At a glance:
- The family-oriented nature of Turkish businesses makes deal-doing a personal affair.
- Contractual documentation should be “bulletproof” in light of frequent bouts of seller's remorse
- Pressure tactics should not be used – they are likely to count against you
- A host of banks are keen to finance such transactions
Turkish deals are not the type that you execute sitting at your City desk in London and dialling into conference calls. A deal in Turkey is very personal, as it requires investors and lawyers alike to be in the room in order to spend significant face time (which may be quite enjoyable, considering that Istanbul is not the worst place to spend your evenings!). To successfully navigate your way though a Turkish transaction and reap the rewards of this high-growth market, it is important to know the people, the specific deal dynamics, and not least, local culture and etiquette.
One recurring aspect in Turkish acquisitions is that the sellers are almost always families. Family-owned and run businesses comprise an incredible 95 per cent of all Turkish companies and account for over 75 per cent of GDP. In addition, the rate of passing businesses to the next generation is quite low, which means that there are a lot of potential targets for sale. This is one of the features that makes the Turkish market very attractive for foreign investors and, in particular, investment funds. The Turkish deal landscape is a stark contrast to the rest of the world, where there are insufficient “fresh” targets to go around and secondaries take on a increasing role. In 2012 secondaries even exceeded primary buyouts in terms of the number of deals for the first time in history.
However, this is also one of the challenges that single out Turkish acquisitions. Frequently, a foreign investor buying into a family-owned Turkish asset would usually find themselves sitting across the table from large, multi-generational families. Decision-making is often a slow process requiring the co-ordinated input of several generations of family members: it can be difficult to advance in negotiations and to crystallise a common position on the sell-side amongst the multiple vendors.
Another unique aspect of transactions in Turkey is that they often become very emotional – the company up for sale is the family legacy, built over generations. The buyer needs to be mindful and aware of family dynamics and sensitivities, and manage these in a constructive way. This usually involves a lot of patience and relationship-building. Such sellers frequently feel seller’s remorse, change their minds, hesitate and want to think things over (and over again). Often they are drawn into the sale process by persistent financial advisers, and have not really made up their mind to sell – instead, they wish to “test” the market. It may thus be easy for them to leave the negotiation table, sometimes even after having signed a sale-purchase agreement. This hesitancy makes it critical to ensure that deals are transacted with “bulletproof” contractual documentation that won’t leave sellers with an easy way out, or at least that would provide buyers with some protection for costs incurred. Sometimes, it is helpful to ward off seller's remorse by keeping the sellers onboard with a minority stake, keeping the company name or giving senior members of the family an honorary position. All of these arrangements need to be tailored on a deal-by-deal basis and tightly framed from a legal perspective.
Given this context, the role of the sell-side adviser can be particularly helpful, whether it be an experienced M&A financial adviser or an M&A attorney. However, according to a 2008 research paper, 51 per cent of Turkish family firms think that receiving “consulting services” is unnecessary/not suitable when they make important decisions with respect to their businesses, and as such it is not uncommon for Turkish family vendors to “skimp” on acquiring expert M&A advice upfront. This often results in vendors being ill-advised at the outset of a deal – or requires buy-side advisers to do “twice the work” in order to raise the deal dynamics to the standards expected of international M&A transactions.
In this “family” context, building relationships of trust with the other side is paramount, and establishing a relationship is the purpose of the first few meetings. The key deciders typically will not show up for the first couple of meetings, but an outside adviser will meet them later after one moves up within the family ranks as matters progress and the family considers this person to be a serious and trustworthy business partner. This delayed introduction to the decision-makers also ends up being a useful negotiation technique for sellers to reopen points as the deal progresses. One should not assume that just because a point was agreed during a meeting that it was actually set in stone. Taking notes often comes in very handy!
Easing the pressure
Pressure tactics and tight deadlines as negotiation techniques are not well-received in Turkey – they can often be turned against you and used as an excuse to stop or stall negotiations. As for most family-entrepreneurs, the target company is their life’s achievement and they will take their time to ponder, and not be rushed or pressured into decisions. This careful approach takes quite a bit of time to sign and close a deal… but it is usually worth it.
One more point to consider regarding timing when conducting business in Turkey – the most important task when mapping out the deal timeline is to pinpoint when the Ramadan month (particularly the Bairam, or “festival”, week) will occur, as work slows to a halt during the Islamic holy month. A deal may come to an abrupt standstill if it is scheduled during this time!
And lastly, another positive aspect of Turkish acquisitions is that private equity buyers are often inclined to secure acquisition financing for such deals, and the regional banks that are the “usual suspects” for such LBO financings are augmented by numerous Turkish banks that are keen to finance such transactions (and develop their Turkish corporate client base). Turkish banks are getting closer and closer to what would be considered “London City standards” in relation to their execution of private equity-backed LBOs. There is still some way to go, but this is largely because the industry is still in its relatively early stages in Turkey.
Turkish banks are generally conservative in nature and take a considerable amount of time (and conduct considerable due diligence) in getting comfortable enough to finance a particular deal. But it is obvious that this prudent approach has served Turkish banks well – and as a consequence Turkey has benefitted from a rather robust and competitive acquisition finance market during the past years when compared to other, neighbouring jurisdictions.
Ted Cominos is a partner and Cristina Proca an associate at Edwards Wildman Palmer.