The Future Of M&A
The hottest deals, the biggest challenges, the best dealmakers! In this special edition of The Firm, we discuss the future of M&A with Adam Emmerich, Partner, Wachtell Lipton; Christopher Saul, Senior Partner, Slaughter and May; Janet Hui, Partner, Jun He; Sergio Sánchez Solé, Partner, Garrigues; Marc Reysen, Partner, O'Melveny & Myers and Cyril Shroff, Managing Partner, Amarchand Mangaldas.
Emmerich: WhatApp is a great example because it’s almost an unknown company in the US and its value depends on the number of subscribers and those eye balls and users are mostly global. So, it is an example of globalization and M&A all rolled up into one. The deal that kicked off the year was the Jim Beam deal which is Suntory of Japan by a US brand. So another example of globalization. We have the Forest Labs-Actavis deal which is an Irish company buying a US drug company. So, it seems like it is starting out as quite an active year and very globalized as well.
Saul: Active and strong capital markets as we have seen, good equity capital markets last year and early this year, a lot of debt available, debt market is healthy. Lots of cash on the balance sheets. A sense of urgency; with some CEOs wanting to move forward and the deals that Adam’s mentioned emphasize that. So, we feel pretty good about M&A in Europe this year. Also of course some sort of pressure off the Euro. The sense that the Euro crisis has at least gone into some degree of a band. So, tentative optimism I would say in Europe for a decent M&A.
Reysen: From the continent indeed, the situation is very similar. It all depends on how certain elements of the economy are developing and so we are keeping our fingers crossed there.
Solé: Spain is a land of extremes. Last year, we were in the middle of one of the worst recessions which we have ever been. I would say that we are still in, at least for a big part of our population, our unemployment rates are extremely high. However, in this first quarter, it is amazing how much the M&A market has improved.
If you open our Spanish news papers you will see that nowadays there might be six-seven initial public offerings (IPOs) in process; there has been none for many many years. We are still in the first quarter and there are five or six which we are talking about in the newspaper. This week it was announced the largest M&A transaction in five-six years, it was this week. I would say that there has been also in this quarter more real estate transactions and this is just the first quarter.
Hui: In fact we have seen some interesting norms which is good for lawyers. We have seen that the Chinese economy seems to have slowed; especially in terms of example the consumer capability and also the property prices. So, it is not just the 30-40 cities that we have seen that the prices start to go down. We have news saying that even in Beijing and Shanghai the property price has gone down.
On the other hand, in terms of M&A transactions especially both for inbound and outbound, we have seen tremendous growth and it is a happy surprise to us because in first quarter, normally, China has been more quiet because of the Chinese New Year and traditionally people start to slowdown things and look at the new deals. But surprisingly, ever since early January, we have seen lot of M&A deals, larger sizes, and smaller sizes, inbound, outbound, they are not just talking, they have been active and people are trying to nail down the transactions. So, from that point of view it is probably that the new government has been doing the right thing. On one hand, we have seen that the economy slowed down and the Renminbi currency - it is the first time after many years it depreciated - and then the valuations of many companies domestically seems to be cheaper than before. In the past the investors thought it was just too much overvalued and very hard to negotiate with the Chinese companies. Now it seems that it is more realistic and for certain sectors which the government has encouraged especially by more favorable approvals and also regulatory incentive schemes to the private companies seems to be working. So, together with the Shanghai plenum and some other liberalization system that has been given by the government - it seems to us that it all encourages more domestic private M&A transactions and therefore we do see that there is a trend that the government will continue to encourage and it’s not just for the SOEs, a lot of private companies in different sectors, services industry, soft skills like intellectual property, we think that there will be growing trend much more than the natural resources.
Doshi: How would you assess the M&A opportunity or the deal making opportunity for India. Is it still the NPA opportunity.
Shroff: It’s a bit of that for sure and not everyone is admitting that it is that because they think sort of at one superficial level they look like normal deals but underlying many of the transactions and there are quite of few of them, there is the NPA element as well.
Doshi: So, there is a degree of stress?
Shroff: There is certainly the degree of stress where the promoters are unable to hold on to their companies anymore. Whether its pressure from the banks or business itself needs capital and there is none that they are able to fulfill it without either getting in a partner or passing on control but in terms of the level of activities, whether it is for this reason or the buys have become cheaper because of the exchange rate or just the opportunity which the international investors are seeing in a post election world -the activity levels are very high; I have not been busy here on M&A in the last few years.
Doshi: As always US is the big daddy of deals this year. Asia Pacific doing even better. However the growth is the highest in Europe. Deal making in emerging markets is slower. Cross border M&A is booming. Private equity buyouts are down and Technology Media Telecommunication (TMT) is ruling the roost.
Emmerich: There are more users on WhatsApp than there are people in the US. It is not a US story; it is obviously an immigrant story also- Ukrainian immigrant in the US who created the thing. So it really is being driven by technology acceptance around the world and we will certainly see many more stories like that. There is lot of controversy of course and commentary about USD 19 billion price tag of WhatsApp - I am personally one of those who think it’s quite reasonable. If you look at the current number of users, a billion users projected over relatively short period of time. You don’t have to talk about a lot of revenue from a billion users, one way or another been driven through the app itself and through Facebook system to justify a price like that and we will see more - I can't tell you what the next thing is going to be…(Interrupted by Anchor)
Doshi: You probably can
Emmerich: I am not sure what it is but as you see globalization -on this scale of half a billion, a billion or two billion users- there is tremendous value being created.
Reysen: My bet would be on technology actually because that is where the money seems to be moving. Natural resources seems to have reached a point of saturation and where the important deals have been done but there is actually sort of more pressure on the companies now to deliver on the promises they made when they did the last deal.
Saul: Two or three themes I would say- one related theme which is telecoms which is a big area of consolidation you are now seeing in Europe. So, SFR the French mobile carrier maybe acquired by Bouygues which will be a 4:3 transaction. So, a big sense of quite expensive consolidation in telecoms - obviously related to technology - but they are an adjacent area.
Another theme I think is utilities with struggling balance sheets actually off-loading some assets and we saw RWE sell DEA last week and they did have a rather tricky time off late. So, these are two themes. I agree about natural resources. I think that will have a rather trickier time and in terms of matrix it depends to be honest. So, new ways of businesses will attract inventive approaches on how do you value it. 450 million subscribes, that’s great. So you are going to pay a lot for that. I just think we need a more expansive view of what value is driven by.
Doshi: I heard the same thing being said in 1999-2000.
Solé: The most interesting M&A we are having is basically in telecom. The transaction- I mentioned - of this week was acquisition of a Spanish telecom company by Vodafone. The big transactions that we will have in the near future will be mainly in the telecom sector as well because there is still a big need of consolidation. The IPOs I was mentioning, most of them do relate to the online world. Probably, the first IPO we will have is the IPO of an online travel agency which has become very quickly the largest travel agency in Europe and it’s online and there is another one which was just announced this week - another online travel agency.
Shroff: Telecom and Pharma will continue to be dominant themes in the next couple of years for India as well in terms of acquisition targets and again all of them would be strategic.
Doshi: So, the tax department will buy out Vodafone!
Shroff: No comment.
Doshi: So telecom and Pharma
Shroff: There are a lot of companies sitting on cash because these are strategic investments. They see a lot of potential in India despite all the frustrations and that is driving and will driver further activity.
Hui: In China, education, banking and finance, pharma are all the key sectors which probably will undergo a lot of reform together with the relaxing of the one child policy which we are trying to catch-up because we have the ageing problem.
Doshi: I am not going to go into more detail on shadow banking because I know that’s a big challenge that the Chinese authorities are going to try and deal with. However I am still curious on knowing where the financing for the M&A activity this year is going to come from? And I am going to turn to the two developed nations on this panel to ask them where is the money coming from?
Saul: There is lot of money on corporate balance sheets, a huge amount of money on corporate balance sheets. The bond markets are pretty hot. So, there is a lot of money in debt capital markets.
The banks do have the money to lend and will lend it. Essentially your point about banks because they are also somewhat distracted, certainly in Europe you are seeing a lot of investigatory pressure around the banks and they have conduct issues that they are grappling with and that I think that has been distracting them. They also have capital constraints. They have the European Central Bank’s asset quality review coming up. So, actually banks have quite a lot going on inside there.
Emmerich: It’s not quite accurate to think about banks lending, it is an odd thing to say but if you look at big transactions like the Verizon-Vodafone transaction and something like that.- the funds are available for this sort of acquisition activity in virtually unlimited amount. So, all of our experience in these very large including cross border transactions is that acquisition finance for a responsible, well capitalized acquirer or buying a serious business is available in virtually unlimited amounts.
Doshi: Economic uncertainty, shareholder activism, regulatory interventions, anti-trust restrictions, tax troubles - which amongst these challenges could slow down the global deal economy?
Reysen: What we see- as many of these deals are global in nature- is actually the challenge of getting it through in particular merger control review in so many jurisdictions and if you look at Facebook-WhatsApp, you realize the complexity that this can give rise to. If you look at Europe, you would expect a big major transaction like that to sit squarely in Brussels and be reviewed by European Commission on a one stop shop basis for the whole of Europe. Now, it appears that they will actually miss the financial thresholds that trigger European merger control and so you might actually end up with up to 29 local filing requirements that might still bring it back to Brussels to consolidate all these filings. However what it does show is that a lot of these transactions that ultimately need to pass through many gates and it may actually be very difficult in a situation where regulators try to prove their mettle to convince regulators in secondary jurisdictions and I don’t think of any those represented in this circle but sort of really smaller countries which are faced with a review like that and which may be honestly create issues locally to step back and say we will waive this through because the global deal is more important than what happens locally. So, that in the future will be one of the major challenges facing more global transactions.
Doshi: So, I guess, to the thresholds now, they need to add a user threshold because many of these companies don’t tick the profit or revenue threshold. Merger control is young in China as well.
Hui: Before we go to merger control finding, I need to give a little bit of positive messages about China. In terms of regulatory hurdles and also the time and the process the new government has tried to cut it down to be more efficient. So, there are more delegations of the authorities and some of the process which requires approval now becomes registration or filing. So, in terms of the general regulatory approvals, it would be simplified. Other than that, there are two things that the investors probably will be very cautious about- the first one is the merger control filing. We have known to be the first one to be filed in China and the last one to come out. However, we have introduced a simple case procedure which hopefully, if they follow it in the simple case procedure, it will be a very quick clearance. The government is talking to us about also reducing the amount of information required by the filing party. In the past, people always complained that the government required too much data and it is somehow mission impossible. So, for that part, it has been improving. The second one is probably more scary thing- it is about the National Security Review. So, if there is pure onshore transaction, then some of the transactions you will have to go through the national security review which creates some uncertainty and fears as to how it goes but so far it has been positive for two years and based on our experience there is no such transaction that has been blocked due to National Security Review. So, it’s a process that you have to go through, it’s probably sometimes shorter, sometimes longer than merger control filing but I can only say that to us, for China, the foreign investors seems to be more welcome with the reduction of the approval requirements and time. So, I am very positive about China on that one.
Saul: One, nationalism just as a sort of international trend, there are bothering signs of the rise of nationalism which affects some degree of enthusiasm and confidence in deal doing. So, we might lose Scotland; you have got Ukraine; you got tensions between China and Japan; you have got Catalonia- so, I am a little worried that nationalist instincts around the world will be, in non specific ways as yet, unhelpful to confidence in deal doing.
Another is tax. There are good things and bad things- people have been quite inventive about using attractive tax jurisdictions to facilitate deals these days and we see that not just in Europe but also the OECDs focus on the BEPS work that they are doing. I think that could really change quite a large part of the playing field, the way people think about things. Not centrally but it will have some impact when it all plays out.
Doshi: BEPS was on the top of my list of challenges that could potentially hurt M&A because everybody is looking at structures with new eyes.
Emmerich: I would echo what Christopher said about nationalism and I would say in a certain way cross-border global taxation and tax structuring falls in to that in a certain way. It was mentioned by the Chairman of Securities and Exchange Board of India that there is also great propensity these days for protests and for feeling in many countries by large parts of the population that something is not right, something is not fair, the system is being gamed by those people who are more successful, by those enterprises who are more successful. I think it is all part of the picture in a certain way and complicated tax structures in the M&A context that are seen either by nationalist or populist sections of our country or company’s constituencies, have a potential to backfire.
Solé: One of the main challenges in Europe is that most of our governments are broke and they don’t want to recognize it and they keep on living as if they were not. For example there is more and more red tape. I know that now I am sounding more like a fellow citizen of Adam and as European but there is more and more red tape. Governments keep on buying goods, buying assets that they don’t pay for– they don’t pay in time for sure and sometimes they don’t even pay. This has happened in Spain. Let me tell you something that I read while coming to India in the plane which made me think a lot which is that if you make a list and that list exists of the largest companies in the world which were created during the last 25-30 years, there is only one from Europe. It is a Spanish one – Inditex. But only one. Something is wrong there.
Shroff: Let us unpack it a bit. So, let us talk of an inbound deal with an Indian seller, tax is not the biggest issue because if it is a public market deal, it is in STT transaction. If you are able to implement it on the Exchange it is not an issue at all. I think for that type of transaction, regime is not that unpredictable. The facts of Vodafone with the foreign seller foreign buyer were unique. I am not seeing too many of those transactions. So, whilst Vodafone maybe an example of the unpredictability of our system and that the government can become a bad loser and change the rules of the game retrospectively sending a bad message or whether you really have a rule of law or not, I think I would put that in a separate box. However, on a day-to-day basis, I don’t find our transactions constrained by the tax issue. The bigger issue I see on deals that we are working on is the fact that so much of our corporate law and not just the Companies Act but the public market related regulations are work in progress and it’s almost impossible to call them correctly. There is so much ambiguity and that is actually a constraint because an incoming investor doesn’t want to take any risks. He is looking for certainty and the only certainty you get is the answer you don’t want to hear.