing that I came up with, I kind of ticked through those deals I've worked on that
00:17:21:11 - 00:17:24:18
either outright failed, or were challenged.
00:17:24:18 - 00:17:27:15
And the good news is it's a relatively short list.
00:17:27:15 - 00:17:30:12
But there are some in my long career.
00:17:30:12 - 00:17:37:16
And the uniting factor to all those deals were the management team that the client, my client,
00:17:37:16 - 00:17:41:22
the buyer effectively bet on or was
relying on didn't play out.
00:17:41:22 - 00:17:45:14
And there's a lot of different
scenarios as I tick through it
00:17:45:14 - 00:17:50:23
that kind of led to that result,
ranging from outright fraud.
00:17:50:23 - 00:17:55:20
The CEO founder literally defrauded
my client, the buyer.
00:17:55:20 - 00:17:59:21
Obviously, that's a bad scenario, and that's
one that isn't typical and you want to avoid.
00:17:59:21 - 00:18:02:08
But there's more subtle areas in this.
00:18:02:08 - 00:18:09:13
Another sponsor bought a portfolio company that at the time the CEO was the son of the founder,
00:18:09:13 - 00:18:11:23
not a particularly strong CEO.
00:18:11:23 - 00:18:18:01
And within a very short amount of time from the closing, my client, the private equity owner,
00:18:18:01 - 00:18:23:17
realized they needed to make a switch
with management, which they did.
00:18:23:17 - 00:18:25:18
That company never recovered.
00:18:25:18 - 00:18:29:11
Seven, eight years later, one
CEO after another, one CFO.
00:18:29:11 - 00:18:30:06
It just never–
00:18:30:06 - 00:18:35:07
So starting out of the gate, betting on the
wrong management team really led to
00:18:35:07 - 00:18:37:09
that investment struggling mightily.
00:18:37:09 - 00:18:44:21
And then maybe the last example of that is
another sponsor acquisition situation.
00:18:44:21 - 00:18:51:07
The CEO of the target that we were buying
was, I'll go so far as to say, a little difficult
00:18:51:07 - 00:18:54:08
in the negotiations, employment terms and the like.
00:18:54:08 - 00:18:58:14
And it was hard to get that deal done
and to get that CEO over the line.
00:18:58:14 - 00:18:59:19
But we did.
00:18:59:19 - 00:19:03:16
And we owned the company for, my client owned the company for a nice hold period
00:19:03:16 - 00:19:05:04
and went to exit.
00:19:05:04 - 00:19:05:19
And guess what?
00:19:05:19 - 00:19:09:13
The CEO who was still around
was difficult on the exit.
00:19:09:13 - 00:19:12:01
And as a seller, that's a bad scenario.
00:19:12:01 - 00:19:15:04
You want to be able to control your exit.
00:19:15:04 - 00:19:21:02
You don't want there to be external factors that are implicating or making it harder for you to sell.
00:19:21:02 - 00:19:25:13
And that CEO that was difficult coming
in proved to be difficult coming out.
00:19:25:13 - 00:19:30:10
So the common theme of those challenge deals is
00:19:30:10 - 00:19:35:16
really kind of betting on the wrong management team, which led to some challenges down the road.
00:19:35:16 - 00:19:40:01
So I think that might be something that buyers maybe underestimate a little bit.
00:19:40:11 - 00:19:45:03
Maybe this would be a great opportunity to turn
it around and say one of the positive things
00:19:45:03 - 00:19:51:18
that helps deals is having the right advisors alongside, whether it's both legal and financial.
00:19:52:00 - 00:19:53:13
That is for sure the case.
00:19:53:13 - 00:19:54:00
Absolutely.
00:19:54:07 - 00:19:57:22
Bill, thanks for joining us today at the
Mizuho | Greenhill M&A Corner.
00:19:58:01 - 00:19:58:11
You bet.
00:19:58:11 - 00:19:59:01
I had a great time.
00:19:59:01 - 00:19:59:13
Thanks for having me.
I'm Doug Jackson, Co-Head of
M&A at Mizuho | Greenhill.
00:00:12:13 - 00:00:17:03
And with me today is Bill Kucera,
Head of Global M&A at Mayer Brown.
00:00:18:00 - 00:00:21:21
Bill, we've had the pleasure of knowing
each other for 25 years now,
00:00:21:21 - 00:00:27:04
and really had the pleasure of working together on a variety of both public and private transactions.
00:00:27:04 - 00:00:28:13
Thanks for joining me today.
00:00:28:19 - 00:00:29:11
Well, thanks for having me.
00:00:29:14 - 00:00:33:10
I thought we'd touch on a variety of current
topics in the M&A landscape,
00:00:33:10 - 00:00:37:01
both from a market and,
importantly, a legal perspective.
00:00:37:01 - 00:00:40:05
Think of it as a bit of an M&A
lightning round, if you will.
00:00:40:05 - 00:00:45:13
Why don't we ease into it with a bit of
thoughts on the current M&A environment.
00:00:45:13 - 00:00:50:11
In particular, I think you'd have to accept
and everybody would acknowledge
00:00:50:11 - 00:00:54:05
that the M&A market is alive
and well and thriving.
00:00:54:05 - 00:00:58:15
M&A volume is up over last year and
the year before meaningfully,
00:00:58:15 - 00:01:00:23
but it's not an evenly distributed market.
00:01:00:23 - 00:01:05:21
Large cap strategic transactions are
really dominating M&A volume
00:01:05:21 - 00:01:10:07
and they have a disproportionate
amount of the deal activity.
00:01:10:07 - 00:01:14:14
From your perspective, what about the current environment is driving that dynamic?
00:01:14:21 - 00:01:15:23
Yeah, well thanks, Doug.
00:01:15:23 - 00:01:21:12
First of all, the macroeconomic
headwinds are certainly well known.
00:01:21:12 - 00:01:25:13
You've got geopolitical tensions, you've
got tariffs, the list goes on and on.
00:01:25:13 - 00:01:28:19
So that certainly is impacting
the broader M&A market.
00:01:28:19 - 00:01:33:07
But as you say, the largest strategic
deals, the so-called megadeals,
00:01:33:07 - 00:01:37:14
have stayed relatively active
despite these headwinds.
00:01:37:14 - 00:01:43:02
And I think there's really two reasons for that, both of which are perhaps obvious in the name.
00:01:43:02 - 00:01:44:15
First, they're large deals.
00:01:44:15 - 00:01:48:15
And so with a bigger deal, there's
frankly more room for error.
00:01:48:15 - 00:01:54:00
To use deal parlance, the materiality
bar tends to be higher.
00:01:54:00 - 00:01:57:22
And so when you have more room
for error, you can get through
00:01:57:22 - 00:02:01:09
more headwinds and tensions in the market.
00:02:01:09 - 00:02:05:15
And second, and I think importantly,
these deals do tend to be strategic.
00:02:05:15 - 00:02:10:11
And strategic deals tend to have
a longer-term outlook.
00:02:10:11 - 00:02:17:15
This is combining two companies in kind of a
'1+1 = 3' strategic vision, so to speak.
00:02:17:15 - 00:02:24:03
And that's in contrast to smaller deals
and deals between financial sponsors,
00:02:24:03 - 00:02:29:07
in which really the goal of that deal
is to maximize near-term value.
00:02:29:07 - 00:02:35:08
And so those deals get more hung up on smaller issues in the market, smaller blips.
00:02:35:08 - 00:02:38:15
I'm working on a transaction right now,
not the biggest deal around,
00:02:38:15 - 00:02:40:17
but it's well into the nine figures,
00:02:40:17 - 00:02:45:03
and the parties are haggling over a $5 million difference in purchase price.
00:02:45:03 - 00:02:49:00
And I think they'll get past it, but the
deal may break over $5 million,
00:02:49:00 - 00:02:52:00
which is not a lot of money in this business.
00:02:52:00 - 00:02:56:05
And so that shows the difference between
these large, big strategic deals
00:02:56:05 - 00:02:59:07
and maybe the smaller,
non-strategic sponsor deals.
00:02:59:15 - 00:03:01:05
You bring up financial sponsors.
00:03:01:05 - 00:03:04:20
I mean, I would imagine there's still tremendous pressure on the sponsor community
00:03:04:20 - 00:03:07:02
to get transactions done.
00:03:07:02 - 00:03:10:20
How are they adopting in terms
of trying to get DPI?
00:03:10:20 - 00:03:16:01
For one, there's no doubt that the private equity market is facing challenges right now.
00:03:16:01 - 00:03:23:19
I saw a KPMG report not too long ago that had the statistic on number of PE deals in the first quarter
00:03:23:19 - 00:03:29:00
of '25 versus the first quarter of '26, and the number of PE deals is down about 20%.
00:03:29:00 - 00:03:33:22
So right there is evidence of
a softer private equity market.
00:03:33:22 - 00:03:39:09
And then more anecdotally, I heard an interview with the Co-CEO of Thomas H. Lee Partners
00:03:39:09 - 00:03:44:21
the other day in which he said that the PE market was the hardest or the most challenged
00:03:44:21 - 00:03:46:09
that he's seen in his career.
00:03:46:09 - 00:03:47:22
I think it was his 45-year career.
00:03:47:22 - 00:03:55:00
So there's no doubt that PE is facing some headwinds because of these more macro levels.
00:03:55:00 - 00:03:58:06
And so, you know, what does the
PE market do in that regard?
00:03:58:06 - 00:04:03:09
It's harder to exit because
there's valuation challenges
00:04:03:09 - 00:04:06:04
and just harder to get buyers to the table.
00:04:06:04 - 00:04:08:06
Certainly the IPO market,
00:04:08:06 - 00:04:14:05
which has been really soft over the last
several years, is thawing, I would say.
00:04:14:05 - 00:04:19:02
And so that is an exit that certain portfolio companies can take advantage of,
00:04:19:02 - 00:04:23:21
but far more prevalent and really a major
trend in the private equity world
00:04:23:21 - 00:04:27:05
is the continuation funds, continuation vehicles.
00:04:27:05 - 00:04:31:13
I think it was 20% of private equity
exits are through CVs now.
00:04:31:13 - 00:04:39:05
And so that is, you know, a tool that private equity sponsors are using to get some liquidity
00:04:39:05 - 00:04:44:19
for its LPs, but put off the ultimate
exit until the time is a little better.
00:04:45:03 - 00:04:53:16
When a fund is transferring or
selling from one existing fund to a CV,
00:04:53:16 - 00:05:00:11
is there anything different about that transaction from a legal standpoint, from your standpoint,
00:05:00:11 - 00:05:03:12
or is it a regular way deal from the
lawyer's standpoint?
00:05:03:22 - 00:05:06:06
You go out of your way to make
it a regular way deal,
00:05:06:06 - 00:05:10:08
and you want it to be arm's length
and show that it's arm's length.
00:05:10:08 - 00:05:16:06
You typically would get fairness opinions on both sides of the deal to show that the consideration
00:05:16:06 - 00:05:20:12
both on the buy side and the
sell side is quote-unquote "fair".
00:05:20:12 - 00:05:25:12
But the fact of the matter is it, is a,
you know, a related or an affiliate deal.
00:05:25:12 - 00:05:30:11
So you do have to be a little careful to make sure your T's are crossed and your I's are dotted
00:05:30:11 - 00:05:36:05
and make sure that there's a propriety of
arm's lengthness, I guess, is the way to put it.
00:05:36:08 - 00:05:42:05
I think we see that as well when we're
in the financial advisory capacity.
00:05:42:05 - 00:05:44:19
For those deals that are getting
done in the marketplace,
00:05:44:19 - 00:05:48:10
do you see it more of a buyer's
market or a seller's market?
00:05:48:10 - 00:05:57:22
First of all, it's a buyer's market if you can get through an auction and to the table.
00:05:57:22 - 00:06:00:14
Auctions are softer than they have been.
00:06:00:14 - 00:06:07:16
I'm working on one now which was launched four or five months ago that, you know, I thought
00:06:07:16 - 00:06:11:06
there was going to be a frothy auction,
going to be lots of interest.
00:06:11:06 - 00:06:14:15
To say that we're limping to the
finish line is an understatement.
00:06:14:15 - 00:06:18:02
There's maybe one buyer left at the end.
00:06:18:02 - 00:06:24:10
And so it's from that standpoint and the buyer that emerged has quickly figured out that the auction
00:06:24:10 - 00:06:28:17
largely broke and that buyer, of course,
has some deal leverage.
00:06:28:17 - 00:06:32:09
And so from that standpoint, if you're a buyer
that's willing to transact in this market,
00:06:32:09 - 00:06:34:10
there's definitely some leverage.
00:06:34:10 - 00:06:41:05
But once you get past that and to the table, the biggest dynamic — and this is really a more macro
00:06:41:05 - 00:06:49:15
change to the M&A world since me and you started doing deals 25 years ago — is rep and warranty
00:06:49:15 - 00:06:51:09
insurance has really changed the game.
00:06:51:09 - 00:06:52:00
It just has.
00:06:52:00 - 00:06:58:03
And it's definitely the biggest change in
M&A deals and processes in our careers.
00:06:58:03 - 00:07:00:00
And there's two sides of that coin.
00:07:00:00 - 00:07:04:20
At first, and most obviously, it is
a huge win for the sellers.
00:07:04:20 - 00:07:12:19
Rep and warranty insurance has allowed for sellers to have limited, or in many instances, no
00:07:12:19 - 00:07:19:12
post-closing exposure on the deal, which 15 years ago would have been unheard of for sellers.
00:07:19:12 - 00:07:23:07
And so from that standpoint, it's a
big win from sellers.
00:07:23:07 - 00:07:27:04
And you go into the deal with
a seller-friendly deal term.
00:07:27:04 - 00:07:35:16
But the flip to that is that the quid pro quo for a buyer agreeing to having no real recourse against
00:07:35:16 - 00:07:43:20
the seller is the seller generally agrees to what I'll say is a fulsome set of representations
00:07:43:20 - 00:07:47:05
and warranties that it gives to the buyer.
00:07:47:05 - 00:07:53:08
And the reason that's good for the buyer is because that supports the buyer's representation
00:07:53:08 - 00:07:54:21
and warranty insurance coverage.
00:07:54:21 - 00:08:00:06
And so while rep and warranty
insurance is obviously good for sellers,
00:08:00:06 - 00:08:03:23
it's also good for buyers too, because it's
facilitated these fulsome reps.
00:08:04:06 - 00:08:09:10
Is there a particular reason why the industry hasn't standardized a rep and warranty package
00:08:09:10 - 00:08:11:04
for an insurance policy?
00:08:11:08 - 00:08:14:17
Because the rep and warranty insurance
market hasn't mandated that.
00:08:14:17 - 00:08:18:14
And the reason it hasn't mandated that is
because it's so competitive now.
00:08:18:14 - 00:08:22:19
It's become so lucrative that more and
more market entrants have come in.
00:08:22:19 - 00:08:27:07
And there's been candidly a little bit
of a race to the bottom on terms.
00:08:27:07 - 00:08:31:21
And premiums down, retentions are down.
00:08:31:21 - 00:08:35:05
Policy terms are incredibly insured-friendly.
00:08:35:05 - 00:08:41:08
I mean, it's to the point where whenever you
do a new policy, you'll go back to your last
00:08:41:08 - 00:08:44:04
fully negotiated policy with that insurer.
00:08:44:04 - 00:08:45:11
And we'll say, "we'll start there".
00:08:45:11 - 00:08:49:06
And those terms are already very insured-friendly.
00:08:49:06 - 00:08:56:00
And so while you would think that the insurance would move a little bit based on the type of reps
00:08:56:00 - 00:09:00:23
you're giving, in deal practice that doesn't happen as the insurer really just insures over it.
00:09:01:10 - 00:09:09:09
Do you see a bifurcation between strategics and financial sponsors in terms of the use of
00:09:09:09 - 00:09:10:11
rep and warranty insurance?
00:09:10:11 - 00:09:15:15
I mean, certainly nearly 100% of financial
sponsor sellers will require it.
00:09:15:15 - 00:09:21:21
But in terms of buyers, are the strategics getting more and more comfortable with it as a product?
00:09:22:03 - 00:09:22:16
They are.
00:09:22:16 - 00:09:25:01
And that's really because they have to.
00:09:25:01 - 00:09:25:16
And you're right.
00:09:25:16 - 00:09:31:17
The early adapters of the rep and warranty insurance products were sponsors.
00:09:31:17 - 00:09:36:13
And they really moved the market at the beginning.
00:09:36:13 - 00:09:39:23
Strategics were slow to adapt,
like they often are,
00:09:39:23 - 00:09:44:00
until they really got to the point where
they couldn't avoid it anymore.
00:09:44:00 - 00:09:53:02
And the reason for that is, if not every sell-side auction, 99% of sell-side auctions are hardwired
00:09:53:02 - 00:09:59:11
such that the seller will have little, if
any, recourse through the deal.
00:09:59:11 - 00:10:00:23
Those are the terms.
00:10:00:23 - 00:10:06:05
No buyer is going to be competitive if they say, “no, no, I want a traditional indemnification package.”
00:10:06:05 - 00:10:12:15
So if you're planning an auction, you pretty much have to accept a limited recourse scenario.
00:10:12:15 - 00:10:16:07
And limited recourse scenarios, you've
got two options as a buyer.
00:10:16:07 - 00:10:18:18
One is you can go to the rep and
warranty insurance market
00:10:18:18 - 00:10:20:17
and procure this great new product.
00:10:20:17 - 00:10:24:12
Or second, you can self-insure and
effectively take the risk.
00:10:24:12 - 00:10:30:23
And while I think there was a time when strategics were trying to figure out which was the better route
00:10:30:23 - 00:10:38:02
there, because of the softness in
the rep and warranty insurance market,
00:10:38:02 - 00:10:43:00
there's more rep and warranty insurance
capacity than there is M&A deals to insure.
00:10:43:00 - 00:10:46:00
And that has led to, as I mentioned a minute ago,
00:10:46:00 - 00:10:47:18
you know, pricing coming down
and terms coming down.
00:10:47:23 - 00:10:53:20
Are there any new developments or particular
focus on deal protection mechanisms
00:10:53:20 - 00:10:54:22
that are worth highlighting?
00:10:55:02 - 00:11:01:22
Yes, certainly in the public deal world, the recent change of the tender offer rules, in which, for
00:11:01:22 - 00:11:08:18
certain tender offers, not all, but if you meet the conditions, cash deal, a competing offer hasn't
00:11:08:18 - 00:11:16:00
emerged, etc., the minimum offer period that
you have to keep the tender offer open
00:11:16:00 - 00:11:19:13
has been reduced from 20 business
days to 10 business days.
00:11:19:13 - 00:11:22:22
And that's pretty material for
both the buyer and the seller.
00:11:22:22 - 00:11:29:13
On the buy side, back to your deal protection, you know, buyers want to get their deal done as quickly
00:11:29:13 - 00:11:31:21
as possible to eliminate the deal risk.
00:11:31:21 - 00:11:33:03
Is somebody jumping the deal?
00:11:33:03 - 00:11:38:12
So reducing from 20 business days to 10
business days is certainly an attractive
00:11:38:12 - 00:11:41:18
deal protection mechanism that a
buyer would think about.
00:11:41:18 - 00:11:45:20
And it's attractive on the sell side, too, simply because stuff happens in the world.
00:11:45:20 - 00:11:51:20
And so sellers want as little market risk or “stuff happening” risk out there as possible.
00:11:51:20 - 00:11:55:09
So getting closed sooner rather
than later is better for the seller.
00:11:55:09 - 00:11:58:05
So this change in the tender offer rule,
00:11:58:05 - 00:12:05:00
if you've got the right fact pattern for your public deal, is pretty valuable and pretty game changing.
00:12:05:03 - 00:12:07:19
Bill, maybe this is a good opportunity to pivot
00:12:07:19 - 00:12:15:02
to talk about the subject matter that dominates all the headlines, which is AI and the use of AI.
00:12:15:02 - 00:12:19:03
How has the M&A process changed
from a legal perspective
00:12:19:03 - 00:12:22:21
with the introduction of viable AI models?
00:12:23:04 - 00:12:24:16
So it is absolutely here.
00:12:24:16 - 00:12:28:09
It is absolutely changing M&A in real time.
00:12:28:09 - 00:12:31:21
Deal process.
00:12:31:21 - 00:12:34:06
The use cases are varied.
00:12:34:06 - 00:12:38:06
They're exciting and they're evolving.
00:12:38:06 - 00:12:42:08
The most obvious is on the
due diligence side, document review.
00:12:42:08 - 00:12:48:17
The things that young M&A lawyers
used to toil all through the night reviewing
00:12:48:17 - 00:12:51:07
hundreds and hundreds of contracts.
00:12:51:07 - 00:12:54:21
In the old days, literally in a physical
data room with boxes.
00:12:54:21 - 00:12:56:09
And I know you remember those days.
00:12:56:15 - 00:12:57:00
I do indeed.
00:12:57:05 - 00:13:02:03
And now you put the contract into an AI tool and it says if a consent is required or not.
00:13:02:03 - 00:13:04:10
So that is a pretty interesting change.
00:13:04:10 - 00:13:09:21
But there's been some other ones in my practice quite recently that have gotten my attention.
00:13:09:21 - 00:13:13:18
And I'll just give a couple of examples
because I find it interesting.
00:13:13:18 - 00:13:21:16
We're doing, on the buy side, a fast moving deal to acquire a pretty complicated tech company,
00:13:21:16 - 00:13:26:03
which candidly, most of the lawyers and the
laymen around couldn't describe
00:13:26:03 - 00:13:27:20
easily about what this company did.
00:13:27:20 - 00:13:31:02
I know you know the type of
companies I'm talking about.
00:13:31:02 - 00:13:36:15
And so here we were faced with having to come up with the definition of the restricted business
00:13:36:15 - 00:13:38:04
for the sell side non-compete, and
00:13:38:04 - 00:13:40:04
“what can the seller not do?”
00:13:40:04 - 00:13:42:16
and we're like, “uh-oh, we don't even know
what the business does”.
00:13:42:16 - 00:13:44:00
So how do we say–
00:13:44:00 - 00:13:45:05
How do we define it?
00:13:45:05 - 00:13:47:14
One of my younger partners says, "I have an idea".
00:13:47:14 - 00:13:52:16
We'll take the banker's offering memorandum and put it into Harvey, which is the legal AI tool,
00:13:52:16 - 00:13:56:18
and ask it to disseminate, cut
through the information
00:13:56:18 - 00:13:59:05
and spit out a definition of restricted business.
00:13:59:05 - 00:14:03:04
Five minutes later, there was a definition of restricted business, which we put in front of our
00:14:03:04 - 00:14:06:09
client, who, of course, did know what the target company did because they were buying it.
00:14:06:09 - 00:14:09:08
And the client said, "Looks great",
didn't change a word.
00:14:09:08 - 00:14:15:09
So that's one example of using AI to solve problems and make things go faster.
00:14:15:09 - 00:14:20:06
The second example, which is perhaps even nearer and dearer to my heart and probably yours
00:14:20:06 - 00:14:25:17
as a former M&A, young M&A lawyer, we
were working on another deal recently,
00:14:25:17 - 00:14:29:12
which, as sometimes happens,
it started off as a stock deal.
00:14:29:12 - 00:14:31:16
And we dutifully prepared a
stock purchase agreement.
00:14:31:16 - 00:14:34:15
And, of course, the deal pivoted to a merger.
00:14:34:15 - 00:14:39:18
And so, uh-oh, we need to change a stock purchase agreement to a merger agreement.
00:14:39:18 - 00:14:45:08
And in the old days, that would entail a fifth-year associate with a lot of blood, sweat and tears,
00:14:45:08 - 00:14:51:23
typically over an overnight period, turning that agreement from a stock purchase into a merger.
00:14:51:23 - 00:14:56:22
But in this case, “Hey Harvey, can you turn our agreement from a stock purchase into a merger?”
00:14:56:22 - 00:15:00:16
And in whatever it was, 10 minutes,
out came a merger agreement.
00:15:00:16 - 00:15:05:20
And so there are some real-time examples
of how AI is changing the M&A process.
00:15:05:20 - 00:15:07:17
And that's obviously the tip of the iceberg.
00:15:07:17 - 00:15:09:17
And that's more anecdotal.
00:15:09:17 - 00:15:13:06
But it is definitely being used in the M&A process.
00:15:13:18 - 00:15:18:08
The hiring needs for the legal profession is
outside the scope of this conversation,
00:15:18:08 - 00:15:21:11
but it does have interesting implications
to the labor market.
00:15:21:22 - 00:15:28:17
But as it relates to AI, what are some
other issues that we should be cognizant of,
00:15:28:17 - 00:15:35:22
whether that's, you know, recording conversations, conference calls, the prompts,
00:15:35:22 - 00:15:39:18
you know, I'll call it a search history,
but the prompts using AI?
00:15:39:18 - 00:15:44:23
Are there any ramifications from a
confidentiality attorney-client standpoint
00:15:44:23 - 00:15:46:14
that clients should be aware of?
00:15:46:18 - 00:15:47:03
You bet.
00:15:47:03 - 00:15:51:14
And this is not surprisingly an
evolving area as we speak.
00:15:51:14 - 00:15:57:18
But there have been a couple of recent cases
on this topic in which, in the M&A context,
00:15:57:18 - 00:16:04:07
and I'm sure in other contexts as well, the question about search histories and AI prompts
00:16:04:07 - 00:16:08:18
and whether those are legally privileged
or could be discoverable,
00:16:08:18 - 00:16:13:16
have been front and center to pretty
significant M&A disputes.
00:16:13:16 - 00:16:18:04
There was one earn-out dispute in which AI prompts was front and center.
00:16:18:04 - 00:16:24:07
And so lawyers are creating various
provisions for nondisclosure agreements,
00:16:24:07 - 00:16:31:09
for the purchase agreement, that talk about the protection of AI searches and AI outputs
00:16:31:09 - 00:16:34:03
and making it legally privileged and
who can use it and who can't.
00:16:34:03 - 00:16:40:08
So I would encourage deal professionals, both bankers, lawyers, to frankly pay attention
00:16:40:08 - 00:16:45:00
to this and make sure you've got policies
and procedures on your deal team
00:16:45:00 - 00:16:48:03
in place so that it's at least thoughtful.
00:16:48:03 - 00:16:55:04
You don't want to get ahead of it and find
out later, wow, those AI prompts that says,
00:16:55:04 - 00:16:59:09
“How do we breach this contract?”
is later discoverable.
00:16:59:09 - 00:17:00:07
That's a bad thing.
00:17:00:17 - 00:17:01:11
Thanks, Bill.
00:17:01:11 - 00:17:03:10
What about some parting thoughts?
00:17:03:10 - 00:17:09:04
If you had to pick one area where
clients are still underestimating risk,
00:17:09:04 - 00:17:11:14
is there an area that you could
highlight for our viewers?
00:17:11:23 - 00:17:16:23
It's a really good question, and it was very thought-provoking when we were preparing for this.
00:17:16:23 - 00:17:21:11
The thing that I came up with, I kind of ticked through those deals I've worked on that
00:17:21:11 - 00:17:24:18
either outright failed, or were challenged.
00:17:24:18 - 00:17:27:15
And the good news is it's a relatively short list.
00:17:27:15 - 00:17:30:12
But there are some in my long career.
00:17:30:12 - 00:17:37:16
And the uniting factor to all those deals were the management team that the client, my client,
00:17:37:16 - 00:17:41:22
the buyer effectively bet on or was
relying on didn't play out.
00:17:41:22 - 00:17:45:14
And there's a lot of different
scenarios as I tick through it
00:17:45:14 - 00:17:50:23
that kind of led to that result,
ranging from outright fraud.
00:17:50:23 - 00:17:55:20
The CEO founder literally defrauded
my client, the buyer.
00:17:55:20 - 00:17:59:21
Obviously, that's a bad scenario, and that's
one that isn't typical and you want to avoid.
00:17:59:21 - 00:18:02:08
But there's more subtle areas in this.
00:18:02:08 - 00:18:09:13
Another sponsor bought a portfolio company that at the time the CEO was the son of the founder,
00:18:09:13 - 00:18:11:23
not a particularly strong CEO.
00:18:11:23 - 00:18:18:01
And within a very short amount of time from the closing, my client, the private equity owner,
00:18:18:01 - 00:18:23:17
realized they needed to make a switch
with management, which they did.
00:18:23:17 - 00:18:25:18
That company never recovered.
00:18:25:18 - 00:18:29:11
Seven, eight years later, one
CEO after another, one CFO.
00:18:29:11 - 00:18:30:06
It just never–
00:18:30:06 - 00:18:35:07
So starting out of the gate, betting on the
wrong management team really led to
00:18:35:07 - 00:18:37:09
that investment struggling mightily.
00:18:37:09 - 00:18:44:21
And then maybe the last example of that is
another sponsor acquisition situation.
00:18:44:21 - 00:18:51:07
The CEO of the target that we were buying
was, I'll go so far as to say, a little difficult
00:18:51:07 - 00:18:54:08
in the negotiations, employment terms and the like.
00:18:54:08 - 00:18:58:14
And it was hard to get that deal done
and to get that CEO over the line.
00:18:58:14 - 00:18:59:19
But we did.
00:18:59:19 - 00:19:03:16
And we owned the company for, my client owned the company for a nice hold period
00:19:03:16 - 00:19:05:04
and went to exit.
00:19:05:04 - 00:19:05:19
And guess what?
00:19:05:19 - 00:19:09:13
The CEO who was still around
was difficult on the exit.
00:19:09:13 - 00:19:12:01
And as a seller, that's a bad scenario.
00:19:12:01 - 00:19:15:04
You want to be able to control your exit.
00:19:15:04 - 00:19:21:02
You don't want there to be external factors that are implicating or making it harder for you to sell.
00:19:21:02 - 00:19:25:13
And that CEO that was difficult coming
in proved to be difficult coming out.
00:19:25:13 - 00:19:30:10
So the common theme of those challenge deals is
00:19:30:10 - 00:19:35:16
really kind of betting on the wrong management team, which led to some challenges down the road.
00:19:35:16 - 00:19:40:01
So I think that might be something that buyers maybe underestimate a little bit.
00:19:40:11 - 00:19:45:03
Maybe this would be a great opportunity to turn
it around and say one of the positive things
00:19:45:03 - 00:19:51:18
that helps deals is having the right advisors alongside, whether it's both legal and financial.
00:19:52:00 - 00:19:53:13
That is for sure the case.
00:19:53:13 - 00:19:54:00
Absolutely.
00:19:54:07 - 00:19:57:22
Bill, thanks for joining us today at the
Mizuho | Greenhill M&A Corner.
00:19:58:01 - 00:19:58:11
You bet.
00:19:58:11 - 00:19:59:01
I had a great time.
00:19:59:01 - 00:19:59:13
Thanks for having me.
