Acquisitions: Commercial Awareness Walkthrough - Bayer's Acquisition of KaNDy Therapeutics
You’ve decided to apply to corporate law firms this year, whether for first-, penultimate- or other- year programmes. You’ll attend the virtual networking, make a conscious effort to read the Financial Times and research firms. But if you’re honest, you have very little idea what corporate firms actually do. You don’t really know what “acquisition” means in any detail or what the process of making one happen involves enough to discuss the process. You don’t know who does what or what your role would be. You can guess at key skills but since you’re not 100% sure of the role itself, it’s hard to argue why you’d be a good fit. You like the sound of corporate law but you need to find out more before you know whether it’s the right fit for you.
This is a very normal starting point for any student! We’re currently in that season of the year where you should start researching law firms and building your commercial awareness seriously before your courses get too intense and exams are on the horizon. From now until November is your sweet spot to invest in applications – do the prep and get your submissions in – before you get too busy with university work and tied up with other commitments. If you’re tempted to wait until after your exams to apply (and you won’t be alone if you are!), please let me encourage you not to. The below is my interpretation of what the next few months probably look like for most students and why waiting until after your exams is probably not the smartest idea you’ve ever had…
For more general advice if helpful, see my post on applications here.
So, you know what you’ll be doing and when but now you actually have to do it! You have to put in the hours researching. You have to learn to digest the FT (which initially feels a lot like reading in a foreign language you have to look up so many terms, cross-references and contextual backstories). This can be hard. For sure, there are books you can read and conversations you can have but (call me old-fashioned) nothing beats putting in the hours and getting to grips with this stuff for yourself!
That doesn’t mean that you can’t find or ask for help. The below is the first in what I’m hoping will be an ongoing series of walk-through commercial awareness topics, pointing out what my approach would be and any helpful resources, information and contributions as we read through specific articles or skim through topics together. My approach is neither the “best” nor the only way of doing things, but hopefully offers some support and guidance in what can feel like an overwhelming task – building your commercial awareness.
A large part of the work of corporate law firms is likely to be acquisitions, so let’s start here with a recent case study example. “Acquisitions” sounds almost self-evident, an innocuous, easy target of a topic, but how can you really dig into the subject matter and improve your understanding (and in turn your applications/interviews)? We’re going to cover a lot of ground below. We’re going to move quickly and touch on areas where it may be helpful for you to dig in further independently. This won’t answer all of your questions and isn’t aiming to be an example answer for any applications, but this is a structure for you to follow and work through as you build your commercial awareness, whatever level you’re currently at.
Starting point: Pick a deal
What are you interested in? Whether it’s cars, sports, science, fintech, finance… find something which grabs your interest and start there, find a recent major deal as your starting point. If in doubt, aim for something significant – what have been the biggest acquisitions over the past 12-18 months and is there anything there you can work with? If you’re looking for ideas, try Practical Law’s “What’s Market?” function – most students should have access to this and it’s an easy go-to for recent deals.
For ease, I’m going to take Bayer’s recent acquisition of KaNDy Therapeutics Limited as my example. Everything below is found from publicly available information with the view that you can look this up along with me and develop a knack for finding good resources to help you as you look at other deals.
Step 1: Background
Always start with any summaries– there will usually be several available to you. On this matter, a quick google and I found:
The Linklaters deal summary – link
A summary by Businesswire – link
The public announcement by KaNDy – link
A summary in the European Pharmaceutical Review – link
A Bloomberg article – link
There’s significant overlap in the above articles so pick which ones are most useful to you, don’t just re-read the same content twice unless it’s unclear or you’re looking for a recap. We’ll be looking at the first two sources in more detail.
Looking at the Linklaters and Businesswire articles, there are lots of things we can glean:
Step 2: Digging deeper
You now know the basics of the transaction – the parties, the advisors and some of the highlights of the transaction. Now you can step back, consider these in more detail and do any further research necessary.
Here are a few specific areas of the above I would land on to flag/think about in some more detail:
Competition (or antitrust – these are synonymous) is, as the articles say, a customary condition for deals. This means that a deal won’t go ahead unless the competition authorities give it the green light. The competition authorities will look at whether an acquisition would result in the buyer having too much influence over a particular market. The basic theory of competition is that more competitors in markets generally fuel healthy competition, driving efficiency, innovation and better customer value. This isn’t always true, in some industries, for example the automobile industry, where economies of scale are essential for efficiency and good product value, there will be room for fewer competitors. Tying historical investments to antitrust clearance, it’s worth considering whether there could be a case that unhealthy market dominance could be achieved as a result of the deal.
Competition is more than just the above test and will also include foreign investment tests and other assessments. For our purposes, this brief overview plus some more thought and research if necessary is absolutely fine.
The articles highlight an initial upfront payment, followed by potential “milestone payments.” This is important. Consider how a buyer will pay for their purchase and step back and think about the risk on these facts from a buyer’s perspective. We’ve already read that the drugs are in a developmental phase; what happens if the drugs do not pass Phase II as quickly as expected, or at all, what if a competitor develops a rival drug…? Buyers and sellers will have to discuss these possibilities in their negotiations. One way to mitigate risk and let the parties get comfortable is to agree to pay a single upfront sum and further sums once key milestones (i.e. key phases) have been passed, this means the buyer gets some comfort that they only pay for a company which is performing and the company and its managers have an incentive to keep performing well.
These articles helpfully list exactly who was involved on the deal from the Linklaters team – look at the list and the different practice areas involved. You can see that several people from TMT/IP were involved. Think this over – you already know that KaNDy are a pharmaceutical company developing drugs, consider where the value in this kind of business lies. It lies in the same place as many start-ups – in ideas, in potential. Think about ways in which the law can lock up this kind of value (e.g. copyrights, patents, etc.) and the implications on a deal. What will need to be transferred under the acquisition? How will these transfers happen? How long will this value be protected? IP is an area of law I know very little about, and you don’t need to become an expert either, but giving some thought to these questions does add value to your understanding of acquisitions (even if it means you can construct a decent list of things parties will need to consider, without knowing what the exact solutions will be). You’ll also see my name on the list (a cause of much excitement to me which led to family, friends and my principal getting “look – my name’s on this!” messages – not very cool but very sincere) – I wasn’t involved in the early stages of the deal and so am writing this much as you will be reading it, piecing together early considerations in the minds of the parties based on the information we’ve read in the articles above.
4) Types of company
Bayer is an AG – an AG is a German public company (it’s always worth looking up the letters after a company name if you’re not sure what they mean). Public companies usually have more stringent disclosure obligations and may be subject to greater restrictions, or at least require more shareholder approvals to take certain actions. You don’t have to be a pro on German law, but it’s good to note this and be aware that the different types of company are subject to different rules so it’s good to get familiar with distinctions between public/private companies and some of these rules, even at a basic level.
KaNDy is a private company based in the UK, and so is likely to be subject to less stringent disclosures and restrictions than if it were a public company.
The differences between public and private companies are set out in the Companies Act 2006, you can find comparisons in textbooks or online (try Practical Law as an easy first port-of-call which most students will have access to) – a few other places to start are available here – link; link (PLC); link (LTD); link; (p.s. if you’re reading as a student, don’t ever write that shareholders “own” a company, even if you read it in the attached – academics hate these semantics and are more likely to give you a lecture on Honoré’s 11 incidents of ownership (which no-one needs to endure more than the once) than listen to any intellectual point you’re trying to make. Academics aren’t wholly wrong and being a semantic pendant will stand you in good stead in academia and practice… shareholders don’t really own a company, even if these terms are often used in practice – whilst an interesting discussion, it’s not one most practicing lawyers will find much time for so pick your words and your battles carefully).
As above, something worth flagging is that this is an international deal and the parties may have to consider any German-specific rules and seek German advisers for some guidance.
6) Historical investments
The articles mention that Bayer has previous experience in women’s health, it may be worth delving into what other investments / targets / commitments Bayer has already, the best place to start is usually the company website – link.
Step 3: Further considerations
The articles we have found clearly don’t tell the entire picture of the deal and we should think about anything else which the parties may have had to consider as part of the deal.
1) Other deal considerations
Think about what a company might have and the implications for an acquisition. As with the above, you don’t have to be an expert, but having an awareness of the various parts of a company will help you piece together the various limbs of a deal. Take a global view and just step back and think logically.
Companies may have…
Employees (and therefore pensions)
Debt (i.e. loans and bonds)
Equity (i.e. shares)
IP rights and data
Each of these aspects, as appropriate, will need to be considered by the parties to negotiate how they will approach each aspect of the business. Consider what the commercial and legal considerations will be for each aspect from the perspective of the buyer, seller and various stakeholders (i.e. those who have an interest in the sale, including parties like employees).
2) Raising the funds
Financing an acquisition is a really important aspect of the deal and worth a bit of time considering, even if it’s not picked up in detail in the articles we’ve been looking at.
Companies are much liked upscaled humans when it comes to raising finance (aka capital) – they can borrow (i.e. take on debt) in the form of loans or bonds, they can sell things (e.g. real estate, IP property or more likely shares), or they can splash out with cash they have sitting around (if you hear the term “dry powder” that’s all this means – cash available, waiting to be spent). These ideas are worth spending time on to make sure you understand the distinctions between the above, since these basic principles and constructs are central to deals but don’t get wrapped up in the details or get stuck down a rabbit hole since, depending on your level of study, you’re likely to cover these principles in more detail later in your degree or on the LPC/SQE. A basic overview is set out below.
Equity (usually shares) – these are sold to investors, companies, or individuals and give shareholders rights which usually include (i) voting rights at meetings, so they play a role in how the company is managed and what actions it takes; (ii) a dividend (a portion of the company’s distributable profits) either annually, bi-annually, quarterly or at other intervals (this isn’t a right but is a reasonable expectation for shareholders). Shareholders pay up-front for their shares and that capital goes to the company. Shareholders can only ever get a return for their investment either by (i) selling shares and hoping to make a profit; (ii) holding on to shares and benefit from the dividends received and hoping this trumps the initial cost of the shares; or (iii) gambling that if the company is wound up, they will get a return on their shares (usually unlikely). The company won’t be obliged to give shareholders back their investment, though it could pay to buy-back the shares if it wanted to.
Debt – loans and bonds work like scaled-up IOUs. The basic principle of a loan is the same as if you or I took out a loan, for example a mortgage. The lender gives money with terms and conditions attached and at the end of the term, the company will have to pay back the money it borrowed, with interest. There may be security and a range of other provisions to give the lender comfort that they can recover their capital at the end of the term. Bonds are a different form of debt, bondholders will pay an initial sum (the premium) and gain a right to interest payments (a coupon – so-called because back when bonds were paper documents, there was literally a coupon the bondholder tore off to redeem their interest). The bondholders will also have to be paid back at the end of the term. Some bonds can be convertible, meaning that under certain conditions, they may switch from debt to equity.
If the above is new to you, these sources might be helpful:
Preference and Ordinary Shares – link
Debt Financing vs. Equity Financing: What's the Difference? – link
Debt vs. Equity: The shifting moods of finance – video link
Once you’re confident of the differences between debt and equity, try to critically consider which will be the preferred option in different circumstances and why. The below might be helpful:
Debt vs Equity: Pros and Cons for Entrepreneurs – link
Should a Company Issue Debt or Equity? – link
Debt vs Equity Financing: Which is best? – link
Step 4: Review
That’s it – we’ve got through one example of an acquisition and considered various facets of the deal all from just a few very simple links. Digesting the information available hasn’t particularly taken long but looking into broader considerations like funding may take some more time and thought. You don’t need to know all of the details of a deal to build your commercial awareness, and you don’t need to become a legal or economics whizz and understand the intricacies of IP law or leverage to make a successful application and improve your commercial awareness, but unpacking a few articles in detail, stepping back and considering the broader aspects of an acquisition including who (which different types of lawyers and any financial/other advisers) will be involved, the different considerations of the parties and any key steps in making the acquisition happen will be super useful to identify the main aspects of a deal.