Many industries develop their own “ecosystems” within which member firms develop essential links with each other. Sometimes these bonds are so critical that their absence would compromise the very existence of the linked companies.
A critical distribution relationship, like that between a software reseller and a software developer; or two companies relying on each other to cover deficits in their own business models that are adequately addressed by the other (e.g., one brings scale and infrastructure and the other brings a reputation for craftsmanship and quality) are two common examples of industry linkages.
Sometimes these symbiotic relationships are the stuff mergers are made of. But often, there are obstacles standing in the way of such seemingly compelling “hookups.” Cultural barriers, governance issues, and divergent financial profiles are among the myriad of issues that can conspire to scuttle the most promising combinations. In such situations, two companies might conclude that the challenges to a successful acquisition are insurmountable no matter how much value might accrue from such a transaction.
One way around this conundrum is to employ a “consortium sale” or “teaming” transaction structure. A consortium seller relationship is formed when two or more market participants join forces for the sole purpose of selling their businesses together to a third party. Unlike a traditional sale transaction, where the selling firms first combine with each other before selling as a single, unitary enterprise to a buyer, the parties to a consortium sale remain separate, independent companies up until the moment they are both acquired by a single buyer in one transaction.
There are many issues to consider before entering the marketplace as a “package deal.” Some of the common legal issues that must be addressed between consortium sellers include:
- Negotiating strategy: Consortium sellers should outline a clear decision-making protocol for deal negotiations ensuring each party retains a voice during the sale process.
- Sharing of confidential business information: Since there is some possibility that the parties do not consummate a joint transaction, each consortium seller must develop protective measures for the sharing of competitively sensitive business information with other consortium members.
- Governance and participation rights: Consortium sellers should protect their interests by outlining a clear governance structure that establishes parameters for how the participants will operate on a coordinated basis pending the sale transaction (keeping in mind the regulatory implications identified below). Properly defined exclusivity rights, designated veto and consent rights and other protocols should be considered.
- Exit/Unwinding rights: The parties should carefully consider what happens if one party wants out of the consortium or desires to engage in a sale transaction apart from the other consortium members. For example, upon termination, parties will need to determine what happens to the work product of advisors, who has rights to such documentation and for what purposes and the disposition and/or return of confidential information.
- Regulatory challenges: Depending on the size and scale of the parties involved, antitrust compliance must be considered. Industry specific rules and regulations may also be implicated.
- Expense allocation: Fees and expenses of advisors to the consortium (including counsel, investment banking, accounting, etc.) must be fairly apportioned among the selling parties.
With middle market M&A activity reaching new highs, it is a good time for companies to examine their market position and whether it might be time to sell, acquire or otherwise address deficits in the business. Consortium sale transactions present another tool that companies can consider in order to gain scale and market leverage on the sell-side of the market. Using this approach, consortium sellers might find a pathway to a successful transaction where “the whole is indeed greater than the sum of its parts.”
If you would like to learn more about these opportunities, contact David Jaffe at (412) 918-1171 or djaffe@metzlewis.com.
This post is written by David Jaffe.
