The role confidentiality plays in M&A operations

Confidentiality in mergers and acquisitions plays a primary role in their success rate.

One of the key objectives for any M&A advisor will be to set-up a competitive process that, on the one hand, allows the customer to maintain negotiating leverage and maximize value and, on the other hand, ensures the best deal outcome.

It is fundamental that the process is managed with a view to maximising confidentiality and, consequently, based on a clear disclosure schedule, maintain a certain level of competition between potential counterparts. In fact, if this is not carried out correctly, there might be a deal break, which will negatively affect the customer in the future, regardless of whether or not an M&A transaction takes place.

What is the Non-Disclosure Agreement and how is it dealt with?
The Confidentiality Agreement, also known as the “Non-Disclosure Agreement” (NDA), constitutes the first line of defense when confidential information is requested by potential investors, the disclosure of which, if not strictly limited, could expose the customer to the infringement of sensitive company data.

Although an NDA is directly binding only for those who sign it, the presence of an M&A advisor serves to protect the receiving party (the advisor’s client) to ensure that the potential investor complies with the agreement according to the terms indicated.

From a practical point of view, in a typical M&A process, targets who have been identified as possible buyers will receive an anonymous presentation of the company (a teaser) from the advisor. From there they can assess their interest, or not, in the transaction. If interested, an NDA is sent for them to sign and return to the advisor – on behalf of the client – so as to proceed with the next step: the disclosure of the client’s name and the delivery of the project documentation (Information Memorandum) relating to the deal.

In other words, the NDA establishes the legal structure and parameters around the confidentiality of shared information, provided that other information processes are also implemented in order to maintain confidentiality of all participants in the M&A process. It is important to highlight what is meant by “internal” company information and the risks related to disclosing sensitive information to third parties, risks that could inhibit the company from achieving objectives and strategies illustrated to the counterparty.

Limiting involvement within the company, will ensure “business as usual” and protect the negotiations
It is essential that management is not distracted by the M&A process and consequently so neglects the ordinary business management, on the basis of which the transfer project was started. To avoid damaging distractions, limit the involvement in negotiations only to shareholders and top managers; the consequent level of confidentiality within the company will help avoid discrepancies in daily operations and will allow middle management to stay focused on their jobs and teams.

It should also be noted that not all employees will react positively to the news of a possible merger or acquisition. The disclosure of a deal negotiation might trigger some employees to “disengagement” with the company and their work. This reaction is usually caused by fear and the uncertainty of a future sale. This could have a direct impact on corporate performance and, consequently, on the success of the deal.

It must also be said that, even without considering the criticality of a drop in performance, there are many other reasons why an M&A transaction is not successful: there is, therefore, no reason to alarm staff before a legal agreement with the potential buyer.

Protect customers from unnecessary worry
If we then consider the impact that an M&A transaction could have on customers, rumors of a potential sale of the company would undoubtedly be detrimental at a commercial level. And this is exactly what happens when a customer feels that a supplier is about to be sold. Questions about the quality of future services, or potential conflicts that may arise between the buyer and the customer with the consequent risk of renegotiating existing contracts are just some aspects that could emerge well before the conclusion of the deal unless properly managed through an effective confidentiality system.

Keep rumours at bay from the competition
And finally, the competitors. In M&A transactions, competitors are seen as natural potential buyers due to the synergies within the reference markets. It is therefore essential that the advisor supports the seller through a careful protection process that goes beyond the confidentiality agreement, incorporating all critical elements linked to sensitive company information into the negotiation. Failing to do this and giving access to such information (typically: contractual agreements with customers, margins, industrial productivity data and know-how) without a set of “contractual commitments” on the part of the buyer, would leave the company exposed to undue advantages for the latter with respect to the present and prospective clientele of the seller.

In conclusion, it must be acknowledged that there will always be a certain amount of risk that confidentiality will be breached considering the numerous variables involved.
However, it is in the common interest of both the seller and the buyer to maintain the utmost possible “secrecy” when it comes to customers, suppliers and competitors until the conclusion of the negotiations. A properly managed confidential process, even internally, will help both parties achieve an optimal result in terms of value, structure and, ultimately, the positive closing of the deal. 

Piermario Croce, October 2019
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