Technology equity markets took a sharp turn in the last two months of Q1 2022, with S&P Technology Index reaching to over 18% in the red in mid-March, before closing the quarter at 7% off.  In the last month, across all sectors, Russia’s attack on Ukraine has rattled markets and dented investor appetite amid increased volatility and uncertainty.  The decline in valuations is being impacted by the combined headwinds of rising inflation and interest rates, as well as geopolitical uncertainty. 

Russia’s invasion of Ukraine triggered an unprecedented phenomenon: global technology firms responded to the invasion by suspending or terminating business operations, effectively self-sanctioning beyond regulatory requirements, often at great expense to bottom lines.  This trend will likely continue – in 2022 decisions about where to invest and who to accept investment from will be driven by ethical concerns, as well as the shifting geopolitical risks.  However, as we will see in this article, many tech businesses struggle to fully abandon their presence in Russia.

This article highlights some of the ways in which the Ukraine crisis is changing tech M&A.

Expanded scope of Due Diligence

As tech companies embark on M&A deals, proactive and effective risk management will be more essential than ever.  Enhanced focus on these issues is likely to translate to expansion of transaction timelines.

  • Sanctions:  The evolving sanctions regime froze the cross-border M&A market for Russian assets and non-Russian assets owned or part-owned by Russian parties.  The first question any M&A team should be checking is whether the deal is permitted under the current sanctions regime.  That requires looking carefully at the ownership structure.  Buyers should look for situations where there may be individuals with proxies or non-sanctioned family members holding their shares.  Recent changes in share ownership will be a definite diligence red flag.
    • It is common for transactions relating to Russian assets to be structured as overseas joint ventures, commonly established in Cyprus, the Netherlands, Luxembourg, Malta or Switzerland.  Tech companies looking to divest their stakes in these entities will need to consider the impact of EU/UK/U.S. sanctions, as well as increasing Russian counter-sanctions.  The restricted number of potential buyers is likely to have a knock-on effect on valuations.
    • The sanctions regime is evolving rapidly, so this particular diligence issue will need to be repeated regularly throughout the deal process as new sanctions measures are introduced.
  • Business Continuity:  More uncertainty and greater risk is also sharpening focus on the impact of the conflict in Ukraine on business continuity.  For tech companies that were already struggling with talent retention, the conflict in Ukraine significantly impacted talent available in the Ukraine tech hub.  However, the concern extends more broadly to Russia as the “brain drain” of top talent continues.  Tech companies looking to leave the Russian market will need to consider (i) whether it is possible to relocate the existing employees; (ii) the availability of local talent in the new location; (iii) the impact of severance costs, which in line with market practice are not insignificant, on the bottom line.  The availability of talent in the region will likely be impacted for some time after the end of the conflict.
  • Commercial Contracts:  Buyers will be concerned about the enforceability of the target’s contractual arrangements.  Provisions such as material adverse change, change in law or force majeure will be the focus of any diligence exercise of material contracts.  Even where a commercial agreement provides for arbitration as the dispute resolution mechanisms, arbitration awards may need to be enforced by a court.  Parties will need to carefully consider such provisions in the context of the legislative and regulatory response to the Ukrainian crisis.

Deal Execution:  A (simplified) way forward

Even where a transaction is permitted under the current sanctions regime, tech companies expanding their businesses through acquisitions should ensure that all contractual payments are front-loaded to the maximum extent permissible, to minimize the risk that new sanctions may make certain payments unlawful.  Other risk mitigation strategies include minimizing the gap between signing and completion and avoiding deferred consideration or significant holdbacks or escrow. 

Tech buyers should not assume that a MAC clause will give them a walk-away right if circumstances change between signing and closing a deal.  MAC clauses are rarely used and even more rarely upheld by courts.  They are unlikely to offer a buyer an “easy exit”, unless the target is disproportionately impacted by the conflict.  A few weeks into the conflict, sellers will increasingly argue that this is a known and assessable risk for the buyer, that should be carved out of the scope of the MAC provision.

Tech M&A transactions continue to be under intense regulatory scrutiny, in part due to the political pressure on regulators to safeguard technology assets.  In recent years, with a hot tech M&A market, a sharp focus was drawn on very significant break fees.  Parties will need to consider how to address this trend, in a world where a break fee may not be allowed to be paid to a sanctioned entity.  Transfers of funds to a Russia connected entity will require careful analysis for compliance with the sanctions regime.

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Ukraine Crisis: Resources for Responding to the Impact of the Escalating Conflict

Our lawyers are actively engaged in advising clients on the full range of implications of the current conflict on their business and operations in Russia, Ukraine and globally. This includes advice on potential acquisitions and disposals of assets in Ukraine and Russia in light of the evolving sanctions regime, mitigating exposure to investments in Russia, managing legal and reputational risks for joint venture partners and commercial advice with respect to the impact on current business operations in the region. Our team includes lawyers with extensive experience representing clients on complex transactions and challenging situations in the region across a broad set of asset classes, as well as excellent relations with trusted local lawyers. Please visit the Ukraine and M&A pages on our web site to learn more about this work.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Mergers and Acquisitions practice:
Louise Nash                                       +44 20 7067 2028                  lnash@cov.com
Peter Laveran-Stiebar                       +1 212 841 1024                    plaveran@cov.com
Philipp Tamussino                            +49 69 768063 392                ptamussino@cov.com
Luciana Griebel                                 +44 20 7067 2268                  lgriebel@cov.com

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Photo of Louise Nash Louise Nash

Louise Nash has a wide ranging corporate practice including mergers and acquisitions, joint ventures and collaborations and private equity (including venture capital). Her practice is international, with virtually all transactions upon which she advises having a cross-border dimension. As such, she has extensive…

Louise Nash has a wide ranging corporate practice including mergers and acquisitions, joint ventures and collaborations and private equity (including venture capital). Her practice is international, with virtually all transactions upon which she advises having a cross-border dimension. As such, she has extensive experience of dealing with the challenges presented by complex cross-border projects. She has particular experience in the branded goods, life science and technology sectors and in advising on deals with a significant intellectual property element.

Peter Laveran-Stiebar

Peter Laveran is a U.S. corporate partner who recently spent more than a decade in Covington’s London office and is a vice chair of the firm’s Corporate Group. His broad-based transactional practice is largely international and he has particular transactional experience in the…

Peter Laveran is a U.S. corporate partner who recently spent more than a decade in Covington’s London office and is a vice chair of the firm’s Corporate Group. His broad-based transactional practice is largely international and he has particular transactional experience in the life sciences and media and communications industries. Peter focuses on domestic and complex cross-border acquisitions and divestitures for private equity investors and emerging and mature companies headquartered in the U.S., Europe, and Asia, including Altice, Bayer AG GlaxoSmithKline, Indivior, Itochu, Magticom, Meda AB, Merck & Co. Inc., and Stagecoach Group PLC.

Peter led the Covington team advising Altice in its $9.1 billion acquisition of Suddenlink and the $1 billion co-investment by funds advised by BC Partners and Canada Pension Plan Investment Board in Cablevision Systems Corporation; Bayer AG on its divestitures of the Coppertone sun care business and the Dr. Scholl’s foot care business; Meda AB in in all of its significant U.S. acquisition and divestiture activity in recent years, including the acquisitions of Acton Pharmaceuticals, MidNite, and a collection of women’s health products from Jazz Pharmaceuticals; Indivior in its demerger from Reckitt Benckiser; Itochu in the sale of PrimeSource Building Products, Inc. to Platinum Equity; funds managed by HealthpointCapital, LLC in the merger of Scient’x Groupe SAS with Alphatec Holdings, Inc.; and Magticom in its acquisition of retail and corporate ISP cable assets from Caucasus Online LLC.

Peter also has experience with joint ventures, strategic alliances, non-controlling venture capital and private equity investments, and other corporate finance matters including international capital raising activities in London. His experience includes advising multi-national companies on the planning and development of European distribution structures and other commercial arrangements, and he has directed global post-closing merger integration efforts for clients in over 75 jurisdictions. Peter has held leadership roles in Covington’s Middle East, Indian, and African practices.

Philipp Tamussino

Philipp Tamussino is a U.S. corporate partner based in Frankfurt. His practice focuses on cross-border corporate and finance transactions. Previously resident in our New York office, he joined the Frankfurt team when the office opened in 2018.
Philipp represents clients in mergers and…

Philipp Tamussino is a U.S. corporate partner based in Frankfurt. His practice focuses on cross-border corporate and finance transactions. Previously resident in our New York office, he joined the Frankfurt team when the office opened in 2018.
Philipp represents clients in mergers and acquisitions, financings, private equity transactions, corporate governance matters, joint ventures and venture capital investments, almost always in an international setting. He also has advised asset managers and investors in a variety of structured finance, alternative investment and financial derivatives transactions.

Philipp is the Managing Partner for Legal Personnel in the Frankfurt office, having previously served in that role in New York.

Photo of Luciana Griebel Luciana Griebel

Luciana Griebel advises clients on global acquisitions and divestitures, private equity transactions, and strategic investments. Luciana has particular expertise in cross-border M&A and acts for companies at all stages of development, as well as investors and management teams.

Luciana serves on Covington’s Diversity…

Luciana Griebel advises clients on global acquisitions and divestitures, private equity transactions, and strategic investments. Luciana has particular expertise in cross-border M&A and acts for companies at all stages of development, as well as investors and management teams.

Luciana serves on Covington’s Diversity and Inclusion Committee and supports the work of the Public Service Committee. She chaired the Associate Advisory Committee for two years, representing the interests of Covington’s associates across the firm.

Luciana’s practice is international and she regularly:

  • represents leading life sciences and technology companies in some of their most important transactions; and
  • assists clients with corporate governance, compliance, and other matters.

Luciana’s pro bono work includes advising charities on a range of corporate matters, including SolarAid, a charity focused on the development of renewable energy technologies in Africa and South America and Barnardo’s (the UK’s leading children’s charity).

Luciana gained valuable in-house experience, while seconded to the legal department of a global pharmaceutical company.