Doing deals for companies in heavily regulated industries requires a hearty appetite for due diligence. Lori Braender, a longtime transactional attorney with Day Pitney, discusses M&A in the food and beverage sector, including the specific nuances of due diligence. Her remarks have been edited for length and style.
MCC: Please share some background about yourself and your career at Day Pitney with our readers.
Braender: I’ve been a transactional attorney with Day Pitney for over 30 years. For the last 20 years, I’ve chaired the firm’s Life Sciences group. I represent a broad range of public and private companies in the U.S. and abroad. They operate in a number of regulated industries, including food and beverage, pharmaceutical, and medical devices. Most of our work focuses on mergers and acquisitions, strategic alliances, product development, licensing, and commercialization arrangements.
MCC: Many expect 2015’s surge in M&A to continue this year. Are you seeing that in your practice? Specifically, related to food and beverage, are you seeing any trends?
Braender: Last year was the biggest year we’ve ever experienced for M&A transactions in the U.S. I believe the food industry represented about a quarter of those deals. We continue to see growth in M&A activity in the first quarter of 2016, and we expect that to continue as the preferred growth strategy for acquirers in the food and beverage industry.
Despite some uncertainty in the market, the acquirers are still motivated by low interest rates, the solid employment numbers and an abundance of cash to make strategic investments. We expect there to be a period of consolidation in the coming months as opportunities to acquire strategic targets have opened up. We also see global acquirers targeting U.S. markets in overwhelming numbers, and that trend will continue in 2016. Most of the transactions are really growth driven, designed to solidify current positions in the marketplace, expand product lines, broaden customer bases and expand geographic reach.
MCC: Food and beverage is a highly regulated sector, with high-profile lawsuits and investigations related to labeling, advertising, tainted food, supply chains and safety issues. As your clients consider M&A, how can they navigate the due diligence process to limit their risk?
Braender: In my experience, successful buyers have to focus on integration, evaluation and due diligence when considering any strategic acquisition. The due diligence process really is the driver of those goals. As the initial step, buyers have to ensure that they assemble and coordinate the best due diligence team possible. That typically is comprised of key management personnel in each of the critical areas of review, an experienced financial and tax advisor, and a knowledgeable legal team to assist in the whole process. What we recommend, when timing permits, is that the due diligence process be performed in phases for the most effective and efficient results. We begin with a physical plant review and an examination of manufacturing systems and integration issues so that the client can detect early on in the process whether or not the acquisition is going to be a profitable one. We manage all aspects of the due diligence process to ensure that the entire team has the best access and remains current on all of those reviews and discoveries. That’s how we help our clients minimize that risk.
MCC: Global supply chains can pose risks, particularly in the food and beverage sector. How are you advising clients on how to mitigate these risks? How can companies and their counsel best assess supply chain and other risks?
Braender: Often buyers limit their due diligence to the target company and don’t really focus on the expansion of diligence to the target company’s entire supply chain in order to assess potential risks. Buyers due diligence efforts must be as robust with the supply chain as they are with the target company. We often see sellers resist sharing supply chain information with buyers before the seller has a firm and binding commitment from the buyer. In those instances, we advise the buyers that they must have clear rights to terminate and withdraw, without penalty, from the transaction if they do discover unexpected adverse conditions before closing. And we see that breakup fees are becoming more routine in order to address the shift of risks in these situations.
Security is also an area of concern within the supply chain due diligence process. First, there is the security of the product. We have to be confident that the product – in transit, in distribution, in the various stages of supply – is protected against adulteration or contamination. Those have to be fully vetted, investigated and reviewed, and appropriate compliance policies must be put in place.
Second, data security is an important issue to address. In recent years, we have made information technology and data breaches a key focus of our due diligence process. Even if a target company is not handling or managing private data, acquirers are more and more interested in investigating whether there are any data breaches or information technology gaps to ensure that there are no risks in the company’s security or of potential commercial attacks on the target company. Those are new trends in due diligence that we didn’t concentrate on years ago. Savvy buyers are investigating all of the target company’s systems to uncover data breaches and information technology gaps in order to avoid unprofitable acquisitions.
In addition, we are looking at an increasing number of foreign companies entering into the U.S. markets. These companies face a comprehensive regulatory scheme applicable to the food and beverage industry that must be understood and navigated, including the impact on an analysis of supply chain issues.
We also counsel that there should be a very detailed analysis of the target’s financial performance, projections and market forecasts, including the target’s margin trends and customer segmentation, and a comparison of that data against market trends. That analysis will usually give insight as to the valuation of the target and how the target can be integrated with the acquiring company.
MCC: What other aspects of the food and beverage sector pose higher risks and require heightened due diligence?
Braender: Product recalls in the food and beverage industry, both voluntary and mandatory, are important indicators of risk to the buyer. The cause and remedies for any recalls have to be thoroughly investigated to determine the scope of risk. Companies should require a clearly established and comprehensive recall program to ensure mitigation of risk after closing. Another area of concern, especially for global transactions, is the increased scrutiny by regulators arising from the Foreign Corrupt Practices Act, export control and similar compliance matters. We review the application of all those laws and the target’s compliance plans to advise our clients on the risks of enforcement penalties, even potential criminal penalties, and advise them on structuring continued robust compliance plans.
MCC: How has due diligence evolved during your career? You mentioned information technology being more of a focus. Are there other aspects today that were less critical yesterday?
Braender: Probably the biggest issue in M&A transactions right now is valuation disparity between the acquirer and the target. It’s a growing problem in M&A. Actually, the due diligence process can address this issue if it’s done correctly and efficiently. The ability of the acquirer to learn early on in the process about the various financial projections, performance, etc., of the target will help discussions on closing the valuation gap. Also, we see that it’s almost a universal approach now that due diligence is conducted through electronic data rooms. It’s critical in the early stage of establishing the due diligence data room that there be a clear management process so that all the parties have appropriate and quick access. That includes indexing in a manner that’s consistent with the buyer’s due diligence request list. If it is a bidding situation, the data room should be established with an index that clearly identifies categories of information and specific documents. Buyers should negotiate broad access rights to the data room, including the right to download and copy documents for easier sharing with key personnel.
MCC: You’ve served as outside general counsel to a number of companies. Tell our readers, most of whom are in-house counsel, what that means in terms of how you handle the relationship.
Braender: Fortunately, I’ve been able to establish relationships with clients that have continued for decades. I believe that this is the result of a few basic principles that I adopted and have followed throughout my career. First, I learn the business and industry of my clients and keep up to date on industry trends and changes in their business. Second, I ask questions about their business goals and objectives. I listen to their answers and design a strategy to meet their legal needs. Their goals are always at the top of mind, and I consistently report back to my clients on a timely basis. Finally, I manage the representation so that the client is never surprised by an outcome.
Lori Braender, Chair of the Life Sciences practice group at Day Pitney, serving as lead counsel in structuring and negotiating acquisitions, joint ventures, affiliation and collaboration agreements, cross-border licensing, and managed-care arrangements. [email protected]
Published March 30, 2016.
