The art of the deal: Pavan Jawanda looks at M&A

  • December 14, 2015
  • By Ann Macaulay

The low dollar, uncertain commodity prices and Canada’s new government are all factors at play in M&A projections for the new year, says Pavan Jawanda, an associate at McCarthy Tétrault in Vancouver.

The unseating of the Conservative government in favour of the Liberals in the October federal election appears to have affected the timing of some deals that are already in the market, says Jawanda, who specializes in mergers and acquisitions.

“Some sellers are sitting on some large capital gains and are of the view that they need to close a deal and crystallize some of those gains before year-end because of some potential tax uncertainty in 2016,” he says. “Potential tax changes, in and of themselves, aren’t driving companies to do deals they wouldn’t have otherwise done but they do seem to be affecting the timing of some deals that are already in the market.”

Jawanda says his firm has been busy over the past several months with a number of cross-border and international deals involving U.S. and foreign investors that are interested in building a Canadian presence and there is some expectation that the general trend in deal activity will continue into 2016, driven by a low Canadian dollar. “Now that currency analysts are forecasting that the lower dollar might be the new norm for the foreseeable future, it seems to be giving some foreign investors the comfort to get a deal done in a reasonable time frame.”

Uncertainty about commodity prices means some blockbuster deals in those areas may be sitting on the sidelines, but that’s by no means the whole story for M&A activity. “While deal volume in resource-based industries is still understandably lighter than levels from a couple of years ago, private mid-market and public deal activity in industries such as tech, consumer products, manufacturing and financial services seems to be thriving.”

Jawanda, who was called to the bar just six years ago, was an accountant before becoming a lawyer. Understanding both the financial and legal languages of a deal means he is well-positioned to give a depth of business advice that a “unilingual” lawyer could not manage.

“I have had the good fortune of working on deals in a number of countries, and finance and accounting seems to be the universal language of business. While there may be technical differences in local accounting practices, IFRS or GAAP, everybody generally understands what EBITDA means, what cash flow is, what working capital is, what leverage is and so on.”

M&A lawyers are an invaluable source of information to clients when they’re buying or selling a business. It’s their job to draft the purchase and sale agreement to fit the commercial realities of the deal and address legitimate risks for the client in order to set up a successful closing and get the parties to agree to a document they’re both willing to sign.

“The most successful M&A lawyers I have seen, including lawyers at my firm and at other firms, can distill these very complex legal documents ‒ which can range from 20 to 100 pages ‒ into key business points that the client, a business person or an entrepreneur can appreciate and make reasoned judgment calls on.”

In April, Jawanda will present on the topic of drafting that all-important purchase and sale agreement as one of the eight core modules of the CBA’s 2016 Skilled Lawyer Series. This year’s program, titled The Anatomy of a Deal, has 16 modules in all looking at all aspects of an M&A deal from start to finish through the lens of a scenario developed by Cassels Brock & Blackwell partner Jake Bullen.

Jawanda was also a presenter of one of the most popular Skilled Lawyer Series courses in 2015.

Ideally, clients bring in the M&A team early to a deal, when there’s a letter of intent, or a memorandum of understanding or even just a confidentiality agreement. “The first thing we usually get involved in is structuring the deal,” he says. At that point, “you’re interacting with the client, typically the buyer or the seller. You might be interacting with their accountants to discuss accounting or tax matters and other experts depending on the type of industry.” In some cases, when tax, labour, intellectual property, environmental or Competition Act issues are unique or complex, the M&A team may look to legal specialists within the firm. “It can become a very multi-disciplinary deal, which I think is what keeps it interesting.”

An initial draft is prepared and sent to the other side and then goes into negotiation. “After that, it can go any number of ways. It could be a very heavily negotiated agreement that could take weeks or months to finalize and get to something that folks are comfortable signing. Or it can be very quick, such as in a very competitive auction process or a distressed deal where time is of the essence.”

The clients’ objectives and concerns are very different based on whether they’re buying or selling. On the sell-side, clients are usually focused on what Jawanda calls the Big Cs: certainty of closing and certainty of consideration.” Buyers, on the other hand, are still focused on getting the deal done but want to address and mitigate risk and unexpected exposure. Closing conditions, termination rights and indemnification all feed into these competing interests.

One interesting recent development is that the appearance of representations and warranties insurance, which has been used in the U.S. quite extensively over the past few years, is becoming an increasingly popular way for buyers and sellers in the Canadian market to mitigate risks, says Jawanda.

“The issue is always the buyers don’t have as much factual insight on these because of the natural asymmetry of information between the buyer and seller,” says Jawanda. And sometimes, “the deal or the business may be so attractive that a buyer is just interested in getting the deal done and is willing to accept some calculated risks.”

Ann Macaulay is a Toronto writer.