Skadden Arps Slate Meagher & Flom LLP With 23 offices, approximately 1,800 attorneys and more than 40 practice areas, Skadden, Arps, Slate, Meagher & Flom LLP and affiliates serves clients in every major international financial centre, providing the specific legal advice companies across a spectrum of industries need to compete most effectively in a global business environment. Our clients include approximately 50% of the Fortune 250 industrial and service corporations, as well as financial and governmental entities. Skadden’s attorneys and staff share a commitment to providing our clients with the highest quality and most cost-effective legal services in an atmosphere emphasizing teamwork, creativity, responsiveness and diversity.
Scott Simpson Mr Simpson is co-head of Skadden's global transactions practice and a member of the firm's policy committee - encompassing the mergers and acquisitions, securities, corporate restructuring, real estate and intellectual property practices. He advises on European cross-border merger and acquisition transactions, including contested and hostile bids. His recent representations include advising Colfax Corporation on its USD2.4 billion acquisition of Charter International; China Three Gorges Corporation on its USD3.5 billion acquisition of a 21.35% stake in Energias de Portugal (the largest ever Chinese investment in Europe); and Outokumpu Oyj (Finland) on its EUR2.8 billion acquisition of ThyssenKrupp's Inoxum business unit.
Lorenzo Corte concentrates on cross-border mergers and acquisitions, including contested takeovers, private sales and acquisitions, and joint ventures. His assignments include acting for Alpha Bank on its proposed merger with EFG Eurobank, for Arcelor on Mittal Steel's unsolicited bid and the subsequent USD33.8 billion merger, for VimpelCom Limited on its USD30 billion exchange offer for OJSC VimpelCom and its business combination with CJSC Kiyvstar G.S.M., and for Nomura on its acquisition of the European and Asian assets of Lehman Brothers.
Global M&A Overview
M&A activity in 2012 continued to be constrained by uncertain macroeconomic conditions, which dampened dealmakers’ confidence. Although there were several bright spots in transactional activity, including an uptick in overall deal volume and value in the fourth quarter of 2012, buyers and sellers entered 2013 in a cautious mood.
While the outlook for 2013 remains uncertain, we believe that the return of confidence to boardrooms and the executive suite in the US should stimulate increased M&A activity. Furthermore, despite global economic conditions, transaction activity in emerging markets increased in 2012, and we are cautiously optimistic that these markets will remain attractive options for opportunistic dealmaking in 2013, with China continuing to be the main driver.
The European economy, on the other hand, faces significant hurdles to recovery due to its strained policymaking environment. This could have a negative impact on global M&A going forward. In addition, the recent trend of aggressive antitrust and competition scrutiny of M&A transactions, which we expect to continue in 2013 and beyond, has had and likely will continue to have a dampening effect on large strategic transactions.
In this discussion, we review these trends and other factors likely to shape the global M&A transaction landscape in 2013.
US M&A: Overcoming ‘Confidence Crisis’ Remains Key to a Healthy Market
The sluggishness in US deal activity that began in the second half of 2011 extended into 2012, as the macroeconomic climate continued to weigh heavily on investor confidence, and 2012 US M&A activity, as measured by both dollar deal volume and number of transactions, finished below 2011 levels.
In light of the economic uncertainty in 2012, buyers and sellers entered 2013 in a cautious mood. Many corporations have scaled back capital expenditures, and exports to markets such as China and Europe have slowed. Moreover, there is widespread concern in the business community that pending tax code changes could further depress business investment.
There are, however, signs that the trend is starting to reverse itself and that confidence is returning to the market. The booming US energy sector could support a much-needed recovery in investor confidence across the board. US companies are getting a competitive edge, as energy prices in the US have already significantly declined. Manufacturing in the US, for the first time in many decades, is growing again. The wealth-creation that will result if this boom continues could be a driver of future inbound and outbound M&A in North America.
Moreover, corporate cash balances are at historically high levels, financing for acquisitions is available on attractive terms, target prices are generally low (or in any event have not yet experienced a significant increase) and the strategic imperative for growth remains strong.
As a result of these conditions, the first quarter of 2013 brought the announcement of a number of very large transactions, including Berkshire Hathaway and 3G Capital’s joint USD28 billion bid for Heinz, Comcast’s USD16.7 billion buyout of NBCUniversal, Liberty Global's USD15.8 billion acquisition of Virgin Media and the USD11 billion merger of American Airlines and US Airways, as well as the proposed USD24.4 billion mega-LBO of Dell led by Michael Dell and Silver Lake Partners.
Europe M&A: The Long Road to Recovery
The European and global economic crises have encouraged limited takeover activity in the past few years. Investors remain extremely reticent to invest in many of the peripheral European economies, particularly in light of the ongoing crises in Spain, Italy, Portugal, Ireland, Greece and, most recently, Cyprus. France, one of the three most important EU economies, has increasingly received harsh criticism in light of its tax and labour policies.
It is hard to predict when the EU might be able to address its monetary, banking and structural issues and cause investor confidence to return, but in our view this is unlikely to occur in the short term. As a result, while outside investors will continue to pick off individual opportunities for investment in Europe, it is unlikely that there will be a significant increase in inbound M&A in 2013, particularly in the EU’s peripheral countries.
It is also somewhat unlikely that there will be a significant increase in intra-European consolidation because of the wide ranging and disparate set of issues affecting EU economies and their varying speed of recovery, together with regulatory hurdles created by increased vigilance at the European Commission regarding competition concerns. See “Antitrust and Competition: US and EU Enforcement Trends” below.
China M&A: Looking Ahead to 2013
The upsurge in both deal volume and value of Chinese M&A transactions that followed the height of the global financial crisis in 2008 and 2009 did not extend to 2012. Because of its myriad interconnections with global finance, China’s economy was brought down to earth last year. However, China remains the strongest of the emerging economies and will likely remain a key component of global M&A growth going forward.
Two trends are likely to continue. First, consistent with Chinese national macroeconomic interests, state-owned enterprises will continue to take the lead in outbound M&A transactions, particularly in the traditional energy and resources sectors. Second, given the announced going-private offers, these transactions will continue to account for a considerable share of China’s M&A market. The SEC recently filed charges against China affiliates of the Big Four accounting firms for refusing to produce the audit work papers and other documents related to China-based companies, which sparked market speculation of a stronger wave of China-based US companies opting for delisting in the coming years.
At the same time, efforts are being made to encourage inbound investment into China. With the launch of a series of implementing guidelines under China’s 12th five-year plan in 2011, the Chinese government signalled its proactive support for mergers and acquisitions and reorganisations. This provides a more positive policy environment for M&A transactions and cross-border investment in the relevant sectors. In addition, the transition of China’s top leadership in November 2012, together with statements issued from the new leaders regarding accelerating economic reform and liberalisation, herald a new wave of domestic growth and, coupled with improving global market outlook, are stoking a positive outlook for Chinese M&A.
Emerging Markets: Despite Economic Uncertainty, Dealmaking Opportunities Continue
Despite global economic conditions, transaction activity in emerging markets increased in 2012, and we are cautiously optimistic that these markets will remain attractive options for opportunistic dealmaking in 2013. M&A activity in high-growth markets accounted for 28% of global deal volume in 2012, with the total value of announced M&A deals reaching approximately USD723 billion, according to Thomson Reuters.
Following a lacklustre first three quarters of 2012, fourth quarter M&A deal value for emerging markets totalled USD254.4 billion, up 69.4% from the third quarter of 2012 and 9.1% from the fourth quarter of 2011, thus proving the enduring attractiveness of emerging markets for companies from both developed and emerging markets alike. Brazil, Russia, India and China led the way in the fourth quarter of 2012 with a combined quarterly deal value at USD127.1 billion. Supported by strong domestic consumption and a growing middle class, emerging markets have proven durable and self-sustainable. Despite an environment of greater caution, opportunities remain, particularly in the retail and consumer products, technology, healthcare and pharmaceuticals sectors.
With no single emerging economy driving global demand, we expect to see a greater diversity of emerging and frontier nations shaping the M&A landscape in 2013. In Latin America, Colombia and Mexico are becoming especially attractive to investors. Foreign investment in Colombia has surged in recent years as the government has become increasingly forceful in curtailing organised crime, and Mexico’s change in government is seen as an opportunity for forthcoming structural reform. While overall Asia deal volume remains relatively flat, Southeast Asian companies and sovereign wealth funds, with strong cash positions and vigorous growth, are aggressively pursuing outbound M&A opportunities, particularly in the energy, financial and retail sectors. In addition, we are also seeing an increase in M&A activity in the Middle East and North Africa, especially in Turkey and Egypt, as Western banks retreat and sell their local subsidiaries.
Given the headwinds in certain developed markets, M&A and other deal activity in emerging markets may well account for a greater percentage of global activity in 2013 than 2012. If that occurs, it will be the result of investors’ search for yield, which will be tempered by execution and political risk concerns. Comprehensive due diligence on the targets, co-investors and sellers, coupled with an understanding of tax, and convertibility or remittance of currency issues, are critical factors for those investors seeking to make the most of their opportunities in these emerging markets.
Antitrust and Competition: US and EU Enforcement Trends
Despite the difficult economic conditions, antitrust regulators globally have increased their vigilance in reviewing transactions. This has weighed on M&A dealmaking, particularly in the EU where consolidation has become necessary to compete in the global marketplace. In 2013 and beyond, the global M&A market will continue to feel the impact of this increased scrutiny from antitrust and competition regulators. In both the US and the EU, regulators have been increasingly cautious in their review of M&A transactions. Coupled with the growing influence of regulators in emerging markets such as China, Brazil and India, this will result in additional obstacles to closing M&A transactions.
US: Obama’s Antitrust Agenda Enters Second Term
Following the November elections, in 2013 the US Department of Justice’s Antitrust Division and the FTC (the Agencies) likely will continue the trend of the last four years of aggressive antitrust enforcement. Thus far under the Obama administration, the Agencies have initiated more enforcement actions, including litigation and consent settlements, and issued more second requests (as a percentage of HSR filings) than over the previous four years. We fully anticipate a continuation of this record of aggressive enforcement, along with increased emphasis on economic and data-driven analysis.
Against the background of the continued recession, the European Commission has resisted calls for a more lenient implementation of merger control in the European Union. The EU commissioner for competition continues to view aggressive merger control enforcement as a key instrument for promoting growth and protecting consumers in the European Union. The recession in Europe has raised the question of whether the Commission should consider industrial policy and focus its merger enforcement on a more dynamic, forward-looking approach.
While developed economies emerge from a prolonged recession, we believe that the US will be the driving force for exiting these recessions completely and behind a resurgence in M&A activity. Emerging markets, with the support of capital from US, Chinese and other investors seeking higher returns, will continue to thrive. On the other hand, we believe that Europe will likely continue to lag significantly behind and that regulatory review of transactions could continue to hamper M&A market growth. However, the combination of increased activity in the US and emerging markets should outweigh the impact of the European economy, leading to an improved M&A market in 2013.