Following a fantastic transaction year 2018, M&A activities have deteriorated during 2019. Rising target prices, difficult financing options and further circumstances added to a less than ideal world. Nonetheless, for some industry segments strong M&A activities are expected to return in 2020. But make no mistake: The next crisis is certain to be seen. Some consultancies will manage the substantial market risks rather pragmatically: If transactional advisory slows down, many M&A lawyers will become litigation experts in no time. However, businesses other than law firms might not always be in the position to adapt their business models so flexibly. Those businesses will likely experience (again) how often M&A deals disappoint when it comes to realising the envisaged operational or financial benefits.
As soon as the operational or financial results will fall short of any party’s expectations, post-M&A disputes will inevitably follow. No matter the legal argument, there will typically be psychological effects causing the deal parties to question who was to blame for failure – and it is only human that the root cause is generally found on the other side: The buyer blames the seller and vice versa. No matter how cautiously consultants have advised their clients, disputes will surface over purchase price adjustments, over the interpretation of representations and warranties and other aspects of the deal. For M&A clients a dilemma can easily arise if, after a problematic transaction result, expensive, generally multi-million, litigation proceedings need to be budgeted. The outlook is grim: About 50 percent of plaintiffs win against 50 percent of defendants, or they meet half way and “split the baby”. Even financially healthy companies struggle with excessive budgets that post-M&A disputes can trigger.
Is there a way out to better manage the dispute costs?
One way out, as many leading law firms have become well aware of, is third-party litigation funding: The litigation funder bears the costs and fees of the legal proceedings in return for a contingent success fee in the form of a share in the proceeds if – and only if – the claim will be successfully adjudicated. Until not long ago, litigation funding was seen as a tool only for financially stressed businesses – and that financially strong clients “must not be bothered”. In recent years, however, most major law firms and dispute resolution boutiques including also their respective clients have come to change their perspective significantly: Litigation funding is sought as a tool to enhance corporate risk management. In other words: Clients tend to transfer litigation costs because they want to, not because they have to. No provisions for litigation costs and more resources to strategic business units are among the advantages produced by litigation funding.
What will be trending in 2020?
- Negotiation Support and Case Management
In addition to modern financing solutions such as portfolio, defence and seed funding, 2020 will see more of non-financial solutions, e.g. (out-of-court) negotiation support and case management systems that do not focus exclusively on the success of a single case but more on the overall efficiency for the entire dispute portfolio of a corporate client. Clients will benefit from value pricing because litigation funders are used to charging their fees only if success has been achieved (and not only promised). Unlike most advisory services, litigation funders invest at their own financial risk. FORIS AG namely spends its own financial resources and advisory time for the (non-legal) preparation of dispute resolution through e.g. specific stakeholder and scenario analyses. At no time will FORIS AG work in competition with the lawyers on the case but, to the contrary, work in close collaboration with them. The client only pays as and when the negotiation support has measurably paid off for the client. No win, no fee.
- Litigation funding will become less expensive – but not for every client
An increasingly competitive landscape will likely provide for more competitive rates for clients in 2020, at least for large claims. In the midcap segment below claim values of EUR 15 million, we predict the market will continue to offer funding in return for a share in the proceeds of around 30 percent. Pricing structures will be negotiated case by case depending on a variety of circumstances relating to the risk-reward analysis. In essence, there is room for negotiating better terms for those clients that have familiarized with the individual opportunities that exist – rather than relying on standard protocols.
To sum it up: The M&A tool box is growing primarily for well-advised clients.