A recent international round table discussion focused on mergers and acquisitions involved members of Alliott Group’s Corporate Finance / M&A Group and explored reasons for the decline in overall deal volume in 2016, trends in the market and the impact of reforms and regulations implemented at national and international levels.
23 November 2016, London, Participants in the round table discussion, who included representatives of Sherrards Solicitors agreed that it was always going to be difficult to match the record levels of activity seen at the top end of the market in 2015, and that prevailing market uncertainty has generally slowed the flow of “mega deals” in 2016.
General M&A sector uncertainty
The following were cited as factors in the slow-down and uncertainty: stock market volatility, the humanitarian crisis, instability in Europe including “Brexit”, the economic standstill in China, the U.S. presidential situation and the anti-tax avoidance BEPS program initiated by the OECD and G20.
Participants agreed however, that lower levels of activity were perhaps to be expected after record levels of global deal making in 2015 that have skewed the figures.
Fred Farkouh, partner at New York accounting firm member Farkouh, Furman & Faccio (FF&F) attributed the uncertainty in part to a lack of clarity over the direction to be taken by President Trump: “There will be a continued slow-down in transactions until the true policies of Donald Trump are known.” He added: “International transactions will be greatly influenced by the BEPS initiative and U.S. anti-inversion legislation and earnings-strippings rules that will greatly impact the types of deals taking place and the strategies previously used to reduce the worldwide effective tax rate.”
Benjamin Gould, partner at Chicago law firm member Masuda Funai comments: “An environment has been created in which a transaction that once appeared to be a sure winner has to be re-examined more closely.”
On the impact of Britain’s proposed EU exit or “Brexit”, Dan Bowtell, co-chair of the alliance’s Corporate Finance / M&A Group and a partner at UK accounting firm member Smith Cooper, comments that the consequences “are more likely to be felt at the larger deal size.”
And in Mexico, Guillermo Villegas, partner at Monterrey accounting firm member Villegas y Villegas describes “a difficult year due to widespread global economic problems.”
The mid-market M&A sector is more buoyant
Across the world, there was general agreement that momentum in the mid-market M&A sector has been maintained so far in 2016. Bowtell commented: “Mid-market M&A in the UK is holding up pretty well in 2016 on the whole, even after the UK’s decision to leave the EU in June. We are seeing similar deal volumes to 2015, and anecdotally we are seeing similar statistics and commentary from other corporate finance and M&A firms. The latest CMBOR figures for Europe more broadly support this assertion that the mid-market is performing well.”
In the U.S. Gould comments that “most of the deal activity so far in 2016 occurred in the lower end of the middle market, with deal values between US$25-500 Million.”
In Australia, Alex Fraser, partner at Brisbane accounting firm member Hanrick Curran comments that deal value for transactions over AUD 50 Million “was up substantially at AUD 46 billion, with approximately 50% of deals in the AUD 100-500 million range.”
Aare Schaier, partner at German member firm audalis, comments that 2016 has been a busy year so far for M&A activity, particularly in the SME sector: “Companies are looking to boost revenues now that concerns over liquidity and balance sheets have eased following the global financial crisis.”
Piergiorgion Zettera, partner at Studio Internazionale in Rome comments that he is seeing increases in foreign private equity investment: “While the acquisition of Italian companies by foreign investors has declined, foreign private equity investment fund activity has increased in Italy, with the main shoppers being of U.S. or UK origin.”
Technology remains hot
Participants around the world were also generally in agreement that companies operating in sectors driven by technology remain attractive targets for investors. Farkouh provided perspective from the U.S. market: “It’s probable that technology, which has seen exponential growth both domestically and globally in recent years, could become the most prominent market.”
In India, Umesh Pandey, partner at B.M. Chatrath & Co comments that technology M&A deal growth has been impressive, with “deal making particularly strong in categories related to the internet of things, healthcare tech, cybersecurity and advertising and marketing.”
In Australia, while commodities remain an important contributor to all announced transactions above AUD 50 million, Fraser comments that “… Transport and logistics, real estate and professional services dwarfed the value of deals in other areas.” He also points out that in the AUD 20-100 million range, there has been “increased focus on deals in the agribusiness sector as food security becomes increasingly important, particularly for foreign entities from Asia.”
In china, a predilection for sport is driving investment in Europe’s sporting clubs. Caroline Berube, partner at HJM Asia Law comments that investment is being encouraged at government level, particularly in European football clubs that are in need of new injections of capital. According to Berube, a growing middle class is also fuelling an appetite for foreign luxury brands and growth in the technology sector.
In the UK, a resilient real estate sector remains popular with foreign investors according to Sherrards Solicitors’ Senior Associate Andrew Cooke, while in Italy, the hotel and leisure sector continues to attract interest from foreign buyers.
Overall, round table participants commented that the sectors most popular with investors are life sciences / biotech, fintech, pharmaceuticals, cybersecurity, media, healthcare, telecoms, IT and energy.
Regulatory reforms: helping and hindering cross border M&A
In the U.S., Gould comments that the number of terminated transactions has risen due to factors including antitrust scrutiny and the adoption of new anti-inversion tax rules by the U.S. Treasury Department: “Prior to the issuance of these rules, there were a significant number of inversion transactions completed and being evaluated for the purposes of increasing the tax efficiency of those companies considering such transactions.”
Gould also comments that “Difficulties in completing acquisitions can stem from foreign companies having to negotiate different employment practices, employee benefit plans and multiple levels of regulation due to the federal structure of the U.S. legal system.”
Along with the Foreign Investment Review Board, the Australian Tax Office is now more involved in the approval of foreign transactions in the country, with tax risk being considered in each case. Together with the “Truth in Takeovers” policy adopted by the Australian Securities Investment Commission, Fraser comments that “this is making foreign inbound M&A transactions more difficult.”
In the UK, Bowtell commented that while he sees increasing regulation as “a necessary hurdle to overcome in making deals”, he doesn’t see it as a primary driver for failure. His UK counterpart Andrew Cooke adds that investors should factor in the time required for new compliance and transparency measures such as maintenance of a register of people with significant control as “compliance issues can slow down a transaction.”
However, in China, Berube points out that government administrative control over business activities is being loosened and the M&A process “shortened and simplified”. Berube warned however that foreign investors need to be prepared for “bureaucracy, currency controls and restrictions in specific sectors”.
In Italy, the new “Jobs Act”, according to Zettera, gives companies more freedom and flexibility to let employees go.
And in the Netherlands, Gerrit-Jan van Meeteren of law firm member VMBS Advocaten views the recent relaxing of the country’s legal framework applicable to Dutch private limited liability companies (BV and NV) as a positive factor, as for example, Dutch companies can now adopt a one-tier board structure which is more familiar internationally.
In Mexico, Villegas advises that mutual non-financial loans are being targeted due to concerns over possible money laundering.
The outlook for cross border M&A is good
There was a consensus among participants that there are reasons to be optimistic about the future. Gould believes that with more and more U.S. business leaders having global experience, they are “quicker to see opportunities and act upon them”. He pointed out that domestic mid-market and family businesses are under pressure from globalisation: “If they don’t expand with their own customers, they risk losing them to foreign suppliers at some point.”
In the Netherlands, van Meeteren sees a positive environment with rising confidence and high levels of cash on corporate balance sheets. In his view, there will be a further rise in cross border transactions as “US Companies seem to show an interest in buying middle market European businesses.”
Pandey also sees reasons to be positive in India: “The deal pipeline is likely to increase further in the next 12 months, with M&A activity being driven by an improving domestic economy and expectations around distressed asset sales.”
To read the 2016 Global M&A Round Table report in full, please click here.
Jean Paul da Costa, who heads up Sherrards corporate team adds, “We are very pleased to be apart of this initiative and it is very helpful to be able to provide our clients with a comparative analysis of the M&A markets across the globe”.
As a long established and highly respected commercial law firm in London with an office in St Albans, Sherrards Solicitors LLP offers clients first class legal services delivered by lawyers with sound business skills. Our experience is firmly focused on acting for owner managed businesses and SMEs, but also includes advising multinational companies with their domestic and international interests. Our membership of Alliott Group, the leading international alliance of professional services firms, as well as our close working relationships with Department for International Trade (DIT), the Law Society’s International Division, and the International Bar Association and American Bar Association, enable us to coordinate services, resolve disputes, and open doors for our clients almost anywhere in the world.
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