Thinking of your target’s acquisition: is your cybersecurity risk assessment sufficient?

security-680x220In 2015, we have seen several important cybersecurity breaches in the industry. Some of them have been extensively mediatized while others remained less known by the general public. Recently, the online dating website Ashley Madison was hacked and the identity of millions of users revealed all around the world. Even more recently, we learned that over 500 million users’ Yahoo accounts had been hacked in 2014 and this news came out shortly after the acquisition of Yahoo by telecom giant Verizon. Can these attacks jeopardize your upcoming transaction? They absolutely can. As a matter of fact, Verizon asked for a $1 billion discount off its initial offer of $4.8 billion to acquire Yahoo and just recently said that it has a reasonable basis to believe that the massive data breach of email accounts represents a material impact that could allow Verizon to withdraw from the deal. The burden seems to now be on Yahoo to demonstrate the full impact of the breach.

These attacks raise an important question: are companies aware of the importance of conducting thorough cybersecurity due diligence in their M&A transactions? Here are a few tips that could be helpful when it comes to assessing the cybersecurity risk of a targeted company:

  1. Do not wait until the end of your due diligence. Start assessing the risk at the earliest stage of the due diligence process. It is important to ask the target what its most important and useful IT systems are and the most common risk associated with them. Are they covered by complete and extensive IT policies? Are they regularly updated and evaluated by IT experts? Those are examples of questions that need to be asked while conducting your IT due diligence.
  2. Know exactly the most important systems that need to be considered. Since due diligence in cybersecurity can be very expensive for the buyer, it is important to identify what systems or technologies are most at risk of being subject to a cyber-attack. By tailoring your risk assessment, you are controlling the cost while making sure to investigate the proper systems with a higher risk of being hacked that will endanger the success of your transaction.
  3. Do not engage in any cybersecurity risk assessment if your company does not have internal IT experts or extensive knowledge in this area. It is no easy task when it comes to estimate the cost of a potential cybersecurity problem within the target’s systems. Not only is it important to discover such problems but it is also very important to be able to evaluate how such problem could negatively impact the transaction and what the best way to fix those problems is, before engaging in further discussions or negotiations. If your company does not have the internal team to proceed with the cybersecurity due diligence, you should consider retaining the services of external IT specialists.
  4. Consider the importance of obtaining cyber insurance. Since cyber-attacks can be highly expensive for a company, the importance of cyber insurance (not only in the specific context of an M&A transaction) is rising for many companies throughout the market. According to an IBM survey conducted in 2016, the average cost of a data breach reached $6.03 million this year, which represents a 12.5% increase compared to 2015. The software-maker McAfee estimated that the total cost of cybercrime in the global economy can reach up to US$575 billion per year. The costs are high and most of the time very difficult to estimate so that is why companies should consider having cyber insurance in order to protect themselves from such costs and uncertainty. Cyber insurance policies can cover a wide range of risks from network security liability to regulatory defense and penalties and network extortion.

For more, please see our previous posts on how to manage cyber security risks during the negotiation and due diligence stages of an M&A transaction and the ways regulatory bodies have begun managing these risks.

The author would like to thank Vincent Belley, articling student, for his assistance in preparing this legal update.

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“Acqui-hiring” the best talent

Large public companies often acquire small private start-up companies to add new capabilities to their portfolios. This strategy is particularly common in the technology sector, where established players can take their pick of a multitude of start-ups. Given the nascent nature of start-ups, start-ups typically have limited assets, often consisting of a small number of software or hardware platforms. Oftentimes, of potentially greater value to an acquirer is the start-up’s talent pool, and hence, the phenomenon of the “acqui-hire”.

The essential concept of the “acqui-hire” is an acquisition that is driven by a desire to harness the target’s key employees, such as software developers and engineers. The opportunity to import a cohesive team of talented employees can represent tremendous value to an acquirer, particularly when such a team has a record of generating and commercializing innovative ideas. In a sense, the acquirer is buying what it hopes will be the team that will create the next sensational product, rather than any of the products currently in the start-up’s portfolio. Thus, the “acqui-hire” is an example of the role that acquisitions play in fostering innovation.

The phenomenon of “acqui-hiring” provides insight into the factors influencing acquisitions beyond the target’s assets, including the acquirer’s company morale and its relationships with other market players. In theory, the “acqui-hire” provides benefits to both the target start-up and the acquirer. The start-up’s key employees get a healthy paycheque, typically in the range of US$1-2 million vesting over several years, and the venture capitalists that initially funded the start-up get some return on their investment. This latter aspect of an “acqui-hire” transaction allows the acquirer to maintain positive relationships with venture capitalists, as opposed to simply poaching the start-up’s top talent and leaving it to fail. The “acqui-hire” also makes the hiring of new talent more palatable to the acquirer’s existing employees. New employees can be paid more than existing employees without disrupting the company’s pay scales because the newly “acqui-hired” talent has to be compensated for the purchase of their equity in the start-up.

Interestingly, some consider “acqui-hires” to be something of a golden parachute for the key employees of start-ups that would be unlikely to secure future financing. Being “acqui-hired” allows the founders of once-promising technology start-ups to tout the fact that their fledgling companies were acquired by one industry giant or another, rather than face the risk of liquidation down the road.

In California’s Silicon Valley, where the “acqui-hire” has been most popular, “acqui-hiring” reached its peak in 2013 and 2014. The levels of seed financing by venture capitalists and the demand for talent by the industry’s major players are the main factors driving the trend. With the recent decline in venture capital funding, it remains to be seen whether the “acqui-hire” will retain its popularity.

The author would like to thank Mark Vanderveken, Articling Student, for his assistance in preparing this legal update.

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Mining M&A for 2016: digging deeper into the numbers

As discussed in our latest update on M&A activity in the mining industry, there has been a recent and substantial rise in deal volume and value in the industry. This is exciting news for mining companies that have suffered from a sustained downward trend in M&A activity as a result of low and volatile commodity prices in addition to political and business-related barriers.

A recent report (the Report) by KPMG elaborates on this recent surge in activity, focusing on each commodity, geographical region and asset (according to their stage of development) most impacted from this increase. Certain of the Report’s findings are set out below:


Gold and copper transactions account for well over the majority of global M&A activity in the first half of 2016. Gold transactions accounted for 20% of deal value globally, second only to copper transactions, which accounted for a whopping 59%. Further, gold transactions accounted for five of the top 10 largest transactions while copper accounted for five (5) of the top six (6).

Geographical regions

Asia and Africa have now become the principal location of acquisition targets, accounting for the majority of deal volume and value across all continents. While Asia leads in both categories globally, Africa is the primary recipient of the recent surge in mining M&A activity as it has seen the largest increase in both deal volume and value across all continents in the first half of 2016.

Stage of development

Naturally, those transactions involving producing assets continue to dominate deal value in the first half of 2016. More troublesome however, is the fact that these transactions have seen a steady and considerable increase in deal value (a 38% increase to an average now of $800 million) while transactions involving assets in exploration or development stages have seen a subtle (if at all) increase in deal value, remaining steady at an average of $20 million and $250 million, respectively. Despite this disparity, transactions involving assets in the exploration stage continue to dominate total deal volume globally.

Given these circumstances, companies that own assets in the exploration or development stage may want to avoid selling the asset and pursue alternative forms of financing or, at least, offer a right to a royalty (or other interest) as oppose to equity in the asset. Indeed, with commodity prices looking to be on the rise, it may be worthwhile to hold on to your assets to avoid selling low.

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Change-in-control severance and its impact on key talent retention

boardroom-680x220As discussed in previous posts written by my colleagues Victoria Riley and Sara Josselyn, key talent retention is an important consideration for parties to a proposed M&A transaction. The uncertainty of a potential transaction may cause key employees to seek work elsewhere, which could in turn, jeopardize the deal itself. A change-in-control (CIC) severance agreement, however, is one mechanism that can be used by companies to allay concerns and prevent key talent departures.

CIC severance offers enhanced severance to key employees upon a change-in-control. The agreement must define what would constitute a “change-in-control”. Although this definition is often drafted to include a merger, hostile takeover (either through share purchases or through a proxy battle) and liquidation, when drafting, it is important to carefully consider context rather than rely solely on precedent, as the definition can, in certain circumstances, be highly fact-specific. Enhanced severance payments would be owed either upon a single trigger (meaning the occurrence of the CIC event alone) or a double trigger (meaning the occurrence of the CIC event plus a qualified termination, excluding termination for cause). A double trigger is the typical arrangement and aligns with what the Canadian Coalition for Good Governance (CCGG) advises. According to Meridian Compensation Partners a standard severance amount is 2-3x pay for a CEO and 1-2x pay for other senior executives, pay being inclusive of salary and bonus.

CIC severance also provides a cost advantage in comparison to other methods used by companies to retain key talent, namely retention bonuses. Retention bonuses offer cash bonuses to employees who stay for a given period of time after a deal is completed. As stated in this article written by Towers Watson, whereas retention bonuses are automatically awarded to all key talent who remain for the given time period as prescribed under the arrangement, CIC severance, presuming there is a double trigger, is only awarded to those key employees who are terminated after the CIC event. As a result, CIC severance may not be awarded at all.

It is recommended that a proactive approach be taken by companies when it comes to CIC severance so as not to jeopardize the deal and to avoid conflicts of interest during an M&A deal.

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A global overview of M&A activity: August 2016

World MapMergerMarket Group recently published its September edition of Monthly M&A Insider which reported on mergers and acquisitions activity around the world for the month of August 2016. More than two thirds into the year, August was no exception to the recent rather sluggish growth in M&A activity, especially compared to the record-breaking year for M&A in 2015.

Global M&A

August saw a total of 946 deals worth US$182.2bn, the lowest-valued August since 2013 (US$152.7bn) and down 34.7% from August 2015’s US$278.9bn. The Energy, Mining & Utilities sector spearheaded activity by contributing 15.8% to the total global market share with 84 deals worth US$28.8bn, despite a 28.1% drop compared to August 2015. The most notable transactions in the sector were JX Holdings’ acquisition of Japan-based TonenGeneralSekiyu KK for US$6.3bn and Tesla’s acquisition of US-based SolarCity worth US$5.3bn. The Pharma, Medical & Biotech sector recorded the largest deal of the month with Pfizer’s acquisition of US-based biopharmaceutical company Medivation for US$13.2bn. Global cross-border M&A saw 295 deals worth US$52.4bn, a 29% decrease in deal value compared to August 2015. Similarly, domestic M&A lost 36.7% of its value from last year and dropped from US$205.1bn in August 2015 to US$129.8bn in August 2016. However, the September announcements of Enbridge acquiring Spectra Energy for US$40.7bn and the merger of equals between the fertilizer giants Agrium and Potash worth US$36bn are likely to pad the statistics of M&A activity in Q4 of 2016.

North America

With 281 deals worth US$82.5bn, North America posted the fourth highest-valued August since 2007, largely driven by the Pharma, Medical & Biotech sector with 31 deals worth US$19.5bn (125% increase). On the other hand, the middle market was down by 25% closing 94 deals with total value of US$7bn, and private equity buyouts were down by 19.3% in value with 74 deals worth US$13.7bn. While Canada only contributed 4.8% to North American M&A activity, the 40 Canadian deals worth US$2.2bn signified an increase by 79.5% compared August 2015.


Economic uncertainty in the Eurozone and the UK’s vote to “Brexit” continue to depress European M&A activity. Performance in the second quarter was unusually weak (down by 5% in deal value from Q1); however, the Brexit related slowdown weakened the British Pound which lead to increased overall activity in Q3 and may in turn drive M&A activity in the final quarter. In terms of value, the Industrials & Chemicals sector lead the way in Europe with 62 deals worth US$6.6bn, representing a 30.1% increase by deal value compared to August 2015. The US$3.2bn acquisition of Switzerland-based Valves & Controls segment of Pentair Plc by Emerson Electric Co. was a major contributor to the upswing in the sector. Inbound and outbound M&A, while still strong with 65 deals worth US$11.5bn and 54 deals worth US$8.5bn respectively, both significantly decreased in value compared to August 2015.

Asia Pacific

M&A activity in Asia Pacific (excluding Japan) recorded 269 deals worth US55.3bn, which is a decrease of 7.9% in deal value compared to last August. The region’s largest deal of the month was Grasim Industries’ US$8bn takeover of Indian conglomerate Aditya Birla Nuvo. The transaction catapulted India to a monthly deal value pf US$15.5bn, the country’s highest monthly value on MergerMarket and a year-on-year 654.4% increase. Overall, India made up 28% of the region’s total deal value, second highest in the region. M&A in Asia-Pacific continues to be dominated by China with 53% of the market share driven by a wave of technology M&A with 39 deals worth US$15bn. China’s most prominent technology deal in August was Didi Chuxing’s US$7bn takeover of Uber China. Overall, inbound M&A remained quiet with only 34 transactions totalling US$3.4bn, equivalent to a 23% decrease compared to last year. Similarly, outbound M&A slowed down by 21.5% year-on-year with a total deal value of US$8.5bn in reaction to uncertainties in international markets according to MergerMarket.

In contrast to the rest of the world, Japan’s M&A market continues to boom. In August, deal value surged by a whopping 723.7% year-on-year in 42 deals worth US$7.9bn, driven in part by the Energy, Mining & Utilities sector through the abovementioned merger between JX Holdings and TonenGeneral Sekiyu. The combined company, JXTG Holdings, will control more than 50% of Japan’s gasoline market. So far this year, Japanese M&A growth has been mainly driven by Industrials & Chemicals and private equity buyouts with 56 and 32 deals respectively.

The author would like to thank Hugo Margoc, articling student, for his assistance in preparing this legal update.

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The year of technology M&A

Despite the 18% drop in the volume of mergers and acquisitions as compared to last year, one sector that has not lost a step is the technology sector. As of June this year there have been about $260 billion in tech deals announced globally, as has been shown by Dealogic data, making it clear that at least as of right now the tech sector is immune to the effects of market volatility that has other sectors approaching deals with caution. This is the highest volume that the sector has seen for the period since the tail end of the dot-com bubble in the year 2000.

The technology sector boom has been spurred by a number of record breaking deals closed in the spring. The deals have been precipitated by unprecedented reserves of cash amassed by the major global tech companies. The top five tech companies in the United States alone have over $504 billion in their reserves, with the top 50 accounting for $1.1 trillion. These major companies have begun to pursue creative and diverse expansion strategies by entering spaces which were previously foreign to them in an effort to capture evolving market share. The overall market decline has made targets that may have been outside of the price range just last year now suddenly affordable. This downward pressure on valuations has also made it difficult for companies to secure funding, giving them no choice but to turn to enter the M&A market where non-traditional buyers are waiting and are in need of the emerging technologies to enable them to remain competitive into the future.

A sub-sector that has seen particular interest involves marketing oriented operations including digital agencies, ad tech companies and analytics firms. M&As in this sub-sector has surged globally to a total volume of $6.8 billion based on 204 deals as compared to a total volume of $2.1 billion on 85 deals in the same period last year, as reported by AdvertisingAge. Of these deals 62% have involved companies with digital marketing capabilities as compared to 42% of last year. Cross-border companies and private equity funds were the main buyers responsible for this surge.

The author would like to thank Alex Kokach, articling student, for his assistance in preparing this legal update.

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Tighter credit may turn cross-border M&A into popular growth strategy for private companies

South of the Canadian border, regulatory oversight and scrutiny continues to play a noticeable role in making it more difficult for private companies to raise capital through bank loans. In this climate, could strategic cross-border M&A become a more popular growth strategy for US companies which are unable to access traditional lenders and are unsure about resorting to non-traditional lenders?

M&A may be attractive for various reasons, many of which are common knowledge. Private companies want to grow, increase their market share, or perhaps enter a new market. At the centre of any such aspiration is the “how” question –“how do we raise the capital required to achieve the envisioned level of growth”? Private companies don’t have the benefit of the public, ready-to go stock market, so their most popular resort is to seek private investment (including private lending firms) or turn to traditional lenders. However, this has become more difficult in the past decade.

The post-2008 environment of regulatory oversight and scrutiny has led many traditional banks to be more and more selective to whom they lend. Even if one is an existing client, banks are equally selective when deciding whether to make a leveraged loan. While non-traditional lenders have offered a flexible alternative, they typically have much higher interest rates. Consequently, even if a private company could resort to non-traditional lenders, it has to be strategic about the growth-strategy it adopts –and that is where a the risk factor in M&A may, in some situations, appear to be a better alternative to a do-it-on-our-own growth strategy.

Looking from above, private companies have good reason to consider cross-border M&A transactions as an alternative to a do-it-on-our-own growth strategy. With the currently deflated Canadian dollar, and many experienced and established companies in multiple Canadian sectors, there’s a lot of substance to the phrase “the price is right”, especially north of the border. The recent spike in equity financing in the Canadian energy sector, is a signpost for that sector’s growth, but why limit ourselves to one sector? With proper legal advice and due diligence, private companies may find that a cross-border M&A to provide a better bargain for their capital in many other industries.

The author would like to thank Blanchart Arun, summer student, for his assistance in preparing this legal update.

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No pause button on big deals in 2016

A recent PwC survey shows that, even after a historic year in 2015 regarding M&A activity, the ever-increasing appetite for M&A will continue its upward trend in 2016.

In 2015, 65% of all deals met PwC’s standard for “mega deals”, which PwC defines as transactions valued at over $5 billion USD. This year, the strategy to optimize results and performance through “active portfolio management” will continue to drive strategic partnerships and acquisitions in the US and abroad.

According to the survey, 59% of 97 US-based CEOs (of companies with annual revenue from $1-10 billion USD) said that they were planning to enter into new strategic alliances or joint ventures in 2016. Over 45% said they were planning to initiate a domestic M&A transaction and approximately one-third said they were planning to initiate a cross-border M&A transaction in 2016, which means that Canadian companies should be on the lookout. Though these numbers are not as high as those of 2015, PwC still expects the mega deal activity to continue throughout this year.

Turning abroad, about 50% of the 1,409 CEOs globally surveyed said that they were planning to enter into new strategic alliances or joint ventures this year. Over 25% said they were planning to initiate a domestic M&A transaction and slightly less than 25% said they were planning to initiate a cross-border M&A transaction.

What makes for such a hot deal market in 2016? At least in the US, PwC claims that companies will continue to pursue deals to position themselves for growth in the fast-moving technology sector and unlock value in stagnant mature sectors such as industry products. In the face of changing external conditions, there seems to be no other way for companies to thrive.

If the first half of 2016 is any indication of M&A activity in Canada for the rest of 2016, the second half of 2016 promises to bring exciting times for Canadian companies. Hang onto your hats!

The author wishes to thank Peter Choi, summer student, for his assistance in preparing this legal update.

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M&A activity in the healthcare sector is on the rise

M&A activity in the healthcare industry has been on an upwards trend since our last update. Good Foundations: Building Healthcare M&A and Real Estate, a report by Mergermarket on deal-making trends in the industry, found that about 90% of the respondents expect healthcare M&A to rise over the next year. The value of healthcare deals in North America increased by 28% and reached a total of US$298 billion in 2015.

The North American healthcare industry is rapidly evolving and demanding that companies innovate to stay relevant. Several fundamental shifts, such as the move from fee-for-service to value-based care, are causing healthcare companies to alter their approach to investments. Technology is also impacting bottom lines, the provision of healthcare, and M&A activity in the industry. For instance, the medical devices that provide for safer, less invasive and more accurate treatments have been a major area of focus of mergers and acquisitions in the past few years. According to Mergermarket, medical market devices deals constituted US$57.5 billion in 2015 and the trend is expected to continue throughout 2016.

The technological advancements are also causing investors to take an increasing interest in digital health startups. 87% percent of the study’s respondents expect digital health startups to be the most sought out targets in 2016, with 71% and 56% holding the same opinion of hospitals and acute care providers, respectively. This is supported by the opinion that acquisition of digital health startups not only provide access to new ideas but also to human capital. The study also found that that increasing consumer demand for healthcare products as well as growing scale and keeping up-to-date with technological updates will be the two biggest drivers of M&A activity in the industry.

While the healthcare industry is faced with several challenges, there is also increased opportunity for growth and improvement. In order to make the most of these advancements, companies must embrace technology in both biotechnology as well as operational improvements.

The author would like to thank Shreya Tekriwal, summer student, for her assistance in preparing this legal update.

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Bitcoin update: cryptocurrency remains rare in M&A transactions despite potential

Bitcoin remains a fringe currency in the context of M&A transactions. Despite some notable advantages over fiat currency, the risks associated with funding a large transaction using the cryptocurrency have limited its use to deals between players in the Bitcoin space. This article provides an update to our previous article on Bitcoin’s viability as a currency for funding M&A transactions.

To date, there have been three notable M&A transactions funded with Bitcoin. Only one of these transactions was completed within the last year, with the other two closing in 2013. The initial excitement over Bitcoin’s use in M&A deals was fueled by the acquisition of SatoshiDice, a Bitcoin gambling service, by an unnamed buyer in July 2013, followed by’s acquisition of ZeroBlock, an application that aggregates Bitcoin exchange prices, in December 2013. The use of the cryptocurrency to fund these multi-million dollar deals led to predictions by some commentators that Bitcoin could one day become a widely accepted currency with which to fund major corporate transactions. Time has shown, however, that major corporate transactions funded by Bitcoin remain rare, and, to date, have been limited exclusively to deals between companies servicing the Bitcoin marketplace. The only recent notable transaction funded with Bitcoin was KeepKey’s acquisition of fellow Bitcoin wallet maker MultiBit in May 2016. The dearth of Bitcoin transactions between companies that operate outside of the Bitcoin space may be due to a number of reasons, including the inconvenience of acquiring and liquidating Bitcoin, hesitance to adopt new technology, and general lack of confidence in the cryptocurrency.

Indeed, it appears that some of the downsides of Bitcoin that initially made it a risky currency in large transactions remain unaddressed. According to a recent article on the Independent, Bitcoin has long been thought to be the world’s most unstable currency. Over the past five years, the price of Bitcoin has ranged between CAD $2 and $1,314 and is currently worth $802. Such volatility, relative to fiat currencies, makes it difficult to determine a fair Bitcoin value for an acquisition. Another risk is the largely unregulated nature of the Bitcoin marketplace. Relatedly, high-profile players in the Bitcoin marketplace have been shaken by data security breaches in which large sums of the cryptocurrency have been lost. Most notably, the once-leading Bitcoin exchange Mt. Gox collapsed into bankruptcy when $460 million of Bitcoin disappeared in 2014. Last month, a hack of the Bitcoin exchange Bitfinex resulted in all users losing 36% of their deposits.

Some emerging issues include the recognition of Bitcoin transfers by governments for tax purposes, as well as the applicability of anti-money laundering laws. With respect to the former, the parties to a transaction may have to exchange a portion of their Bitcoin proceeds for fiat currency to satisfy their income tax obligations, as ZeroBlock did following its acquisition by With respect to the latter, Canada’s anti-money laundering laws were amended in 2014 to add persons dealing in virtual currencies to the definition of “money services business”, thereby making such persons subject to additional reporting requirements.

In addition to its use to fund M&A transactions, Bitcoin assets may plausibly represent an asset class of a target business in future M&A deals. However, the uncertainty in the Bitcoin marketplace and the volatility of the cryptocurrency will pose challenges for acquirers seeking to place a value on such assets.

The features that make Bitcoin an attractive currency for M&A deals are notable. Namely, large sums of Bitcoin can be transferred in a matter of seconds, all while avoiding traditional wire transfer fees and administration costs.

Time will tell whether Bitcoin’s relevance in the M&A space will extend beyond its current status as a niche currency.

The author would like to thank Mark Vanderveken, articling student, for his assistance in preparing this legal update.

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