"A Beginner's Guide to M&A" | FAQs from Hampleton's Webinars (#8)

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Since the start of the outbreak in March 2020, Hampleton Partners has provided tech business owners with regular webinar updates regarding M&A prospects in the current climate.

In this blogpost, we have compiled questions asked in our April 2021 webinars on activity in the DACH (*German-speaking) and Nordic regions – and their answers – through which we aim to provide "A Beginner's Guide to M&A".

Note: Our DACH Webinar was co-hosted alongside law firm Osborne Clarke, whom we have also credited here.

Are rights to intellectual property and software developed within the company automatically transferred in the M&A process? Could employees involved in the development of this IP claim any ownership or rights to the technology?

Konstantin Ewald (Osborne Clarke): German law stipulates that software developed in and for a company constitutes the property of the firm. Compensation for developing this technology is included in the employee’s wages.

However, in certain circumstances, a firm does not have right of ownership and transfer of software developed by an employee:

If the technology was developed as a side project or in an employee’s free time
If the employee who developed the technology is based outside of Germany – in this case, all IP ownership is established by the laws of that country
If the software in question was developed within an academic or university environment – in this case, the employees are not bound by their employment contract, but rather are subject to the rules surrounding intellectual property developed at the university

How do I acquire a company that is insolvent?

Dr Björn Hüten (Osborne Clarke): Distressed sales and purchases are fairly widespread at the moment due to the effect of coronavirus. Several acquirers have approached us [Osborne Clarke] for information on purchasing an insolvent company.

Firstly, it’s key to differentiate between balance sheet insolvency with a positive forecast; and a balance sheet insolvency with a negative forecast. In the latter scenario, the firm must file for insolvency and effectively goes into administration. Subsequently it is the insolvency administrator who oversees and executes on all matters relating to technology or intellectual property rights, company restructuring or employee rights.

In all “distressed” scenarios, the firm remains in the driver’s seat with regard to all such matters until it files for insolvency. Thus, a sale – or any other options – should be considered before filing for insolvency.

Is the vendor due diligence process customary or mandatory? What does it involve?

Dr. Jan Eiben (Hampleton Partners): It is customary for an acquirer to carry out a vendor due diligence process, via their own M&A advisory team, to flag any deviations from the standards highlighted in the original investment documentation.

However, this process can also be upended: as the seller, in the preparation for a deal, you can also check and compile all legal documents, bundle them together and make them accessible to all prospective buyers in a virtual data room.

Preparing this data room will allow you to flag any potential issues early on, safeguarding until any bad surprises later in the process and against the buyer using newly uncovered elements to negotiate the transaction price. Of course, a virtual data room also saves all parties work, money and time.

Due diligence scenarios differ from case to case and from sector to sector. If your company has been operating in Germany for the past five years, evidently the vendor due diligence process is unlikely to look into possible corrupt deals with government officials. But this might be the focus of the legal due diligence in other cases.

Topics which typically arise in a due diligence process include intellectual property and employment law – particularly if the seller employs many individuals on various contracts (fixed term, freelance, etc.).

If I want a high valuation, should I sell or go public?

Robin Eyben (Osborne Clarke): Most transactions are M&A deals, not IPOs (there are more IPOs in the USA, but there too M&A transactions outnumber the IPOs). Only the behemoths and large companies attempt to go public, chiefly because they can rely on capital and positive projections but also because they can cover the costs involved in planning an IPO.

Miro Parizek (Hampleton Partners): In my 20 years of experience, I can confidently say that the number of M&A transactions is around 20 or 30 times the number of IPOs.

Some of the valuation highs seen in IPOs are difficult to reach unless you are also benefiting from a hype movement around your technology.

I would also add that an IPO is not strictly speaking an “exit”. In reality, it is akin to a Series D round – i.e. it is part of a corporate strategy move which relies on large amounts of funding. Therefore, the choice between M&A and IPO has less to do with valuation and more to do with where you are interested in taking your business and how to do this – including aspects such as liquidity and post-transaction prospects.

As a Series C startup, am I ready to go public via a SPAC (special purpose acquisition company)?

Robin Eyben (Osborne Clarke): SPACs are very hot at the moment – even in Germany. We’ve received a lot of queries from investors and parent companies regarding how to take public their portfolio companies through a structured SPAC.

In the capital markets world, it is understood that it is not worth going public through a SPAC if the company is valued under $500 million; and that SPACs become interesting if the company is valued at $1 billion or more. There are limits to this, however. Firstly, valuations in this space are flexible. Currently we are seeing valuations grow at top speed, with some companies going from Series C to SPAC within only a few weeks. Secondly, there are also some unconventional routes to SPAC. Venture capital investors create their own SPAC vehicle and then exit their own portfolio company through this take-public vehicle. Some have even carried out entire portfolio transfers for all of the valuations of their individual portfolio companies add up.

Do you have any advice for someone selling a company pre-revenue company?

Henrik Jeberg (Hampleton Partners): Selling a company pre-revenue can be hard, but it is not impossible. You obviously won’t sell to a private equity buyer, but you can still sell to a strategic acquirer, especially if your technology is of particular interest to them. In that regard, it is crucial to have strong technology, a strong team and clean financials.

Why is Sweden the clear winner of Tech M&A in the Nordics?

Michel Annink (Hampleton Partners): On the one hand, the PE and VC communities are larger in Sweden than in other Nordic countries, which has a strong effect on investments and developments overall. On the other hand, Sweden is simply a relatively large home market that helps foster those larger deals and larger companies. Beyond this, there are many theories surrounding Sweden’s leading position and how it stems from its drive for innovation, high-level education system, and how it works with the commercial sector.