M&A Report

Regulation and M&A: How Scrutiny Raises the Bar for Acquirers

As regulatory review periods get longer and less certain, companies must elevate their deal strategy and integration approach.

Suzanne Kumar, Adam Haller, and Dale Stafford

First published on января 30, 2024
min read


Резюме Regulatory scrutiny can extend the pre-close period from three months to up to two years. If a deal may garner regulator attention, buyers should adjust transaction strategy for longer timelines and more uncertainty. A long pre-close integration plan should differentiate preparations for earliest and latest pre-close periods. More than ever, dealmakers need to plan for the worst and prepare for the best. This article is part of Bain's 2024 M&A Report. Explore the report In 2022 and 2023, at least $361 billion in announced deals were challenged by regulators around the globe. And among the $255 billion of those deals that ultimately closed, nearly all required remedies. Concerns raised by the European Commission and the UK’s Competition and Markets Authority (CMA) caused Microsoft to restructure its $69 billion acquisition of Activision Blizzard. Today’s US Department of Justice and Federal Trade Commission (FTC) prefer litigation, and the legal outcome often is a court-ordered remedy. For example, the FTC’s challenge to Amgen’s $27.8 billion purchase of Horizon Therapeutics was resolved via a consent order—and after months of delay. Rising scrutiny and lengthening review timelines have caused a handful of companies to withdraw their deals. Yet the simple reality is that buyers still need to do deals to advance strategic goals, and most contested deals do make it to close. In today’s regulatory environment, however, with approval processes for contested deals becoming longer and less predictable, companies contemplating large, game-changing M&A must have conviction and fortitude. Indeed, timelines for scrutinized deals have extended considerably. The pre-close period, that crucial and vulnerable phase between announcement and close, can stretch from quarters to years. Most deals close within about three months. Regulatory scrutiny adds three to six months to the deal timeline, but more complicated deals often take twice as long, up to two years (see Figure 1). This changes the calculus for buyers and sellers alike. One exception: Brazil. Regulators have intentionally accelerated approval for deals to 17 days on average in 2023, 90% faster than just two years ago (see “M&A in Brazil: International Buyers Act While Domestic Acquirers Show Caution”). Figure 1 The average time to reach a regulatory outcome for scrutinized deals is 12 months Meanwhile, the regulatory climate continues to evolve. For example, regulators have differentially focused on deals in technology and healthcare, given wider concerns about competition and consumer well-being in those industries. For example, the UK’s CMA required Meta to divest Giphy because of the potential impact on advertisers. Adobe canceled its proposed deal for Figma as multiple regulators challenged the likely effects on designers. In healthcare, the FTC is looking beyond product-to-product competition and taking into consideration the buyer and seller’s full therapeutic portfolio in its extensive review of Pfizer’s acquisition of Seagen and its oncology treatments. New strategies for today’s playing field Even as the rulebook changes, companies looking for growth and transformation are staying in the M&A game. The most successful are adapting their strategies to navigate twin uncertainties: Will the deal close? And when? Such doubts can be paralyzing, leading a buyer’s executives to say one thing (we are confident that the deal will close on time) while they do another (plan for the longest possible close date). At the same time, the target’s management is doubly distracted under a contested deal. They can’t take for granted that the transaction will close. They need to commit leadership and planning resources to both integration planning and the alternative. So, how to adapt for a potentially tricky deal? The answer begins with conviction on the strategic rationale for the deal and a watertight value creation story. The best-prepared acquirers use extensive diligence to wrestle the deal thesis to the ground, confirming a base case with plenty of upside to withstand the twists and turns of deal approval. With clarity on value, here’s how buyers can prepare for a disappointing outcome and lay the groundwork for a positive one. Craft the transaction for the realities of today’s regulatory environment For deals of strategic importance that might draw regulator attention, buyers should confront the possibility of a long pre-close period and even deal abandonment. Can the deal thesis support a worst case of poor base business performance, extensive attrition, and a moving close date? How can companies improve the odds of getting to close? Stress-test the deal model around key value drivers. In a scope deal predicated on talent, would the deal thesis hold if few leaders remained or if a critical function saw high turnover ahead of day one? Should more generous retention packages be baked into the deal model? For a scale deal, what investments would be required during the pre-close period to ensure rapid synergy realization, and how would that change the deal economics? Consider remedies. Are there viable remedies acceptable to buyer and regulator? A transformative portfolio strategy might necessitate proactive divestitures to clear the path for big-ticket dealmaking down the road. The European Commission has remained open to remedies. US regulators have been highly skeptical of divestitures and other remedies, but courts have been more open. For example, Amgen’s acquisition of Horizon was permitted via a consent order with conditions around product bundling between Amgen and Horizon’s offerings. Use the deal agreement to mitigate financial risks. Similar to other elements of the deal structure, terms and conditions can be a value lever negotiated between parties. Deal covenants can create mechanisms to adjust the purchase price beyond working capital pegs—revenue and profit, for example. Deal cancelation fees ensure that both parties have a financial incentive to close. Gird the organization for the longest close date Play the long game when it comes to communication and change management. When a close is distant and uncertain, the excitement of a deal announcement can quickly fade into fatigue and stasis. Be ambitious in sharing a vision for the combined company. Support individuals and teams with a long-term view on pre- and post-close periods. Quickly align both parties on the overall vision for the deal and the integration strategy. Besides setting a common course, this exercise is a simple way to engage target leadership in the critical early days (the first few weeks and months). First impressions matter. And target leadership will be essential to steering the acquired business across any bumps until close. Setting a tone of collaboration will pay dividends across a long pre-close period and beyond. Know who matters, and give them a reason to stay. Based on the deal thesis, work quickly to identify the critical leaders or other talent who will make it work while keeping the base business on track until close. Then, figure out what they care about, and give them a reason to stay. Overinvest in financial incentives, and openly seek to win their hearts and minds. Use the shared vision for the combined company and their role in it to shore them up over the long period of vulnerability until close, and don’t let up post close. Use the pre-close integration planning to set a tone of collaboration and excitement. The integration management office makes an excellent culture lab where each side can get to know one another, establish shared goals, and build cross-company support over protracted timelines. At the same time, it’s important to keep both companies focused on the base business, which is particularly hard for deals under review. Management often will have to balance business-as-usual plus uncertain integration timelines and the possibility of a canceled deal with also planning the divestitures required to close. Establish spending guardrails to optimize business-as-usual and integration planning. Tough decisions lie ahead. Should a company invest in 90 days of integration planning or focus on delivering better earnings? Should it continue longer-term capital investments or suspend them in anticipation of the combined company’s priorities? Contemplating the longest timelines will support the right medium-term trade-offs. Plan for the earliest available close date Uncertainty can be paralyzing. But even a long pre-close period isn’t infinite. The default mode will be to underinvest resources and teams’ time until there’s more clarity on the outcome, but that leaves value on the table. Executives can be overly conservative in using data and analytics to plan for integration and make short-term vs. long-term financial decisions, such as staying under budget on retention or deferring integration planning costs. Use the integration strategy to guide where and when to lean in on pre-close planning. Launch no-regrets planning. Much planning can happen from deal announcement onward: This includes defining the long-term operating model, building the foundation for process and technology integration, and planning the nuts and bolts of day one. Of course, timelines must be flexible. One company recently preparing for a major deal considered different scenarios for closing within 6 months to 24 months. The extended timeline incorporated lower-effort phases to accommodate certain regulatory milestones. In all scenarios, the company would be ready for a smooth close and day one. Initiate clean teams on major sources of value as deal close approaches. Clean teams get a jump start on synergy realization, preparing data that allows management to make quick decisions and take action upon close. Third-party clean teams can readily identify customer overlaps or dig into procurement contracts without jeopardizing current employees. As deal close nears, company subject matter experts can join in to validate the details and support post-close planning. One caveat: In a contested deal, it can take months to navigate the logistical and legal complexities of information sharing amenable to both parties and their counsel. Start early. When to walk away? Only you and your board can make that decision. But if you are doing a big deal with a high probability for scrutiny, you and your board will likely ask yourselves this question at some point. So, it is more critical than ever to have conviction on the front end of the deal about the circumstances under which you should walk. This means rigorously stress-testing your model so that you can say confidently that the deal still makes sense, even in your worst-case scenario. Read the Next Chapter M&A in Aerospace and Defense: Four Themes Shaping Space Industry Deals in 2024 Read our 2024 M&A Report Download the PDF Explore the report

Резюме

Regulatory scrutiny can extend the pre-close period from three months to up to two years.
If a deal may garner regulator attention, buyers should adjust transaction strategy for longer timelines and more uncertainty.
A long pre-close integration plan should differentiate preparations for earliest and latest pre-close periods.
More than ever, dealmakers need to plan for the worst and prepare for the best.

In 2022 and 2023, at least $361 billion in announced deals were challenged by regulators around the globe. And among the $255 billion of those deals that ultimately closed, nearly all required remedies. Concerns raised by the European Commission and the UK’s Competition and Markets Authority (CMA) caused Microsoft to restructure its $69 billion acquisition of Activision Blizzard. Today’s US Department of Justice and Federal Trade Commission (FTC) prefer litigation, and the legal outcome often is a court-ordered remedy. For example, the FTC’s challenge to Amgen’s $27.8 billion purchase of Horizon Therapeutics was resolved via a consent order—and after months of delay. Rising scrutiny and lengthening review timelines have caused a handful of companies to withdraw their deals.

Yet the simple reality is that buyers still need to do deals to advance strategic goals, and most contested deals do make it to close. In today’s regulatory environment, however, with approval processes for contested deals becoming longer and less predictable, companies contemplating large, game-changing M&A must have conviction and fortitude.

Indeed, timelines for scrutinized deals have extended considerably. The pre-close period, that crucial and vulnerable phase between announcement and close, can stretch from quarters to years. Most deals close within about three months. Regulatory scrutiny adds three to six months to the deal timeline, but more complicated deals often take twice as long, up to two years (see Figure 1). This changes the calculus for buyers and sellers alike. One exception: Brazil. Regulators have intentionally accelerated approval for deals to 17 days on average in 2023, 90% faster than just two years ago (see “M&A in Brazil: International Buyers Act While Domestic Acquirers Show Caution”).

The average time to reach a regulatory outcome for scrutinized deals is 12 months

Meanwhile, the regulatory climate continues to evolve. For example, regulators have differentially focused on deals in technology and healthcare, given wider concerns about competition and consumer well-being in those industries. For example, the UK’s CMA required Meta to divest Giphy because of the potential impact on advertisers. Adobe canceled its proposed deal for Figma as multiple regulators challenged the likely effects on designers. In healthcare, the FTC is looking beyond product-to-product competition and taking into consideration the buyer and seller’s full therapeutic portfolio in its extensive review of Pfizer’s acquisition of Seagen and its oncology treatments.

New strategies for today’s playing field

Even as the rulebook changes, companies looking for growth and transformation are staying in the M&A game. The most successful are adapting their strategies to navigate twin uncertainties: Will the deal close? And when?

Such doubts can be paralyzing, leading a buyer’s executives to say one thing (we are confident that the deal will close on time) while they do another (plan for the longest possible close date). At the same time, the target’s management is doubly distracted under a contested deal. They can’t take for granted that the transaction will close. They need to commit leadership and planning resources to both integration planning and the alternative.

So, how to adapt for a potentially tricky deal? The answer begins with conviction on the strategic rationale for the deal and a watertight value creation story. The best-prepared acquirers use extensive diligence to wrestle the deal thesis to the ground, confirming a base case with plenty of upside to withstand the twists and turns of deal approval. With clarity on value, here’s how buyers can prepare for a disappointing outcome and lay the groundwork for a positive one.

Craft the transaction for the realities of today’s regulatory environment

For deals of strategic importance that might draw regulator attention, buyers should confront the possibility of a long pre-close period and even deal abandonment. Can the deal thesis support a worst case of poor base business performance, extensive attrition, and a moving close date? How can companies improve the odds of getting to close?

Stress-test the deal model around key value drivers. In a scope deal predicated on talent, would the deal thesis hold if few leaders remained or if a critical function saw high turnover ahead of day one? Should more generous retention packages be baked into the deal model? For a scale deal, what investments would be required during the pre-close period to ensure rapid synergy realization, and how would that change the deal economics?

Consider remedies. Are there viable remedies acceptable to buyer and regulator? A transformative portfolio strategy might necessitate proactive divestitures to clear the path for big-ticket dealmaking down the road. The European Commission has remained open to remedies. US regulators have been highly skeptical of divestitures and other remedies, but courts have been more open. For example, Amgen’s acquisition of Horizon was permitted via a consent order with conditions around product bundling between Amgen and Horizon’s offerings.

Use the deal agreement to mitigate financial risks. Similar to other elements of the deal structure, terms and conditions can be a value lever negotiated between parties. Deal covenants can create mechanisms to adjust the purchase price beyond working capital pegs—revenue and profit, for example. Deal cancelation fees ensure that both parties have a financial incentive to close.

Gird the organization for the longest close date

Play the long game when it comes to communication and change management. When a close is distant and uncertain, the excitement of a deal announcement can quickly fade into fatigue and stasis. Be ambitious in sharing a vision for the combined company. Support individuals and teams with a long-term view on pre- and post-close periods.

Quickly align both parties on the overall vision for the deal and the integration strategy. Besides setting a common course, this exercise is a simple way to engage target leadership in the critical early days (the first few weeks and months). First impressions matter. And target leadership will be essential to steering the acquired business across any bumps until close. Setting a tone of collaboration will pay dividends across a long pre-close period and beyond.

Know who matters, and give them a reason to stay. Based on the deal thesis, work quickly to identify the critical leaders or other talent who will make it work while keeping the base business on track until close. Then, figure out what they care about, and give them a reason to stay. Overinvest in financial incentives, and openly seek to win their hearts and minds. Use the shared vision for the combined company and their role in it to shore them up over the long period of vulnerability until close, and don’t let up post close.

Use the pre-close integration planning to set a tone of collaboration and excitement. The integration management office makes an excellent culture lab where each side can get to know one another, establish shared goals, and build cross-company support over protracted timelines. At the same time, it’s important to keep both companies focused on the base business, which is particularly hard for deals under review. Management often will have to balance business-as-usual plus uncertain integration timelines and the possibility of a canceled deal with also planning the divestitures required to close.

Establish spending guardrails to optimize business-as-usual and integration planning. Tough decisions lie ahead. Should a company invest in 90 days of integration planning or focus on delivering better earnings? Should it continue longer-term capital investments or suspend them in anticipation of the combined company’s priorities? Contemplating the longest timelines will support the right medium-term trade-offs.

Plan for the earliest available close date

Uncertainty can be paralyzing. But even a long pre-close period isn’t infinite. The default mode will be to underinvest resources and teams’ time until there’s more clarity on the outcome, but that leaves value on the table. Executives can be overly conservative in using data and analytics to plan for integration and make short-term vs. long-term financial decisions, such as staying under budget on retention or deferring integration planning costs. Use the integration strategy to guide where and when to lean in on pre-close planning.

Launch no-regrets planning. Much planning can happen from deal announcement onward: This includes defining the long-term operating model, building the foundation for process and technology integration, and planning the nuts and bolts of day one. Of course, timelines must be flexible. One company recently preparing for a major deal considered different scenarios for closing within 6 months to 24 months. The extended timeline incorporated lower-effort phases to accommodate certain regulatory milestones. In all scenarios, the company would be ready for a smooth close and day one.

Initiate clean teams on major sources of value as deal close approaches. Clean teams get a jump start on synergy realization, preparing data that allows management to make quick decisions and take action upon close. Third-party clean teams can readily identify customer overlaps or dig into procurement contracts without jeopardizing current employees. As deal close nears, company subject matter experts can join in to validate the details and support post-close planning. One caveat: In a contested deal, it can take months to navigate the logistical and legal complexities of information sharing amenable to both parties and their counsel. Start early.

When to walk away? Only you and your board can make that decision. But if you are doing a big deal with a high probability for scrutiny, you and your board will likely ask yourselves this question at some point. So, it is more critical than ever to have conviction on the front end of the deal about the circumstances under which you should walk. This means rigorously stress-testing your model so that you can say confidently that the deal still makes sense, even in your worst-case scenario.

Read the Next Chapter

M&A in Aerospace and Defense: Four Themes Shaping Space Industry Deals in 2024