This write-up is relevant to businesses, startups, investors, and legal professionals involved in mergers and acquisitions in Malaysia.
Mergers and acquisitions (M&A) are often strategic drivers for business growth, but they are also inherently complex transactions fraught with potential risks. These risks can significantly affect the success of the deal and the future stability of the company. Below, we explore some of the most common pitfalls in M&A transactions in Malaysia and their practical implications:
1. Inadequate Due Diligence
If due diligence is not conducted properly, a buyer might suddenly uncover a host of undisclosed liabilities, debts, or obligations that it must assume after the transaction has closed and they have taken control of the business. This could include hidden unrecorded debts, contingent liabilities, or regulatory violations that were not disclosed during negotiations. These risks often emerge only after the buyer steps into the business and begins to review the operations more closely.
The buyer’s legal remedies for these post-M&A surprises are largely dependent on the “Representations and Warranties” (R&Ws) and “Indemnities” negotiated during the M&A transaction. These clauses are designed to provide protections by holding the seller accountable for any misrepresentations or undisclosed risks. If a buyer uncovers such liabilities post-M&A, they may seek compensation for damages or even pursue rescission of the deal based on the seller’s breach of these warranties.
Without conducting comprehensive due diligence, the buyer loses the opportunity to negotiate these specific protections, leaving them vulnerable to risks they could have mitigated by tailoring specific R&Ws and indemnities based on risks uncovered during the due diligence process.
2. Cultural Integration Challenges
A successful M&A doesn’t just end when the deal is signed, it continues into the post-merger integration phase too. Neglecting this phase, especially the cultural factors (e.g. aligning corporate values, management styles, and employee expectations) can make it hard for parties to achieve their target synergies post-M&A and create operational disruptions.
When two companies merge without careful planning for cultural integration, the result can be a clash of corporate cultures. This misalignment can lead to costly consequences, such as communication breakdowns between leaders, confusion among employees, unproductive meetings, and widespread organizational friction.
Organizational culture is deeply ingrained and doesn’t change overnight. In the context of M&A, cultural integration isn’t about imposing a completely new culture or achieving rapid transformation. Rather, it involves honestly assessing the cultures of both the acquiring company and the target, then determining practical steps to bridge the gap and create a unified approach in the near-term post-M&A period.
3. Ambiguous Deal Terms and Documentation
One of the most critical components of an M&A transaction is ensuring that all deal terms are clearly defined. Vague or poorly drafted agreements (e.g. Sales and Purchase Agreements, Share Swap Agreements, etc.) and/or terms often lead to disputes post-acquisition, especially when certain obligations, warranties, or restrictions even are not clearly outlined.
For example:
- Non-Compete Clauses: A poorly defined non-compete clause can lead to significant challenges, particularly if it leaves room for interpretation regarding the scope, duration, and geographical reach of the restrictions. If the seller’s activities post-transaction are not properly restricted, they could establish a competing business that undermines the value of the acquisition.
- Purchase Price Adjustment Clauses: A purchase price adjustment mechanism is designed to ensure the final price is aligned with the target’s financial position at closing. Without a clear method for adjusting the purchase price, disputes over financial figures can delay the closing process or result in lengthy negotiations after the transaction is completed. The buyer may find it difficult to recover the funds they believe were overpaid.
4. Failure to Account for Regulatory Hurdles
Navigating the regulatory landscape is one of the most complex aspects of M&A transactions, especially when they span across different jurisdictions. In Malaysia, M&A deals often require approval from a variety of regulatory bodies, such as the Malaysian Competition Commission (MyCC), Bank Negara Malaysia, and industry-specific regulators like the Securities Commission and Bursa Malaysia. Failure to properly assess or secure these approvals can lead to significant delays or, in the worst-case scenario, the cancellation of the deal.
A recent example is the merger between Celcom (Malaysia) (part of Axiata Group Berhad), and Digi (Malaysia), a subsidiary of Telenor ASA. The merger required approval from the Malaysian Communications and Multimedia Commission (MCMC) to ensure that the deal would not reduce market competition. Had MCMC determined that the merger would result in an anti-competitive market, the transaction could have been blocked. Additionally, the parties involved could have faced penalties, including fines of up to RM500,000 or imprisonment for up to 5-years.
This case highlights the severe consequences of overlooking or underestimating the regulatory approvals required for M&A transactions. Non-compliance with regulatory frameworks can not only derail a deal but also expose the parties to legal and financial risks, including hefty fines or criminal charges.
Implications for Businesses
The risks associated with M&A transactions in Malaysia are significant, but they can be mitigated with careful planning, thorough due diligence, and proactive management of cultural, regulatory, and operational aspects of the deal. Businesses must be vigilant about conducting proper valuations, aligning expectations, and ensuring compliance with all relevant laws. By addressing these potential pitfalls early, businesses can maximize the benefits of an M&A transaction and avoid costly mistakes.
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This article was written by George Teng (Associate) from Donovan & Ho’s corporate practice group.
Donovan & Ho is a law firm in Malaysia, and our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
