European M&A forum: key takeaways

Author: Amélie Labbé | Published: 28 Sep 2017
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Navigating private M&A transactions

  • In spite of Brexit, elections in France and Germany, as well as the geo-political standoff between North Kore and the US, markets are still open for business albeit with a slight change in the mix of M&A towards more inward deals (coming into the EU);
  • There have been strong deal volumes in the insurance space (20% up on last year), and also the financial services sector as companies have to shrink the size of their balance sheet by divesting/selling assets. In the energy sector, which is dependent on government policy, it’s a different matter;
  • Companies in the financial services sector are expected to parcel up and dispose of the smaller parts of their businesses because of regulatory requirements: "We are worried about passporting rights like all banks so there’s a lot of uncertainty," said one panellist.
  • Brexit has caused UK clients to look into ringencing risk: by introducing Brexit break clauses and by acquiring EU businesses to secure passporting rights. EU and US companies are also taking advantage of the weak pound to buy UK counterparts, to have a presence.
  • There used to be an assumption that locked box mechanisms were primarily preferred by sellers, but now buyers are asking for it as it creates a certainty of price before the deal is announced (70% of deals in the EU ate believed to include this provision). The seller doesn’t want to be left with legacy disputes.

Financial services M&A

  • There is no unified M&A strategy across the banking sector: some are in disposal mode to become leaner, some have other priorities than acquiring a company. The key question is whether M&A is the best form to create innovation.
  • Some banks prefer making a minority investment: "If we do M&A, we worry we may stifle the innovation in the target," said one panellist. There are also legacy issues and systems, technical challenges and regulatory issues to take into account.
  • Asking an unregulated company to solve your own regulatory issues is an interesting concept. The problem is compliance isn’t a revenue generating area so it’s hard to tell to shareholders.
  • Potential M&A activity is expected with big banks wanting to be first movers in implementing the second Payment Services Directive, the Directive on Security of Network and Information Systems, and the General Data Protection Regulation.


Focus session: Merger control: Steering a safe course

  • The increasing scale of M&A activity, higher volumes of deals and more cross-border deals all contribute to pushing up merger control activity. Increasing market concentration is also a factor.  
  • Competition agencies rely on a static definition of the market structure in terms of market share to make their decisions - they discount tech disruptions, new entrants/entry barriers and transaction synergies (these criteria don’t play strongly in merger processes).
  • The intensity and basis of an authority’s intervention can change: loss of innovation/conglomerate theory/access to data are distinct from the competition argument but which come into play in regulatory decisions.
  • Merger control is affected by how the transaction is structured but it shouldn’t be this way: joint ventures attract more difficult proceedings; consolidation of a market where there are only a handful of companies is difficult too, so the 'do it first and do it big’ mantra applies. Mergers in neighbouring sectors are often easier to get approval for.
  • Advice:

1)    Develop a merger clearance narrative early – why do customers benefit from merger?

2)    Be realistic about time and about lack of control when it comes to dealing with regulators.

3)    Plan for implementation but don’t implement the plan – be flexible.


Focus session: Shareholder activism

  • Activism in the EU has grown its own roots, with EU home-grown activists. There has also been a spillover from the US in terms of more funds flowing into activist structures.
  • There were 342 global campaigns outside the US in past year (compared to 50 in 2010), with a focus on strategic and operational campaigns now – activism isn’t just about board composition anymore.
  • Institutional investors are feeling the pressure to become more active and in parallel, companies are engaging shareholders more. 'Engaged shareholder’ is also a term that is increasingly being used.
  • FTSE 350 companies have to put remuneration policy up for review, which encourages more disclosure and transparency.
  • Taking the Market Abuse Regulation is also important here: when do companies need to make an announcement of a takeover approach? It’s a case-by-case situation and depends on the size of company, shareholder base etc. However, corporates should err on side of caution.

Private equity exits

  • IPO is the preferred goal as there is flexibility as to when a full exit can take place and it usually reaps the highest return, but is not the most common method – only 17% of European PE divestments were via IPO in 2016.
  • They have their downsides too – there is a lot of uncertainty, they can be time-consuming and subject to heavy disclosure requirements.
  • Secondary buyouts via trade sale have been more common.
  • Reverse mergers with a listed company are also popular as they afford the same exit result without the IPO process.
  • The use of special purpose acquisition companies for reverse mergers became common in the US and are now being used in Europe.
  • They help ease a lot of the uncertainty surrounding an IPO with the target still becoming public by the end and are often seen as a fast-track process.

Chinese investment

  • As there are multiple parties including Mofcom, the NDRC and SAFE and no direct regulations governing Chinese M&A, parties should consider how the different rules all fit together.
  • Since December 2016 there has been a focus on acquisitions of $10 billion or more, acquisitions of under 10% of an overseas listed company, and transactions over $1 billion that are outside the PRC investors’ core business, for instance, a property investment by a tech company.
  • This increased scrutiny is an attempt to limit high levels of capital outflows that have become a problem in China.
  • Encouraged investments include Belt and Road infrastructure projects, agriculture, oil and gas – all things that will benefit China in some way.
  • This all has a big impact on deal timetables – it can take over two months just to complete the submission package for filing, then 40 business days with the NDRC and 30 business days with Mofcom once the filing has been accepted.
  • Reverse break fees, generally not popular with Chinese buyers but increasingly demanded, must be kept offshore ahead of time.

Bridging the value gap

  • "An earnout often converts today’s disagreement over price into tomorrow’s litigation over outcome" is a harsh but broadly fair representation of how earnouts work in practice.
  • They can be difficult to negotiate and usually result in extensive post-closing monitoring and reporting.
  • A common earnout-related dispute is either side arguing that the other has made it impossible for post-acquisition targets to be met, for instance changes to workforce, maintaining relationships.
  • Parties should on the whole try to avoid earnouts; if that’s not possible then approach them expecting problems and if none arise, be pleasantly surprised.
  • For a successful earnout, take detailed instructions from the business, keep it simple and ask accountants and litigators to review the documentation. A lot of fallouts arise from accounting problems.