In 2018, global M&A volumes reached their highest point since the financial crisis and, despite a noted slow down in pace during Q4, deal activity recorded near peak levels in many markets – a positive and unanticipated result given the ongoing political and economic uncertainties. The key drivers in 2018 were corporates with cash seeking rationalisation and growth, private equity with dry powder to invest and cheap debt. These drivers prevailed over the headwinds of political and economic uncertainty, populist protectionist trends leading to greater political interest in deals and high value expectations. Across all of the markets that we cover we identified a number of common, significant factors for dealmakers in 2018. Central to these was the possibility of the disruptive influence of third parties in the M&A process. In this report we focus on five M&A disruptors that we expect to see more of in 2019: • Politicians armed with new foreign direct investment powers continue to assert themselves, with an increasing tendency towards protectionism even where the national security concern is not obvious. • Anti-trust regulators have greater powers and are growing in confidence – their willingness to take bold and sometimes unpredictable decisions can derail, or at least delay, the transaction. • Investors are more willing than ever to assert their views and are not afraid to interfere with an M&A process or agitate to create one. • Talent is an increasingly vital asset on an acquisition and, on technology-related acquisitions, the retention of individuals behind the technology can be key to a successful deal. • Interlopers are taking advantage of longer deal timetables to disrupt M&A transactions, either by making a competing offer for the target or by targeting the buyer. We also report on the views of our colleagues on regional activity in 2018 and the outlook for 2019.
Politicians — the global trend of political intervention
The backdrop to this shift in approach was a rise in protectionism on a global scale, with governments keener than ever to preserve their own country’s position in increasingly global value chains, as well as protecting their own national security. Much of the global focus has been on the evolution of the Committee for Foreign Investment in the United States, but developments in Europe, such as the UK's proposals for a distinct national security regime and the tightening of Germany's foreign direct investment (FDI) controls are equally relevant. For 2019, those involved in cross-border M&A need to be aware that the concept of national security will be extended beyond defence-related activities to include critical infrastructure, communications assets and advanced technology. Although the most high-profile prohibition decisions to date have tended to relate to acquisitions by Chinese companies, most FDI regimes apply to any foreign buyer if the deal could result in a threat to national security or, in some regimes, involve "national champion" companies or sectors of "strategic importance". FDI regimes tend to be less transparent than the merger control process, with some countries choosing not to publish any decisions, or only very brief details. It is also apparent that FDI authorities are starting to liaise with each other more behind the scenes, so adopting a global (and consistent) approach to FDI filings will be key in 2019. In some cases, it will be advisable for dealmakers to consider whether any remedies could be offered up in order to ease the FDI process. FDI approval is inherently political, so understanding the process and communicating effectively with stakeholders is critical.
Anti-trust regulators — armed and ready to intervene
In 2018, we saw far more active enforcement, with many regulators using market intelligence and international co-operation to identify unnotified deals. Filings can now be triggered even where the target has limited or no connection to the jurisdiction, and a corporate culture of full global compliance means that deal-doers need to consider early on where filings need to be made and factor these into the deal timetable. Timetables for review vary widely and can be very lengthy in some jurisdictions, even for a first phase review. We are also seeing regulators intervening more in deals to extract remedies from parties (and, in the worst cases, to block deals where no suitable remedies can be agreed). There is a growing trend for regulators to request many more internal documents from deal parties in these cases. We have also seen regulators focusing on the impact of a deal on innovation/R&D competition, in addition to the impact on existing market competition. As well as issuing more fines for failure to notify and the provision of inaccurate information in merger filings, regulators have also started to focus more on verifying that the buyer does not start to exercise control over the target assets while awaiting the outcome of the merger review, a practice known as gun-jumping. This makes it more important than ever in 2019 for market participants to identify any potential merger control issues up front and plan carefully how to deal with them on a global basis. Key to this process will be anticipating how competitors could react – complaints will inevitably mean a closer review.
Investors — shareholders as key players
Shareholders' influence on M&A activity has been on the rise for some time but their increasing willingness to take a stance on even the largest transactions means that boards must, more than ever, consider the views of their investors when contemplating M&A activity. In part, the influence of shareholders on M&A is due to activist investors, who may agitate for a board to undertake a transaction (for example Whitbread's decision to demerge Costa Coffee and Unilever's disposal of its spreads business), or intervene in a transaction that has been announced with the aim of forcing a buyer to pay a higher price for a target (seen for example on the takeover of SAB Miller by AB InBev), a practice known as bumpitrage. The refusal simply to follow a board's recommendation is not confined to activist shareholders. In 2018, we saw disgruntled UK investors force the board of Unilever to drop proposals to simplify its corporate structure and move its headquarters to the Netherlands. We have also seen parties forced to renegotiate the terms of a transaction requiring shareholder approval in response to the views of major shareholders. Boards contemplating M&A in 2019 should therefore sound out key investors pre-announcement where possible, taking care to do so within the confines of any legal and regulatory restrictions. However, even when they do that, shareholders' initial views may change, a risk that is increased where there is a protracted deal timetable as a result of anti-trust or other clearance procedures. Listed companies and their M&A counterparts will therefore be focused on the steps they can take to protect a deal, such as securing shareholder approval early in the transaction timetable, agreeing a break fee or obtaining binding commitments from shareholders to vote in favour of a transaction.
Talent — retaining the key individuals
The legal challenges around acquiring innovative technology, such as intellectual property ownership and cybersecurity, are well known to dealmakers. But buyers are also recognising the crucial role that the individuals behind the technology play on a successful deal. Securing the buy-in of the innovators or those who understand the technology became an essential part of the M&A process in 2018 – from deal origination through to integration. In the year ahead, it will be important to identify at an early stage any key individuals needed for the transition period and for the longer term. Traditional deal mechanisms to incentivise management and key employees, including earn outs and bonus structures, should be discussed early on. These mechanisms can be complex and heavily negotiated but the buyer should be less concerned about obtaining "buyer-friendly" arrangements and more focused on whether the incentive arrangements operate in a way that genuinely motivates the individuals concerned and aligns their interests with the company’s operational targets and objectives. Corporates are showing more willingness to learn from private equity management incentive plan techniques, and more creativity in crafting bespoke incentive solutions within a corporate framework. Cultural differences can of course become a major obstacle to any successful M&A integration process but they are particularly pertinent in tech acquisitions where a buyer's more “corporate” culture can stifle a young technology business. As corporates seek to collaborate with such individuals, full acquisition is not always the preferred solution. The rise of corporate venture capital similarly demonstrates the appetite of corporates for alternative ways to partner on opportunities in new technologies and new markets.