Hostile M&A at a crossroad

Author: Tom Young | Published: 4 Jan 2016
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Hostile takeovers could rise in 2016, as last year’s mega deals are replaced by smaller consolidations and activist shareholders continue to push boards into action.

But counsel believe that increasingly complex antitrust regimes may hamper such structures. Instead, semi-hostile deals are expected to continue, with a focus on pre-conditional approaches in the UK deemed likely.

According to data from Dealogic, 73 hostile deals were announced in 2015 for a combined $559.2 billion. This was slightly down on the $575.7 billion in 2014 (82 deals).

Last year was also notable for its number of $10 billion plus deals, with 67 closing. Ten of these were worth more than $50 billion, which could explain the downturn in hostile volumes. Deals of such complexity are often best structured consensually. “Without the assistance of the target not only is execution more challenging but the potential for value disruption between signing and closing increases,” said Charlie Jacobs, partner at Linklaters in London.

Because of this, semi-hostile deals may continue. In this scenario, the bidders’ first attempt at securing a recommendation is often met by an initial refusal from the target board, unhappy about price.

The bidder then approaches the target shareholders directly with a so-called bear-hug, encouraging the target board to re-engage. After several more rounds of price discovery, the bidder typically seals a recommended bid. Although these deals end amicably, Dealogic’s criteria classifies them as hostile because it assesses the target board’s initial attitude on announcement.

KEY TAKEAWAYS

  • Hostile takeovers were down slightly on volumes and numbers in 2015 from 2014;
  • The emboldening effect of activist investors and likely growth in mid-market deals could lead to a rise in hostile bids in 2016;
  • But counsel believe that the growth in antitrust regimes in emerging markets could drive consensual deals;
  • More likely is a continuance of semi-hostile bids and, in the UK especially, pre-conditional deals.

Many of last year’s high-profile deals, such as Pfizer-Allergan, Anheuser-Busch InBev-SAB Miller were industry consolidations, and smaller firms are expected to gain confidence from those precedents and look to expand themselves, often with hostile approaches.

“We’re likely to see more mid-market deals which will drive up the volume numbers and consequently the number of hostile and semi-hostile deals in 2016,” Raj Karia, head of corporate for Norton Rose Fulbright in Europe, Middle East and Asia.

In Europe, the continued rise of US activist investor involvement in corporates is expected to promote more hostile deals too. With funds willing to buy a stake and force management to work hard for their mone,y boards are expected to push even more for aggressive growth, which typically leads to hostile approaches.

Charlie Jacobs Linklaters
Charlie Jacobs, Linklaters
But hostile M&A will be hampered by continuing competition scrutiny that many large, global deals face. New regimes in India, China, Brazil and Africa’s Comesa Competition Commission have all added complexity to M&A deals. “These new antitrust regimes are more difficult to navigate thus making hostile deals for targets with cross-border businesses more difficult to execute,” said Karia.

“If you end up with even just a small asset in China or Brazil then there may be some challenging regulatory hurdles to overcome,” he added.

Because of this, Karia believes that regulatory pre-conditional transactions, popularised by 2008’s BHP/Rio Tinto deal will also grow, offering bidders comfort against merger control obstacles. This is especially true in the case of UK bidders, bound by the Takeover Code’s insistence on completion within a prescribed timetable.

Away from hostilities, Karia also believes that share-for-share deals are also likely to rise. Most deals in 2015 were cash deals because companies are well capitalised, with cheap debt financing easily available. “But as interest rates rise, more companies will probably want to use paper. In that scenario you will tend to find more share-for-share deals, including on hostiles,” Karia.

Optimism continues to surround M&A though, with counsel confident of another strong year. “We think the momentum seen in 2015 will continue into 2016. Consolidation will continue to be a key theme in most sectors, including energy, pharmaceuticals and insurance,” said Jacobs.

See also

European boards wise up as activism spreads

Canadian Oil Sands’ poison pill pre-empts reforms

Comesa Competition Commission answers its critics