beyond borders the future of dealmaking

BEYOND BORDERS.

THE FUTURE OF DEALMAKING

04 Methodology and background05 Foreword 06 Executive summary08 Chapter 1: M&A outlook20 Chapter 2: M&A strategies for success30 Chapter 3: The M&A experience 36 Chapter 4: Legal and regulatory challenges 48 Powering through the volatility: an interview with Mark Shafir,

co-head of global mergers & acquisitions, Citi, New York 50 Sector focus 50 Consumer 52 Energy, mining and natural resources 54 Financial services 56 Infrastructure 58 Pharmaceuticals and healthcare 60 Private equity 62 Telecommunications, media and technology (TMT)64 Conclusion: Five steps to cross-border deal success 66 About Herbert Smith Freehills, FT Remark and Mergermarket

CONTENTS

HERBERT SMITH FREEHILLS04 METHODOLOGY AND BACKGROUND

METHODOLOGY AND BACKGROUNDAt the end of 2015, FT Remark surveyed 700 senior executives at major businesses around the globe about their experiences of cross-border M&A and their views about the outlook for dealmaking over the next three years. Some 19% of respondents were headquartered in the Americas, 44% were EMEA-based and 37% were from the Asia-Pacific region. All companies had annual revenues of at least US$1 billion and all participants in the survey had considered

at least one cross-border acquisition over the preceding 24 months.

In addition to commenting on their overall business strategy, respondents shared insights on the most significant deal in which they were recently involved. The survey included a combination of qualitative and quantitative questions and all interviews were conducted over the telephone by appointment. Results were analysed and collated by FT Remark, an independently-appointed research

company, and all responses are anonymised and presented in aggregate.

In order to capture any change in sentiment due to changing economic conditions in early 2016, FT Remark conducted a second study in February 2016 of 100 of the same respondents from the original survey group of 700. The regional breakdown of the second survey mirrors the first. Results from this second survey are presented in the opening chapter.

Industrial and manufacturingInfrastructurePharmaceuticals and healthcareReal estateTechnology, media and telecommunications

80

80

40

40

40

40

80

80

80

80

60

AgribusinessConglomeratesConsumer and retailEnergy, mining and natural resourcesFinancial buyersFinancial services

SECTOR BREAKDOWN

GEOGRAPHICAL BREAKDOWN

AMERICAS19%

EMEA44% 37%

APAC

NUMBER OFRESPONDENTS

MERGERMARKET 05FOREWORD

We are delighted to introduce the first edition of Herbert Smith Freehills' global cross-border M&A report, carried out in association with FT Remark, the research division of the FT.

Just as a week is a long time in politics, a quarter can seem an eternity in business. The record-breaking highs and bullish confidence that characterised the cross- border M&A landscape in the latter stages of 2015 have been dampened by a more uncertain macroeconomic environment at the start of 2016.

The slowdown in China, continued volatility in commodity prices and uncertainties over Europe may have tempered M&A appetites in the very short term, however, our surveys, conducted at the end of 2015 and updated in Q1 2016, reveal that attitudes have not changed fundamentally and that the medium-term outlook for M&A remains positive.

Fifty-nine percent of respondents in our updated 2016 survey said that recent volatility would have no impact on M&A over the next two to three years – indeed, 15% said that it would increase their hunger for deals. The fundamentals of M&A are still very much in place – the availability of debt to fund deals, supportive stakeholders, and an appetite to grow through acquisition were not all in evidence through the doldrums of the early part of the decade.

And, in spite of a softening in volume in Q1 2016, cross-border M&A deal values have risen by 14% to US$324 billion compared with the same quarter last year. 2016 has already seen a number of significant cross-border deals announced. These include Irish pharmaceutical company Shire’s US$35 billion bid for US-based Baxalta and Deutsche Boerse’s proposed merger with the London Stock Exchange.

While our survey reveals that there are variations across regions and sectors, the general perception is that the medium-term

outlook for the M&A market is still healthy. This positive sentiment towards M&A in the medium term is encouraging. When it comes to cross-border dealmaking over the next three years, 88% of those surveyed stated that at least one of their deals would be international.

In spite of the uncertainty around the upcoming US presidential election, North America retains a strong focus for M&A activity – 99% of respondents believe that M&A in the region will increase in the next two to three years. This view is backed by Mark Shafir, co-head of global mergers & acquisitions at Citi in New York, who is interviewed on page 48 of this report, and says that: “the market is still very strong… big M&A is going to continue to be part of the landscape”.

Other regions revealed by our survey as being of particular interest for dealmakers are China and India, although the challenges and risks of executing deals in these and other developing markets are also highlighted. The key to getting these deals across the line is to understand the market you are entering and to prepare for the particular challenges it presents. Adapting your approach to the market is crucial.

Predicting the M&A market in the face of continuing headwinds is difficult. Some will see present uncertainties as an opportunity and others as a negative. Overall, as noted above, the fundamentals of a good market remain in place and our survey shows that the prospects for a robust M&A market over the next three years are more than encouraging.

Stephen Wilkinson Global head of M&A, Herbert Smith Freehills, London

FOREWORD

IMM

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E V

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M V

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MARKET FORCES WILL NOTDICTATE DEALMAKING APPETITEIN THE SHORT OR MEDIUM TERM

The 2016 updated survey indicates that manydealmakers feel that the present environment will not

When asked aboutthe next 12 months, 46% say recent turbulence

increase their appetite for M&A. The medium-termfigures indicate a more positive outlook. Nearly 60%

state that recent volatility would have no impact onM&A over the next two to three years, while 15% say

it would increase their hunger for deals.

MORE CAPITAL FOR M&ACompanies are increasingly prioritising capital

for M&A. In our first survey, 39% of respondentswere focused on using their capital for acquisitions,a five percentage point increase compared to 2012.Our updated survey only served to reinforce that

prioritisation, with 45% stating they wouldutilise their capital for M&A.

LEGAL HURDLESRegulatory barriers have

represented the most challenging strategic factors in recent M&A

deals, according to 28% of respondents. Such issues have

proved significantly more challenging when investing in

developing markets, cited by 47% in South Asia and 38% in Africa.

CROSS-BORDER DEALS ON THE AGENDAMost respondents (86%) say they are looking to make between one to three or more acquisitions over the next three years. And out of these, 88% believe that between one and three of these acquisitions are likely to be cross-border deals.

CROSS-SECTOR DEALS AND DIVESTMENTS

DOWNRespondents are less

enthusiastic about cross-sector acquisitions – only 17% are

considering making an acquisition outside their

own sector.

Meanwhile, corporates are likely to hang on to their assets,

as nearly half of respondents (46%) say they have no intention

of making any divestmentsin the next two years.

DIFFERENT REGIONS, DIFFERENT LEGAL CHALLENGESA broad range of expertise is needed to handle legal hurdles in dealmaking. Almost a quarter of Asia-Pacific-based respondents cite di�culties relating to environmental regulation as having contributed to a deal failure. In the EMEA region, 36% of respondents blame labour and employment regulation. Anxieties over data protection and cyber security rules are rising up the agenda – these are now the single most important regulatory risk for dealmakers doing M&A in Japan and South Korea.

India is gaining in prominence as a favoured M&A destination given recent liberalisation of foreign investment, with 95% of respondents predicting the country will see further increases in M&A activity.

INDIA EMERGES

GLOBAL/LOCALWhilst geographical diversification is increasingly important, international M&A is much more likely to be conducted in neighbouring countries or regions than in continents in which the acquirer does not already operate. 33% of EMEA-based companies will focus on Western Europe. 37% of Asia-Pacific respondents are targeting Southeast Asia while 44% of respondents in the Americas are focusing attention on Latin America or North America.

CONCERNS AROUND EUROZONE INSTABILITYInstability in the Eurozone is ranked as themost important risk factor to dealmaking enthusiasm by 25% of respondents, followed by 20% citing a slowdown in Chinese demand.

LITIGATION RISK RISINGAlmost three quarters (73%) of respondents expect overall litigation risk to increase in the years ahead. Seventeen percent of respondents say they were significantly less likely to pursue deals because of litigation risk.

ANTI-TRUST REGULATIONSCAN GIVE RISE TO MAJOR

DEAL DISRUPTIONAlmost three quarters (71%) of

respondents picked out theseregulations as an issue that had

caused a deal to fail.

45%

71%

17%

73%

25%

95%

NORTH AMERICA LEADS THE WAY99% of respondents forecast further increases in North American M&A over the next three years. Businesses say they are primarily attracted to developed markets, such as North America, due to their relatively stable economic environment, the availability of suitable targets and stronger infrastructure.

99%

MULTIPLE DEALS UP BUT MAJOR DEALS DOWN57% of respondents are expecting to make two or more acquisitions over the next three years. However, 53% say that none of their acquisitions will be major deals (defined as more than 6% of revenue).

28%

53%

86%

46%

36%After a record-breaking year for M&A last year, the start of 2016 has been more uncertain with the slowdown in the Chinese economy, depressed commodity prices and falling stock markets, coupled with Eurozone instability, all causing uncertainty in the globaleconomy. However, despite these uncertainties,our two separate surveys, conducted in late 2015 and updated in 2016, demonstrate that the short to medium-term outlook for M&A as a priority focus for capital allocation by corporates remains extremely robust.

The surveys have produced a wealth of insights for dealmakers across four key areas of cross-border M&A: outlook, strategy, experience and legal challenges.

EXECUTIVE SUMMARY

46%

HERBERT SMITH FREEHILLS06 EXECUTIVE SUMMARY

IMM

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RT

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M V

IEW

ME

DIU

M- T

ER

M V

IEW

MARKET FORCES WILL NOTDICTATE DEALMAKING APPETITEIN THE SHORT OR MEDIUM TERM

The 2016 updated survey indicates that manydealmakers feel that the present environment will not

When asked aboutthe next 12 months, 46% say recent turbulence

increase their appetite for M&A. The medium-termfigures indicate a more positive outlook. Nearly 60%

state that recent volatility would have no impact onM&A over the next two to three years, while 15% say

it would increase their hunger for deals.

MORE CAPITAL FOR M&ACompanies are increasingly prioritising capital

for M&A. In our first survey, 39% of respondentswere focused on using their capital for acquisitions,a five percentage point increase compared to 2012.Our updated survey only served to reinforce that

prioritisation, with 45% stating they wouldutilise their capital for M&A.

LEGAL HURDLESRegulatory barriers have

represented the most challenging strategic factors in recent M&A

deals, according to 28% of respondents. Such issues have

proved significantly more challenging when investing in

developing markets, cited by 47% in South Asia and 38% in Africa.

CROSS-BORDER DEALS ON THE AGENDAMost respondents (86%) say they are looking to make between one to three or more acquisitions over the next three years. And out of these, 88% believe that between one and three of these acquisitions are likely to be cross-border deals.

CROSS-SECTOR DEALS AND DIVESTMENTS

DOWNRespondents are less

enthusiastic about cross-sector acquisitions – only 17% are

considering making an acquisition outside their

own sector.

Meanwhile, corporates are likely to hang on to their assets,

as nearly half of respondents (46%) say they have no intention

of making any divestmentsin the next two years.

DIFFERENT REGIONS, DIFFERENT LEGAL CHALLENGESA broad range of expertise is needed to handle legal hurdles in dealmaking. Almost a quarter of Asia-Pacific-based respondents cite di�culties relating to environmental regulation as having contributed to a deal failure. In the EMEA region, 36% of respondents blame labour and employment regulation. Anxieties over data protection and cyber security rules are rising up the agenda – these are now the single most important regulatory risk for dealmakers doing M&A in Japan and South Korea.

India is gaining in prominence as a favoured M&A destination given recent liberalisation of foreign investment, with 95% of respondents predicting the country will see further increases in M&A activity.

INDIA EMERGES

GLOBAL/LOCALWhilst geographical diversification is increasingly important, international M&A is much more likely to be conducted in neighbouring countries or regions than in continents in which the acquirer does not already operate. 33% of EMEA-based companies will focus on Western Europe. 37% of Asia-Pacific respondents are targeting Southeast Asia while 44% of respondents in the Americas are focusing attention on Latin America or North America.

CONCERNS AROUND EUROZONE INSTABILITYInstability in the Eurozone is ranked as themost important risk factor to dealmaking enthusiasm by 25% of respondents, followed by 20% citing a slowdown in Chinese demand.

LITIGATION RISK RISINGAlmost three quarters (73%) of respondents expect overall litigation risk to increase in the years ahead. Seventeen percent of respondents say they were significantly less likely to pursue deals because of litigation risk.

ANTI-TRUST REGULATIONSCAN GIVE RISE TO MAJOR

DEAL DISRUPTIONAlmost three quarters (71%) of

respondents picked out theseregulations as an issue that had

caused a deal to fail.

45%

71%

17%

73%

25%

95%

NORTH AMERICA LEADS THE WAY99% of respondents forecast further increases in North American M&A over the next three years. Businesses say they are primarily attracted to developed markets, such as North America, due to their relatively stable economic environment, the availability of suitable targets and stronger infrastructure.

99%

MULTIPLE DEALS UP BUT MAJOR DEALS DOWN57% of respondents are expecting to make two or more acquisitions over the next three years. However, 53% say that none of their acquisitions will be major deals (defined as more than 6% of revenue).

28%

53%

86%

46%

36%After a record-breaking year for M&A last year, the start of 2016 has been more uncertain with the slowdown in the Chinese economy, depressed commodity prices and falling stock markets, coupled with Eurozone instability, all causing uncertainty in the globaleconomy. However, despite these uncertainties,our two separate surveys, conducted in late 2015 and updated in 2016, demonstrate that the short to medium-term outlook for M&A as a priority focus for capital allocation by corporates remains extremely robust.

The surveys have produced a wealth of insights for dealmakers across four key areas of cross-border M&A: outlook, strategy, experience and legal challenges.

EXECUTIVE SUMMARY

46%

MERGERMARKET 07EXECUTIVE SUMMARY

CROSS-BORDER M&A TRENDS

• Geographical expansion is driving deals.

• In the medium term, sentiment for cross-border M&A remains very positive.

• Companies are generally looking to do M&A closer to home.

• Ability to raise funds still underpins positive future M&A growth, in spite of the rise in US interest rates.

• Corporates are generally seen to be outbidding private equity houses.

• Eurozone instability and China slowdown could deter dealmaking.

• Developed markets as well as China and India are key target territories.

CHAPTER 1

M&A OUTLOOK

HERBERT SMITH FREEHILLS10 M&A OUTLOOK

CROSS-BORDER M&A OUTLOOK Cross-border M&A hit record highs in 2015. And, according to our survey, despite the stock market turbulence that dominated headlines in the early part of 2016, the short to medium-term outlook is optimistic. We explore the future for cross-border dealmaking and the strategies that dealmakers will pursue

Despite the turbulence that has affected world markets, from the slowdown in China and severely depressed commodity pricing to the tightening of US monetary policy, global businesses continue to focus on M&A.

The aforementioned macroeconomic factors coupled with continued uncertainties about the future direction of Europe and unrest in the Middle East have all conspired to rattle investors at the beginning of 2016, wiping around US$8 trillion off global stock markets. Yet, cross-border M&A deal values have actually risen by 14% in Q1 of 2016 compared to the same quarter in 2015, while volumes are down by 10%. According to our survey, as the world economy stutters somewhat, M&A as a growth strategy remains a preferred choice for most corporates in the medium term.

After a record-breaking year for global M&A and cross-border deals in 2015, the majority of survey respondents still believe that dealmaking will be the main path to growth in 2016 and beyond. An updated survey, conducted in February 2016 with 100 of the same respondents from the previous survey, shows little change in overall sentiment. Respondents are somewhat disquieted by the current economic environment but nevertheless remain firmly focused on M&A as a strategy. Some hope that volatility will produce opportunities including more favourable valuations for

buyers, but this of course could lead to a mis-match of pricing expectations between buyers and sellers in the short term, making deal consummation harder.

Figure 1.1, taken from the updated survey1, reveals that nearly half of respondents believe that recent market turbulence has had no impact on their M&A appetite in the short term (46%). Moreover, only 3% said that market turbulence would significantly reduce their dealmaking appetite. Indeed, many stated that their strategies already included contingency plans for market fluctuations.

“Our main focus is on the North American market which is more stable in comparison to other potential destinations and we see a high level of recovery in the economy,” says the CFO of a UK-based TMT corporate. "The availability of high-end technologies, growing scale of innovations and attractive targets still create a demand for the assets there and we are looking to acquire and add on new capabilities.”

A senior director of M&A at a US- based corporate shares the sentiment: “Our strategies are pre-planned and we have a good contingency plan in place to tackle all uncertainties that may come up. Our appetite for M&A has not been impacted due to the market turbulence and our risk appetite is high as well.”

Others see volatility as an opportunity – 20% now have an increased appetite for M&A, including one Asia-based head of strategy in the energy sector who says: “We see opportunity for us in the market and are looking to be aggressive in our M&A activity in the short term. We have huge capital in hand and this is the right time to buy more assets when the values could become super low because of the prolonged low oil prices.” This is in line with the expectation that distressed opportunities in the energy and mining sectors will rocket in 2016.

Stephen Wilkinson, global head of M&A at Herbert Smith Freehills in London, believes that shareholders see M&A as a robust value-creation strategy. “I think there has been an acceptance over the last two years that growth and scale through M&A represent a path to shareholder value in a way that wasn’t accepted immediately after the global financial crisis,” he says.

When asked about longer-term investment strategies, respondents show similar confidence in M&A with 59% saying there has been no impact on M&A appetite for the coming two to three years (Figure 1.2). However, with some conflicting economic long-term forecasts about the future of commodity cycles, among other issues, some find it difficult to hedge their dealmaking plans and prefer risk-free options.

1In order to capture any change in sentiment after the economic shocks of early 2016, FT Remark conducted a second study of 100 of the same respondents from the original survey group of 700.

MERGERMARKET 11M&A OUTLOOK

1%

3%

31%

19%

Significantly reduced appetite for M&A over next 12 monthsModerately reduced appetite for M&A over next 12 monthsNo impact on appetite for M&A over next 12 monthsModerately increased appetite for M&A over next 12 monthsSignificantly increased appetite for M&A over next 12 months

46%

15%

59%

Moderately reduced appetite for M&A over next 2-3 yearsNo impact on appetite for M&A over next 2-3 yearsModerately increased appetite for M&A over next 2-3 years

26%

FIGURE 1.1 SHORT-TERM VIEW: GIVEN THE RECENT TURBULENCE IN THE MARKET, HAS YOUROUTLOOK FOR M&A ACTIVITY CHANGED SINCE WE LAST SPOKE AND WOULD THATAFFECT YOUR M&A IN THE NEXT 12 MONTHS?

FIGURE 1.2 LONG-TERM VIEW: GIVEN THE RECENT TURBULENCE IN THE MARKET, WILL YOUR INVESTMENT STRATEGY CHANGE IN THE MID-LONG TERM, I.E. FOR THE NEXT TWO TO THREE YEARS?

"There has been an acceptance over the last two years that growth and scale through M&A represent a path to shareholder value in a way that wasn’t accepted immediately after the global financial crisis."STEPHEN WILKINSON, GLOBAL HEAD OF M&A, HERBERT SMITH FREEHILLS, LONDON


Overall, while respondents appear to be following through with existing plans for M&A, the survey found that a number are preparing to slow down the pace (Figure 1.3). In the initial survey conducted in late 2015, only 28% of respondents said they were looking to do fewer deals than in the previous years. Upon revisiting the question in Q1 2016, this number has now climbed to 36% (Figure 1.4).

In addition, the size of individual deals seem to have shifted slightly towards smaller ones rather than major transactions (Figure 1.5). In the original survey, 17% stated that two of their acquisitions would be major deals (defined as delivering an increase of more than 6% in overall revenues) – this has subsequently fallen to only 9% in the

new survey. Meanwhile, over half (53%) say they will now be undertaking no major deals at all – a 10 percentage point increase on the original survey.

While major deals may have been put on hold, venturing into new territory might also present more risk for corporates who had already stated a preference for regional deals closer to home. At a headline level, it has become fashionable to talk about global M&A; the reality, however, is that while companies are increasingly pursuing international deals, these transactions are more likely to be with companies in neighbouring countries, or elsewhere in the region, than in continents that are new to them.

CHINA'S CHANGE

HEADLINES ABOUT THE GLOBAL IMPACT OF A SLOWDOWN IN CHINESE GROWTH MAY HAVE GIVEN THE IMPRESSION THAT THE COUNTRY IS IN ECONOMIC TURMOIL, BUT CHINA REMAINS A VERY ATTRACTIVE PROPOSITION TO COMPANIES SEEKING DEAL OPPORTUNITIES. “The transition in the Chinese economy is throwing up all sorts of deal opportunities,” says Matt Emsley, head of corporate, Greater China, at Herbert Smith Freehills in Hong Kong. “The economy may previously have been driven by infrastructure and real estate investment – which was what drove demand for commodities – but the manufacturing industry is moving up the value chain and other sectors such as food, healthcare, education and financial services are rising.”

For example, in July, an investor group led by US private equity firm Capital International announced it would take a stake in Didi-Kuaidi, the Chinese mobile taxi service, via a capital increase of US$3 billion.

Foreign investors are also finding it easier to enter China. “The rising liberalisation of foreign investment rules is opening up more sectors to outside interest,” says Emsley.

However, he points out that some investors are nervous about the future shake-up of China’s variable interest entity rules, which affect industries where foreign investment restrictions apply.

China is also an increasingly important source of outbound investment. In February, ChemChina announced it would buy Swiss agribusiness Syngenta for US$46 billion – the biggest Chinese outbound deal so far. Earlier in 2015, ChemChina had already launched an offer for Italian tyre maker Pirelli for US$8.8 billion.

However, the China outbound deal landscape is varied and not just restricted to heavy industry, according to Emsley. “We have Chinese firms looking to acquire new technology, but also making investments that reflect the changing demographics in China and its rising wealth – in sectors such as hotels and leisure,” he adds. In January this year, for example, Chinese conglomerate Dalian Wanda announced it would take a controlling stake in Hollywood film studio Legendary Entertainment for US$3.5 billion with the aim of deepening China's influence in the global entertainment industry.

MERGERMARKET

%

FIGURE 1.3 HOW MANY ACQUISITIONS IS YOUR FIRM LIKELY TO MAKE OVER THE COMING YEARS?

FIGURE 1.4COMPARED TO THE PREVIOUS THREE YEARS, IS THIS:

FIGURE 1.5HOW MANY OF YOUR ACQUISITIONS ARE LIKELY TO BE MAJOR DEALS (DEFINED AS AN INCREASE OF MORE THAN 6% IN OVERALL REVENUES)?

0

1

2

3 ormore

26% 28%

31% 41%

29% 17%

14% 14%

UPDATED SURVEY ORIGINAL SURVEY2


0

1

2

3 2% 1%

9% 17%

36% 39%

53% 43%

30% 37%

33% 35%

36% 28%

Fewer deals thanin the previous

three years

The same level of dealmaking

More deals thanin the previous

three years


13M&A OUTLOOK

2Figures shown here for original survey pertain to the same 100 respondents in the updated survey


UPDATED SURVEY

ORIGINAL SURVEY3

3 or moreacquisitions

2 acquisitions

1 acquisition

0 acquisitions

14%12%

29%42%

47%

41%

12%

3%

FIGURE 1.6 HOW MANY OF YOUR ACQUISITIONS ARE LIKELY TO BE CROSS-BORDER ACQUISITIONS?



Our survey update shows that while 88% of respondents are still looking to do at least one cross-border deal, the share of respondents not looking to conduct any cross-border deals at all increased from 3% to 12%. And those who were likely to do two cross-border deals, fell by 13 percentage points to 29% (Figure 1.6).

DEAL DRIVERS

Despite market volatility, the survey reveals that corporates still see M&A as the most common route to growth. When it comes to the main facilitators for those deals, the ease with which businesses are able to raise funds is the single most important factor.

However, it is unlikely that deals will be spread evenly across all sectors. M&A spikes are often found in particular industries and this is likely to continue into 2016. “In the pharmaceutical industry, there was a rush to do inversion deals, in part because of the reduction of the tax burdens which US companies could achieve,” Wilkinson says. “More recently, we’ve seen industry consolidation and the move towards quad play as a strategic driver of deals in the telecommunications, media and technology (TMT) space in Europe.” Interestingly, given the appetite for distressed assets, the energy, mining and natural resources sector could see a hike in M&A volume after a lukewarm 2015. For a more detailed analysis of sector-focused M&A, turn to page 50.

RISK FACTORS

However, given current conditions, companies are well aware of the aspects that could negatively impact their ambitions for M&A. Dealmakers see Eurozone instability as the factor most likely to dampen their dealmaking enthusiasm over the next 12 months (see Figure 1.7), though the slowdown in China also looms large. The impact of tightening US monetary policy is seen as the third most pressing risk factor – though this could well recede as the year goes on. Meanwhile, political tensions in areas ranging from Ukraine and the Middle East to the South China Seas are also unsettling.

DEVELOPED MARKETS AND ASIAN POWERHOUSES LEADING

As Figure 1.8 demonstrates, businesses anticipate North America, Greater China and India will be the regions where there is most likely to be a significant increase in M&A activity over the next three years. And, despite the Eurozone’s problems, executives expect to see Western Europe remain a key target area for buyers for the foreseeable future.

In North America, the pick-up of the US economy last year has attracted mounting interest from bidders – almost all respondents (99%) see M&A activity in North America rising in the years ahead – although doubts remain about the speed at which the recovery will continue, particularly now that interest rates are rising. But while

the forthcoming presidential election may be another cause of uncertainty, businesses appear to be sanguine. “We expect the US to be the leading source of growth in the coming years, at least among developed markets,” says the CFO of an Italian retailer that has just completed an acquisition there. “Its recovery is resilient.”

It is worth noting that US buyers are in an optimistic mood. “US corporates benefitted from a swifter recovery from the global financial crisis than Europe, which means they approach M&A with a higher degree of confidence and financial firepower,” says Gavin Davies, M&A partner at Herbert Smith Freehills in London. “Those US buyers are seeking strategic plays, in particular the constant global search for M&A, to drive their corporate growth.”

In China, meanwhile, stock market volatility and declining consumer demand may yet unnerve acquirers – indeed, GDP growth of 6.9% in 2015 was the weakest in a quarter of a century. But the long-term allure of the world’s second largest economy remains compelling and many buyers anticipate favourable valuation in quality targets. The chief executive of one US manufacturer with interests in China says: “It is still a relatively cheap place to buy and the pressure is on businesses such as ours to move towards these regions with the greatest future growth potential.” For more on China, see China’s change, page 12.

FIGURE 1.7 PLEASE RANK THE FOLLOWING RISK FACTORS IN TERMS OF THEIR IMPACT LEVEL ON YOUR DEALMAKING ENTHUSIASM OVER THE NEXT 12 MONTHS (PLEASE RANK TOP THREE WHERE 1=MOST SIGNIFICANT IMPACT)

Instability in Eurozone

Slowdown in Chinese demand

Low commodity price

environment

Impact of tightening US

monetary policy

Russia conflict with Ukraine

Rising tensions in South China

Seas

Unrest and war in Syria/Iraq/Libya/Yemen

Possibility of Britain’s exit from the EU

1 25% 20% 17% 9% 10% 7% 6% 6%

2 21% 16% 14% 12% 11% 9% 9% 8%

3 17% 13% 15% 16% 13% 9% 9% 8%

RAN

K


MIDDLEEAST

WESTERNEUROPE

CEE

AFRICA

SOUTHEASTASIA

SOUTHASIA

JAPAN ANDSOUTHKOREA

GREATERCHINA

AUSTRALIA

NORTHAMERICA

LATINAMERICA

48%

38%

13%1%

53%40%

1%6%

39%56%

5%

87%

12%1%

42%

8% 18%

32%

26%

59%

14% 1%

7%

34%

33%

26%

49%

11%2%

38%

22%5%

31%

42%

25%5%

47%

23%

9%

24%

60%

7%

Significant increase

Modest increase

Modest decrease

No opinion

Stay the same

FIGURE 1.8 FOR EACH OF THESE REGIONS WHAT ARE YOUR EXPECTATIONSFOR THE LEVEL OF M&A ACTIVITY OVER THE COMING YEARS?


Elsewhere, more than nine out of ten (95%) respondents expect South Asia – dominated by India – to see an increase in M&A activity, while businesses continue to be keen to extend their reach into Southeast Asia, where almost as many (93%) respondents anticipate rising activity.

The maturing of Asian markets across the region is an important theme in global M&A. “Asia-Pacific should no longer be characterised as solely an M&A destination,” says Nicola Yeomans, M&A partner at Herbert Smith Freehills in Singapore. “It’s a strong originator of deals – there are nearly as many buyers based in Asia as there are in the US.”

Herbert Smith Freehills’ Stephen Wilkinson believes the Asian theme will become increasingly dominant. “There will be bumps along the way but Asia is going to be a focus of the future because it’s an area that companies cannot ignore,” he says. “For example, China’s appetite for resource and asset ownership is going to make Asia an increasingly important source of outbound investment, as well as a target destination.”

As for specific countries that are expected to see the biggest increases in M&A activity, the US is by far the most frequently cited (40%). It is followed by China and then India (see Figure 1.9). India, in particular, is moving swiftly up the agenda for companies all around the world, says Yeomans. “There has always been interest but not at the levels we’ve seen since the election of Prime Minister Modi,” she says. “We have bidders from Japan, China, the US, Canada and Europe, all of whom are interested in a broad range of assets, including in areas such as financial services where the foreign direct investment regime is now loosening.”

According to Mergermarket data, financial services deals in India saw an increase of 52% to 41 from 2014. Of these, 66% of deals came from overseas, including, for example, the US$342 million acquisition of a further 23% stake in Reliance Life Insurance, which increased Japan-based Nippon Life Insurance’s stake to 49%.

And respondents agree that, among other factors, the leadership of Prime Minister Modi provides a distinct pro-business advantage. “India has a stable economy, foreign investment and strong capital flows. Apart from this, the government is also implementing favourable policies to encourage investment by increasing transparency and governance and reducing litigation. These are some of the reasons why we chose to invest in India,” says the director of M&A of a US pharmaceutical company.

Alan Montgomery, head of India M&A at Herbert Smith Freehills in London, says the Modi government has certainly prompted a boost in interest in Indian deals, even if the pace of reform has not been as quick as some had hoped – not least because the government does not control the upper house of the country’s parliament.

“The government has not yet been able to make the transformational changes that everyone expected,” Montgomery says. “However, they have done an exceptional job at communicating to the international investment community that India is ‘open for business’ and where they have been able to introduce policy changes to boost overseas investment they have done so. The aggregate of these smaller changes have really helped boost inbound interest. The relaxation of foreign direct investment policy has been a particular focus: we’ve seen a number of sectors opening or continuing to open up to overseas investors, including defence, insurance, rail, construction and broadcasting for example.”

In Europe, meanwhile, Germany remains a key territory. “Germany is regarded as the most robust and stable economy in the Eurozone, and while the euro is weak, valuations in Germany look relatively low,” says Ralf Thaeter, managing partner at Herbert Smith Freehills in Germany. “The European Central Bank’s policy of cheap money is also fuelling investment into Germany – plus low energy prices make the country’s industrial businesses look much more attractive.”

40%

USA

17%

China

12%

India

FIGURE 1.9 FOR WHICH COUNTRY DO YOU EXPECT TO SEE THE BIGGEST INCREASE IN M&A ACTIVITY (TOP THREE SHOWN BELOW)?


However, there are certain respondents from private equity firms who are more bullish about the prospects for buyout firms. As the managing partner of one French private equity firm says: “Private equity has no shortage of capital at its disposal and it will pay top prices for the right assets.”

This is certainly true. While the S&P 500 corporate cash balance stands at around US$1.45 trillion, research firm Preqin found that buyout firms had the capital to compete, with dry powder standing at US$1.32 trillion. The competition between corporates and private equity looks set to hot up in 2016.

AFRICA IS OPEN FOR BUSINESS

LOWER DEAL VALUE, A 27% DROP YEAR-ON-YEAR TO US$27 BILLION, IN AFRICA REFLECTS THE DOMINANCE OF THE NATURAL RESOURCES SECTOR ACROSS THE CONTINENT AS A WHOLE. However, as Figure 1.8 shows, significant numbers of respondents expect to conduct more transactions in these frontier markets.

“There has been tremendous excitement about the ‘Africa rising’ bubble but the natural resources pull-back has inevitably seen people become more cautious,” says Nina Bowyer, energy and infrastructure partner at Herbert Smith Freehills in Paris. “Although people are consolidating, they’re not running away, and there are still transactions taking place in areas such as power and renewables,

as well as in consumer, pharmaceuticals and agribusiness.”

Bowyer also expects M&A activity to spread more widely in the years ahead. “The market in Africa has got bigger,” she says. “So deals continue in places such as Nigeria, but there is also M&A in countries like Gabon, Ivory Coast, Mali and Guinea, as well as in more obvious locations such as Kenya and South Africa.”

For example, the Ivory Coast saw two inbound European deals in 2015, with UK-based PE firm Duet Group buying juice company Société Africaine des Produits and the acquisition of Les Brasseries Ivoiriennes by French brewer Brasseries et Glacières.

And in spite of fears over a breakaway from the EU – the so-called Brexit – the UK is also expected to maintain its position at the heart of the European M&A market. Indeed, according to our survey, 72% of UK respondents are planning to make two or more acquisitions over the next three years. And 96% say that their next deal is likely to be cross-border.

CORPORATES ON TOP

As longer-term optimism suggests a resilient cross-border M&A environment, acquirers can expect to face competition for most of the deals they pursue across all the markets in which they participate and contests for the most attractive deals will be especially tough. Strategic buyers are thought to have the edge in the race, as Figure 1.10 shows – some 46% of respondents believe these acquirers are currently out-competing private equity buyers, though almost as many (40%) see the market as balanced.


DON'T DISCOUNT PRIVATE EQUITY

PRIVATE EQUITY HOUSES HAVE BEEN ACTIVE PARTICIPANTS IN M&A, BUT NOT NECESSARILY IN THE SPECTACULAR FASHION OF THE PAST. “We have seen fewer major deals, partly because private equity remains cautious. In addition, corporates have been more active participants in auction processes; and some of these transactions are difficult to pull together as they often require clubs of investors,” says James MacArthur, head of private equity at Herbert Smith Freehills in London. “But private equity firms do have plenty of dry powder and they are still able to do deals where they think the valuations are reasonable.”

Looking forward, MacArthur expects private equity funds to continue to be active. “We’ve seen significant funds being raised. We expect continued transaction activity, particularly in certain sectors such as infrastructure and energy, and we expect another year of significant exit activity,” he says.

46%

Strategic buyers generally out-competing private equity buyers

40%

Balanced market between strategic buyers and private equity buyers

14%

Private equity buyers generallyout-competing strategic buyers

FIGURE 1.10 HOW WOULD YOU DESCRIBE THECURRENT BALANCE BETWEEN STRATEGIC AND PRIVATE EQUITY BUYERS?

CROSS-BORDER M&A STRATEGIES

• Companies are increasingly prioritising M&A as a key use of capital.

• Positive economic outlook is the key attribute for attractive targets.

• Geographical diversification will drive deals.

• Cross-sector M&A is likely to be slow in 2016.

• Divestment outlook is down for the coming year.

CHAPTER 2

M&A STRATEGIES FOR SUCCESS

HERBERT SMITH FREEHILLS22 M&A STRATEGIES FOR SUCCESS

M&A STRATEGIES FOR SUCCESS

Our survey finds that cross-border M&A is very much at the forefront of companies' investment strategies over the next three years, despite recent market uncertainties. Geographical diversification is the order of the day, while cross-sector deals and divestments are likely to remain on the back burner for the foreseeable future

Companies’ appetite for M&A is reflected in how they are now prioritising the use of their capital. As Figure 2.1 shows, while capital investment was a clear priority for businesses three years ago, it is now cited as most important by only 38% of respondents compared to those who are focused on M&A (45%), a significant increase on three years ago (36%). Using capital to boost shareholder returns – through share buybacks or special dividends, for example – lags some way behind.

For some companies, it’s a question of how to deliver shareholder value over the longer term. “Of course we want to provide our shareholders with higher returns, but we believe acquisitions represent the best way to do that,” says the director of strategy of a Chinese agricultural company that recently invested in Southeast Asia. “Acquisitions that have improved our capabilities in the past have done exactly that.”

CROSS-BORDER FOCUS – MORE REGIONAL, LESS GLOBAL

While M&A has risen up the capital usage ladder, when it comes to cross-border deals, the geographical specificity of those international ambitions depends, in large part, on the location of the acquirer. Overall, Western Europe is the most likely destination for acquirers (cited by 24% of respondents), followed by North America (17%), Southeast Asia (16%), South Asia (11%)

and Latin America (11%). However, as Figure 2.2 reveals, in most parts of the world, businesses are more likely to be prioritising acquisitions in their existing operating regions.

For example, businesses based in the EMEA region are most likely to be focused on deals in Western Europe (cited by 33% of respondents), though North American acquisitions are also on their wish-lists (19%). In the Americas, the outlook is more global, with 28% of respondents focused on Western Europe and 23% prioritising Latin America. “Labour is cheap in the region and the infrastructure is well-developed,” comments the senior VP of strategy at a Canadian energy business now actively looking for targets in South America. Asia-Pacific respondents, meanwhile, are clearly focused on transactions in Southeast Asia (37%).

This preference for doing deals closer to home is natural enough – particularly for companies at an earlier stage in their internationalisation process as it should be more practical to execute such acquisitions and, critically, to integrate and manage them successfully afterwards.

LOCAL ATTRACTIONS

Geographical proximity may be one strategic factor in M&A deals but, as Figure 2.3 demonstrates, most businesses are attracted

to particular countries by the positive economic outlook for their markets (64%). The availability of suitable targets is the key factor for nearly as many (58%) respondents.

The prevalence of certain factors explains the relative attractiveness of particular regions. In both China and India, it is the longer-term potential of these economies, with their burgeoning middle class populations and their focus on industrialisation, which is compelling.

Similarly, a rise in interest rates in the US and uncertainty over this year’s presidential election have not deterred investors from targeting North America – more than half (51%) are attracted to the positive economic environment here. The decision to raise rates appears to have been taken as a signal that the Federal Reserve is confident enough in the economy’s resilience to tighten monetary policy.

By contrast, only a minority (14%) of acquirers with a focus on Western Europe pointed to a positive economic environment – a reflection of the impact that problems in the Eurozone and the UK referendum on leaving the EU continues to have on confidence throughout the region. Instead, buyers were attracted to the availability of suitable targets in the region and their attractive valuations.

MERGERMARKET 23M&A STRATEGIES FOR SUCCESS

Q1 2016 Q4 20154

THREE YEARS AGO

Capital investment

M&A

Provide shareholderreturns

17% 26%

22%

45% 35%

36%

38% 39%

42%

FIGURE 2.1 HOW DO YOU PRIORITISE THE USE OF CAPITAL AND HOW DOES THAT COMPARE TO THREE YEARS AGO?

"2015 was a tale of two halves for M&A in Australia – the year started out relatively slow but, as it progressed, we saw a string of big deals... I expect 2016 to be even stronger as we are seeing boards increasingly looking to M&A as a means of driving growth. Australian companies are still good value by international standards."ANDREW RICH, M&A PARTNER, HERBERT SMITH FREEHILLS, SYDNEY



WHICH REGION IS YOUR ACQUISITION STRATEGY LIKELY TO BE FOCUSED ON?

FIGURE 2.2WHAT ATTRACTS YOU TO THIS PARTICULAR COUNTRY?

FIGURE 2.3

Central and Eastern Europe

North America

Western Europe

Southeast Asia

Greater China

Africa

South Asia (India, Pakistan)

Japan & South Korea

Middle East

Australia

Latin America

23%

21%

2% 3%17%

3%

2%

1%

28%

AMERICASFIG 2.2

POSITIVEECONOMIC

ENVIRONMENT

64%

AVAILABILITYOF SUITABLE

TARGETS

58%

ATTRACTIVEVALUATIONOF TARGETS

52%

STRONGINFRASTRUCTURE

39%

SKILLEDLABOUR

FORCE

37% 10%TRADE AGREEMENT WITH OWN COUNTRY

27%OPENNESS TOINVESTMENT

27%POLITICALSTABILITY

31%LOW COST OF DOING BUSINESS

34%FAVOURABLE REGULATORY ENVIRONMENT

6%

12%

3%

8%

12%

11%

37%

6%

4%

APACFIG 2.2

1%

9%

19%

1%7%

7%

4%

33%

6%10%

EMEAFIG 2.2

2% 2%

31%EASE OFOBTAININGFUNDING


WHICH REGION IS YOUR ACQUISITION STRATEGY LIKELY TO BE FOCUSED ON?

FIGURE 2.2WHAT ATTRACTS YOU TO THIS PARTICULAR COUNTRY?

FIGURE 2.3


North America

Western Europe

Southeast Asia

Greater China

Africa

South Asia (India, Pakistan)

Japan & South Korea

Middle East

Australia

Latin America

23%

21%

2% 3%17%

3%

2%

1%

28%

AMERICASFIG 2.2

POSITIVEECONOMIC

ENVIRONMENT

64%

AVAILABILITYOF SUITABLE

TARGETS

58%

ATTRACTIVEVALUATIONOF TARGETS

52%

STRONGINFRASTRUCTURE

39%

SKILLEDLABOUR

FORCE

37% 10%TRADE AGREEMENT WITH OWN COUNTRY

27%OPENNESS TOINVESTMENT

27%POLITICALSTABILITY

31%LOW COST OF DOING BUSINESS

34%FAVOURABLE REGULATORY ENVIRONMENT

6%

12%

3%

8%

12%

11%

37%

6%

4%

APACFIG 2.2

1%

9%

19%

1%7%

7%

4%

33%

6%10%

EMEAFIG 2.2

2% 2%

31%EASE OFOBTAININGFUNDING


Japan and South Korea also scored badly for its economic environment (9%), though Graeme Preston, head of corporate, Japan, at Herbert Smith Freehills in Tokyo, says Japan’s problems are sometimes overstated. “The major cities of Japan are actually doing very well – that’s true for Tokyo and all the big cities,” he argues. “Where Japan is struggling is in rural areas.”

Along with Western Europe, other regions to have been cited as offering good availability of suitable targets included Central and Eastern Europe (50%), the Middle East (40%) and Africa (36%).

Sometimes, countries’ individual attractions enable them to stand out from their region. For example, the director of finance at a South African infrastructure company says: “Peru is the most attractive market in Latin America with strong economic growth supported by a low cost of doing business. We see it as a natural place to extend our operations.”

In the Middle East, meanwhile, the head of finance at a Saudi infrastructure company says: “We made our most recent acquisition in Qatar because we believe it is going to be the most significant market in the construction industry, with opportunities increasing dramatically because of its openness to foreign investment.”

GEOGRAPHICAL DIVERSIFICATION DRIVES DEALMAKING

To some extent, these regional variations will also be driven by the strategic rationale behind companies’ acquisition planning. Overall, almost a quarter of respondents (24%) are prioritising geographical diversification as they set M&A strategy while close to a fifth (18%) focus on increasing market share but, as Figure 2.4 reveals, the most important drivers vary considerably depending on the target region. For example, investors in certain regions are significantly more likely to prioritise growth – this is the motivation for almost a third (32%) of buyers targeting Greater China.

19%

12%

19%18%

10%

12%

5%4%

1%

WESTERNEUROPE

27%

21%6%12%

6%8%

8%

12%SOUTHEAST

ASIA

18%

15%

11%

7% 16%

20%

10% 3%

SOUTH ASIA

24%9%

12% 18%

17%

9%

6%5%

23%

20%

20%

9%

8%

6%

9%5%

NORTH AMERICA

50%

20%

30%

MIDDLEEAST

35%8%

22%

3%2%

13%

10%

7%LATIN

AMERICA

18%

18%

18%

9%

9%

9% 9%

10%

JAPAN AND SOUTH

KOREA

33%

6%

8%3%

3%

19%

11%

17%

AFRICA

25%5%

10%

10%

20%30%

CEE

26%4%9%

4%

13%

13%

9%

22%

AUSTRALIA

16%5% 5%

16%

16%

32%

10%GREATER

CHINA

Geographical diversification

Accessing new resources

Increased market share

Stable returns

Revenue synergies

Tax/financing advantages

Cost synergies

Capital enhancement

Technology

High levels of growth

Diversification, revenue and cost synergies (16% each) are also driving deals into China. The head of finance at a Netherlands-based natural resources business says of a recent acquisition in China: “Through this deal, we were able to combine our capabilities and facilitate cost reductions.”

CONVERGENCE ON THE BACK BURNER

By contrast, while internationalisation represents a clear direction of travel for large numbers of businesses, respondents are much less likely to be considering a shift into new business areas. As Figure 2.5 shows, fewer than one in five (17%) of companies are considering making an acquisition outside of the sectors in which they currently operate.

There’s no doubt that making acquisitions in new sectors requires a leap of faith for businesses, even for those with the most ambitious growth plans. However, there are several reasons for considering doing so. Diversification can provide businesses with valuable ballast, suggests the director of strategy of a Japanese financial services company. “We’ve been acquiring beyond our sector to give us financial stability when conditions in our industry worsen, and so that we can benefit from earnings on our investments in more secure times,” he says.

Another reason to consider sector diversification is to achieve scale more rapidly. The CFO of a German industrials business that has made an acquisition in India, says: “We plan to acquire outside our sector so that we can balance costs and maintain operational efficiencies in the core business by making continual investments without seeking debt but by disposing of these alternative non-core investments.”

17%

Yes

83%

No

FIGURE 2.5 ARE YOU CONSIDERING MAKING AN ACQUISITION IN A SECTOR OUTSIDEYOUR OWN?


19%

12%

19%18%

10%

12%

5%4%

1%

WESTERNEUROPE

27%

21%6%12%

6%8%

8%

12%SOUTHEAST

ASIA

18%

15%

11%

7% 16%

20%

10% 3%

SOUTH ASIA

24%9%

12% 18%

17%

9%

6%5%

23%

20%

20%

9%

8%

6%

9%5%

NORTH AMERICA

50%

20%

30%

MIDDLEEAST

35%8%

22%

3%2%

13%

10%

7%LATIN

AMERICA

18%

18%

18%

9%

9%

9% 9%

10%

JAPAN AND SOUTH

KOREA

33%

6%

8%3%

3%

19%

11%

17%

AFRICA

25%5%

10%

10%

20%30%

CEE

26%4%9%

4%

13%

13%

9%

22%

AUSTRALIA

16%5% 5%

16%

16%

32%

10%GREATER

CHINA


Accessing new resources


Stable returns

Revenue synergies

Tax/financing advantages

Cost synergies

Capital enhancement

Technology


FIGURE 2.4 WHAT STRATEGIC FACTORS WILL YOU PRIORITISE?


DIVESTMENTS DOWN

It comes as a surprise that our respondents indicated companies are less likely to see asset sales as an integral part of their M&A strategy over the next two years. Almost half (46%) of respondents have no intention of making any divestments at all (Figure 2.6). With this in mind, and given the high volume of respondents who are intending to make acquisitions, this could mean a shortage of top-quality opportunities and competition fuelling high valuations for the best assets.

However, in line with the growth in cross-border acquisitions, among those businesses that are planning to sell off assets, well over half (60%) expect to be making disposals in overseas markets (Figure 2.7).

The most common reason, cited by 53% of those businesses that are considering divesting, is a desire to offload under-performing businesses (Figure 2.8). More than a third (36%) of businesses are planning to consolidate in order to focus on their core business, while almost as many (35%) want to make divestments in order to reduce debt.

JAPAN BEYOND BORDERS

WHETHER INSIDE OR OUTSIDE THEIR OWN SECTOR, JAPAN CONTINUES TO BE A MAJOR SOURCE OF OUTBOUND INVESTMENT IN GLOBAL M&A – AS COMPANIES SEEK TO STRENGTHEN THEIR POSITIONS OUTSIDE A COUNTRY WITH AN AGING POPULATION AND MINIMAL GROWTH. In 2015, outbound deal volume from Japan rose 15% to 297 deals, while deal value spiked 67% to US$88 billion.

“We’ve got both the tier two and three companies that are now looking to bulk up by making overseas investments,” says Graeme Preston, Japan head of corporate at Herbert Smith Freehills in Tokyo. “We’ve also got the tier one Japanese companies – the likes of Dentsu, Softbank and Suntory – which continue to do the really large billion-dollar deals in the US or Europe, and also look for possibly smaller, more speculative deals in emerging markets everywhere.”

The financial services sector alone amounted to US$32.6 billion in outbound investments, including Tokio Marine Holdings' US$7.5 billion acquisition of UK-based HCC Insurance Holdings.

AUSTRALIA HOTS UP

INVESTORS HAVE SOMETIMES WRITTEN AUSTRALIA OFF AS A PURE COMMODITY PLAY, WHICH MIGHT DETER THOSE WORRIED ABOUT THE PLUNGING PRICE OF RAW MATERIALS. However, investors from China and Southeast Asia have been targeting sectors from agriculture to infrastructure. China also made several medical and consumer acquisitions in Australia in 2015, among them the 83% stake in supplements developer Swisse Wellness by Chinese baby food maker Biostime International for US$992 million.

“2015 was a tale of two halves for M&A in Australia – the year started out relatively slow but, as it progressed, we saw a string of big deals including Japan Post’s US$5.1 billion takeover of Toll, Brookfield’s US$9.4 billion bid for Asciano and Iron Mountain’s US$2.4 billion move for Recall,” says Andrew Rich, M&A partner at Herbert Smith Freehills in Sydney. “I expect 2016 to be even stronger as we are seeing boards increasingly looking to M&A as a means of driving growth. Australian companies are still good value by international standards.”

Foreign investors are welcome in Australia, says Rich. “There are some misconceptions about Australia's attitude – while there is a process to go through with the Foreign Investment Review Board, the reality is that very few deals are blocked and most are cleared within the statutory 30-day time period; and while anti-trust considerations are sometimes an issue, there is no evidence that the clearance process is any more difficult in Australia than anywhere else.” Foreign buyers are attracted by a benign legal environment and business-friendly political stability.

Outbound investment is rising too, adds Rich. “Southeast Asia is a key market for Australian companies. We are also waiting to see what the impact will be of the recently concluded Free Trade Agreements with China, Japan and South Korea, and of the TransPacific Partnership."


46%

0 divestments

31%

1 divestment

17%

2 divestments

3%

3%

3 divestments

4 divestments or more

40%

0 divestments

44%

1 divestment

12%

2 divestments

2%

2%

3 divestments

4 divestments or more

FIGURE 2.6 HOW MANY DIVESTMENTS ARE YOU LIKELY TO MAKE IN THE NEXTTWO YEARS?

FIGURE 2.7 HOW MANY OF YOUR DIVESTMENTS ARE LIKELY TO BE IN A DIFFERENT MARKET TOYOUR HEADQUARTERS?

FIGURE 2.8 WHAT ARE LIKELY TO BE THE MAIN FACTORS DRIVING YOUR DIVESTMENT(S)?

Offload under-performing

units

Concentrate on core business

Reduce debt Favourable valuations (good

time to sell)

Raise funds for acquisition(s)

Shareholder activism

Regulatory requirement(s)

1 31% 18% 20% 12% 14% 3% 2%

2 22% 18% 15% 16% 14% 8% 7%RAN

K

KEY LEARNINGS FROM RECENT ACQUISITIONS

• Geographical diversification has been the main driver behind deals in the past two years. However, drivers are region-specific – buyers in EMEA were looking to increase market share while those in the Americas were looking at high rates of growth.

• As with anticipated future deals, regional focus has surpassed a more global perspective for cross-border deals in the past two years. Those based in the Americas have been the exception.

• A positive economic environment in the target country/region is the key overall attraction for buyers. However, attractions are extremely region specific.

CHAPTER 3

THE M&A EXPERIENCE

HERBERT SMITH FREEHILLS32 THE M&A EXPERIENCE

THE M&A EXPERIENCE

A company’s future M&A outlook and strategy will often be informed by past successes and failures. We examine the lessons that executives have learned from their recent cross-border deals

The recent experiences of companies during their cross-border M&A activity provide important insights as they consider future strategy, and, at an aggregate level, have implications for how dealmaking is likely to progress in the years to come.

As Figure 3.1 reveals, three strategic drivers have underpinned the lion’s share of recent M&A. On a global basis, a quarter of companies (25%) have been making acquisitions in order to attain geographical diversification, while slightly fewer have been looking for increased market share (22%) or higher levels of growth (20%). Other factors, such as revenue synergies (10%) and cost synergies (9%) were less significant, while only 2% of respondents said they were seeking sector diversification.

Interestingly, on a regional level, there are some notable differences. For example, companies in the Americas have been focusing more on high levels of growth for their acquisitions (24% compared with 20% in total) while those in EMEA have been concentrating on increasing their market share (28% compared with 22% in total).

These factors are not necessarily mutually exclusive: the CFO of a Japanese firm that made an acquisition in Australia says: “Expanding into new territories certainly helped us to diversify, but we also believe it is the key to achieving our growth potential.”

BUYERS STAY CLOSE TO HOME

Overall, as Figure 3.2 reveals, Western Europe was the region most frequently targeted by those buyers surveyed, accounting for almost a third (30%) of deals, while North America (19%) was also popular. However, similar to our survey results for anticipated future deal activity (Figure 2.2, chapter 2), buyers were more likely to target deals closer to home. Acquirers in the EMEA region, for example, targeted Western European acquisitions in more than a third of deals (37%). Similarly, Asia-Pacific acquirers bought companies in Southeast Asia in 28% of their transactions.

The chief executive of a Norwegian technology company that made an acquisition in Sweden believes that an acquisition closer to home represents less of a risk: “We know the region well given its proximity and we already have close relationships there – it provided greater certainty that our shareholders would see enhanced returns.”

Buyers based in the Americas were more likely than companies from elsewhere to conduct transactions in Latin America, which accounted for almost a fifth (19%) of their transactions – though, bucking the trend somewhat, Western Europe (43%) was the most popular region of all for Americas-based acquirers.

REGIONAL ATTRACTIONS

Companies chose to focus on particular markets for a broad variety of reasons (Figure 3.3). Overall, regions were most likely to have been targeted because of their positive economic environment – this was a decisive factor in almost a quarter (24%) of transactions. Attractive valuations were cited by 19% of respondents as the primary driver of market choice.

The positive economic outlook was especially significant for buyers in North America (cited by 40% of respondents), South Asia (31%) and Southeast Asia (29%), while attractive valuations were crucial for more than a third (39%) of buyers in Japan and South Korea, and almost as many (29%) in Central and Eastern Europe.

The head of M&A of an Indian pharmaceuticals company says his company was optimistic about the continued strength of the US economy and not unnerved by the rise in interest rates. “We felt that was a sign of the extent to which the US had recovered since the financial crisis,” he says. “The positive signs of development we saw offered real growth opportunities.”

The strong infrastructure of Australia was attractive to almost a quarter (24%) of buyers. “We knew the country’s infrastructure would help us with production efficiencies and cost control,” says the finance director of a Middle Eastern industrials firm that bought

MERGERMARKET 33THE M&A EXPERIENCE

in the country. He points to the existence of statutory bodies such as Infrastructure Australia, which has a mandate to plan strategically for infrastructure evolution across the country.

The country has spent more than 1% of GDP on infrastructure improvements for several years and has now embarked on a privatisation scheme to fund economic and social infrastructure projects. The director of strategy of a Japan-based conglomerate with a recent acquisition in Australia also believes that strong infrastructure was one of the key elements that factored into making this particular purchase. “Australia’s local governments have their own taxes to provide services such as local planning, and also rely on state and federal funding to provide infrastructure such as roads and bridges," he says. "This helps when considering the business we are engaged in as transportation and logistics go hand-in-hand with infrastructure.”

Meanwhile, the presence of a skilled labour force caught the attention of significant numbers of buyers in Central and Eastern Europe (23%) and South Asia (19%). In Africa, meanwhile, almost a third (30%) of acquirers were attracted by the low cost of doing business there.

Buyers also remarked on the importance of investor-friendly government policies. For example, a Benelux-based industrials

firm says of an acquisition in Oman: “We wanted to increase our presence in the region, and Oman has very favourable laws towards investors, as well as a low cost of doing business.”

CONFRONTING THE CHALLENGES

A similar degree of international variability is evident in the problems cited by businesses involved in cross-border transactions, with certain problems often coming to the fore in particular regions, and other difficulties more prominent elsewhere.

Overall, as Figure 3.4 shows, the most common issue encountered during M&A activity was a legal or regulatory challenge, as stated by almost a third of respondents (28%). The gap between the buyer’s and seller’s valuation of the business was a stumbling block in just over a fifth (21%) of deals while slightly fewer respondents (17%) cited the volatile economic climate as problematic.

Drilling down into those headline statistics, unsurprisingly, developing markets were generally more likely to throw up legal and regulatory problems. In South Asia, these were challenging for almost half the respondents (47%), while deals in Africa were also likely to throw up such problems, with 38% of respondents encountering these. Respondents also warned about political instability in some of these markets – notably

“International investors have begun to realise that while they need to understand the country-specific environment, that is really difficult. We’re seeing a big push towards sharing equity with a local partner – but you do need to do your diligence on those partners before signing the deal.”NINA BOWYER, ENERGY AND INFRASTRUCTURE PARTNER, HERBERT SMITH FREEHILLS, PARIS

in China, where this represented a challenge for a fifth of respondents (20%).

By contrast, deals in more developed markets were more likely to encounter different problems. For example, the valuation gap was the most serious issue for almost half of buyers targeting Japan and South Korea (42%) – to the surprise of an Indian industrials business that acquired in Japan; its finance director concedes: “We thought we would find companies in need of capital and prepared to sell cheaply given the economic situation."

Meanwhile, almost a quarter (23%) of companies doing deals in Western Europe worried about the economic environment – reflecting the lasting impact of the financial and Eurozone crises.

HERBERT SMITH FREEHILLS34 THE M&A EXPERIENCE

WHAT ATTRACTED YOU TO THIS PARTICULAR COUNTRY (BY REGION TARGETED)?

WHAT STRATEGIC FACTORS DID YOU FIND MOST CHALLENGING? (BY REGION TARGETED)

WHAT WERE THE STRATEGIC DRIVERS OF THIS PARTICULAR DEAL (BY REGION BASED)?

FIGURE 3.1 IN WHICH COUNTRY WERE THE MAIN OPERATIONS OF THE TARGET (BY REGION BASED)?

FIGURE 3.2

25

16

14

FIGURE 3.3 FIGURE 3.4

Geographical diversificationIncreased market shareHigh levels of growthRevenue synergiesCost synergiesStable returnsTax/financing advantagesCapital enhancementSector diversification

2% 2%

24%

28%19%

7%

7%

8%

3%

2%3%

25%

TOTAL

22%

20%

10%

9%

3%

6%

Western Europe

Africa

North America

Southeast Asia

Latin America

Australia


Greater China

South Asia

Middle East

Japan and South Korea

4%4%

43%

18%

2%

19%

2%1% 2%3%

2%

AMERICAS

5%2%

18%

15%

24%

16%

8%

8%

4%

AMERICAS

3% 3%

30%

15%

20%

10%

12%

3%

4%

APAC

EMEA

4%

6%

28%

4%

2%

3%

15%

11%

7%

18%

APAC

2%

3%2%

10%10%

4%

37% 20%

4%

8%

EMEA

8%

19%

6%

4%

4%

5% 2%4%

11%

30%

7%

TOTAL

0 20 40 60 80 100

11 2 9 30 11 24 4 27 %

AFRICA

0 20 40 60 80 100

539 5 11 11 6 17 6 %

JAPAN & SOUTH KOREA

0 20 40 60 80 100

14 29 414 1114 %11 3

GREATER CHINA

0 20 40 60 80 100

717 9 66 14 915 %26

LATIN AMERICA

0 20 40 60 80 100

17 410 6 4 9197 %24

WESTERN EUROPE

0 20 40 60 80 100

13 52 106 4 9248 %19

TOTAL

0 20 40 60 80 100

22 14 6 9329 23 9 3 %

CENTRAL AND EASTERN EUROPE

0 20 40 60 80 100

6 6 40 65 17 %11 3 5 1

NORTH AMERICA

0 20 40 60 80 100

18 7 2 20 9 24 911 %

AUSTRALIA

0 20 40 60 80 100

18 6 20 294 9 10 4 %

SOUTHEAST ASIA

0 20 40 60 80 100

8 3 19 12 4 31 19 4 %

SOUTH ASIA (INDIA, PAKISTAN)

0 20 40 60 80 100

193 3 12 12 4 819 %12 8

MIDDLE EAST

0 20 40 60 80 100

%8 1794 4 4 20 34

NORTH AMERICA

0 20 40 60 80 100

%5 3 3 135 7 28 36

AUSTRALIA

0 20 40 60 80 100

%7 20 1320 2020

GREATER CHINA

0 20 40 60 80 100

%428 3317

JAPAN AND SOUTH KOREA

0 20 40 60 80 100

%211111 5 5 47


0 20 40 60 80 100

%20135 5 2 13 18 24

SOUTHEAST ASIA

0 20 40 60 80 100

%3 8 17 10 21 383

AFRICA

0 20 40 60 80 100

%4 15 26 22 267


0 20 40 60 80 100

%5 6 6 11 11 17 3311

MIDDLE EAST

0 20 40 60 80 100

%4 6 7 9 23 19 2111

WESTERN EUROPE

0 20 40 60 80 100

%73 5 9 17 21 2810

TOTAL

0 20 40 60 80 100

%83 10 8 10 13 23 25

LATIN AMERICA

Attractive valuation of targetsEase of obtaining fundingFavourable regulatory environmentLow cost of doing businessOpenness to investmentPolitical stabilityPositive economic environmentSkilled labour forceStrong infrastructureTrade agreement with own country

Securing support from own shareholdersSecuring approval from own boardRaising fundsPolitical instabilityCompetition from other biddersVolatile economic environmentBuyer valuation gapLegal/regulatory factors

MERGERMARKET 35THE M&A EXPERIENCE

WHAT ATTRACTED YOU TO THIS PARTICULAR COUNTRY (BY REGION TARGETED)?

WHAT STRATEGIC FACTORS DID YOU FIND MOST CHALLENGING? (BY REGION TARGETED)

WHAT WERE THE STRATEGIC DRIVERS OF THIS PARTICULAR DEAL (BY REGION BASED)?

FIGURE 3.1 IN WHICH COUNTRY WERE THE MAIN OPERATIONS OF THE TARGET (BY REGION BASED)?

FIGURE 3.2

25

16

14

FIGURE 3.3 FIGURE 3.4

Geographical diversificationIncreased market shareHigh levels of growthRevenue synergiesCost synergiesStable returnsTax/financing advantagesCapital enhancementSector diversification

2% 2%

24%

28%19%

7%

7%

8%

3%

2%3%

25%

TOTAL

22%

20%

10%

9%

3%

6%

Western Europe

Africa

North America

Southeast Asia

Latin America

Australia


Greater China

South Asia

Middle East

Japan and South Korea

4%4%

43%

18%

2%

19%

2%1% 2%3%

2%

AMERICAS

5%2%

18%

15%

24%

16%

8%

8%

4%

AMERICAS

3% 3%

30%

15%

20%

10%

12%

3%

4%

APAC

EMEA

4%

6%

28%

4%

2%

3%

15%

11%

7%

18%

APAC

2%

3%2%

10%10%

4%

37% 20%

4%

8%

EMEA

8%

19%

6%

4%

4%

5% 2%4%

11%

30%

7%

TOTAL

0 20 40 60 80 100

11 2 9 30 11 24 4 27 %

AFRICA

0 20 40 60 80 100

539 5 11 11 6 17 6 %

JAPAN & SOUTH KOREA

0 20 40 60 80 100

14 29 414 1114 %11 3

GREATER CHINA

0 20 40 60 80 100

717 9 66 14 915 %26

LATIN AMERICA

0 20 40 60 80 100

17 410 6 4 9197 %24

WESTERN EUROPE

0 20 40 60 80 100

13 52 106 4 9248 %19

TOTAL

0 20 40 60 80 100

22 14 6 9329 23 9 3 %


0 20 40 60 80 100

6 6 40 65 17 %11 3 5 1

NORTH AMERICA

0 20 40 60 80 100

18 7 2 20 9 24 911 %

AUSTRALIA

0 20 40 60 80 100

18 6 20 294 9 10 4 %

SOUTHEAST ASIA

0 20 40 60 80 100

8 3 19 12 4 31 19 4 %


0 20 40 60 80 100

193 3 12 12 4 819 %12 8

MIDDLE EAST

0 20 40 60 80 100

%8 1794 4 4 20 34

NORTH AMERICA

0 20 40 60 80 100

%5 3 3 135 7 28 36

AUSTRALIA

0 20 40 60 80 100

%7 20 1320 2020

GREATER CHINA

0 20 40 60 80 100

%428 3317

JAPAN AND SOUTH KOREA

0 20 40 60 80 100

%211111 5 5 47


0 20 40 60 80 100

%20135 5 2 13 18 24

SOUTHEAST ASIA

0 20 40 60 80 100

%3 8 17 10 21 383

AFRICA

0 20 40 60 80 100

%4 15 26 22 267


0 20 40 60 80 100

%5 6 6 11 11 17 3311

MIDDLE EAST

0 20 40 60 80 100

%4 6 7 9 23 19 2111

WESTERN EUROPE

0 20 40 60 80 100

%73 5 9 17 21 2810

TOTAL

0 20 40 60 80 100

%83 10 8 10 13 23 25

LATIN AMERICA

Attractive valuation of targetsEase of obtaining fundingFavourable regulatory environmentLow cost of doing businessOpenness to investmentPolitical stabilityPositive economic environmentSkilled labour forceStrong infrastructureTrade agreement with own country

Securing support from own shareholdersSecuring approval from own boardRaising fundsPolitical instabilityCompetition from other biddersVolatile economic environmentBuyer valuation gapLegal/regulatory factors

LEGAL AND REGULATORY CHALLENGES FOR 2016

• Legal/regulatory factors have been the most challenging aspects of deals done by respondents in the past two years.

• Anti-trust and labour and employment regulations were the most common causes of deal failure. Almost half of those surveyed are most concerned by anti-trust regulations when doing deals in North America.

• Almost three quarters of executives feel that overall litigation risk will increase in the next few years and this could affect the level of deals undertaken.

• Environmental issues are also seen as a key regulatory deal-breaker.

• Legal challenges are region specific. In EMEA, labour and employment regulation was the biggest issue for acquirers. In Asia-Pacific, almost a quarter stated that environmental regulations caused deal failure.

• Unsurprisingly, finalising transitional service agreements and agreeing warranties and indemnities are seen as the most complex part of the negotiation/due diligence process.

CHAPTER 4

LEGAL AND REGULATORY CHALLENGES

HERBERT SMITH FREEHILLS38 LEGAL AND REGULATORY CHALLENGES

LEGAL AND REGULATORY CHALLENGES Legal and regulatory challenges are seen as the main challenges to cross-border M&A. Here we explore those obstacles in more detail and explain how to overcome them

A broad range of specific legal and regulatory issues have challenged companies doing deals over the past couple of years, as Figure 4.1 reveals. Overall, anti-trust regulation, cited by a quarter (25%) of respondents, has been the most serious problem, followed by labour and employment regulations (21%) and environmental regulations (18%). The rising global concern about data security and protection saw 10% of respondents cite this as an issue that challenged them during the dealmaking process.

In certain regions, particular challenges have been especially common. Half of all companies doing deals in China said anti-trust regulations had been their biggest challenge; the other half cited labour and employment regulation. In developing markets, bribery and corruption regulations have caused difficulties for some companies – 25% of transactions in South Asia, for example, and in 16% of deals in Latin America. Latin American deals also presented money laundering regulation challenges, with more than a fifth (21%) of respondents citing this issue; money laundering was an even more prominent challenge in Japan and South Korea, where a quarter (25%) of respondents picked it out.

The director of M&A at a Japanese financial services firm, after investing in a South Korean business, says: “Money laundering regulations are strict and investing funds into a firm involves a lot of processes and many

challenges.” Half of respondents targeting Japan and South Korea also note labour and employment regulations as a major challenge.

Learning the lessons of these encounters is important, for there is no reason to think such legal and regulatory issues will become any less challenging in the case of future deals.

This is well understood by most companies. Indeed, while respondents to the survey are generally optimistic about the outlook for M&A activity, with healthy appetites for pursuing transactions over the next three years, they expect to encounter a broad range of legal and regulatory challenges as they do so. Some of the challenges anticipated are very familiar – anti-trust compliance, for example – while other issues, such as the trend towards increasing shareholder litigation, are now rising up the agenda. One recent piece of research conducted by Cornerstone Research found the proportion of deals challenged by shareholders has doubled since 2007.

ANTI-TRUST AND BEYOND

Where deals have failed to complete in the past, it has been anti-trust issues that have been most likely to cause the breakdown, as Figure 4.2 reveals. Almost three quarters (71%) of respondents picked out anti-trust regulation as an issue that had caused a deal to fail. More than half also singled out two

other challenges – labour and employment regulations (57%) and environmental regulations (54%) that had previously proved to be deal-breakers.

Stephen Wilkinson, global head of M&A at Herbert Smith Freehills in London, says the rise of anti-trust is a global phenomenon made more complicated by the increasing reach of anti-trust regulators. “Compared to ten and even five years ago, there are many more regulatory regimes on a national level – for example, in China, Africa and South America – which, in theory, have jurisdiction not only over transactions that involve companies incorporated in those regions, but also over foreign-to-foreign transactions,” he warns. “The thresholds for intervention can often be met on cross-border deals.”

Mark Jephcott, head of competition, Asia, at Herbert Smith Freehills in Hong Kong sees the same happening in the Asia-Pacific region. “Obtaining the necessary merger control clearances can have significant implications for the timing and structure of an M&A transaction,” he says. “The proliferation of anti-trust regimes in recent years, particularly in the APAC region, has introduced additional complexity and means that companies can no longer focus only on the EU and US as the key jurisdictions where anti-trust clearance may be required.”

MERGERMARKET 39LEGAL AND REGULATORY CHALLENGES

8%

21%

10%

9%

9%

18%

25%

16%

5%5%10%11%

32%

21%LATIN

AMERICA

2%2%

2%5%13%

21%

15%

26%

16%

NORTHAMERICA

5%

17%

11% 6%

28%

17%5%11%

AFRICA

15%

30%

15%

20%10%

10%

CEE

13%

38%

25%12%

12%

MIDDLE EAST

23%

24%

23%

1%6%3%

5%

15% WESTERN EUROPE

17%

11%

17%

28%

22%

5%

AUSTRALIA

50%50%GREATER

CHINA

25%

25%

50%JAPAN

AND SOUTHKOREA

16%

17%

17%

25%25%

SOUTHASIA

16%

5%

21%

37%

5%5%

11%

SOUTHEASTASIA

Anti-trust regulations

Labour and employment regulations

Data protection/cyber security regulations

Money laundering regulations

Import/export regulations

Environmental regulations

Bribery and corruption regulations

Tax regulations

Government rules

EU regulations

Government intervention/patent laws

FIGURE 4.1 WHAT LEGAL AND REGULATORY FACTORS DID YOU FIND MOST CHALLENGING? (BY REGION TARGETED)


This may mean deals can take longer than expected. In China, for example, MOFCOM – the anti-trust regulator – has demonstrated on a number of occasions its ability and willingness to undertake detailed reviews of mergers and to adopt an independent line to other major merger control jurisdictions, including as regards the imposition of a substantial remedies package.

Examples include its conditional clearances of the Seagate/Samsung and Microsoft/Nokia deals in 2011 and 2014 respectively, and most recently in the Nokia/Alcatel-Lucent deal in 2015. Timing considerations have also been of concern, especially where a transaction raises substantive anti-trust issues (such as the Glencore/Xstrata transaction in 2013). In such cases, a period of more than a year may be required to negotiate and finalise remedies with MOFCOM.

"It is not all bad news, however,” says Jephcott. “In recent months, the efficiency of MOFCOM's merger review process has improved considerably. In 2014, MOFCOM introduced the simplified merger control procedure which reduced the information gathering burden on notifying parties considerably. More recently, there has been a considerable reduction in the review period following an internal restructuring process

in September 2015 whereby all three of the internal Divisions (Consultation, Legal and Economics) may now review cases ab initio, rather than pre-acceptance being restricted to the Consultation Division.

“This has already reaped significant benefits – one can now expect clearance from initial filing in simplified cases of around two to three months in simple cases – our record is six weeks from start to finish.”

Jephcott advises that if deals are subject to MOFCOM approval, parties should consider seeking to impose some certainty around timings. “A number of mechanisms are available, such as the imposition of a long-stop date or payment of a reverse-break fee which apply where merger control clearance is not obtained by a specified date,” he says. “Bidders in transactions involving listed targets (and listed targets in recommended transactions) should also ensure that they manage shareholder expectations and potentially consider more regular updates to the market than usual in order to secure a successful outcome for the deal.”

REGIONAL DIFFERENCES

Businesses point to particular issues in particular regions, as Figure 4.3 shows. In the Americas, respondents listed five issues –

data protection, environmental regulation, money laundering regulation, bribery and corruption laws and anti-trust regulation – as being equally likely to have caused a deal failure in the past. These companies weren’t concerned with labour and employment regulation at all – a stark contrast to those pursuing deals in the EMEA region, where this was the single biggest issue for acquirers, more than a third (36%) of whom blamed it for their failed deal. Nor were import/export laws an issue in the Americas, but in EMEA, respondents blamed this issue for 14% of deal failures.

Getting past these difficulties requires patience – but also careful anticipation of what the issues are likely to be. Expert advice based on local expertise is invaluable. “One of the first issues we highlight to our cross-border clients is the need for cultural understanding,” says Nicola Yeomans, M&A partner at Herbert Smith Freehills in Singapore. “That is an area where there is no substitute for working with advisers who have done deals in these markets before and who can talk to you about how to build relationships and conduct negotiations.”

71%

57%54%

38%

35%

22%

Anti-trust regulationsLabour and employment regulations

Money laundering regulationsImport/export regulationsData protection/cyber security regulationsBribery and corruption regulations


29%

FIGURE 4.2 WHAT LEGAL OR REGULATORY FACTORS CAUSED YOUR DEAL TO FAIL TO COMPLETE?


"The most significant change [in the bribery and corruption space] has been on the transactional front. A recognition of the need to identify bribery and corruption risk up front, so that buyers and investors can properly assess valuations and manage risk going forward has fundamentally impacted how teams approach transactions in high-risk markets in Asia and Latin America."KYLE WOMBOLT, GLOBAL HEAD OF CORPORATE CRIME AND INVESTIGATIONS AT HERBERT SMITH FREEHILLS, HONG KONG

DO YOUR DILIGENCE

In the Asia-Pacific region, while anti-trust regulation was the single biggest cause of a deal’s failure to complete, with more than a third (35%) of respondents citing this issue, difficulties related to environmental and labour and employment regulation were also cited by respondents.

However, these issues can be dealt with, says Austin Sweeney, head of corporate, Asia, at Herbert Smith Freehills in Hong Kong. “Our advice is that if your due diligence is good enough to uncover problems, they can usually be dealt with, though you may also need to get to grips with the broader political dynamics,” he says.

Graeme Preston, head of corporate, Japan, at Herbert Smith Freehills in Tokyo agrees that skimping on due diligence is always a mistake – but it is also a trap that inexperienced cross-border acquirers sometimes fall into. “It’s possible you will save on legal fees by restricting the due diligence you do or by hiring counsel on the basis of costs alone, but the cost of a huge disaster you could have avoided by doing the job properly will be far higher than any saving you make.”

IF IN DOUBT…

It is important to note that walking away from a transaction, disappointing though this outcome may be, can be the right decision. “We would never make a final offer if we felt the anti-trust obligation issues were too onerous or there were major compliance issues,” says the CFO of a US industrials business that missed out on a deal in Japan. “Even a small problem can hit the business’ finances and damage the reputation of management.”

In a similar vein, the head of finance of a Spanish retailer which eventually turned down a deal in Canada says: “We would never go ahead with a transaction where the government concerned opposed it, even if only informally, because in most cases policymakers have the power to cause you problems.”

WARRANTIES, TSAS AND TAX

Legal and regulatory factors are not the only potential causes of a deal failing to succeed. Often, the breakdown comes as the two parties engage and negotiate.

The auction process has, in some markets, been the default sale process. “The way things are being sold has changed – there’s been an evolution of the auction process,” says Gavin Davies, M&A partner at Herbert Smith Freehills in London. “There are now all sorts of variations to the auction. On the buyside, it can be helpful to try to see behind the curtain, and understand what the real competitive picture is – a full auction, a preferred buyer being accelerated or a dual-track process, for example.”

More than half the respondents (58%) who suffered a deal failure said it was because they were unable to finalise a transitional service agreement (TSA). It is a reflection of the depth of integration of so many global businesses, particularly in IT functions, that so many deals require such agreements, as the seller agrees to continue providing support of some kind to a business, and this represents a major stumbling block to overcome.

“Once the seller has sold and got the money, they may not have the same commercial incentive to provide those transitional services whereas those services can be crucial to allow the buyer to protect and realise the value of its investment,” warns John Ogilvie, dispute resolution partner at Herbert Smith Freehills in London. “For businesses where the continued provision of transitional services is important, it’s crucial to set out the issues very clearly at the negotiation stage.”

Almost as many respondents (57%) say their deals failed because they had not been able to agree an acceptable package of warranties or indemnities to protect the buyer from problems that emerge after the deal has completed. Warranty agreements can be a particular issue in deals where a private equity firm is the seller. James MacArthur, head of private equity at Herbert Smith Freehills in London, warns: “Private equity has historically been unwilling to provide warranty comfort on an exit, because when they sell down their


WHAT LEGAL/REGULATORY FACTORS CAUSED THIS DEAL TO FAIL TO COMPLETE? (BY REGION BASED)

OTHER THAN VALUATION, WHAT PARTS OF THE NEGOTIATION/DUE DILIGENCE PROCESS CAUSED THIS DEAL TO FAIL TO COMPLETE?(BY REGION BASED)

FIGURE 4.3

FIGURE 4.4

Credibility of financial accounts

Di�culties finalising transitional service agreements

Uncertain tax or other liabilities

Lack of clarity about IP/technology ownership

Di�culties agreeing warranties/indemnities

Complex ownership structures


Problems between governments







Land and real estate laws

17%

11%

7%

32%

22%

11%

APACFIG 4.4

20%

20%20%

20%

20%

AMERICASFIG 4.3

2%2%9%

2%

2%

8%

17%

23%

35%

APACFIG 4.3

17%

33%

AMERICASFIG 4.4

17%

33%

8%

31%

11%

25%

14%

11%

EMEAFIG 4.4

14%

9%

9%

36%

23%

9%EMEAFIG 4.3


holdings they need to distribute funds to their investors – if they can’t, or need to hold funds in escrow for potential claims, that affects their internal rate of return.”

This may require more imaginative thinking. Warranty and indemnity insurance, for example, can be a solution to this problem, both for deals involving private equity and in other transactions where agreement is difficult to reach or as a tool in an auction process. “Usually you would expect the buyer to pay, though that is up for commercial negotiation,” MacArthur adds. However, it should also be noted that the cost of warranty and indemnity insurance can often be prohibitively high in developing markets.

More than half (54%) of the survey respondents with a failed deal blamed uncertainty about future tax liabilities – this is an issue that is rising in prominence, with tax now so central to reputational issues in many markets, as well as having the potential to cause a direct financial impact.

“Latent tax liabilities can be very hard to predict and the taxman has an opportunity to go back over quite a long period, so companies will look for extended tax warranties and an indemnity,” says Ogilvie.

India has a number of examples, where businesses such as Vodafone and Cairn Energy have faced and continue to face this issue. “The Indian tax authorities are notoriously aggressive,” warns Alan Montgomery, head of India M&A at Herbert Smith Freehills in London. “While the courts and the Modi government have taken some very positive steps to rein in the adversarial approach of the Indian tax authorities, tax is still something that makes investors very nervous when going into India – it becomes absolutely crucial to understand the implications of how you structure any deal in the country.”

Figure 4.4 provides a regional breakdown of the problems most likely to disrupt M&A negotiations. TSA-related issues were the most common cause of deal failure for respondents based in both Asia-Pacific and the Americas, cited by a third (32% and 33%)

of companies, while in the latter regions, respondents also pointed to a lack of clarity about ownership of intellectual property or technology as a factor equally likely to have led to a breakdown in negotiations. One French technology company executive complains: “This can be really difficult in our sector because patent rights are so often spread across the globe and held by different entities in different places.”

Meanwhile, respondents seeking to do deals in the EMEA region were particularly likely to have seen an issue over the credibility of financial records and accounts derail negotiations, with almost a third (31%) having suffered a deal failure for this reason.

CONFRONTING FUTURE CHALLENGES: ANTI-TRUST ISSUES

Figure 4.5 suggests that anti-trust regulation will go on representing a major challenge for potential buyers. Sixteen percent of respondents cited environmental regulation and labour and employment laws as major concerns, while 12% noted data protection and cyber security regulation.

Anti-trust concerns are particularly front of mind for companies considering making acquisitions in North America, where close to half (44%) see such regulation as a potential hurdle. A third of acquirers (34%) considering transactions in the Middle East are also nervous about anti-trust issues.

One difficult anti-trust challenge is that in less developed markets, anti-trust laws and tests simply may not be clear, with rulings handed down on a case-by-case basis. The CFO of a West African energy business complains about exactly this problem. “We’ve had this issue in Pakistan, where there is a lack of transparency around anti-trust,” he says.

CONFRONTING FUTURE CHALLENGES: BRIBERY AND CORRUPTION RULES

The prevalence of criminal sanctions in some jurisdictions present a concern – most prominently in South Asia, where more than a quarter (28%) of survey respondents point to

this worry, and in Latin America, where a fifth (20%) flag it.

"The most significant change we have seen in the bribery and corruption space in the last decade has nothing to do with the large, long-lasting enforcement actions that are often the subject of lengthy press reports,” says Kyle Wombolt, global head of corporate crime and investigations at Herbert Smith Freehills in Hong Kong. “The most significant change has been on the transactional front. A recognition of the need to identify bribery and corruption risk up front, so that buyers and investors can properly assess valuations and manage risk going forward, has fundamentally impacted how teams approach transactions in high-risk markets in Asia and Latin America.”

The only way to overcome such problems is through thorough due diligence, stresses Nina Bowyer, energy and infrastructure partner at Herbert Smith Freehills in Paris. “You need to have proper policies in place, as well as manpower and advisers on the ground to monitor what is going on,” she says. “You need to be sure you know exactly who your partners are and then work in partnership with them in genuine collaboration.”

Alan Montgomery, head of India M&A at Herbert Smith Freehills in London, says this makes it crucial to not only diligence deals carefully but also to plan up front how to eradicate potential compliance issues post-completion. Sometimes this will involve changing the business model of the target and, if so, a purchaser will need to think up front about the impact of that change on deal value. “For example, we worked with a purchaser that uncovered potential issues in the front-end sales and marketing operations of a target,” he says. “It completely changed the business model of the target entity following the transaction, retaining the manufacturing operations but shutting down sales and distribution function and turning it into a franchise operation.”

27%

20%25%

15%

4%2% 7%

WESTERNEUROPE

29%

13%

13%12%

10%

11%

12%

SOUTHEAST ASIA

18%

5%

8%

11%

23%

28%

5% 2%

SOUTH ASIA

28%9%

12% 16%

16%

10%

9%

44%

17%

8%

17%

2%2%10%

NORTH AMERICA

34%

11%11%

11%

11%

22%

MIDDLEEAST

25%

5% 6%

5%

21%

20%

18%

LATINAMERICA

20%

30%

10%20%

10%

10%JAPAN

AND SOUTH KOREA





Taxation




14%8%

11%

3%28%

17%19%AFRICA

25%5%

5%10%

25%30%

CEE

26%5%5%

4%

17%

17%

26%

AUSTRALIA

16%

16%

11%

21%

10%16%

10%GREATER

CHINA


27%

20%25%

15%

4%2% 7%

WESTERNEUROPE

29%

13%

13%12%

10%

11%

12%

SOUTHEAST ASIA

18%

5%

8%

11%

23%

28%

5% 2%

SOUTH ASIA

28%9%

12% 16%

16%

10%

9%

44%

17%

8%

17%

2%2%10%

NORTH AMERICA

34%

11%11%

11%

11%

22%

MIDDLEEAST

25%

5% 6%

5%

21%

20%

18%

LATINAMERICA

20%

30%

10%20%

10%

10%JAPAN

AND SOUTH KOREA





Taxation




14%8%

11%

3%28%

17%19%AFRICA

25%5%

5%10%

25%30%

CEE

26%5%5%

4%

17%

17%

26%

AUSTRALIA

16%

16%

11%

21%

10%16%

10%GREATER

CHINA

FIGURE 4.5 WHICH REGULATIONS ARE YOU MOST CONCERNED ABOUT WHEN MAKING AN ACQUISITION IN THIS COUNTRY?


73%

Yes

27 %

No

CONFRONTING FUTURE CHALLENGES: ENVIRONMENTAL CONCERNS

Environmental regulation, meanwhile, is of most concern to businesses planning deals in Central and Eastern Europe, where almost a third of respondents (30%) point to this issue, and in Australia, where more than a quarter (26%) feel the same. In Australia, in particular, this may be linked to the country’s pre-dominance in natural resources and commodity production.

Businesses should expect this issue to rise up the agenda in many countries, argues Austin Sweeney. “It’s going to make this a crucial part of your due diligence process," he says. “And where you do find an environmental problem, how are you going to address that? It may be just a question of penalties, which can be dealt with via options such as indemnities, but criminal sanctions or really serious reputational damage may call into question the deal altogether.”

CONFRONTING FUTURE CHALLENGES: CONCERNS OVER CYBER SECURITY

In Japan and South Korea, meanwhile, almost a third of those businesses considering acquisitions in the region (30%) are concerned about data privacy and cyber security regulations – for these buyers, this issue represents their single biggest concern. In Western Europe, meanwhile, where the European Union has passed new legislation on data protection, some 15% of acquirers are concerned. “We definitely worry about data sharing,” says the CFO of a Russian telecoms firm who oversaw an acquisition in the Netherlands.

Ralf Thaeter, managing partner at Herbert Smith Freehills in Germany, feels that this could put a block on certain deals, particularly for non-European Union companies making acquisitions in particular countries. “Germany especially has very strict data protection laws and that is sometimes seen as a barrier,” he warns. “For example, integrating a German target into a larger group may not be as simple as you might expect given the regulation on the exchange of private information.”

CONFRONTING FUTURE CHALLENGES: DEALING WITH THE WORKFORCE

Labour and employment regulation is a concern for 28% of acquirers looking for targets in Africa and 25% seeking to acquire in both Western Europe and Central and Eastern Europe. The highly regulated markets of the European Union, where labour markets in several countries are sometimes criticised as particularly inflexible, are clearly a factor for many would-be acquirers.

Frédéric Bouvet, M&A partner at Herbert Smith Freehills in Paris, says that acquirers in Europe simply have to plan ahead on this issue, building the time that they need into their deal timelines. “In France, if your deal is above a certain threshold, you cannot have a binding agreement until you’ve at least received some input from the works council in a company, if there is one,” he says. “That can take several months, which can be a frustration for buyer and seller alike – and while new legislation is supposed to provide for a maximum timeframe of four months, it is early days on how that will be applied.”

Bear in mind too that businesses are now being held to account for workforce-related issues throughout their entire supply chain. Issues around child labour, worker exploitation and human rights can be highly damaging for a business, even if the practices in question are related to the activities of a third-party supplier.

CONFRONTING FUTURE CHALLENGES: LITIGATION RISK ON THE RISE

As Figure 4.6 reveals, litigation risk is an issue rising up the agenda for large numbers of companies considering engaging in M&A activity. Almost three quarters of respondents (73%) expect overall litigation risk in M&A to increase in the years ahead – in other words for more buyers of businesses to subsequently bring claims against sellers such as warranty claims and claims for indemnification.

FIGURE 4.6 DO YOU THINK OVERALL LITIGATION RISK IN M&A TRANSACTIONS WILL INCREASE OVER THE NEXT FIVE YEARS?


34%

49%

17%Significantly less likely

to undertake M&A

Moderately less likely to undertake M&A

No change in likelihood of undertaking M&A

LITIGATION RISK IN THE SPOTLIGHT

THE MOUNTING PROBLEM OF LITIGATION RISK IDENTIFIED IN FIGURE 4.6 IS A GLOBAL ONE, SAYS JOHN OGILVIE, DISPUTE RESOLUTION PARTNER AT HERBERT SMITH FREEHILLS IN LONDON, THOUGH IT OFTEN HAS DIFFERENT MANIFESTATIONS IN DIFFERENT REGIONS.

“In the US, it has almost become institutionalised for shareholders to claim that public information made available prior to the deal did not constitute adequate disclosure, though some judges are now clamping down on these cases. In Europe, we see problems in Germany with shareholders filing suit against merger resolutions adopted at shareholder meetings, and in France, minority shareholdings are a frequent cause of difficulties,” he says. “We also see all sorts of disputes in emerging markets where companies are sometimes prepared to take more risk than they might have historically because of the growth prospects they see.”

The nature of the dispute can vary enormously. Ogilvie points to claims under warranties and indemnities, disagreements following management buyouts over earn-outs; cases related to how liability caps should be applied, and problems connected to post-completion restrictions on sellers.

“Where disputes are possible, make sure client advice is privileged and not disclosable,” Ogilvie adds. “Having the discipline to lock down privilege is very important. Clients should also bear in mind potential disclosure obligations when creating documents concerning issues that may prove contentious.”

Clearly, this issue will be an important concern to manage. Two thirds of companies forecasting an increase in litigation risk warn that they will be less likely to undertake M&A (Figure 4.7).

Nevertheless, says Ogilvie, it is possible to reduce litigation risk after the deal by planning for as many eventualities as possible. “The first thing is to have a multi-disciplinary team in from day one, with disputes lawyers to stress test the commercial agreements and to look at the provisions which could give rise to disputes: warranties, indemnification and caps on liabilities, for example. The jurisdiction clause, which sets out where any disputes will be heard, is also very important; so too will be the experience and expertise of local counsel – they will be crucial members of the team in executing due diligence as thoroughly as possible.”

FIGURE 4.7 WILL INCREASED LITIGATION DETER YOU FROM DOING M&A DEALS IN FUTURE?

HERBERT SMITH FREEHILLS48 POWERING THROUGH THE VOLATILITY

HOW DID YOU VIEW GLOBAL M&A IN 2015 AND, IN PARTICULAR, IN NORTH AMERICA, CONSIDERING THAT OUR SURVEY SUGGESTS PEOPLE EXPECT IT TO BE AT THE CENTRE OF DEALMAKING IN 2016 AND BEYOND?Last year, the global M&A market eclipsed the record it set in 2007. Out of that volume, half was in North America so it’s totally understandable that people are focusing on the region as the most likely market for deals.

Overall, it’s going to be a stretch to achieve another US$5 trillion in value over this year. In 2015, everything fell into place to make those kind of record numbers possible. Not least because last year’s market was very much driven by those major deals of US$10 billion and beyond – there were almost 70 of them compared to 45 or so in the 2007 peak. In other words, the market was very heavily skewed towards the riskier and larger transactions.

With the market turbulence we’ve seen in 2016, given macroeconomic concerns, commodity price deflation and political instability in certain regions, we’re in a more difficult overall environment. Business still feels pretty good although volumes in January globally were off by about 30%. However, the longer this current market dislocation goes on, the greater the probability that there may be pause in the market – we’re not really seeing it yet but we could if markets continue to remain unstable.

IS IT POSSIBLE THEN THAT M&A VOLUMES COULD FALL SHARPLY FOLLOWING THIS MARKET VOLATILITY?I think it’s more likely that we will take a breather but I think the market is still very strong and I expect it to be a good year – I just don’t know that we can eclipse last year’s record.

MAJOR DEALS WERE ONE IMPORTANT THEME OF 2015. ARE THE MARKET CONDITIONS RIGHT FOR THAT TO CONTINUE IN 2016? There are reasons to be positive: there’s still a strong desire for growth, and you see that particularly in the key ratios in the US, which still imply a fairly significant growth component. You really have to look at it on an industry-by-industry basis but it’s very difficult to achieve the sort of growth expectations that investors are looking for with a strictly organic approach, so big M&A is going to continue to be part of the landscape.

The major deals may not be at the levels we had last year but they are still going to be pretty important.

On the other hand, business is all about CEO and board confidence and if confidence starts to really abate then you could see some pull back. For now though, I still think people are going to do the big deals because the strategic imperative is so compelling.

"Last year, the global M&A market eclipsed the record it set in 2007. Out of that volume, half was in North America so it’s totally understandable that people are focusing on the region as the most likely market for deals."

POWERING THROUGHTHE VOLATILITYMark Shafir, co-head of global mergers & acquisitions at Citi in New York, shares his views about the outlook for global M&A

MERGERMARKET 49POWERING THROUGH THE VOLATILITY

IN WHICH SECTORS DO YOU EXPECT TO SEE THE MOST ACTIVITY?Last year was pretty robust across most sectors. M&A activity in technology was up by 116%, and was really quite dramatic, but financial institutions were up 100% too. Activity rose in almost every sector, with the exception of energy, which was flat, and telecoms which was slightly down.

I think deal activity will continue to be broad based. Technology, parts of healthcare, and consumer all have real potential. Energy is also very interesting because we may get some consolidation given the major reset in oil pricing – some companies are sitting on a fair bit of debt. Otherwise, it’s going to be the usual suspects driving this market.

AND DO YOU SEE NORTH AMERICA CONTINUING TO DOMINATE?The notable feature of the last couple of years has been just how strong the transatlantic volumes have been – both outbound and inbound. They far and away dwarf other cross-border deal flows and regional impacts.

Looking forward, we can point to some negatives but Europe, for example, has still not recovered to the extent in terms of volumes that the US has – relative to the 2007 peak, there’s still a US$600 billion or US$700 billion gap, so there is some upside there.

Europe is particularly interesting because valuations are a little more challenged than in the US – so you could see transactions out of the US or out of places such as China into Europe. There is certainly some upside potential in this market.

WHERE WILL THE DEAL FLOWS COME FROM?It’s tough because the emerging markets have been pretty beaten up from a macroeconomic perspective, while US into EMEA volumes last year were up pretty dramatically.

I do think China will be prominent: there is a great deal of interest in outbound deals and when you look at the 2025 ‘Made in China’ initiative, you can see the potential for outbound M&A. Still, I expect a lot of the activity to continue to be transatlantic.

IS THE CHINESE ECONOMIC SLOWDOWN PUTTING DEALMAKERS OFF?China remains strong. There is a significant amount of capital available through state-owned enterprise, as well as private companies and China’s big financial players.

So, while there are some concerns around just how strong the Chinese economy is and the impact this might have, until there are major changes, I expect more activity.

WHAT ARE THE LEGAL ISSUES THAT CONCERN PARTICIPANTS IN NORTH AMERICAN DEALS?People buying in the US traditionally get concerned about the litigation environment in this country. Buyers that haven’t done a lot of deals in the US do have to get to grips with that and understand that it’s part of the landscape.

Going the other way, US players going to Europe tend to worry more about regulation and issues such as whether you can achieve cost synergies in certain jurisdictions that have very strong labour rules. Elsewhere anti-trust and issues such as bribery and corruption will be more concerning.

These are generalisations though and in the end, you’ve really got to go case-by-case and industry-by-industry – many of these businesses are already global and they balance these sort of difficulties against the desire to make good use of the cash they have on their balance sheets.

Ultimately, if they can put that cash to work and do the right transaction, they will try to overcome their worries about the jurisdiction.

"I think deal activity will continue to be broad-based. Technology, parts of healthcare, and consumer all have real potential. Energy is also very interesting because we may get some consolidation given the major reset in oil pricing – some companies are sitting on a fair bit of debt. Otherwise, it’s going to be the usual suspects driving this market."

50 SECTOR FOCUS

ON THE RISE

In 2015, the value of cross-border deals in the consumer sector (US$282 billion – a post-crisis record) saw an increase of 37% year-on-year on the back of 851 deals. Although volume was marginally down on 2014, it was higher than any other post-crisis year. In Q1 2016, there have been 174 cross-border deals valued at US$26 billion. This is a 23% drop in volume but a 38% increase in value.

GLOBAL MOVES

Our overall survey has shown that while the majority of businesses were optimistic about the potential for cross-border M&A, they were inclined to transact primarily within their own regions. However, the consumer sector has somewhat bucked this trend. In 2015, North American purchasers spent more in Europe than in any other region. One of the standout international cross-border deals was Japan Tobacco’s US$5 billion move for fast-growing US brand American Spirit – another example of companies in Japan looking overseas for growth potential through acquisition. For more on Japan, see Japan beyond borders, page 28. At the beginning of 2016, another major cross-border deal from Asia into the US was announced with Chinese manufacturer Qingdao Haier’s US$5.4 billion bid for GE Appliances.

REGIONAL FOCUS

In terms of value, it is Europe that has seen the largest proportion of deals. Despite fears over instability in the EU, two major deals have shone the spotlight very brightly in the region. The standout deal of the year in the consumer sector saw Belgian/US beer giant Anheuser- Busch InBev bid US$120 billion for London-listed, South African born SABMiller. Once it completes, the new company will supply around one third of the world’s beer. Meanwhile, June saw the US$11 billion tie-up between Dutch grocery chain Royal Ahold and its Belgian rival Delhaize.

Overall, the region saw cross-border deals worth US$197 billion – putting that into perspective, North America was in second place with total value of US$50 billion.

FUTURE OF DEALMAKING

This upward trajectory looks likely to continue, with our survey showing that respondents are now prioritising M&A over other uses of capital. Forty-one percent said that deals are now the preferred use of capital over investment (38%) or shareholder capital returns (21%). This is a shift from three years ago, when only 32% were prioritising M&A as the key use of capital.

With those figures in mind, it would appear that 2016 could be another strong year for cross-border deals in the consumer sector.

SECTOR FOCUS.

CONSUMERWhen it comes to cross-border M&A deals, the consumer sector really delivered the goods in 2015. And 2016 could be just as strong

SECTOR FOCUS.

HERBERT SMITH FREEHILLS

"Deal trends in the consumer sector look set to continue being driven by the role of brands and innovation, pressure to consolidate and customer purchasing power."SUSAN BLACK, CO-HEAD GLOBAL CONSUMER PRACTICE, HERBERT SMITH FREEHILLS, LONDON

"Deals will be subject to the influence and impact of economic and political stability along the supply chain."KRISTIN STAMMER, CO-HEAD GLOBAL CONSUMER PRACTICE, HERBERT SMITH FREEHILLS, SYDNEY

MERGERMARKET 51SECTOR FOCUS

Consumer Sector Cross-border M&A 2015 (US$bn)

How do you prioritise your use of capital, and how does that compare to three years ago?

Capital investment

M&A

Provide shareholder returns

THREE YEARS AGO NOW

38%

41%

21%

46%

32%

22%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

200

400

600

800

1000

2015

2014

2013

2012

2011

2010

200

9

50

100

150

200

250

300

73.495.0 117.8

162.0

108.9

205.9281.7

24%

23%

15%15% 13% 3%

Geographical diversificationIncreased market share

Cost synergiesRevenue synergiesStable returnsTax/financing advantagesCapital enhancement


What strategic factors will your prioritise?

5%

2%

CONSUMER SECTOR CROSS-BORDER M&A 2015 (US$ BILLION)

TARGET REGION

BID

DER

REG

ION

Africa Asia-Pacific

Europe Latin America

Middle East

North America

Total

Africa 0.03 0.03 5.63 5.69

Asia-Pacific 11.66 5.82 0.55 1.25 3.24 22.52

Europe 0.47 0.81 161.58 4.22 40.75 207.83

Latin America 0.36 2.55 3.25 1.85 8.01

Middle East 0.07 2.47 2.38 0.19 0.08 5.19

North America 0.09 6.63 19.39 2.38 0.20 3.80 32.49

Total 0.66 21.96 197.35 10.59 1.45 49.72 281.73

WHAT STRATEGIC FACTORS WILL YOU PRIORITISE? CONSUMER SECTOR CROSS-BORDER M&A 2009-15 (US$ BILLION)

HOW DO YOU PRIORITISE YOUR USE OF CAPITAL, AND HOW DOES THAT COMPARE TO THREE YEARS AGO?

Consumer Sector Cross-border M&A 2015 (US$bn)


Capital investment

M&A

Provide shareholder returns

THREE YEARS AGO NOW

38%

41%

21%

46%

32%

22%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

200

400

600

800

1000

2015

2014

2013

2012

2011

2010

200

9

50

100

150

200

250

300

73.495.0 117.8

162.0

108.9

205.9281.7

24%

23%

15%15% 13% 3%

Geographical diversificationIncreased market share

Cost synergiesRevenue synergiesStable returnsTax/financing advantagesCapital enhancement


What strategic factors will your prioritise?

5%

2%

HERBERT SMITH FREEHILLS52 SECTOR FOCUS

FALLING PRICES, RISING VALUES

The volatility in oil and gas prices shook markets around the world, when Brent crude fell by 47% in 2015 and hit further lows early in 2016. In January, the World Bank adjusted its 2016 forecast for crude oil prices to US$37 per barrel. And low prices have certainly had an impact on M&A in the energy, mining and natural resources industries. Meanwhile, mining commodities have also fared poorly. In its January statement, the World Bank estimated that prices would decline 25% in 2016.

In terms of cross-border deals, while value was at its highest level since 2012 with US$174.7 billion worth of deals, volume dropped significantly from 479 deals in 2014 to 371 last year (the same as in 2009). Value for cross-border M&A has continued to remain high into 2016. When compared to Q1 2015, volume is up 2% while value has risen from US$14 billion to US$44 billion – an increase of 219%. This is on the back of a number of large cross-border deals out of North America including Canada’s Brookfield Renewables' US$4.6 billion purchase of Colombian company Isagen.

REGIONAL FOCUS

The majority of cross-border deals in the sector were intra-regional rather than global in 2015. European buyers invested US$95 billion within the region out of a total of US$100.9 billion, although much of this came from Shell’s US$81.2 billion purchase of UK energy group BG.

The same is true for Asia-Pacific companies, which spent nearly half of the US$32.4 billion total within their own region – this included Chinese company Guangdong’s US$950 million takeover of Australian-listed mining company PanAust. This trend can also be seen in Latin America.

The only region that bucked this trend was North America, which invested US$13.4 billion in Europe and US$10.9 billion in Asia-Pacific but only US$6.9 billion within its own territory.


The instability in the markets make future predictions particularly uncertain in the energy, mining and natural resources sector. While acquirers may well take a ‘wait and see’ attitude, the slump in commodity prices could mean that corporates may look to, or, indeed, be forced to divest underperforming assets and this potentially could lead to more interest from private equity groups which have raised significant funds to invest in the sector in recent years. An example of this came in August when Anglo American sold two Chilean copper mines to investment group Audley Capital for US$300 million.

Despite the continued threat of falling prices – corporate divestitures, distressed assets and renewed interest from PE could help revive the M&A market in the coming years.

ENERGY, MINING AND NATURAL RESOURCESLow oil and commodity prices continue to make the headlines across the world, yet this has not hit the M&A market as hard as expected, with values at a three-year high

SECTOR FOCUS.

"The oil price volatility meant that the gap between buyer's and seller's forward forecasts made it challenging to agree value for deals. That gap has narrowed now with more parties being accepting of a 'lower for longer' price environment, meaning that we should see more M&A."ROB MERRICK, CO-HEAD, GLOBAL ENERGY PRACTICE, HERBERT SMITH FREEHILLS, PERTH

"The opportunities for cross-border deals would increasingly attract private equity firms who are looking further afield towards Asia after raising billions of dollars in oil and gas funds. They are particularly keen to invest in oil and gas projects outside North America – initial interests were in Europe and Africa and now we have seen them expanding into Asia and Australia."ANNA HOWELL, CO-HEAD, GLOBAL ENERGY PRACTICE, HERBERT SMITH FREEHILLS, LONDON


Energy & Mining Sector Cross-border M&A 2015 (US$bn)

Which regulations are you most concerned about when making an acquisition in this country? (Please select all that apply)








67%

72%

46%

25%

49%

28%

14%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

100

200

300

400

500

600

2015

2014

2013

2012

2011

2010

200

9

0

50

100

150

200

250

300

107.3

214.6248.6

162.9 146.4169.5 174.7

19%19% 16% 14%

12% 3%

Western EuropeAfrica

Southeast AsiaNorth AmericaCentral and Eastern EuropeSouth Asia (India, Pakistan)Middle EastGreater ChinaAustralia

Latin America

Which regions is your acquisition strategy likely to be focused on? (Please select all that apply)

9%3%3%

2%

ENERGY, MINING AND NATURAL RESOURCES CROSS-BORDER M&A 2015 (US$ BILLION)

TARGET REGION

BID

DER

REG

ION

Africa Asia-Pacific


Middle East

North America

Total

Africa 0.02 0.05 0.07

Asia-Pacific 1.20 15.88 5.81 1.37 1.80 6.30 32.36

Europe 1.24 0.25 95.29 1.56 0.03 2.56 100.93

Latin America 1.12 0.02 1.14

Middle East 0.27 0.56 0.38 1.21

North America 0.15 10.93 13.37 7.70 6.89 39.04

Total 2.61 27.33 115.08 11.75 1.83 16.15 174.75

WHICH REGIONS IS YOUR ACQUISITION STRATEGY LIKELY TOBE FOCUSED ON?

ENERGY, MINING AND NATURAL RESOURCES SECTOR CROSS-BORDER M&A 2009-15 (US$ BILLION)

WHICH REGULATIONS ARE YOU MOST CONCERNED ABOUT WHEN MAKING YOUR NEXT ACQUISITION?

Energy & Mining Sector Cross-border M&A 2015 (US$bn)

Which regulations are you most concerned about when making an acquisition in this country? (Please select all that apply)








67%

72%

46%

25%

49%

28%

14%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

100

200

300

400

500

600

2015

2014

2013

2012

2011

2010

200

9

0

50

100

150

200

250

300

107.3

214.6248.6

162.9 146.4169.5 174.7

19%19% 16% 14%

12% 3%

Western EuropeAfrica

Southeast AsiaNorth AmericaCentral and Eastern EuropeSouth Asia (India, Pakistan)Middle EastGreater ChinaAustralia

Latin America


9%3%3%

2%


RECORD VALUES, HIGH VOLUMES

Dealmaking in the financial services sector saw a huge surge in value last year, while volume remained high but static. At US$222.4 billion, value rose by 151% year-on-year on the back of 405 deals. Despite falling by nine deals from 2014, deal volume remained above other post- crisis years.

GLOBAL MOVES

M&A in the sector was characterised by global rather than just regional transactions. European corporates spent more than US$45 billion in North America, out of a spend total of US$67 billion – this included the largest financial services cross-border deal of the year as Swiss insurance company ACE purchased US rival Chubb for US$28 billion.

However, as bidders, Asia-Pacific companies invested the most in cross-border deals in the sector – a total of US$78.3 billion (of which US$55.4 billion was spent on outbound M&A).

And with an aging demographic and slow growth at home, Japanese corporates were particularly active. Six of the top 20 international transactions involved Japanese financial groups doing deals in either the US or Europe. One of the most notable was insurance giant Tokio Marine’s US$7.5 billion purchase of US medical insurers HCC. For more on Japan, see Japan beyond borders, page 28.

North America was the only territory which invested more within its own territory than overseas with US$39.5 billion worth of regional deals.


Despite last year’s concentration on developed markets, our survey shows that the highest percentage of financial services respondents (20%) will be focusing their cross-border acquisition strategy on Southeast Asia in the foreseeable future. North America and Western Europe are in second and third positions respectively. In line with the main survey, the majority of financial services investors are attracted to a region by a positive economic environment and the availability of suitable targets.

The continued volatility in world markets has slowed M&A in the financial services sector. The opening three months of 2016 saw 80 deals at US$22 billion – a drop of 19% and 33% respectively. However, factors such as Japan’s ongoing search for growth and continued consolidation in the insurance sector should help drive the market forward.

FINANCIAL SERVICESThe financial services sector showed its strength in cross-border M&A in 2015, setting new records for deal value in the process

SECTOR FOCUS.

"M&A among insurers was impacted by continuing uncertainty as to the effect of changes to the regulatory solvency regime in Europe. With increasing clarity as the new regime beds down, we expect more deals in the insurance sector in 2016."ALEX KAY, PARTNER, HERBERT SMITH FREEHILLS, LONDON


Financial Services Sector Cross-border M&A 2015 (US$bn)

Which factors attract you to this region? (Please select all tthat apply)

Trade agreement with own countryOpenness to investment

Low cost of doing businessPolitical stability

Favourable regulatory environmentStrong infrastructure

Ease of obtaining fundingSkilled labour force

Attractive valuation of targetsAvailability of suitable targets

Positive economic environment

38% 36% 36%

32% 21%

7%

43%

64%

39%

52%

73%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

100

200

300

400

500

2015

2014

2013

2012

2011

2010

200

9

0

50

100

150

200

250

36.0

78.2 78.5 86.4105.8

88.6

222.4

20%

18%

14%13% 11% 5%

Southeast AsiaNorth America

South Asia (India, Pakistan)AfricaLatin AmericaCentral and Eastern EuropeMiddle EastAustraliaJapan & South KoreaGreater China

Western Europe

9%4%4%

1%

1%

Which regions is your acquisition strategy likely to be focused on?

FINANCIAL SERVICES SECTOR CROSS-BORDER M&A 2015 (US$ BILLION)

TARGET REGION

BID

DER

REG

ION

Africa Asia-Pacific


Middle East

North America

Total

Africa 0.70 0.11 0.81

Asia-Pacific 0.03 22.94 26.02 0.18 0.46 28.67 78.30

Europe 0.65 3.31 17.40 1.44 45.05 67.85

Latin America 0.29 0.03 0.32

Middle East 0.19 0.99 3.02 4.20

North America 0.13 4.87 26.32 0.06 39.57 70.95

Total 1.70 32.22 72.76 1.97 0.46 113.32 222.43

WHICH REGIONS IS YOUR ACQUISITION STRATEGY LIKELY TOBE FOCUSED ON?

FINANCIAL SERVICES SECTOR CROSS-BORDER M&A 2009-15 (US$ BILLION)

WHICH FACTORS ATTRACT YOU TO A TARGET REGION?

Financial Services Sector Cross-border M&A 2015 (US$bn)


Trade agreement with own countryOpenness to investment

Low cost of doing businessPolitical stability

Favourable regulatory environmentStrong infrastructure

Ease of obtaining fundingSkilled labour force

Attractive valuation of targetsAvailability of suitable targets

Positive economic environment

38% 36% 36%

32% 21%

7%

43%

64%

39%

52%

73%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

100

200

300

400

500

2015

2014

2013

2012

2011

2010

200

9

0

50

100

150

200

250

36.0

78.2 78.5 86.4105.8

88.6

222.4

20%

18%

14%13% 11% 5%

Southeast AsiaNorth America

South Asia (India, Pakistan)AfricaLatin AmericaCentral and Eastern EuropeMiddle EastAustraliaJapan & South KoreaGreater China

Western Europe

9%4%4%

1%

1%

Which regions is your acquisition strategy likely to be focused on?


INFRASTRUCTURE M&A ON THE INCREASE

The sector saw solid cross-border M&A volume in 2015 – at 199 deals, it dropped only 8% year-on-year. With the exception of 2014, last year’s value figure is the highest since 2009.

STRATEGIC DRIVERS

Geographical diversification and increased market share were key strategic drivers for infrastructure M&A in 2015 with most dealmakers having either a small foothold, or no operations, in the existing market.

REGIONS OF FOCUS

Western Europe and Latin America appear to be strong regions of focus for future acquisitions. One dealmaker noted: "Latin America has huge needs for investment in infrastructure and engineering and they will require significant support from foreign players." Southeast Asia, South Asia (India, Pakistan), North America, and Central and Eastern Europe were also regions of interest.


Despite concerns expressed by some market participants over rising asset values, as well as global instability and volatile markets, infrastructure dealmakers in our survey were upbeat about the future for M&A in their sector. Most infrastructure investors intend to make the same number or more deals in the next three years as they did in the past three years. In terms of legal obstacles, the majority of respondents are concerned about anti-trust regulations – this is in line with the overall report. However, a quarter is worried by labour and employment rules, compared with only 16% in total.

While the sector could well be affected by macroeconomic headwinds, the long-term outlook for the infrastructure sector appears to be positive.

SECTOR FOCUS.

INFRASTRUCTUREThe infrastructure sector has seen steady volume and value figures in cross-border M&A in 2015, with more deals expected in 2016

SECTOR FOCUS.

"Infrastructure assets continue to experience very high levels of demand. Indeed, in an era of on-going volatility and uncertainty, the stable and long-term nature of infrastructure assets are, if anything, increasingly attractive."PATRICK MITCHELL, HEAD OF INFRASTRUCTURE FOR UK AND EMEA, HERBERT SMITH FREEHILLS, LONDON


Infrastructure Sector Cross-border M&A 2015 (US$bn)









OVERALL INFRASTRUCTURE

26% 36%

16%

14% 17%

18% 11%

11% 10%

8%

8%

25%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

50

100

150

200

250

2015

2014

2013

2012

2011

2010

200

020

40

60

80

100

120

25.2 21.034.8 35.5

27.1

115.8

60.3

42%

32%

26%

More deals than in the previous three yearsThe same level of dealmakingFewer deals than in the previous three years

INFRASTRUCTURE SECTOR CROSS-BORDER M&A 2015 (US$ BILLION)

TARGET REGION

BID

DER

REG

ION

Africa Asia-Pacific


Middle East

North America

Total

Africa 0.01 0.01

Asia-Pacific 15.02 0.55 0.42 15.99

Europe 0.04 1.42 18.79 0.23 1.54 6.68 28.70

Latin America 0.01 1.23 0.17 1.41

Middle East 1.29 1.84 3.13

North America 0.80 8.78 0.36 1.10 11.04

Total 0.04 18.53 29.98 1.82 1.54 8.37 60.28

HOW DOES YOUR EXPECTED LEVEL OF DEALMAKING FOR THE NEXT THREE YEARS COMPARE TO THE LAST THREE YEARS?

INFRASTRUCTURE SECTOR CROSS-BORDER M&A 2009-15 (US$ BILLION)


Infrastructure Sector Cross-border M&A 2015 (US$bn)









OVERALL INFRASTRUCTURE

26% 36%

16%

14% 17%

18% 11%

11% 10%

8%

8%

25%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

50

100

150

200

250

2015

2014

2013

2012

2011

2010

200

0

20

40

60

80

100

120

25.2 21.034.8 35.5

27.1

115.8

60.3

42%

32%

26%

More deals than in the previous three yearsThe same level of dealmakingFewer deals than in the previous three years


A BLOCKBUSTER YEAR

Major cross-border deals were the order of the day in pharmaceuticals and healthcare in 2015. Transactions including Israeli generics giant Teva's ongoing US$40.5 billion acquisition of Allergan’s generics business, Abbvie's US$21 billion acquisition of Pharmacyclics and Canadian pharmaceuticals company Valeant’s US$15.5 billion takeover of gastrointestinal specialist Salix all drove announced M&A value up to US$379.6 billion.

Volume reached 456 cross-border deals in 2015 – up from 434 in 2014 and 354 in 2013 – despite a number of significant transactions being announced and subsequently withdrawn. These included US giant Pfizer’s attempted US$183.7 billion acquisition of Ireland-based Botox-producer Allergan, Teva's hostile bid for Mylan and Mylan's own hostile bid for Perrigo.

GLOBAL DEAL DRIVERS

Many deals in 2015 were prompted by a desire to consolidate, creating scale and efficiencies under increasing global pressure on prices of pharmaceuticals. Companies producing branded products, specialties, biosimilars and treatments for difficult indications and rare diseases were attractive targets due to their higher margins, as was the case with Actavis's acquisition of Allergan.

Product pipeline was also a factor, as global big pharma in particular coped with blockbuster pharmaceuticals coming off patent. The acquisition of Pharmacyclics, for example, added the blockbuster blood cancer drug, Imbruvica, to AbbVie's portfolio.

Tax was the big sector story for M&A in 2014 and this continued to some extent in 2015, as more companies sought tax friendly jurisdictions outside the US. Pfizer's attempted acquisition of Allergan would have been the largest "inversion" transaction in history - its proposed relocation to Ireland was intended to bring with it significant tax benefits, but the deal was derailed in early April after the US Treasury issued changes to the rules relating to inversions.

North America – the world’s largest pharmaceuticals market – saw the most action in terms of inbound/domestic and outbound activity. There was also healthy activity in established healthcare markets like Europe as well as China, India and the Middle East.


It is not certain that 2015’s record figures will be surpassed this year, but we believe many of the factors highlighted above will continue to influence M&A in the sector. And while 58% of dealmakers plan to concentrate on developed markets (US, Western Europe), we also believe that the search for geographical diversification and new markets (highlighted by 25% of pharmaceuticals and healthcare executives) will become more significant drivers.

PHARMACEUTICALS AND HEALTHCAREWith a slew of major deals in 2015 and rising value in 2016, dealmaking in the pharmaceuticals and healthcare sector remains robust

SECTOR FOCUS.

"Whilst the fundamental drivers in 2016 remain the same as 2015, the new US Treasury regulations which resulted in the termination of the Pfizer/Allergan merger, the upcoming US elections, potential increased interest rates and the first results announcements of those companies who merged during the 2014 pharma boom, all point to 2016 being a less frenetic year than 2015. This is likely though to only be a hiatus with the next phase of the pharma M&A cycle expected to involve spin-offs of non-core businesses either to raise cash to pay down debt taken out to fund acquisitions or to allow companies in the sector to focus on their core strengths."ALAN MONTGOMERY, HEAD, CORPORATE LIFE SCIENCES PRACTICE, HERBERT SMITH FREEHILLS, LONDON


Pharmaceuticals Sector Cross-Border M&A 2009 - 2015


Stable returns

Capital enhancement

Revenue synergies

Cost synergies




8%

5%

20%

12%

15%

15%

25%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

100

200

300

400

500

2015

2014

2013

2012

2011

2010

200

950

100

150

200

250

300

350

400

86.6 84.3 90.660.9 76.4

259.7

379.640%

18%

8%8%8%

6%

Western EuropeNorth America

Latin AmericaAustraliaGreater ChinaAfricaCentral and Eastern EuropeSouth Asia (India, Pakistan)

Southeast Asia

6%

4%2%

Which regions is your acquisition likely to be focused on? (Please select the most important)

PHARMACEUTICALS AND HEALTHCARE SECTOR CROSS-BORDER M&A 2015 (US$ BILLION)

TARGET REGION

BID

DER

REG

ION

Africa Asia-Pacific


Middle East

North America

Total

Africa 0.15 0.70 0.85

Asia-Pacific 0.09 5.42 1.42 1.70 0.12 4.19 12.94

Europe 0.13 1.61 43.84 0.48 0.53 41.79 88.38

Latin America 0.02 0.02

Middle East 11.59 0.15 2.30 0.29 43.79 58.12

North America 0.80 1.65 196.50 0.60 0.60 19.13 219.28

Total 12.61 8.83 242.61 5.10 1.54 108.90 379.59

WHICH REGIONS IS YOUR ACQUISITION LIKELY TO BE FOCUSED ON?

PHARMACEUTICALS AND HEALTHCARE SECTOR CROSS-BORDER M&A (US$ BILLION)

WHAT STRATEGIC FACTORS WILL YOU PRIORITISE?

Pharmaceuticals Sector Cross-Border M&A 2009 - 2015


Stable returns

Capital enhancement

Revenue synergies

Cost synergies




8%

5%

20%

12%

15%

15%

25%

VOLUME VALUE

Value U

S$ billion

Volu

me

0

100

200

300

400

500

2015

2014

2013

2012

2011

2010

200

9

50

100

150

200

250

300

350

400

86.6 84.3 90.660.9 76.4

259.7

379.640%

18%

8%8%8%

6%

Western EuropeNorth America

Latin AmericaAustraliaGreater ChinaAfricaCentral and Eastern EuropeSouth Asia (India, Pakistan)

Southeast Asia

6%

4%2%

Which regions is your acquisition likely to be focused on? (Please select the most important)


SLOWER BUT STEADY

As cash-rich corporates became even more competitive in the M&A market in 2015 and valuations rose to post-crisis highs, private equity (PE) firms became more cautious in their approach – eager not to pay over-heated prices in the auction process.

Last year, cross-border buyout volumes were down 19% year-on-year to 754 deals while value dropped 12% to US$189.3 billion. However, these falls in the investments made by PE firms should not be overstated – in comparison with the five years between 2009 and 2013, both value of deals and volume were up considerably.

GLOBAL MOVES

Mergermarket figures for 2015 show that there have been some truly global cross-border buyouts. Europe is the main focus for cross-border deals, with US$95.6 billion worth of activity. Over half of buyout investment flowed into the region last year, with almost US$48 billion of the investment into Europe coming from North America. One notable transatlantic deal saw US firm Hellman & Friedman take control of Swedish security company Verisure for US$5.8 billion in October 2015.

Meanwhile, according to Mergermarket data, both European and Asia-Pacific firms ploughed marginally more into North America than into their own regions. Asia-Pacific investors were also active in Europe with US$11.4 billion-worth of deals including China-based JAC Capital Management’s US$1.8 billion purchase of NXP Semiconductors in the Netherlands.


While the balance between PE and corporates appears to have swung somewhat toward the latter in 2015, buyout firms are upbeat about their prospects for future dealmaking. Forty-four percent expect the level of buyouts to rise in the next three years. And only 16% expect to execute fewer deals in the next three years.

There is also a deep divide between overall respondents and PE on regulations that they find most challenging to dealmaking. For example, nearly a quarter of PE firms are most concerned about money-laundering rules compared with only a tenth of executives in total. In part, this can be explained by the regulatory scrutiny that a number of PE firms are under, especially in the US.

Although 2015 may have been slower than expected for PE, significant funds have been raised, dry powder is at record levels, according to research firm Preqin, and sectors such as energy, mining and natural resources and infrastructure could prove to be successful hunting ground for PE firms in 2016.

SECTOR FOCUS.

PRIVATE EQUITY SECTOR FOCUS.

Buyout firms have seen a dip in buyouts in the past year compared to 2014, but, according to our survey, they are expecting to see deal volume rise in the next three years

"The caution of PE firms, particularly in Europe, reflects a desire not to overpay for assets. Strategic buyers, Asian sponsors and institutional investors can have a lower cost of capital than buyout firms. Ignoring the macroeconomic impact of a Brexit, market conditions in Europe continue to improve, and opportunities to deploy the record amount of dry powder exist. Developing sectors, such as infrastructure, will continue to be attractive to private equity investors." JAMES MACARTHUR, HEAD OF PRIVATE EQUITY, HERBERT SMITH FREEHILLS, LONDON


Private Equity Buyouts Cross-Border M&A 2009 - 2015








Which regulations are you most concerned about when making your next acquisition? (Please select most important)

37%

12%

24%

15% 12%

16% 8% 12%

7% 10%

10%

10%

27%

VOLUME VALUE

PRIVATE EQUITY OVERALL

Value U

S$ billion

Volu

me

0

200

400

600

800

1000

2015

2014

2013

2012

2011

2010

200

90

100

200

300

44.6

108.0138.6

113.7 129.6

217.9

189.3

48%

35

%

31%

23%17%

15%

Western EuropeSoutheast Asia

South Asia (India, Pakistan)Greater ChinaLatin AmericaAustraliaJapan & South KoreaCentral and Eastern EuropeAfricaMiddle East

North America

16%13% 7%5%

1%


PRIVATE EQUITY BUYOUTS CROSS-BORDER M&A 2015 (US$ BILLION)

TARGET REGION

BID

DER

REG

ION

Africa Asia-Pacific


Middle East

North America

Total

Africa 0.02 0.31 2.25 2.58

Asia-Pacific 0.32 11.00 11.39 0.18 12.39 35.28

Europe 1.09 1.10 32.79 0.18 0.01 33.20 68.37

Latin America 0.04 0.04

Middle East 0.20 0.27 1.17 0.41 2.05

North America 0.11 20.74 47.96 2.71 0.75 8.79 81.06

Total 1.74 33.42 95.56 2.93 0.94 54.79 189.38

WHICH REGIONS IS YOUR ACQUISITION LIKELY TO BE FOCUSED ON?

PRIVATE EQUITY BUYOUTS SECTOR CROSS-BORDER M&A 2009-15 (US$ BILLION)


Private Equity Buyouts Cross-Border M&A 2009 - 2015








Which regulations are you most concerned about when making your next acquisition? (Please select most important)

37%

12%

24%

15% 12%

16% 8% 12%

7% 10%

10%

10%

27%

VOLUME VALUE

PRIVATE EQUITY OVERALL

Value U

S$ billion

Volu

me

0

200

400

600

800

1000

2015

2014

2013

2012

2011

2010

200

9

0

100

200

300

44.6

108.0138.6

113.7 129.6

217.9

189.3

48%

35

%

31%

23%17%

15%

Western EuropeSoutheast Asia

South Asia (India, Pakistan)Greater ChinaLatin AmericaAustraliaJapan & South KoreaCentral and Eastern EuropeAfricaMiddle East

North America

16%13% 7%5%

1%


62 SECTOR FOCUS

VOLUME OVER VALUE

In 2015, the volume of cross-border deals in the TMT sector eclipsed all other sectors. This fast-moving set of intertwined sectors saw 1,007 cross-border transactions in 2015 – more than 150 more than the second-placed consumer sector. At US$213 billion, value was marginally down on the 2014 total but well above other post-crisis years.

GLOBAL MOVES

The sector not only bucked the lower volume/higher value trend for 2015 but also the inclination towards more regional (as opposed to international) cross-border moves. There was a truly global market for TMT transactions in 2015. The highest value between regions was Europe into North America, with US$59.6 billion worth of deals – including two major deals between Netherlands-based companies and their US counterparts. In March, NXP Semiconductors acquired Freescale Semiconductors for US$15.9 billion. Six months later, cable TV and internet business Altice announced it would purchase New York’s Cablevision in a US$18.5 billion deal. Meanwhile, Asia-Pacific and North American countries poured more money, US$26.4 billion and US$30.9 billion respectively, into Europe rather than their own regions.

Overall, the developed markets of Europe and North America saw the highest deal values – and this was, in part, down to a surge of interest from Asia-Pacific bidders, who raked up outbound deals worth US$40.6 billion. These included a wide variety of transactions from Chinese corporates such as Dalian Wanda’s US$3.5 billion bid for Hollywood production studio Legendary Entertainment and state-backed Tsinghua Unisplendor’s US$3.76 billion deal for US data storage company Western Digital Corp.

FUTURE OF DEALMAKING

With such high value and volume throughout 2015, and given market volatility, it is not entirely surprising that Q1 2016 has seen something of a drop-off in cross-border dealmaking. The first three months saw 207 deals, valued at US$23 billion – a 22% and 66% decline respectively when compared with Q1 2015.

Despite the drop-off in Q1 2106, dealmaking in the TMT sector looks set to pick up for the rest of the year and beyond. In our survey, 28% of companies in the sector stated that they were likely to make four or more acquisitions in the next three years – this compared to only 13% overall.

However, if there is one aspect that could put a block on the surge of cross-border deal activity for TMT companies, it is anxiety over data protection and cyber security regulations. Forty-two percent of respondents stated that they were concerned over these ever-tightening rules, compared with only 16% of companies in total.

TELECOMMUNICATIONS, MEDIA AND TECHNOLOGY (TMT)In terms of volume, cross-border M&A in the TMT sector in 2015 was electrifying. Our survey shows that the next three years could be even stronger

SECTOR FOCUS.


"A combination of convergence and consolidation has fuelled a vibrant TMT M&A market over recent times, and the trends for M&A activity are set to continue, with North America taking the lead and now the Asia-Pacific region becoming a real focus." TONY JOYNER, CO-HEAD OF TELECOMMUNICATIONS, MEDIA AND TECHNOLOGY, HERBERT SMITH FREEHILLS, PERTH


TMT Sector Cross-Border M&A 2009-2015 (US$bn)

Which regulations are you most concerned about when making your next deal?

Taxation







Data protection/cyber security regulations 42%

5%

14%

1%

1%

1%

9%

27%

VOLUME VALUEOVERALL TMT

Value U

S$ billion

Volu

me

0

200

400

600

800

1000

1200

2015

2014

2013

2012

2011

2010

200

94+

3

2

1

0

0

100

200

300

64.0

98.6100.3

153.0

137.3

225.5

212.7

21% 8%

17% 21%

33% 30%

16% 13%

13% 28%

TMT SECTOR CROSS-BORDER M&A 2015 (US$ BILLION)

TARGET REGION

BID

DER

REG

ION

Africa Asia-Pacific


Middle East

North America

Total

Africa 0.08 1.35 0.12 1.55

Asia-Pacific 0.55 24.68 26.44 0.01 0.24 13.83 65.75

Europe 0.41 1.10 31.85 0.82 0.34 59.56 94.08

Latin America 0.02 0.02 0.04 0.08

Middle East 0.12 0.17 0.51 0.80

North America 9.62 30.90 2.36 2.14 5.89 50.91

Total 1.08 35.48 90.73 3.21 2.72 79.95 213.17

HOW MANY ACQUISITIONS IS YOUR FIRM LIKELY TO MAKEOVER THE NEXT THREE YEARS?

TMT SECTOR CROSS-BORDER M&A 2009-15 (US$ BILLION)

WHICH REGULATIONS ARE YOU MOST CONCERNED ABOUT WHEN MAKING YOUR NEXT DEAL?

TMT Sector Cross-Border M&A 2009-2015 (US$bn)

Which regulations are you most concerned about when making your next deal?

Taxation







Data protection/cyber security regulations 42%

5%

14%

1%

1%

1%

9%

27%

VOLUME VALUEOVERALL TMT

Value U

S$ billion

Volu

me

0

200

400

600

800

1000

1200

2015

2014

2013

2012

2011

2010

200

94+

3

2

1

0

0

100

200

300

64.0

98.6100.3

153.0

137.3

225.5

212.7

21% 8%

17% 21%

33% 30%

16% 13%

13% 28%

HERBERT SMITH FREEHILLS64 CONCLUSION

Interconnected global financial markets are, of course, sensitive to short-term shocks but company strategy remains centred on maintaining operational efficiency and enhancing growth by entering new markets and growing the consumer base.

Political and economic volatility notwithstanding, cross-border M&A will continue to hinge on individual country propositions and the ease of doing business there.

However, undertaking international M&A is an exercise in balancing risk and reward. On the one hand, expansion into new markets offers the opportunity of tapping new sources of growth, while providing diversification benefits for businesses whose domestic markets may not deliver the returns required. On the other, new markets bring new challenges and dangers: businesses must pursue deals without falling into traps they may not even know exist and give themselves the best chance of being able to execute on their strategy after completion.

Our survey suggests at least five crucial issues dealmakers will need to address as they seek to maximise their M&A opportunities.

UNDERSTAND REGIONAL DIFFERENCES

The survey reveals there are major differences between the opportunities and challenges dealmakers will be confronted by as they move from region to region. The legal and regulatory headaches posed by deals in developing markets, for example, may be less challenging in developed economies, but these regions bring their own problems – economic woes or high valuations, for example.

Accordingly, while companies may have a global mindset, they also need to think regionally. Dealmakers need access to expert advice and experience that delivers on both counts. M&A advisers must be able to provide a global network and culture with consistent standards and practices in markets all around the world. At the same time, they also need to be able to offer boots on the ground in individual territories in order to supply a detailed understanding of regional issues. “Strong legal teams operate effectively both globally and locally,” says Stephen Wilkinson, global head of M&A at Herbert Smith Freehills in London.

MAKE TIME FOR DUE DILIGENCE

The need to devote sufficient time and resources to due diligence is a

consistent theme throughout this survey. Almost all of the challenges that threaten the success of a deal identified by respondents – from bribery and corruption issues to problems with IP or technology ownership – have the potential to cause significant damage to companies that uncover them too late. By contrast, where issues are identified, they can generally be resolved – or, at worst, there is an opportunity to avoid damage by walking away.

Cost is naturally a concern for any business conducting a transaction, but beware false economies, warns Graeme Preston, head of corporate, Japan, at Herbert Smith Freehills in Tokyo. “Good due diligence will pay some dividends,” he says. “The short-term saving that comes from not instructing your advisers to be completely thorough can be outweighed by the financial havoc that a problem not spotted subsequently causes.”

FIVE STEPS TO CROSS-BORDER DEAL SUCCESSThe global economic outlook for 2016 and beyond is highly uncertain. With Q1 deal volume off to a slow start this year, it would seem that the various economic and political headwinds have made investors wary about aggressively pursuing cross-border deals in the very short term. However, the general sentiment in our survey shows that support for inorganic growth persists in the medium term.

MERGERMARKET 65CONCLUSION

PRIORITISE THE BIG ISSUES

While those regional differences are crucial, certain challenges crop

up time and again wherever dealmakers are conducting transactions – it almost always makes sense to prioritise these issues.

Above all, almost three quarters of respondents (71%) say that where a deal has failed, anti-trust regulation was to blame. More than half picked out two other issues: labour and employment regulations (57%) and environmental regulations (54%).

Against a background of a more challenging global anti-trust environment, businesses and their lawyers are showing more appetite to engage with anti-trust risk in a deal, according to Gavin Davies, M&A partner at Herbert Smith Freehills in London. “Buyers and sellers are getting more used to doing deals where an anti-trust regulator may well intervene,” he says. “In particular, the big industry players are very likely to raise complex anti-trust questions. There’s an evolution of more sophisticated approaches to navigating through detailed anti-trust reviews as part of the M&A process.”

CONSIDER LITIGATION RISK

Some 73% of respondents believe litigation risk is

increasing in global M&A – but while significant numbers of companies warn this could potentially deter them from doing deals, it is possible to prepare for such risk.

“Use a multi-disciplinary team of advisers in order to identify the issues most likely to be a trigger for litigation,” advises John Ogilvie, dispute resolution partner at Herbert Smith Freehills in London. “We embed disputes lawyers in the

deal team so that there is an opportunity to stress test every aspect of the agreement and to study the provisions most likely to give rise to disputes – warranties, indemnities, limitations on liability and jurisdiction clauses are amongst the most important.”

TRUST YOUR INSTINCTS

Successful M&A requires nerve and single-mindedness. The slowdown in

the Chinese economy, for example, might make for anxious times for businesses with exposure there, yet respondents to this survey see China as more likely than any country other than the US to see the biggest increase in dealmaking in the years ahead – reflecting its long-term potential. Similarly, while the business press has often trumpeted the idea of convergence, only 17% of respondents are pondering deals beyond their own sectors.

Good communication with shareholders is important, adds Stephen Wilkinson. “Shareholders are no longer urging total caution – they are actively looking for companies to add value and in many marketplaces that means a focus on dealmaking,” he says. “They want their boards to set out a strategy for enhancing value through the right type of M&A transactions.”

Companies that are unable to work through these steps may not enjoy the returns on investment hoped for from their M&A strategies. But doing so in a global marketplace, where the most pressing issues – and the detailed nature of those issues – varies region by region, country by country, and deal by deal, is not straightforward.

HERBERT SMITH FREEHILLS66 ABOUT


Operating from 25 offices across Asia Pacific, EMEA and North America, Herbert Smith Freehills is at the heart of the new global business landscape providing premium quality, full-service legal advice. We provide many of the world’s most important organisations with access to market-leading dispute resolution, projects and transactional legal advice, combined with expertise in a number of global industry sectors, including energy, natural resources, infrastructure, technology and financial services.

ABOUT HERBERT SMITH FREEHILLS' GLOBAL M&A PRACTICE

Herbert Smith Freehills' M&A team provides market-leading capability on public and private mergers and acquisitions with particular strength and expertise in cross-border, high-value, complex M&A activity. We are consistently ranked in the top tiers in the UK and European directories for M&A and have a market-leading position in Asia-Pacific M&A league tables, by both volume and value of deals. Our key clients include major international and domestic corporate entities, the world's leading investment banks, financial buyers, and public sector and government clients.

We advise clients on their most complex domestic and cross-border transactions across the globe. Our role frequently puts us at the heart of industries that are reshaping, restructuring and expanding into the world's emerging markets. Our distinctive breadth of industry sector expertise gives us a top-tier reputation in industries such as energy, mining and infrastructure, financial services and TMT, some of the busiest industries for M&A activity in recent years.

FT Remark produces bespoke research reports, surveying the thoughts and opinions of key audience segments and then using these to form the basis of multi-platform thought leadership campaigns. FT Remark research is carried out by Remark, part of the Mergermarket Group, and is distributed to the Financial Times audience via FT.com and FT Live events.

Mergermarket is an unparalleled, independent mergers & acquisitions (M&A) proprietary intelligence tool. Unlike any other service of its kind, Mergermarket provides a complete overview of the M&A market by offering both a forward-looking intelligence database and a historical deals database, achieving real revenues for Mergermarket clients.

Disclaimers

The contents of this publication, current at the date of publication set out in this document, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.

Herbert Smith Freehills LLP and its affiliated and subsidiary businesses and firms and Herbert Smith Freehills, an Australian Partnership, are separate member firms of the international legal practice known as Herbert Smith Freehills.

© Herbert Smith Freehills LLP 2016

Herbert Smith Freehills

This publication contains general information and is not intended to be comprehensive nor to provide financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any investment or other decision or action that may affect you or your business. Before taking any such decision, you should consult a suitability qualified professional advisor. Whilst reasonable effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed and neither FT Remark nor any of its subsidiaries or any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at the user’s risk.

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© Herbert Smith Freehills LLP 2016

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