Anthony F. Newton, Haynes and Boone LLP, Houston

Mid-market companies should know that 2012 is shaping up to be a solid year for M&A activity

In 1989, Jeff Hildebrand left a career at Exxon to start his own company with three employees and a telephone. From humble beginnings, Houston-based Hilcorp Energy Company grew operations to become one of the largest private producers of onshore crude oil and natural gas. Although the firm enjoyed increasing revenue for several years running, few would have predicted the payday that awaited it in 2011.

In June 2010, Hilcorp and the equity firm Kohlberg, Kravis, Roberts & Co. LP (KKR) formed a partnership to acquire, own, and develop oil and gas assets in the Eagle Ford shale play in South Texas. In June 2011, Marathon Oil agreed to acquire the operation for $3.5 billion in an effort to expand its output and reserves.

Deals like the Marathon-Hilcorp acquisition don't fall into the oil patch every day, but mid-market oil and gas exploration companies should know that 2012 is shaping up to be a solid year for acquisitions and mergers.

Yet the new year arrives with some perils. Owners and their lawyers need to be prepared.

When the giant energy company knocks on the door, that company will be ready – and in a hurry. With rapidly expanding markets, the major energy company finds it easier to buy existing assets and talent than to expand its own businesses.

The speed and experience of the energy giant, with its stable of skilled attorneys, can be intimidating for the small and mid-sized oil and gas operator, as well as for the attorney who serves it. For the big guy, an acquisition is a common occurrence; for the mid-market operator, this may be the once-in-a-lifetime event.

You need to get it right.

If that big company comes knocking, prepare to be flooded with a sea of documents. Lawyers serving mid-market energy companies in the oilfield need to have a checklist available when the giant comes calling. Here are things to do now:

Develop an M&A strategy

When the target is contacted, the acquirer already has a strategy, so you should put one in place quickly. That strategy will include analyzing alternatives: Is it better to grow organically, by remaining independent and expanding output and sales, or by acquisition, where the acquiring company's innovation, market, brand, and talent will accelerate your growth? Are there other potential acquirers who should be contacted? Or, should the company be actively marketed by an investment banking firm to maximize deal value?

Consider a transaction structure

Have you thought about the ideal approach to handling the income tax aspects of a transaction? If not careful, you can be taxed at both the corporate and shareholder levels. The buyer will seek a structure beneficial to it, and the flip side of that may be costly and detrimental to the seller. Your tax liability can be reduced through tax election, tax-deferred reorganization, recapitalization, and other strategies – but you need experience and knowledge in your corner, and calmness and care during what often is a feverishly active period.

Be ready for due diligence

The acquirer will form a due diligence team, and its first step will be to ask for financial, legal, commercial, and organizational documents. It will ask for access to executives who lead those areas. Who will provide financial statements and tax returns and respond to questions? What is the condition of your financial statements? Who will address liability risks – organizational qualifications; contracts and how they would be assumed, assigned, or terminated; ongoing regulatory actions and litigation? Who would assist the acquirer in understanding market concentration, customers, and competitors? How would you share information on intellectual property, while at the same time protecting it?

Understanding regulatory issues

Are you required by the Hart-Scott-Rodino Pre-merger Notification Act to notify the Federal Trade Commission or the Department of Justice Antitrust Division before an acquisition? If a foreign company is the acquirer, could the deal be blocked because of national security concerns under the Exxon-Florio Amendment to the Defense Production Act? If your company operates globally, will an acquisition affect local content requirements under foreign law? And, cultural differences in the conduct of business in other countries—specifically, the payment of certain "gratuities"—could unintentionally put you at odds with the Foreign Corrupt Practices Act.

Timing implications

With Congress facing continuing and mounting deficits, should you consider the timing of the deal? Do you anticipate heightened taxes in connection with the expiration of the Bush tax cuts? How could Congressional consideration of the national debt and the outcome of the 2012 general election affect your business?

Controlling the human resources equation

How will existing employment agreements be affected by the acquisition? The enforceability of non-competition and other restrictive covenants differ from state to state, and you should be aware of the implications. How will you protect your business if key members of senior management and key technical employees are recruited away? Is there, or will there be, a transaction incentive plan offered to executives in your company?

Managing the integration

Will you need a plan to recognize and manage cultural differences in the acquisition? How do you get management buy-in across your company?

If you're the owner of a mid-market E&P or oilfield services company in a shale play, congratulations. You're sitting in the catbird seat. With the oil and gas sector expanding rapidly to meet a growing economy, the majors almost certainly will be hungry for acquisitions that allow them to expand swiftly.

But with your opportunity come many risks. Be prepared.

About the author

%{[ data-embed-type="image" data-embed-id="5d086d92f6d5f267eec85b3a" data-embed-element="aside" data-embed-align="right" data-embed-alt="Fne Newton Tony" data-embed-src="https://img.ogj.com/files/base/ebm/ogj/image/2018/08/fne_newton_tony.png?auto=format&h=640&w=640" data-embed-caption="" ]}%Anthony Newton is a Houston-based partner with Haynes and Boone LLP. He is an experienced corporate transactional attorney with a background in private middle-market energy-related transactions.

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