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Tools for Advanced M&A – How to Reduce Uncertainty in Transactions
4 Dec 2017 2017 has witnessed strong M&A activity, with year to date figures for Europe showing increase in aggregate deal value compared to both 2015 and 2016. The outlook remains promising with a robust deal pipeline and an abundance of dry powder and strong corporate balance sheets. However, there are significant factors that continue to cause uncertainty for M&A. TThe nature of deals is changing. Deals are getting bigger and frequently involve complex multi-jurisdictional aspects, the market players are facing increasing pressure to get the deals done in a highly competitive and unpredictable landscape. In addition, the clichéd phrase "every company is a tech company" has interesting implications for transactions; the value of companies more often lies in intangible assets, making the valuation more challenging and expanding the scope of due diligence to complicated issues involving technical, IPR and data privacy matters. Ultimately, all of these factors contribute to the parties in M&A transactions facing growing uncertainty in an increasingly complex world – and we did not even mention the rapidly changing political and regulatory landscape! Against this background, it is vital that all parties involved in M&A make the most of tools which help to reduce uncertainty and enable focus on issues that really matter. Comfort through M&A Insurance In broad terms, M&A insurance is a product enabling the buyer and/or the seller to transfer risks related to the transaction to the insurance market. With the help of M&A insurance, the transaction can be structured in a way that typically provides the buyer with less risk and equal or better protection, while the seller achieves the best possible price in combination with an exit with less or no risk or liabilities. The most widely used type of M&A insurance policy is W&I insurance, which insures the seller's representation and warranties, bridging the gap between the parties in M&A negotiations on the potential post-closing erosion of value. M&A insurance has become an appealing antidote against uncertainty and it has become a fixture on Nordic deals, especially transactions with private equity involvement. M&A insurance brings clarity to the allocation of risk and allows the parties to focus on fundamental questions. Used correctly, M&A insurance means more straightforward transaction processes reducing the time spent in negotiations. As the insurance market evolves, we also expect to see a rise in the use of opinion based insurances against specific known tax or litigation issues, complementing W&I insurance and further expanding the toolbox. AI – the End of M&A lawyers? AArtificial intelligence (AI) has been characterized as the most important technology of our time and its revolutionary significance to the mankind is often compared with that of steam engine or electricity. Not surprisingly, AI is already being integrated into M&A processes and can play a vital part in helping the parties to focus on what really matters. In the context of M&A, law firms have adopted AI tools in particular in the work intensive stages of due diligence which have traditionally required hundreds of hours of document review. We at Dittmar & Indrenius have introduced the Luminance® AI platform as a part of our due diligence process in order to better enable us to focus our efforts on providing added value to our clients. "The rise of AI will highlight the significance of the remaining human factors in the M&A process, making the choice of legal advisor perhaps more essential than ever." Despite of the inevitable triumph of AI – and perhaps to the regret of some – M&A lawyers are not an endangered species. At least for now, the uses of AI are limited to routine tasks which do not require creativity. While AI is handling more and more routine work in transactions, the lawyers need to focus on increasingly complex issues which call for creativity, judgment and efficient communication. These are all tasks that machines are not very good at, at least not today. Consequently, the rise of AI will highlight the significance of the remaining human factors in the M&A process, making the choice of legal advisor perhaps more essential than ever. Pablo Picasso once said that computers are useless because they can only give you answers. This observation, while perhaps somewhat exaggerated, provides insight also on the limits of AI. It is a tool for analyzing massive amounts of data and answering specific questions, not for posing them. Lawyers who figure out what problem to tackle next, or what new possibility to explore, will continue to be essential. Paraphrasing the leading AI researchers Erik Brynjolfsson and Andrew McAfee from MIT, over the next decade AI won’t replace lawyers, but lawyers who use AI will replace those who don’t.
The Finnish Government Publishes Proposal on Patient's Freedom of Choice
12 May 2017 As a part of the major health and social services reform, the Finnish Government published on 9 May 2017 a proposal for new regulation (the "Freedom of Choice Act"), enabling patients to choose between healthcare providers from the private and public sectors. The Government published a draft proposal on the freedom of choice in December 2016, after which the draft proposal was circulated for expert opinions in early spring 2017. Based on over 600 expert opinions, certain parts of the draft proposal were amended. Following our D&I Alert issued on 23 December 2016 on the draft proposal, in this D&I Alert we focus on some of the key amendments implemented in the government proposal. The Proposal in Brief: The Patient Becomes the Customer Currently, social and healthcare services are largely provided by municipalities. Regulatory obstacles have effectively kept the market share of private healthcare providers fairly low. The proposal aims to make the market more effective by enabling grand-scale competition on the market. In the proposal, a social and healthcare county ("County") procures the health and social care services from direct service providers ("suoran valinnan palvelun tuottaja") (i.e., service providers offering services with the same broad scope as the current public health and social care centers) by paying a fee based on the age, location and health conditions of the persons under the direct service provider's primary responsibility. The customer may choose, for one year at a time, which direct service provider to use, paying the same basic fee regardless of the service provider used. Furthermore, some social and healthcare services are made available through vouchers or a personal budget. The vouchers effectively extend the customer's freedom to choose which service provider to use. Amendments from the Draft Proposal Based on expert opinions certain amendments were made to the draft Freedom of Choice Act, comprising in particular the following: the direct service providers and the Counties shall offer consultation, assessment and coordination services; a direct service provider shall provide a minimum of 60 % of its services by using its own staff, i.e., without using subcontractors, and provide security for protection against insolvency; the criteria for the remuneration paid to direct service providers were amended to include the customer's need for services; and the timetable for the implementation of the new rules was specified. Possible Implications for the Private Sector The private sector currently holds a 25 % share of the social and healthcare market. The new regulation enables new business opportunities due to e.g.: private and public service providers competing for the same customers in a situation where the private sector is more used to competition than the public sector; small and midsized private service providers are expected to participate on the market by providing their services in exchange for vouchers or customers' personal budgets; private service providers being able to offer services without taking part in tenders due to a new notification system introduced in the proposal; and private service providers being able to use their expertise in customer service and cost efficiency to win over patients from other service providers. The health and social care centers run by the Counties will mostly be challenged by large service providers offering their services directly to the Counties. The market for providing direct services is completely new, which could allow new entrants to gain a significant market share in a short period of time and existing private sector actors to strengthen their positions. Next Steps The Government has expressed a strong will to carry out the reform with a tight schedule. According to the schedule, the reform should be handled by the Parliament prior to the summer break of 2017. Should the proposal be approved, it would come into effect in two stages. From the entry into force on 1 January 2019 (the Counties may opt for a transfer period) until the end of 2021, the focus will be on basic level services. Thereafter, the scope will be widened, and finally in the beginning of year 2023 the legislation would be in full effect. We at Dittmar & Indrenius are happy to discuss any questions you may have regarding the Finnish health and social services reform and its expected implications.
The Technology Revolution Drives Transactions
13 Apr 2017 New World Order Companies are facing revolutionary changes. The rise of digital technology platforms, such as Google, Facebook, Uber and others, has given many companies a lot to digest. However, the development in technology is only the beginning; the real revolution lays in the business models and ecosystems that are built around platforms. Platform ecosystems can be seen as the bedrock of new value creation in the digital economy and they will redefine the future of all industries1. As a platform gains more users, other businesses looking for access to new customers may congregate around it. These other businesses will integrate their services with the platform leading to an intense snowball effect where the companies can collectively achieve much more than by acting alone. The inconvenient truth is that platform-based business models provide superior paths to growth and companies that fail to adapt to these new models may face a threat to their continuation. Old Dogs - New Tricks? Also companies in more traditional industries are preparing for the platform economy2. For example, in 2016 General Motors invested USD 500 million into Lyft, a US-based ride-share company and a rival of Uber. Another great example is Wal-Mart's recent USD 3.3 billion acquisition of Inc, a US-based e-commerce start up known for its platform. In Finland, Nokia Corporation's recent EUR 350 million public tender offer for Comptel Corporation, a listed Finland-based provider of a platform to deliver digital and communication services, can be seen as a strategic move towards a platform ecosystem. The acquisition helps Nokia in its pursuit to sell more services and software instead of network-equipment and to create a standalone software business, which will focus on enterprise software and platforms for Internet-of-Things. Are You the M&A Steamroller? When a new technology (not to mention new economy) threatens to roll over you, you’re either part of the steamroller or the road. New platform ecosystems may be small, but there is only a limited window of time for companies to come up with a strategy on how to gain access to them. A 'wait and see' strategy is potentially dangerous and companies pursuing such strategy are at risk of falling behind and finding themselves forced to make rushed – and usually less successful – decisions. The acquisition of technology assets has surged in importance as a top strategic driver of M&A3 and its role will become all the more crucial as companies in traditional industries have to adapt to the cataclysm that digital platforms will create. Companies can build their platform capabilities through acquisitions targeting promising technology companies. But before rushing to acquire that promising Palo Alto startup, it may be worthwhile considering the following points: 1Due diligence scrutinising IP, data protection and cybersecurity issues plays a major role, as these aspects have become crucial factors in a target's value. Since the exclusive ownership of software IP can be essential, all third party dependencies must be identified. The platform has to be safe for other businesses in order to attract them, which underlines the importance of the target's digital resilience and cyber readiness. Additionally, seller's warranties may be virtually worthless if the target proves not to be the sole owner of the desired technology. Unnoticed data protection issues may in turn collapse the value of the target and prevent scalability. In addition, it goes without saying that technological due diligence is a must. 2Platform-based businesses are creating new regulatory challenges to lawmakers and legislative changes may pose material risks that a buyer needs to understand. A developer of a platform, or any technology, may not have evaluated possible regulatory risks which can materialize e.g. in the areas of employment and tax regulation. 3Although acquiring an own platform through M&A may be the fastest solution, many businesses may find cooperation-based deals, such as joint ventures and licensing arrangements more useful. As the pace of technology development gets more intense, the value of owning an asset that quickly becomes outdated might be limited. However, cooperation based deals come with their own set of risks and challenges which must be diligently assessed. These issues often relate to formality of the structure and development of technology arising from jointly held IP. Businesses are on the verge of a new era. Although platforms are causing a paradigm shift in how business is conducted, adapting to them does not necessarily mean abandoning your existing business model. The old and new models may complement each other. A key observation is that companies should come up with a strategy for building a foundation for their future platform-based business – the emergence of which seems inevitable. Having a platform strategy and implementing it successfully is one of the main elements in a company's future success. Key Insights Building the basis for your own platform-based business entails many challenges. Here are key takeaways to keep in mind when building your company's digital future through transactions. Don't be a drifting raft. Have a strategy how to systematically build your capabilities to integrate your business with a platform-based business model. Get your due diligence right from the start. Rigorous due diligence is essential. Cyber security, IP and data protection related issues merit special attention. Be prepared. Understand and be prepared for the regulatory risks that new unconventional business models may create. Be dynamic. M&A is not a cure-all, consider also other options.
The Finnish Government Publishes Draft Proposal on Patient's Freedom of Choice
23 Dec 2016 As a part of the major health and social services reform, the Finnish Government published on 21 December 2016 a draft proposal for new regulation (the "Freedom of Choice Act"), enabling patients within the scope of the established freedom of choice to select which health and social services they use. The proposal introduces a right for patients to choose between all healthcare providers fulfilling certain requirements established by law. This is new thinking, since public healthcare has traditionally not been compelled to consider patient´s preferences – effectively patients will now become customers. The announced reform has attracted broad interest both in Finland and abroad, as Finland would be the first country in the world to introduce such wide right of choice for patients. The purpose of the reform is to increase the customers' possibilities of exerting influence, speed up access to services as well as improve the quality and cost-effectiveness of the services. The Draft Proposal in Brief The Purpose and Scope of the Proposed Reform The aim of the proposed reform is to adopt the most effective practices so that services are produced in a highly cost-effective way. In the proposed model, the work-load of service providers would ideally be evened out, and differences in people's welfare would be reduced. The Freedom of Choice Act regards general healthcare and social care and partly special healthcare and dental services. Emergency services are excluded. Freedom of Choice The customers may choose, for one year at a time, which social and healthcare center and dental care unit to use, all while the social and healthcare county ("County") paying the same basic fee regardless of which service provider is used. This implies that the customer may, without having to compare costs, choose whether to go to a private or public healthcare provider. The social and healthcare services are made available through vouchers or a personal budget. The vouchers extend the customer's freedom to choose which service provider to use. Personal budgets are used with customers who are in continuing need for support and assistance. Implications for the Private Sector According to the proposal, the new legislation would bring new business opportunities and diversify the base of service providers on the market. Competition on the private healthcare market is also expected to increase. Public service providers will be required to streamline their services to compete for customers with private healthcare providers. Under the current rules, private service providers have been able to enter the public healthcare market by taking part in tenders. Since the new system proposes to abolish the tenders and instead only requires fulfillment of specified requirements, the public healthcare market is expected to become simplified. Private service providers offering their services to the patients, without the requirement for an assignment by the relevant County (so called direct service providers), are required to offer services with the same broad scope as the current public health and social care centers. As significant resources are required to accomplish this, the companies run by the Counties will mostly be challenged by large service providers, which have the possibility to meet the criteria set forth in the proposed legislation. However, this also enables for smaller service providers to form parts of subcontracting networks, where they may offer their services. The direct service providers may also use the services of smaller providers by subcontracting certain parts of their business to them. Future Steps and Conclusion The draft proposal will be circulated for comments in early 2017, and the aim of the Government is to have it handled by the Parliament prior to the summer break of 2017. Should the proposal be approved, it would come into effect in two stages. From the entry into force on 1 January 2019 until the end of 2021, the focus will be on basic level services. Thereafter, the scope will be widened, and finally in the beginning of year 2023 the legislation would be in full effect. As a conclusion, we highlight the following possible implications of the draft proposal: the patients will have a genuine freedom to choose which doctor and which hospital to entrust; private businesses get access to the public market without participating in public tenders; private businesses will find new possibilities to compete with the public sector, which would increase the private sector's market share of the social and healthcare market from the current level of 25 %; and small and midsize service providers may form parts of subcontracting networks to provide their services, resulting in an increased number of players on the market. If the implications above realize, a unique social and healthcare model would be established in Finland, enabling new opportunities for profitable investments in the social and healthcare sector.
What's the Big Deal With Mega-Deals?
2 Dec 2016 Internationally big ticket M&A deals get a lot of media attention. Everyone seems to talk about mega-deals. Mega-deals certainly have some special features that need to be taken into account. Still, the issues involved in mega-deals are largely the same as in any sizeable M&A transaction. Thinking ahead and being prepared are key success factors regardless of deal size. D&I's Transaction Powerhouse lists issues to take into account when planning and executing a deal which is big from your perspective: Structuring 1Focus on the big picture In the current regulatory environment structuring is not only about identifying and creating tax efficient structures, but rather about facilitating business opportunities while meaningfully managing operational and business risks. In addition to tax, e.g. the allocation of data or IPRs may be a key driver in structuring transactions. 2Tried and tested structures may no longer work The competition for tax revenues between countries and the turbulent political landscape has led to tighter and more extensive regulation and decreased the threshold of regulatory interventions. Tax structures that were applicable in the past may not be viable today or in the near future. 3Maintain long perspective and flexibility Your tax structure should be made with a long perspective. Flexibility is key in the different stages of a company's life cycle, and a potential exit should also be taken into account in the structuring phase. 4Obtain advance comfort Taxation is uncertain like never before. Foreseeable risks may be mitigated in advance through sensible structuring and e.g. preliminary rulings from tax authorities. 5Social responsibility pays off Consider how the contemplated tax structure presents itself to the public. Companies can show a sense of social responsibility by paying a certain amount of tax in the country of establishment without making the structure substantially less effective.   Negotiations It has been said that in order for negotiations to be successful, 50-80 % of the time spent on the negotiations should be spent on preparation. When negotiating a mega-deal or any other transaction of great significance, it is paramount to ensure that the parties understand each other and play by the same rules. Additional value can be created for all parties involved if the negotiation process allows the parties to focus on the essentials. 1Understand who's involved and when to talk to them Multiple parties are directly or indirectly involved in big transactions, many of the parties not so apparent at the first glance. Mapping them all out, trying to understand their interests, and planning the sequence in which the parties (or potential parties) are to be involved in the negotiation process can make all the difference. 2Understand the other side Do whatever you can to get an in-depth understanding of the other side, both on substance, such as their interests and best alternative to a negotiated agreement, and on their negotiating style and culture. 3Build the best negotiation team Consider what you really need in the negotiation and who could deliver that. If you do not know the market, bring in someone who does. Often, the decision makers and negotiators should not be the same. However, do understand who calls the shots on the other side of the table. 4Negotiate the process Before negotiating the deal itself, take time to negotiate the process. Agree on the overall schedule, when and where to meet, the agenda and how to handle the drafting process. 5Be prepared for the unknown International negotiations are complex and are often full of surprises. Cultural differences may accentuate the challenges. Take this into account when planning the negotiation schedule and your resources.   Regulatory Approvals Simply assessing where global M&A transactions require clearance presents considerable challenges given the number and nature of the jurisdictions involved. In many emerging regimes, notification tests are unclear, with even local advisors having trouble providing definitive guidance. In more established regimes, the administrative burden of the review process may be considerable and the authorities' requests for information remarkably extensive. 1Political interests vs. written legislation In some jurisdictions, the tendency is that the competition and other regulatory authorities take into account public interest factors when deciding on clearance. To successfully navigate such challenges, you need to be familiar not only with the legislative framework but also the local political atmosphere and engage in discussions with relevant parties. 2Different outcomes in different jurisdictions In multi-jurisdictional cases, the parties should prepare for the possibility that the authority in one jurisdiction approves the transaction, but a second jurisdiction subsequently disapproves it. This may happen even in jurisdictions where the authorities typically have a functioning co-operation. Concurrent filing obligations in all relevant jurisdictions need to be taken into account when planning and implementing cross-border transactions. 3Creative and innovative solutions In many jurisdictions, authorities have become more willing to accept behavioral remedies, i.e. commitments relating to the future conduct of the parties, either standalone or together with structural remedies. To facilitate clearance, be prepared and seek to find creative solutions that satisfy the requirements under applicable laws but also the interests of the company and the public. 4Timing and preparation The waiting times for a competition clearance vary significantly between jurisdictions and cases, and, depending on the situation, can be considerably long. The key is to initiate the clearance procedures as early as possible and be well prepared. 5Tougher sanctions for illegal early implementation Especially as waiting times for a competition clearance can be long, the importance of proper procedures, like joint defence and clean teams, to avoid illegal pre-closing information exchange or gun jumping, should not be underestimated. Significant fines have been imposed for premature implementation of a transaction in several jurisdictions.   D&I's Recent Mega-Deals and Large Transactions 1The largest corporate transaction ever involving a Finnish company D&I advised Alcatel-Lucent in its combination with Nokia in a deal valued at 15,6 billion. 2The largest corporate split-up ever D&I advised Hewlett-Packard on the Finnish law and tax aspects of its separation into HP Inc. and Hewlett Packard Enterprise Company, the largest corporate split-up globally ever. 3The largest energy related deals on the Finnish market D&I has been involved in all the largest energy related deals on the Finnish market in recent years including advising AMP Capital, a leading global infrastructure manager, and Infracapital, a leading European infrastructure investor, in their acquisition and related financing of Adven Group, a provider of critical energy infrastructure and services in Finland, Estonia and Sweden; and advising SL Capital Partners in its acquisition of Gasum's local gas distribution network, the largest gas DSO in Finland. 4The largest circular economy transaction on the Finnish market D&I advised the Association of Finnish Local and Regional Authorities, the second largest shareholder of Ekokem Corporation, a leading Nordic circular economy company, in connection with Fortum's acquisition of Ekokem at EUR 700 million on a debt and cash free basis. 5Leading cinema operator in the Nordic and the Baltic regions D&I advised Bonnier and Ratos in the sale of a majority stake in Nordic Cinema Group, the leading cinema operator in the Nordic and Baltic regions, to Bridgepoint in a transaction with an enterprise value of SEK 4.7 billion.

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