M&A monitor 2019 predictions - Why only the strongest will thrive - Freshfields Bruckhaus Deringer
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
M&A monitor 2019 predictions Why only the strongest will thrive
M&A monitor Q4 2018
Looking ahead to what
will define M&A over the
next 12 months.
We believe that deal-making will be about the survival of the fittest. In volatile
markets, outcomes are enveloped in economic and transactional uncertainty:
political headwinds are growing, regulators are getting tougher and
competition for the best assets is fiercer than ever (although pricing
dislocations may have unpredictable effects, including for financing).
Such conditions are not for the faint-hearted, and the businesses that
thrive will include those with supportive stakeholders, courage in their
convictions and the ability to make clear decisions.
Slower, tougher, more Culture – the impact
uncertain – navigating of diversity
CFIUS
Predicting the unpredictable Bonus thoughts
– the future of transatlantic – other trends we
antitrust enforcement are monitoring
Why financial investors
are starting small
2
M&A monitor Q4 2018
Slower, tougher, more uncertain – navigating CFIUS
In the current climate, fortitude is declaration at the end of a 30-day review, what specific export controls apply.
a prerequisite for overseas but will do so only if it is certain the Failure to comply with the new
companies looking to do deals in the deal raises no concerns (an unlikely mandatory filing obligations risks
US. Recent reforms of Washington’s outcome given its resource constraints). penalties that can be as large as the
foreign investment laws mean that If it has identified any potential issues by deal value itself.
any non-US business buying into a the end of this stage, it can either request
CFIUS is also increasingly focused on
new list of ‘critical technologies’ that the parties submit a formal filing third-party risk (in private equity deals
now has to lodge a mandatory or initiate a review itself. this can involve probing limited partners’
declaration with the Committee
The most likely scenario, however, is links to foreign regimes and their level
on Foreign Investment in the United
that nothing happens, essentially telling of influence over the general partner),
States (CFIUS). The committee,
buyers and sellers that they have so buyers with complex ownership
which was already struggling to deal
complied with their mandatory filing structures might face difficult and
with an explosion of cases that
obligations but the committee does not intrusive disclosure requests.
have arisen in recent years, now
finds itself faced with myriad new have enough information to give an On the brighter side, the committee’s
notifications that would not have affirmative approval. Some parties with staffing gaps may soon be addressed.
previously entered the system. As a lower risk profiles might be comfortable The latest round of reforms allocated
result, foreign acquirers will have with closing their transactions without CFIUS a dedicated budget of $20m, but
to ready themselves for a more a formal clearance. The alternative is change will not happen overnight. Until it
uncertain – and surely longer – to force CFIUS to reach a conclusion by does, buyers will have to hang in there to
M&A process from here on out. voluntarily submitting a traditional get their transactions over the line.
notification from the outset, in theory
CFIUS has defined ‘critical technologies’ capping their exposure to CFIUS risk at
by reference to certain export control five to six months.
categories split across 27 industries
for which strategically motivated foreign
investments could pose a threat to
In response, deal-makers will need to
budget even more time for the CFIUS $20m
process. Early-stage due diligence now
US technological superiority or
requires a detailed understanding
national security.
of whether any aspect of the target’s
The committee has the option to approve business is involved with one of the CFIUS’s dedicated
transactions submitted via a mandatory committee’s key industries and, if so, budget
3
M&A monitor Q4 2018
Predicting the unpredictable – the future of transatlantic antitrust enforcement
Antitrust litigation under the Trump presidency
Merging parties Agency Type of deal Outcome
Wilhelmsen/Drew FTC Horizontal FTC won
Tronox/Cristal FTC Horizontal FTC won
Sanford Health/Mid Dakota FTC Horizontal FTC won
Otto Bock/
FTC Horizontal Decision pending
Freedom Innovations
AT&T/Time Warner DOJ Vertical DOJ lost, appeal pending
Cross-border deals have become suggested reversing the burden of proof attention towards a single vertical
more politicised in recent years, with in these ‘killer acquisitions’ by obliging merger (AT&T/Time Warner), the only
antitrust enforcement one of the ‘super large companies’ to demonstrate time in 40 years such a transaction
principal battlegrounds. the efficiency benefits of the transaction has been challenged.
to secure clearance. Although legally
questionable, if his ideas are taken up As for horizontal tie-ups – which are
In Europe, the Commission has signalled
in practice it will place significant predominately the deals that antitrust
that buyouts involving big tech companies
demands on acquirers. enforcers care about – the Trump DOJ is
will continue to be scrutinised over their
yet to take one to trial (it did challenge
impact on consumers, markets and In the US, it is harder to generalise
a very small aspect of Parker Hannifin/
innovation. The authority has long tried because two agencies with what appear to
to curb the power of tech giants and is CLARCOR but the case was settled).
be very different enforcement
considering new measures to aid its cause. Looking ahead, the outcome of the DOJ’s
philosophies are responsible for reviewing
At present, parties are only required to investigation into the T-Mobile/Sprint
deals. Under the Trump presidency, the
submit a merger filing if certain revenue Federal Trade Commission (FTC) has merger may therefore provide some
thresholds are met. But in future, the taken a robust, traditional approach by insight. The head of the agency’s antitrust
price of the target may be used as an focusing on horizontal mergers. Its work division, Makan Delrahim, has said that
additional trigger (acknowledging that has so far been validated by the courts; of he sees little wrong in reducing the
even smaller tech deals can have a the four cases it has litigated, three have number of players in the mobile market
distorting impact on competition). been won and a ruling on the fourth is from four to three, and if the deal is
The European Commission’s chief pending. By contrast, the Department passed it could lead to further
economist, Tommaso Valletti, has also of Justice (DOJ) has directed much of its consolidation in key industries.
4
M&A monitor Q4 2018
Why financial investors are starting small
Minority acquisitions by financial sponsors
35 1,200
30
1,000
Aggregate deal value ($bn)
25
Number of transactions
800
20
600
15
400
10
200
5
0 0
e
e
08
09
08
10
09
12
10
13
15
16
Av 18
12
13
15
16
Av 18
11
17
11
17
14
14
ag
ag
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
er
er
Announcement date Announcement date
The story of Ant Financial’s year Deal volumes hit a 10-year high in 2017, taking multiple minority stakes as a route
reveals two trends set to continue and activity in 2018 was not far behind to overall control, effectively turning
into 2019. by early December. In Ant’s case, investors buyouts into a two- or three-stage process.
were attracted by the chance to gain
financial exposure to one of Asia’s biggest Minority investments offer fewer board
In August, Alibaba’s payments arm
success stories (its value has more than seats, although with directors being
pushed back its hotly anticipated IPO,
tripled to $150bn since 2015). And with driven to act independently, even
proving that even the fastest-growing
a listing expected, they have an exit point controlling positions may not enable
companies can find it tough to list in
in their sights. owners to influence strategy to the extent
the current climate. Yet it also launched
they did in the past. This is particularly
the biggest ever funding round by a Exit dynamics are one of the biggest
so in regulated sectors, but the Securities
private business (pulling in more than issues for buyout firms playing in this
and Exchange Commission’s hard line
$14bn from the likes of Warburg Pincus), space. These are funds that have defined
with Elon Musk suggests that autocratic
demonstrating the increasing appetite horizons to deliver returns, unlike typical
growth investors whose approach is leadership styles are on borrowed time
from financial sponsors for VC-style
more open-ended. The strongest players in every industry. It is also harder to
growth investments.
may be able negotiate an obligation that raise leverage from a minority position
As the table above shows, such interest the business will be sold or listed within (where dividends may be the only source
in minority stakes has been on the rise in a given timeframe – or agree rights of security), meaning sponsors are
recent years (arguably returning many that enable them to force their way out. increasingly chasing businesses with
funds to their VC-pedigree roots). But those that can’t are increasingly the highest growth potential.
5M&A monitor Q4 2018
Culture – the impact of diversity
When market conditions are companies and found that those with and tech – to gauge whether these
challenging, it puts greater the most diverse executive teams were theories apply in practice. All our
pressure on businesses to make 21 per cent more likely to outperform on interviewees valued the ability of diverse
the right decisions. profitability and 27 per cent more likely teams to ‘cover every angle and identify
to demonstrate superior value creation. potential pitfalls’ during deals. Mixed
Senior executives are expected to generate Academic studies suggest homogenous teams are less likely to be dragged into
growth whatever the prevailing winds teams act to marginalise dissenting the ‘ego-driven’ aspects of a negotiation
– and when asset values are high, voices and promote ‘herd mentality’, (where minor points are fought over
acquisitions tend to be more closely overconfidence and ‘empire-building’ ‘simply to win the argument’), and are
scrutinised. (where the consolidation of executive less likely to harbour cliques that can
power takes precedence over what is monopolise discussions. One also pointed
One way companies may be able to tackle best for the business). In the context of to the benefits of cultural diversity in
this challenge is by building more diverse M&A, less-diverse companies have even breaking down deferential hierarchies
deal teams. Governments and investors been found to pay more for assets, in and enabling teams to tackle subjects
are pushing for greater gender, ethnic and part because decision-makers may that might otherwise be off limits.
social balance on boards, and diversity has overestimate their ability to
been shown to deliver tangible returns. drive synergies. The most diverse executive
A 2018 McKinsey study, Delivering through We spoke to senior decision-makers in teams are more likely to
Diversity, analysed more than 1,000 three industries – healthcare, finance outperform on profitability.
6M&A monitor Q4 2018
Bonus thoughts – Global M&A
other trends we are monitoring YTD activity by sector
8
7
1
Carve-outs, spin-offs and other 6
portfolio-optimising transactions M&A
We expect these to continue – not least because of 5 value
the ubiquitous nature of the activist investor, regardless
2
of target size or industry, and regardless of region. 4
3
Sector $bn %
1 Telecoms, media and technology 865 24
2 Energy and power 645 18
Volatility in energy prices
3 Industrials and materials 490 13
All part of the new normal – not just for the resources
4 Consumer * 417 12
sector, but for the rest of the industrial economy.
5 Healthcare 399 11
6 Real estate 321 9
7 Financials 320 9
8 Infrastructure and transport 135 4
The shift back towards a focus on Total 3,592 100
corporate governance and controls
8
The market has generally favoured less risk-averse 7
1
boards over the past five years, so will high-profile 6
conduct (accounting, bribery and corruption, individual
5
behaviour) scandals lead to a more conservative M&A
approach to transactions? volume
4
2
3
Sector Vol %
Digitisation – what’s next? 1 Telecoms, media and technology 10,872 25
This is obviously a major driver of M&A activity – 2 Consumer * 9,276 22
we are looking hard at the secondary and tertiary layers 3 Industrials and materials 7,825 18
here, including enhanced antitrust enforcement,
4 Financials 4,392 10
ethical tech and continued efforts to ‘best practice’
the cyber security crisis. 5 Healthcare 3,339 8
6 Real estate 3,148 7
7 Energy and power 2,818 7
For further insights, please visit our Transactions blog.
8 Infrastructure and transport 1,110 3
Total 42,780 100
*Includes retail
7M&A monitor Q4 2018
Global M&A YTD – value and volume
(Company nationality is determined by HQ location.)
Global USA* Europe* Asia-Pacific*
M&A value M&A value M&A value M&A value
$3,592bn $1,560bn $897bn $873bn
M&A deal volume M&A deal volume M&A deal volume M&A deal volume
42,780 11,317 12,240 15,101
Top 3 deals Top 3 deals Top 3 deals Top 3 deals
Shire/Takeda Express Scripts Holding/ Shire/Takeda Flipkart Group/ $16bn
$76.9bn Cigna Corp $68.5bn Pharmaceutical $76.9bn Walmart
Pharmaceutical
Energy Transfer Coles Group/
Express Scripts $68.5bn Partners/Energy Sky/Comcast Shareholders of $11bn
$61.8bn $48.4bn
Holding/Cigna Corp Transfer Equity Wesfarmers
Energy Transfer Abertis Infraestructuras Yantai Wanhua Chemical
Partners/Energy $61.8bn Sprint/T-Mobile US $58.7bn SA/Abertis $41.5bn Industry/Wanhua $10.2bn
Transfer Equity Infraestructuras SA SPV Chemical Group
Inbound: Inbound: Inbound: Inbound:
most targeted markets investing into markets investing into markets investing into
markets US companies European companies Asia-Pacific companies
USA USA UK China
11,317 deals $1,560bn 9,065 deals $1,289bn 2,342 deals $182bn 5,013 deals $395bn
China Canada USA Japan
5,250 deals $418bn 454 deals $69bn 861 deals $127bn 2,659 deals $79bn
UK Japan Japan Australia
2,855 deals $212bn 102 deals $33bn 99 deals $97bn 1,090 deals $69bn
Outbound: Outbound: Outbound: Outbound:
most acquisitive markets US companies are markets European companies markets Asia-Pacific companies
markets investing into are investing into are investing into
USA USA UK China
10,870 deals $1,530bn 9,065 deals $1,289bn 2,253 deals $124bn 5,110 deals $391bn
China UK Germany Ireland
5,221 deals $433bn 337 deals $68bn 1,130 deals $116bn 14 deals $77bn
UK India USA Australia
2,756 deals $225bn 116 deals $21bn 612 deals $100bn 1,135 deals $77bn
*Includes domestic deals NB: All deal volumes include net debt of target.
Financial sponsor M&A – top 3 deals with financial sponsor involvement
1 2 3
$58.7bn $29.6bn $26.6bn
Sprint/ EDP Energias de Portugal/ Dr Pepper Snapple/
T-Mobile US China Three Gorges Keurig Green
(Europe) Mountain
© Freshfields Bruckhaus Deringer LLP, December 2018, 07627 Source: Thomson One (Deals). Data as at 10 December 2018You can also read
