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Global M&A outlook: Where there's a will, there's a way

Welcome to Allen & Overy’s M&A Insights, our analysis of the latest themes and trends in the global mergers and acquisitions market.

Mixed signals from an increasingly complex world

The data points to a decline in activity across most regions and sectors. Yet the picture is less stark than the numbers suggest: while deal value and volume are down by 12% and 16% respectively, the first half of 2019 is still the third largest YTD on record for global M&A and the third time a first half year period has hit the USD2 trillion mark. U.S. dominance of the global deals market was reinforced by the 19% growth in the value of U.S. transactions to account for 55% of total global deals.

While geo-political and economic issues appear to be affecting confidence, there is plenty of evidence that companies are prepared to take on big strategic deals when opportunities arise. The difference is that they now do so with a clear expectation of greater complexity, as those political issues translate into greater regulatory intervention. In “CFIUS – permanent roadblock or just a taller hurdle?”, Ken Rivlin and Maura Rezendes examine new CFIUS rules and the potential challenges these pose to investors.

The search for growth and digitalisation continue to be two powerful drivers of deals. However, investors are being more selective about where they invest. Do they target all the main economic blocs, the U.S., Europe and Asia – or do they prioritise one or two? All that underlines profound changes in the global economy. But change is not necessarily bad for M&A deals. Indeed, change can itself be a powerful catalyst for transformational transactions.

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Continued growth underlines U.S. dominance

U.S. dominance of the global deals market was underlined in the first half, as a string of significant strategic acquisitions saw the value of U.S. transactions grow by 19% to account for some 55% of total global deals.

A surge in big-ticket domestic transactions was a standout feature of the market, lifting the total value of U.S. deals to some USD1.1tn, bucking trends in almost all other markets.

Western Europe continued to see the decline in deal values that became evident in the second half of 2018. Here values fell 57%, with transactions in this region accounting for just 14% of total global deals.

The APAC region, making up 9% of total transactions, fell by 21%, while Greater China was also in retreat, with values falling by 31% to account for 9% of the global market. Values in Eastern Europe and Latin America declined by 36% and 5% respectively.

MENA (up by 219%) and Sub-Saharan Africa (up from a low base by 239%) were the only other regions recording growth, in both cases powered by very significant transactions, including the transformational USD69bn Saudi Aramco/SABIC chemicals deal and Total’s USD8.8bn acquisition of Anadarko’s African assets.

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Financial services deals accelerate

After several years of inactivity, dealmaking has returned with some force to the financial services sector with the value of transactions rising by more than 7% to reach a twelve-year high in the year to date.

Where banking is concerned, this marks a third distinct phase of activity since the financial crisis, which firstly saw many banks disposing of poorly performing assets before then focusing on strengthening capital positions and dealing with a tsunami of regulation.

Many banks are now in much better financial shape and, with the regulatory tide retreating, are once again contemplating acquisitions, although the pace of activity remains relatively slow with deal numbers back to 2013 levels.

Some parts of the industry are still struggling with more fundamental issues. The fate of Germany’s second largest institution, Commerzbank, remains in question after an, apparently politically driven, effort to engineer a merger with Deutsche Bank looking to have failed. Reports suggest others may have made tentative approaches, but it remains to be seen if a non-German solution for such an important bank would be seen as acceptable.

Italy’s banking industry remains another special case, apparently unable to shake off the troubles of the past, as we have seen with one of the oldest banks, Monte dei Paschi di Siena, only two years after a government bail out.

Other drivers are at play in different parts of the sector. For asset managers, for instance, transparency rules brought in under MIFID II have put huge pressure on firms to cut fees, which, in turn, is encouraging consolidation.

Meanwhile, fintech remains very buoyant with most banks recognising this is an area requiring substantial investment. No longer is it just a case of legacy institutions fighting off disruptive newcomers. Instead there is a growing accent on collaboration between the two, as we’ve seen with the Barclays venture with start-up, MarketInvoice.

In addition, with some of the original bank disruptors – such as Revolut, Monzo and Atom – reaching maturity, the fintech ecosystem is becoming increasingly rich, especially in the UK and in New York, with further M&A activity likely as it evolves.

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Life of mine - the outlook for the mining industry

Mining has for so many years been a no-go area for M&A activity, where the focus has been on cutting debt and returning cash, with shareholders putting a virtual ban on M&A. However, there are some interesting developments driving a shift in the market.

This shift is partly down to the firming of commodity prices. Some companies, regaining confidence in making good profits, have seen a significant improvement in share prices as a result.

Iron ore prices seem comfortably settled above the USD100 a tonne level, helped in no small degree by tragic dam collapses that have forced Vale to close off some production. As the world’s biggest supplier of iron ore, predominantly to China, that has pushed up prices further.

Gold prices are not as strong and consolidation is occurring here, as we saw with the USD10bn Newmont/Goldcorp merger, the biggest mining transaction of 2019 so far. We expect to see some further M&A activity led by Australian producers, who are now trading at a healthy premium to their Canadian peers.

There is increased deal activity focused around rare earths and the specialist minerals like lithium and nickel essential to a whole range of technologies, not least batteries, chips and electric vehicles. The bid by Wesfarmers for lithium miner Kidman is a case in point. It is also bidding for Lynas Corp, the biggest producer of rare earths outside China and a significant prize should China try to lock up the market in rare earth minerals in response to mounting trade tensions, as recent reports suggest.

Technology is beginning to disrupt the industry, particularly with the potentially transformational application of blockchain in mining supply chains. But by far the biggest disruptive force for mining is climate change. Its impact will be double-edged, posing an existential threat to coal mining but a fillip for other minerals used to build solar and wind farms (aluminium and iron ore) and those rare earth elements vital to many advanced technologies.

Confidence in the industry is improving and with some investors now urging miners to deploy accumulated cash on value-creating transactions; we expect to see further developments and strong activity in H2.

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Top six sectors by value (USD)

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Activist investing - is your board ready?

The threat of an activist campaign has now become an everyday hazard for listed companies across the world. Yet well-prepared boards can defend against this highly disruptive event and even use it to strengthen their strategic purpose.

Once mostly a feature of U.S. corporate life, activism has now spread to many markets in Europe and Asia and is a threat that shows no sign of abating.

The statistics show that campaigns reached a new high in 2018 and with far greater global reach than ever before. More importantly an increasing number of attacks were focused on transactions, with one study suggesting a third of campaigns were M&A related.

Different dynamics apply in different jurisdictions and, in planning a defence, it is important for boards to understand trends both within their own sectors and in other markets. For instance the UK, now probably the second most popular target for activists, tends to be less litigious than the U.S., with battles fought out through PR or proxy battles rather than in the courts.

Activists are increasingly targeting Japanese companies – often cash-rich and with plenty of non-core businesses that can be sold off. Some continental European jurisdictions offer boards greater protections, not least the Netherlands, but even France has seen an upsurge in activity in important companies such as Pernod Ricard and Lagardère.

With limited regulatory or government intervention, apart from in clear national interest cases, the onus is on boards to prepare their own robust defence, much as they would for a hostile bid. That means keeping strategy under constant review, having board members with an appropriate array of expertise, and maintaining regular contact with current shareholders whose support will be vital.

Most importantly boards should engage with activists, who often have well-articulated cases, presenting clear arguments in support of the current strategy. Stonewalling is not an option; neither is attacking the activists in the media, without a very carefully built plan.

A declining M&A market could expose even more corporate strategic vulnerabilities for activists to exploit. So this is a trend that will only continue to grow, even at an economically uncertain time. Boards need to be ready.

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Public M&A shows signs of resilience

Although activity has declined from last year’s record levels, evidence from key jurisdictions suggests that public M&A is remaining resilient supported by a number of factors, not least an increase in private capital being deployed in this market.

Confidence in the U.S. – still the powerhouse for public deals – remains high despite the international and domestic political dramas dominating the headlines. Boardrooms are focusing on achieving growth and realising that this can be achieved fastest through acquisitions – often big strategic deals, innovatively financed and increasingly supported by shareholders.

A dip in share prices at the end of 2018 led to a spate of more opportunistic public deals in both the UK and Germany, but in both markets a standout trend is the growing activity by well-resourced financial investors.

In the UK we have seen an increase in take-privates by PE houses, with the UK public market generally seen as undervalued in comparison to other developed markets. However, a predicted wave of take-private deals in Germany this year has not yet materialised thanks to a recovery in share prices during the Spring. But with big targets relatively scarce, investors appear increasingly willing to use their accumulated cash to take on larger and more complex deals. Continuing moves by German conglomerates to hive off non-core businesses are also bolstering public activity.

Meanwhile, a series of significant reforms aimed at internationalising China’s public markets are already boosting foreign investment in A shares with further liberalisation in the pipeline.

Regulatory complexity remains a challenge, particularly due to the proliferation of national security merger controls. In the U.S. CFIUS reviews are now more frequent and much broader in scope, while in Europe new EU legislation applying from next year will mark the first time a supra-national approach is taken to vetting inbound investment. The German government has become more interventionist on this issue while in the UK proposals for government scrutiny in a much wider range of sectors is under consideration.

Dealmakers must prepare carefully for such challenges and pitch their offers at a level that is hard for target boards to ignore. There is unlikely to be an explosion of public deals in the months ahead, but good reason to believe activity will remain robust.

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