Nordic M&A - Risks Re-Divided

Article by Jan Örndahl and Jarno Tanhuanpää

Introduction

The global financial crisis has had a significant influence on the Nordic M&A market. In the first half of 2009, M&A activity with Nordic involvement totalled EUR 19.7 billion. That is 62 per cent lower than in the first half of 2008. At the same time, the lack of financing options and the valuation differential that exists between the buy and sell side parties has led to a rise in market uncertainty. The shift to a buyers' market has also triggered a number of changes in market practice and hence structures such as vendor notes, shareholder loans and earn-out -provisions are more and more common in the current Nordic M&A market.

Securing Funding and Financing

According to the market intelligence, it is currently very challenging to acquire financing for deals valued over EUR 100 million and the portion of equity capital required normally amounts to 50 per cent of the value of the overall financing package. Considering the above, a key issue in the current market environment is the ongoing liquidity shortage in acquisition finance. One solution for bridging financing gaps in transactions is a vendor note. With a vendor note, a part of the purchase price owed is converted into a loan and is paid to the seller only upon the respective maturity of the loan. A vendor note is typically unsecured, ranks junior compared to bank financing and has a relatively long maturity. Therefore, the seller assumes credit risk when granting a vendor note to the buyer but benefits customarily from a relatively high interest yield. A vendor note is a good example of the fact that sellers are forced to bear more risk in transactions in the current market environment and, granting a vendor note is nowadays in many cases a prerequisite for the completion of transactions.

A shareholder loan is another example of the seller's increased risk exposure and more proactive role in M&A transactions. In the current economic environment, it is not necessarily a given that the target company will be able to settle its debts as they fall due during the time between signing and closing. Therefore, the buyer may require that the seller furnish the target company with liquidity, e.g. in the form of shareholder loans. However, it is worth noting that in case the loan is repaid to the seller at closing, in many Nordic countries the seller risks having to return the amount of the loan should the target company go bankrupt...