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With an increase in sizeable, highly strategic public M&A transactions in key markets, we assess the regulatory and market challenges now confronting bidders, from activist shareholders to bid defence mechanisms and tighter rules on tax.
Deal activity
Deal values are up significantly in 2014, showing a renewed appetite for big-ticket strategic M&A. Size of deal values is a key indicator of confidence to carry out strategic M&A, and we have seen an increased number of hostile approaches and paper bids in recent months.
The U.S. market is buoyant with M&A reaching pre-crisis levels. With summer dealmaking breaking record levels, there is definitely increased confidence in U.S.-based management teams. The U.S. is once again the driving force in the global M&A market.
In this quarter, in the UK, we have seen offers for Shire (deal value of approximately GBP32bn) and TUI Travel (deal value of approximately GBP5.2bn) and Carillion’s approach for Balfour Beatty. But with private equity players being less keen to enter the public M&A arena (one of the impacts of the automatic ‘put up or shut up’ rules introduced in the UK a few years ago) and the recent tightening of the U.S. tax rules underpinning inversion structures, the health of the UK public M&A market across all deal sizes still hangs in the balance.
Looking to Europe, in Spain, low interest rates, easier access to funding and, more generally, a renewed confidence in the economy has prompted an increase in high-value public M&A activity (the most attractive targets being international companies which have deleveraged or restructured during the downturn).
Deals in Q3 included bids by CVC for Deoleo and Orange for Jazztel. By contrast, in France and Holland, there has been a dearth of big-ticket public M&A in recent months.
Turning to Asia, Singapore outbound public M&A has been particularly buoyant, with OCBC’s acquisition of Hong Kong’s Wing Hang Bank and Frasers Centrepoint’s acquisition of Australand Property Group both completing within the quarter. In Malaysia, Q3 has seen the creation of a national champion and the decline of a national icon. CIMB’s offer to purchase both RHB Capital and Malaysia Building Society would create the largest financial institution in Malaysia and consolidate the banking sector significantly. Further consolidation is expected in the sector, with the market anticipating that other financial institutions will look at deal opportunities. This trend is largely a product of the government’s desire to create national champions capable of taking on regional competitors ahead of the commencement of the ASEAN Economic Community in 2015. In parallel, the MH17 disaster triggered Khazanah’s decision to take Malaysia Airlines private and commence a thorough restructuring of the national carrier.
Tax inversions
A big driver of public deals this year has been action by U.S. corporations to acquire or merge with companies in the UK, Ireland and elsewhere. These jurisdictions have less onerous corporate tax regimes which allow U.S. corporations to redomicile their businesses and escape much higher corporate tax bills in the U.S. – an ‘inversion’ structure. Pharmaceutical companies have been at the forefront of the inversion race. They tend to have large amounts of overseas earnings that can potentially escape U.S. tax following an inversion transaction. This was supposedly a driver of both the approach by Pfizer for AstraZeneca (later withdrawn) and AbbVie’s decision to make an offer for Shire.
However, at the end of September, the IRS took some initial steps to try to stem the inversion tide. It announced changes to a variety of technical tax rules governing inversion transactions which complete on or after 22 September. Among other things, a greater number of inversions (those which involve non-U.S. ‘cash box’ companies, such as the Elan/Perrigo merger) may now be subject to existing unfavourable tax rules regarding post-inversion reorganisations. In some cases, the new non-U.S. parent may even be dragged into the U.S. tax net. These and similar new rules will make many inversions more difficult to achieve, as well as being less attractive if they are achieved.
Other anti-inversion measures requiring new legislation are also under consideration. One option would be to require that no more than 50% of the shares of the merged group be owned by former shareholders of the U.S. participant if anti-inversion tax penalties are to be avoided. Currently, the non-U.S. participant’s shareholder base has to represent only 20% of total investors in the merged group to avoid the most troublesome anti-inversion rules. If Congress does eventually insist on the new 50% level, this will be a showstopper for the vast majority of transactions.
There is the possibility of a rush of further inversion transactions in the months ahead while the tax loophole remains partially open.
Shareholder activism
The presence, scale and sophistication of shareholder activists continue to grow. Shareholder activism has long been a feature of the U.S corporate scene and remains very much on the agenda (this includes the ongoing situation involving Valeant Pharmaceuticals and Allergan), with powerful funds forcing boards to make important personnel or strategic changes, unlocking conglomerates and forcing them to make disposals, as well as influencing the outcome of M&A transactions.
There have been significant campaigns in other mature markets, too – notably in the UK, parts of Continental Europe and, in a few cases, in Japan. The UK’s Electra Private Equity investment fund has recently found itself embroiled in a battle against New York activist Edward Bramson who requisitioned a shareholder meeting to shake up the board and prompt a strategic review of the investment fund. The targeting of German pharmaceutical giant Celesio by Elliott, a hedge fund, during its bitter and drawn-out takeover by a U.S. competitor, McKesson, some months back, is still a talking point in the German market.
Key regulatory trends
A number of regulatory developments have been attracting debate in Europe.
In the UK, the Takeover Panel is planning to change its rules on public statements made by parties during a bid. The backdrop to the proposals is the recent Pfizer/AstraZeneca situation, during which Pfizer made a number of voluntary, and long-term, post-offer commitments in relation to AstraZeneca’s R&D operations and manufacturing facilities in the UK. The upshot of the proposals would be a two-tier disclosure regime, introducing a regulatory distinction between post-offer commitments and statements of intention. If the proposals are adopted, it will be interesting to see whether parties gravitate towards statements of intention, given the higher regulatory tariff associated with post-offer commitments. However, it is also possible that targets might press for post-offer commitments from bidders (eg in relation to management, employees and production facilities) as part of the ‘price’ for securing a recommendation. It remains to be seen whether the Panel will make use of its statutory powers in enforcing post-offer commitments, or whether it will revert to its more traditional sanctions of private or public criticism.
Recent measures in France have given targets more power to defend bids, with targets generally being free to take action to frustrate a bid without needing shareholder approval to do so and long-term shareholders being given automatic double voting rights.
In Germany, meanwhile, the recent landmark Federal Supreme Court decision in Deutsche Bank/Postbank shows that a shareholder may benefit from an uplift in the bid price if it challenges the fairness of that price in court, even though the deal terms have previously been approved by BaFin. This will create uncertainty for bidders in the future, regardless of whether they are making a voluntary or mandatory bid.
Public M&A is definitely back – but not without its challenges. We have seen plenty of false dawns over the last five years but the combination of strong underlying fundamentals and boardroom confidence suggests that this time it may be back for good, or at least for the foreseeable future.
