Forging ahead: US M&A H1 2017: Forging ahead: H1 in review

by White & Case LLP
Contact

White & Case LLP

Expectations of another bumper year for US M&A failed to materialize in the first half of 2017, as total deal volume fell below 2016 levels.

In the first six months of 2017, there were 2,413 deals, an 8 percent drop from the 2,631 recorded in H1 2016. Value was up, albeit by a small margin, edging 0.5 percent ahead of the US$585.4 billion in H1 2016 to US$588.5 billion in the first six months of 2017. Inbound activity fared a little better, buoyed by activity in the consumer sector, with a deal value of US$209.7 billion for the first half of 2017, up 26 percent on the same period in 2016.

Meanwhile, US dealmakers remain confident acquirers overseas, conducting 592 deals worth US$202.5 billion in the first half of the year, overtaking all half-year value totals on record despite volume dropping 6 percent year-on-year.

Dealmakers temper their expectations

There was an expectation that momentum from the last quarter of 2016 (when close to US$500 billion worth of deals were announced) would carry into 2017. The expectation was built around continued stock market growth and the business-friendly agenda of incoming President Donald Trump, who had laid out plans to cut personal and corporate tax rates, reduce the taxation of overseas cash piles repatriated to the US, invest US$1 trillion in infrastructure and roll back regulation.

Trump's agenda has been thought to be beneficial for business, but there are now substantial questions about whether he can implement it, and you have to price that in.

John Reiss, Partner, White & Case

However, doubts about Trump's ability to move his agenda through the Capitol have emerged after an unsuccessful attempt to push through healthcare reform and the botched execution of an immigration order. These factors have weighed on initial optimism.

"M&A activity does feel a bit lackluster when compared to previous years," says John Reiss, Global Head of M&A at White & Case. "Trump's agenda has been thought to be hugely beneficial for business, but there are now substantial questions about whether he can implement it, and you have to price that in."


View full image

Consumer spending spree

Scale is defined differently now. Scale is not defined by stores and leases. It’s defined by clicks and ad revenues.

Michael Deyong, Partner, White & Case

Dealmakers will be encouraged by a return to strong activity in the consumer sector, which delivered US$132.9 billion worth of transactions and was the most active sector by deal value in H1. This is a marked improvement for the industry, which was only the sixth-largest sector by deal value last year and has already delivered a higher value in the first half of 2017 than it did in the whole of 2016. Growth in consumer M&A can bode well for wider M&A activity, as consumer M&A is a good barometer of disposable income, employment levels and economic growth.

The deal activity in consumer will also have a positive effect on technology M&A, as consumer companies increasingly rely on digital and online platforms to sell and market their products. Amazon's US$13.5 billion purchase of grocer Whole Foods is a prime example of how deal activity in one sector spills over into another.

"Consumer habits have affected the way companies approach their acquisitions, and convergence between industries does drive activity in different sectors in new ways," says White & Case partner Michael Deyong. "Scale is defined differently now. Scale is not defined by stores and leases. It's defined by clicks and ad revenues."


View full image

China puts on the brakes

China showed almost insatiable appetite for foreign companies in 2015 and 2016, with deal value more than doubling 2015's record levels to US$207.4 billion. But restrictions in China now require the foreign exchange regulator to screen and approve any deal worth more than US$2 billion, which could hinder outbound activity.

There are some concerns that the US is perhaps not as friendly to China as it used to be, and if you put that together with the limitations in China on capital outflows, then it does put inbound M&A from China under pressure.

John Reiss, Partner, White & Case

In 2016, China was the third-biggest inbound M&A investor into the US, with US$62.6 billion worth of deals. Only Canada and Germany closed deals worth more. In the first half of 2017, however, China ranked only ninth, with US$6.1 billion worth of deals.

Trump's "America First" rhetoric may prove a further barrier for Chinese firms looking to do deals in the US. The decision by US authorities to block Fujian Grand Chip Investment Fund's US$550 million acquisition of technology group Aixtron last year due to national security concerns also indicates the increased scrutiny surrounding Chinese investors pursuing even non-US transactions with an affiliated US business involved.

"There are some concerns that the US is perhaps not as friendly to China as it used to be, and if you put that together with the limitations in China on capital outflows, then it does put inbound M&A from China under pressure," Reiss says. "That is a concern, because China has been one of the most important stories in the M&A market in recent years."

Strong fundamentals persist

Despite these headwinds, deal figures for the first half of 2017 remain high by historical standards. Deal volume and value in H1 2017 was higher than in any H1 period from 2011 to 2013. There may be some signs that the market is slowing after record levels of activity from 2014 through 2016, but the outlook for M&A is still positive on balance.

M&A remains a strategic imperative for corporates that need to grow, private equity has money to invest and the financing market is supportive. If you look at the fundamentals, they are favorable.

John Reiss, Partner, White & Case

The US economy is expected to continue growing steadily, with the World Bank forecasting growth of 2.1 percent in 2017 and 2.2 percent in 2018. This is higher than forecasts for the Eurozone and compares favorably to faster-growing but riskier emerging markets. Debt markets are open and with interest rates at 1 percent (significantly lower than 5.8 percent average over the last 50 years), financing is accessible and cheap.

Given these solid economic fundamentals, it isn't a great surprise that the seven of the ten largest M&A deals in the world in H1 2017 involved either a US bidder or a US target. The US remains an attractive jurisdiction for overseas buyers, with five of the ten largest US M&A deals in the first six months of the year involving a bidder from overseas.

"Even when you put aside the benefits of the pro-business Trump agenda, the US is in good shape and continues to give buyers confidence. M&A remains a strategic imperative for corporates that need to grow, private equity has money to invest and the financing market is supportive. If you look at the fundamentals, they are favorable," Reiss says.


View full image


View full image

CYBERSECURITY AND THE C-SUITE

The c-suite is responding more proactively to cyber risks during the M&A process, but implementing effective due diligence practices remains a challenge

The business community is grappling with the evolving threat of cybercrime. Research firm Ponemon Institute puts the average cost of a breach at US$7 million for US companies, while Juniper Research predicts that the global cost of cybercrime will reach US$2 trillion by 2019. In a recent Mergermarket survey, 68 percent of respondents said initiating due diligence early is of utmost importance in mitigating cybersecurity risks.

Despite increasing awareness across all sectors, many c-suite executives are still unsure how to respond to the threat of cybercrime and how to build cybersecurity into their wider business and M&A strategy.

"The c-suite understands that cybersecurity is a material issue that could affect their business," says White & Case partner Steven Chabinsky. "What is still lacking is an understanding of how senior leadership gets into the risk management process. The c-suite is still too focused on this being an information technology issue and not a whole of business issue."

Deal diligence disrupted

M&A is one area in particular where the c-suite needs to be more proactive on cyber risk. Chabinsky believes that while companies have been good at reviewing compliance, there is work to be done when it comes to carrying out effective due diligence. "A lot of the c-suite is relying on representations and warranties as their primary defense against subsequent privacy or cybersecurity events," says Chabinsky. "The issue there is that those reps and warranties really may not be sufficient, as they may not capture the full extent of the harm to a business from a pure dollar perspective."

Kevin Petrasic, partner at White & Case, says that in addition to a thorough review of all representations, warranties and caps, technology due diligence should also review the integration of a target's technology infrastructure, how the target shares data with third parties and the risk of exposure to a cyberattack through the target. "It is simply good practice for companies to monitor cyber vulnerabilities in the context of an acquisition, and understand exactly where the risks are and what price concessions may be appropriate if it turns out that an acquirer is taking on risk," Petrasic says.

The challenge facing acquirers is how to gain this insight in an acquisition process when time and resources are scarce. Petrasic adds, "I don't think there's necessarily a magic bullet. I think it's about being informed, and understanding what the potential risks are by understanding the structure, industry and particular circumstances of the target."

TAXING TIMES

Trump's proposed tax reforms have the potential to significantly change the way US firms conduct M&A at home and abroad, although they may be a mixed bag for dealmakers

Dealmakers have been cautiously optimistic about President Trump's and the House GOP's proposed tax reform plans. Underpinned by a strategy to cut rates, remove special-interest deductions, move to a territorial rather than worldwide system and provide a one-time reduced rate on earnings repatriated from abroad, the proposed reforms hold the potential to provide a significant boost to US M&A activity.

But White & Case partner Andrew Kreisberg cautions against over-enthusiasm, as uncertainty around the implementation of the reforms needs to be priced into M&A forecasts. "We really have very little indication as to which of these reforms, if any, will happen," Kreisberg says.

Kreisberg also points out that even if the full package of reform is implemented, the changes will not necessarily benefit all investors. One proposal in the House GOP plan, for example, is to eliminate the deductibility of net interest expense, which Kreisberg says would have "a very prominent and obvious effect on M&A," as the removal of such deductions would make any deal using leverage instantly more expensive. "This would be a significant disadvantage to private equity (PE) funds who more commonly borrow significant amounts to engage in buyouts, versus strategic buyers," Kreisberg says.

Another proposal to allow for the immediate expensing of investments in both tangible and intangible assets (not including, however, financial assets or land) rather than depreciating such assets over time, could, however, be a positive for M&A. It could also impact the form that such transactions take. "This would strongly favor asset purchases rather than stock purchases, because stock would be treated as a financial asset that would not give rise to this immediate deduction," Kreisberg says.

The Trump administration and the House GOP have also proposed moving to a territorial system of taxation, which, when combined with reduced corporate rates in the US, should remove the incentive for inversions. "If we go to a territorial system, then foreign earnings should not be subject to tax in any event, so there would not be the motivation to shift those operations abroad," Kreisberg says.   

THE CFIUS CLAMPDOWN

Inbound M&A from China is down this year, as CFIUS continues to scrutinize incoming deals on national security grounds

The Committee on Foreign Investment in the United States (CFIUS), a US government body that reviews the impact of inbound deals on US national security, has ramped up its scrutiny of Chinese deals. In 2016, inbound transactions from Chinese companies hit a record high of US$62.6 billion, a more than five-fold increase on 2015 totals. In H1 2017, however, inbound M&A from China is down sharply, with only US$6.1 billion worth of deals announced.

Heightened concern around US national security has given regulators reason to rigorously scrutinize inbound investments from China, according to White & Case partner Farhad Jalinous.

"There is undoubtedly a heightened level of apprehension about how transactions coming from the more sensitive parts of the world will progress," Jalinous says. The concern has also created caution among some buyers, who are unsure about the eventual outcome of their transactions. "Twenty years ago, few outside of Washington and traditional national security-related M&A circles knew what CFIUS was, but now it is covered in the mainstream media all the time," says Jalinous.

Jalinous adds that although the laws and regulations applying to how CFIUS assesses transactions have not changed so far this year (even though proposals for change are expected to be coming soon), there is a sense that CFIUS clearance can now come into play across a wider range of transactions, which has had implications for Chinese deals. "There has to be a very careful consideration of the facts of a deal, including the identity of the buyers, their backgrounds and sources of financing, the target company and its business, and the risk profile of the transaction from a US national security perspective ," Jalinous says. "It is not enough to just look at how a target company's activities relate directly to national security, but also indirectly. From the government's perspective, there is a universe of factors, which can have a significant impact on US national security—and sometimes even the target companies involved are not aware of their sensitivity from a national security perspective."

Although inbound buyers are exercising caution, the number of CFIUS filings remains very high, Jalinous points out. "Based on the number of filings so far this year, I would not be surprised if we end the year with over 250 filings, which is a remarkable number."   

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© White & Case LLP | Attorney Advertising

Written by:

White & Case LLP
Contact
more
less

White & Case LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.