Managing Risks in the M&A Process

Doug Jackson: I'm Doug Jackson, Co-Head of M&A at Mizuho | Greenhill. And with me today is Bill Kucera, Head of Global M&A at Mayer Brown. Bill, we've had the pleasure of knowing each other for 25 years now, and really had the pleasure of working together on a variety of both public and private transactions.

Thanks for joining me today.

Bill Kucera: Well, thanks for having me.

Doug Jackson: I thought we'd touch on a variety of current topics in the M&A landscape, both from a market and, importantly, a legal perspective.

Think of it as a bit of an M&A lightning round, if you will. Why don't we ease into it with a bit of thoughts on the current M&A environment. In particular, I think you'd have to accept and everybody would acknowledge that the M&A market is alive and well and thriving.

M&A volume is up over last year and the year before meaningfully, but it's not an evenly distributed market. Large cap strategic transactions are really dominating M&A volume and they have a disproportionate amount of the deal activity. From your perspective, what about the current environment is driving that dynamic?

Bill Kucera: Yeah, well thanks Doug. First of all, the macroeconomic headwinds are certainly well known. You've got geopolitical tensions, you've got tariffs, the list goes on and on.

So that certainly is impacting the broader M&A market. But as you say, the largest strategic deals, the so-called megadeals, have stayed relatively active despite these headwinds. And I think there's really two reasons for that, both of which are perhaps obvious in the name.

First, they're large deals. And so with a bigger deal, there's frankly more room for error. To use deal parlance, the materiality bar tends to be higher.

And so when you have more room for error, you can get through more headwinds and tensions in the market. And second, and I think importantly, these deals do tend to be strategic. And strategic deals tend to have a longer-term outlook.

This is combining two companies in kind of a '1+1 = 3' strategic vision, so to speak. And that's in contrast to smaller deals and deals between financial sponsors, in which really the goal of that deal is to maximize near-term value. And so those deals get more hung up on smaller issues in the market, smaller blips.

I'm working on a transaction right now, not the biggest deal around, but it's well into the nine figures, and the parties are haggling over a $5 million difference in purchase price. And I think they'll get past it, but the deal may break over $5 million, which is not a lot of money in this business. And so that shows the difference between these large, big strategic deals and maybe the smaller, non-strategic sponsor deals.

Doug Jackson: You bring up financial sponsors. I mean, I would imagine there's still tremendous pressure on the sponsor community to get transactions done. How are they adopting in terms of trying to get DPI?

Bill Kucera: For one, there's no doubt that the private equity market is facing challenges right now. I saw a KPMG report not too long ago that had the statistic on number of PE deals in the first quarter of '25 versus the first quarter of '26, and the number of PE deals is down about 20%. So right there is evidence of a softer private equity market.

And then more anecdotally, I heard an interview with the Co-CEO of Thomas H. Lee Partners the other day in which he said that the PE market was the hardest or the most challenged that he's seen in his career. I think it was his 45-year career.

So there's no doubt that PE is facing some headwinds because of these more macro levels. And so, you know, what does the PE market do in that regard? It's harder to exit because there's valuation challenges and just harder to get buyers to the table.

Certainly the IPO market, which has been really soft over the last several years, is thawing, I would say. And so that is an exit that certain portfolio companies can take advantage of, but far more prevalent and really a major trend in the private equity world is the continuation funds, continuation vehicles. I think it was 20% of private equity exits are through CVs now.

And so that is, you know, a tool that private equity sponsors are using to get some liquidity for its LPs, but put off the ultimate exit until the time is a little better.

Doug Jackson: When a fund is transferring or selling from one existing fund to a CV, is there anything different about that transaction from a legal standpoint, from your standpoint, or is it a regular way deal from the lawyer's standpoint?

Bill Kucera: You go out of your way to make it a regular way deal, and you want it to be arm's length and show that it's arm's length. You typically would get fairness opinions on both sides of the deal to show that the consideration both on the buy side and the sell side is quote unquote "fair". But the fact of the matter is it, is a, you know, a related or an affiliate deal.

So you do have to be a little careful to make sure your T's are crossed and your I's are dotted and make sure that there's a propriety of arm's lengthness, I guess, is the way to put it.

Doug Jackson: I think we see that as well when we're in the financial advisory capacity. For those deals that are getting done in the marketplace, do you see it more of a buyer's market or a seller's market?

Bill Kucera: First of all, it's a buyer's market if you can get through an auction and to the table. Auctions are softer than they have been. I'm working on one now which was launched four or five months ago that, you know, I thought there was going to be a frothy auction, going to be lots of interest.

To say that we're limping to the finish line is an understatement. There's maybe one buyer left at the end. And so it's from that standpoint and the buyer that emerged has quickly figured out that the auction largely broke and that buyer, of course, has some deal leverage.

And so from that standpoint, if you're a buyer that's willing to transact in this market, there's definitely some leverage. But once you get past that and to the table, the biggest dynamic — and this is really a more macro change to the M&A world since me and you started doing deals 25 years ago — is rep and warranty insurance has really changed the game. It just has.

And it's definitely the biggest change in M&A deals and processes in our careers. And there's two sides of that coin. At first, and most obviously, it is a huge win for the sellers.

Rep and warranty insurance has allowed for sellers to have limited, or in many instances, no post-closing exposure on the deal, which 15 years ago would have been unheard of for sellers. And so from that standpoint, it's a big win from sellers. And you go into the deal with a seller-friendly deal term.

But the flip to that is that the quid pro quo for a buyer agreeing to having no real recourse against the seller is the seller generally agrees to what I'll say is a fulsome set of representations and warranties that it gives to the buyer. And the reason that's good for the buyer is because that supports the buyer's representation and warranty insurance coverage. And so while rep and warranty insurance is obviously good for sellers, it's also good for buyers, too, because it's facilitated these fulsome reps.

Doug Jackson: Is there a particular reason why the industry hasn't standardized a rep and warranty package for an insurance policy?

Bill Kucera: Because the rep and warranty insurance market hasn't mandated that. And the reason it hasn't mandated that is because it's so competitive now. It's become so lucrative that more and more market entrants have come in.

And there's been candidly a little bit of a race to the bottom on terms. And premiums down, retentions are down. Policy terms are incredibly insured-friendly.

I mean, it's to the point where whenever you do a new policy, you'll go back to your last fully negotiated policy with that insurer. And we'll say, "we'll start there". And those terms are already very insured-friendly.

And so while you would think that the insurance would move a little bit based on the type of reps you're giving, in deal practice that doesn't happen as the insurer really just insures over it.

Doug Jackson: Do you see a bifurcation between strategics and financial sponsors in terms of the use of rep and warranty insurance? I mean, certainly nearly 100% of financial sponsor sellers will require it. But in terms of buyers, are the strategics getting more and more comfortable with it as a product?

Bill Kucera: They are. And that's really because they have to. And you're right.

The early adapters of the rep and warranty insurance products were sponsors. And they really moved the market at the beginning. Strategics were slow to adapt, like they often are, until they really got to the point where they couldn't avoid it anymore.

And the reason for that is, if not every sell-side auction, 99% of sell-side auctions are hardwired such that the seller will have little, if any, recourse through the deal. Those are the terms. No buyer is going to be competitive if they say, “no, no, I want a traditional indemnification package.”

So if you're playing in an auction, you pretty much have to accept a limited recourse scenario. And limited recourse scenarios, you've got two options as a buyer. One is you can go to the rep and warranty insurance market and procure this great new product.

Or second, you can self-insure and effectively take the risk. And while I think there was a time when strategics were trying to figure out which was the better route there, because of the softness in the rep and warranty insurance market, there's more rep and warranty insurance capacity than there is M&A deals to insure. And that has led to, as I mentioned a minute ago, you know, pricing coming down and terms coming down.

Doug Jackson: Are there any new developments or particular focus on deal protection mechanisms that are worth highlighting?

Bill Kucera: Yes, certainly in the public deal world, the recent change of the tender offer rules, in which, for certain tender offers, not all, but if you meet the conditions, cash deal, a competing offer hasn't emerged, etc., the minimum offer period that you have to keep the tender offer open has been reduced from 20 business days to 10 business days. And that's pretty material for both the buyer and the seller. On the buy side, back to your deal protection, you know, buyers want to get their deal done as quickly as possible to eliminate the deal risk, somebody jumping the deal.

So reducing from 20 business days to 10 business days is certainly an attractive deal protection mechanism that a buyer would think about. And it's attractive on the sell side, too, simply because stuff happens in the world. And so sellers want as little market risk or “stuff happening” risk out there as possible.

So getting closed sooner rather than later is better for the seller. So this change in the tender offer rule, if you've got the right fact pattern for your public deal, is pretty valuable and pretty game changing.

Doug Jackson: Bill, maybe this is a good opportunity to pivot to talk about the subject matter that dominates all the headlines, which is AI and the use of AI. How has the M&A process changed from a legal perspective with the introduction of viable AI models?

Bill Kucera: So it is absolutely here. It is absolutely changing M&A in real time. Deal process.

The use cases are varied. They're exciting and they're evolving. The most obvious is on the due diligence side, document review.

The things that young M&A lawyers used to toil all through the night reviewing hundreds and hundreds of contracts. In the old days, literally in a physical data room with boxes. And I know you remember those days.

Doug Jackson: I do indeed.

Bill Kucera: And now you put the contract into an AI tool and it says if a consent is required or not. So that is a pretty interesting change. But there's been some other ones in my practice quite recently that have gotten my attention.

And I'll just give a couple of examples because I find it interesting. We're doing a, on the buy side, a fast moving deal to acquire a pretty complicated tech company, which candidly, most of the lawyers and the laymen around couldn't describe easily about what this company did. I know you know the type of companies I'm talking about.

And so here we were faced with having to come up with the definition of the restricted business for the sell side non-compete, and “what can the seller not do?” and we're like, “uh oh, we don't even know what the business does”.

Doug Jackson: So how do we define it?

Bill Kucera: How do we define it? One of my younger partners says, "I have an idea".

We'll take the banker's offering memorandum and put it into Harvey, which is the legal AI tool, and ask it to disseminate, cut through the information and spit out a definition of restricted business. Five minutes later, there was a definition of restricted business, which we put in front of our client, who, of course, did know what the target company did because they were buying it. And the client said, "Looks great", didn't change a word.

So that's one example of using AI to solve problems and make things go faster. The second example, which is perhaps even nearer and dearer to my heart and probably yours as a former M&A, young M&A lawyer, we were working on another deal recently, which, as sometimes happens, it started off as a stock deal. And we dutifully prepared a stock purchase agreement.

And, of course, the deal pivoted to a merger. And so, uh-oh, we need to change a stock purchase agreement to a merger agreement. And in the old days, that would entail a fifth-year associate with a lot of blood, sweat and tears, typically over an overnight period, turning that agreement from a stock purchase into a merger.

But in this case, “Hey, Harvey, can you turn our agreement from a stock purchase into a merger?” And in whatever it was, 10 minutes, out came a merger agreement. And so there are some real-time examples of how AI is changing the M&A process.

And that's obviously the tip of the iceberg. And that's more anecdotal. But it is definitely being used in the M&A process.

Doug Jackson: The hiring needs for the legal profession is outside the scope of this conversation, but it does have interesting implications to the labor market. But as it relates to AI, what are some other issues that we should be cognizant of, whether that's, you know, recording conversations, conference calls, the prompts, you know, I'll call it a search history, but the prompts using AI? Are there any ramifications from a confidentiality attorney-client standpoint that clients should be aware of?

Bill Kucera: You bet. And this is not surprisingly an evolving area as we speak. But there have been a couple of recent cases on this topic in which in the M&A context, and I'm sure in other contexts as well, the question about search histories and AI prompts and whether those are legally privileged or could be discoverable, have been front and center to pretty significant M&A disputes.

There was one earn-out dispute in which AI prompts was front and center. And so lawyers are creating various provisions for nondisclosure agreements, for the purchase agreement, that talk about the protection of AI searches and AI outputs and making it legally privileged and who can use it and who can't. So I would encourage deal professionals, both bankers, lawyers, to frankly pay attention to this and make sure you've got policies and procedures on your deal team in place so that it's at least thoughtful.

You don't want to get ahead of it and find out later, wow, those AI prompts that says, “How do we breach this contract?”, is later discoverable. That's a bad thing.

Doug Jackson: Thanks, Bill. What about some parting thoughts?

If you had to pick one area where clients are still underestimating risk, is there an area that you could highlight for our viewers?

Bill Kucera: It's a really good question, and it was very thought-provoking when we were preparing for this. The thing that I came up with, I kind of ticked through those deals I've worked on that either outright failed, or were challenged. And the good news is it's a relatively short list.

But there are some in my long career. And the uniting factor to all those deals were the management team that the client, my client, the buyer effectively bet on or was relying on didn't play out. And there's a lot of different scenarios as I tick through it that kind of led to that result, ranging from outright fraud.

The CEO founder literally defrauded my client, the buyer. Obviously, that's a bad scenario, and that's one that isn't typical and you want to avoid. But there's more subtle areas in this.

Another sponsor bought a portfolio company that at the time the CEO was the son of the founder, not a particularly strong CEO. And within a very short amount of time from the closing, my client, the private equity owner, realized they needed to make a switch with management, which they did. That company never recovered.

Seven, eight years later, one CEO after another, one CFO. It just never. So starting out of the gate, betting on the wrong management team really led to that investment struggling mightily.

And then maybe the last example of that is another sponsor acquisition situation. The CEO of the target that we were buying was, I'll go so far as to say, a little difficult in the negotiations, employment terms and the like. And it was hard to get that deal done and to get that CEO over the line.

But we did. And we owned the company for, my client owned the company for a nice hold period and went to exit. And guess what?

The CEO who was still around was difficult on the exit. And as a seller, that's a bad scenario. You want to be able to control your exit.

You don't want there to be external factors that are implicating or making it harder for you to sell. And that CEO that was difficult coming in proved to be difficult coming out. So the common theme of those challenge deals is really kind of betting on the wrong management team, which led to some challenges down the road.

So I think that might be something that buyers maybe underestimate a little bit.

Doug Jackson: Maybe this would be a great opportunity to turn it around and say one of the positive things that helps deals is having the right advisors alongside, whether it's both legal and financial.

Bill Kucera: That is for sure the case. Absolutely.

Doug Jackson: Bill, thanks for joining us today at the Mizuho | Greenhill M&A Corner.

Bill Kucera: You bet. I had a great time.

Thanks for having me.