Eversheds Sutherland Spain Madrid-based partner Juan E. Díaz says the coronavirus pandemic will lead to an increase in transactions involving distressed assets which will lead to rising demand for M&A lawyers with a high degree of flexibility, knowledge of a range of business sectors and IT management skills.
Leaders League: What are currently the biggest opportunities for corporate/M&A lawyers in Spain?
Juan E. Díaz: The market is facing a situation that – as a result of the Covid-19 pandemic – is of unknown proportions and therefore new uncertainties and challenges in business and transactional activity will emerge. While activity remains strong in sectors such as renewable energy and healthcare, it’s envisaged that there were will be a rise in atypical and distressed transactions which will lead to demand for M&A lawyers with a high level of flexibility, a wider knowledge of different business sectors and excellent skills in relation to the management of IT tools.
We are seeing that restructuring transactions (including mergers, demergers, and divestitures) involving big corporations will be a recurrent source of work. We also note a significant increase in regulatory restrictions, so a good knowledge of foreign investment regulations, security issues and antitrust frameworks is often paramount for a corporate M&A lawyer.
What trends are you observing in private equity sector in Spain?
Covid-19 is hitting private equity hard. General partners are today battling to keep their portfolio companies alive. The task ahead of them is enormous and requires titanic efforts that, on many occasions, will not be rewarded because a significant number of portfolio companies will inevitably perish. Business plans are in the process of being reviewed, so are financing agreements that have been entered into with private equity funds and financial institutions. Meanwhile, managers need to constantly reassess strategies and each investment needs to be reconsidered. And, despite all efforts, it will be difficult under these circumstances for private equity houses to fulfil the promises of very high investment returns that have been made to limited partners.
Needless to say, the current environment does not make investing easy. And this is not only because managers are busy with their own portfolios, but also because it is hard for them to accurately evaluate investment opportunities amid such levels of uncertainty. However, such circumstances are also paving the way for opportunistic private equity funds to flourish. The focus of some private equity houses is distressed and special situations and there is no doubt that there will be opportunities for them in the short term, particularly in the context of insolvency proceedings.
We also anticipate that debt funds will be very busy. Today, there are good big and mid-market industrial companies with historically robust balance sheets that will have no access to additional bank financing in the short term because of the pandemic. Many of these companies will certainly look towards the debt funds that have proliferated in Spain in recent years.
“Client confidence, and a law firm’s reputation, can be severely undermined if it transpires a firm has not adopted the necessary measures and resources to protect their systems.”
What are the biggest challenges law firm leaders currently face?
We have to accept that innovation and an entrepreneurial approach are essential for law firms. Flexibility and an open-minded vision will be necessary to thrive in the future. The Covid-19 pandemic has accelerated flexible working, and there will be a need to reappraise business models in terms of the consequences and implications of increased remote working. It also brings into focus the role of non-lawyers (such as IT consultants and accountants) in terms of improving and introducing new technologies to create new ways of delivering services to clients.
Law firms must adopt forms of pricing based on value added. Hourly rates will become the exception rather than the rule. Predictability on fees is key for many clients and a ‘success fee versus abort fee’ element will be more and more popular.
Cybersecurity is another key issue for law firms, which must invest money and direct resources to ensure the security of IT systems, and provide the corresponding training as well as revised business continuity plans. Client confidence, and a law firm’s reputation, can be severely undermined if it transpires a firm has not adopted the necessary measures and resources to protect their systems.
What do you think will be the emerging trends in M&A/private equity in the coming year?
Given the exceptional situation, the market is facing economic and geopolitical uncertainty that is resulting in a slowdown in activity. Businesses and investors are reassessing risks and reevaluating the rationale when carrying out a transaction. This also means that transactions are perhaps taking longer to complete.
We expect a significant increase in distressed M&A deals and an acceleration of divestments. Debt financing will become increasingly prominent in the market.
It is a major opportunity for opportunistic funds, while large corporations with healthy balance sheets will also be on the lookout for acquisition opportunities.
We have seen that the valuation of targets is a major challenge. With the growing gap between the respective expectations of sellers and the buyers with regards to price, we have seen an increasing use of “earn out” mechanisms to narrow such gaps.
In order to face the political and economic uncertainty, as well as the unpredictable consequences of the pandemic, sharing or transferring certain risks may be a strategy used to close some transactions. This may reinforce the use of warranty and indemnity insurance by shifting certain transactional risks from the sellers to the insurers.
We also expect an increase in the number of international transactions where there is a need for an interval between signing and closing, not only as a result of antitrust regulations but also increased government restrictions in relation to certain foreign investors. It will be interesting to see how such restrictions will impact on M&A activity in Spain.
Online companies, food industry companies and healthcare businesses are clearly the winners in the Covid 19 era. There is also likely to be transactional activity in the Fintech industry, the insurance sector and the professional services industry.