This time last year, a collective sigh of relief from City dealmakers was reverberating around the Square Mile as the M&A market regained momentum despite a backdrop of economic and political uncertainty. Since then, deal counsel have barely paused for breath, with many juggling multiple deals well into the parts of August in which even the most committed deal junkie would expect to be pretending not to check work emails on a sun lounger.
Such boom-time dynamics are borne out by the latest Mergermarket figures for H1 2018, which saw announced global M&A deals hit $1.94trn, its highest value since the financial crisis.
Freshfields Bruckhaus Deringer partner Charles Hayes notes: ‘Corporates have strong cash reserves; there is still a lot of cheap debt. With some market participants talking about us being at or near the peak, buyers are still keen to deploy capital for the right assets and sellers are looking to take advantage of favourable market conditions.’
Deals valued at $10bn and above kept on coming, with 26 ‘mega-deals’ announced in H1 2018 accounting for a 28.3% increase in value compared with the first half of last year. European deal activity has been similarly robust, with some $600.9bn of deals with European assets in H1 2018 according to Mergermarket. That value is 26% higher than the same period in 2017, and significantly up on comparable figures seen during the first half of 2016 and 2015. On this course, this year could see the value of European M&A cracking $1trn for the first time since 2008.
Despite – or perhaps because of – Brexit uncertainty, the UK has been Europe’s standout market, both by number of deals and combined value, a fact many attribute to buyers targeting the pre-exit window of relative calm while foreign bidders take advantage of a battered sterling. The UK garnered 629 ranked transactions worth $147.4bn in H1 2018, more than 50% higher than the equivalent period in the first half of 2017.
Of the top five global deals by value, three were in Europe, including Japanese giant Takeda Pharmaceutical Company’s $79.7bn bid for Irish drug-maker Shire, its London Stock Exchange-listed rival, by some distance this year’s largest offer by market cap (generating lead roles for Slaughter and May, Linklaters and Davis Polk & Wardwell).
Also boosting deal values were E.ON’s $46.6bn bid for innogy and the much-publicised battle for Sky, which saw Comcast make a $40.7bn bid in February against a rival offer from Rupert Murdoch-owned 21st Century Fox. Comcast instructed Davis Polk and Freshfields, while Linklaters acted for E.ON against Hengeler Mueller for innogy.
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Convergence and consolidation have, as expected, been major forces in US and European M&A. Though the two forces are becoming difficult to distinguish as old-economy companies increasingly aim to bring in new-economy tech, and associated talent and business models, via acquisitions.
As such, the emergence of disruptors like Netflix and Amazon continues to impact media M&A and drive global values in the sector. Tech accounted for $178.5bn of deals in H1 2018, up 59.7% on H1 2018 as traditional players like Comcast and Disney look to protect market share.
The surge in big-ticket M&A is also driving an increase in subsequent disposals as competition authorities push for asset sales. Sky News would not have been on the block if Rupert Murdoch’s 21st Century Fox were not required to sell it to pursue its bid for Sky.
The surge in tech bids shows no sign of abating, including high-profile deals like this year’s $816m float of cyber security company Avast Software, which generated a headline-grabbing role for White & Case, opposite underwriter counsel Latham & Watkins.
The return of hungry buyers has also seen a rise in unsolicited bids – always the most prized mandates for M&A advisers looking to hone tactical skills. Slaughters head of corporate Andy Ryde comments: ‘Shire/Takeda is an enormous deal that started off as an unsolicited bid and later became recommended. Melrose’s takeover of GKN remained hostile to the end. There seems more of a willingness to attempt hostile deals in the knowledge they might not happen. Bidders can take that risk and it doesn’t necessarily mean the end of the road for the CEO.’ Adds Ashurst corporate partner Tom Mercer: ‘Target boards are less confident and bidders know that. A lot more companies are dusting down their defence books.’
More conventional consolidation was also notable as companies look to scale as a bulwark to volatile trading conditions. Several advisers pointed to the $10bn proposed merger of domestic supermarket giants Asda and Sainsbury’s as an example of an evolving market as big brands chase scale to remain competitive against low-cost retailers. The bid saw Linklaters mobilise for Sainsbury’s opposite Slaughters for the vendor.
Slaughters’ Victoria MacDuff notes: ‘UK domestic players could continue to consolidate to protect businesses post-Brexit. Some consolidation may be defensive to protect their market share. Remedy divestments caused by mergers are not a new feature, but we might see more of that as sectors consolidate.’
Richard Browne, M&A partner at Allen & Overy (A&O), agrees. ‘What’s going on in supermarkets is interesting. The fact that people are able to do those deals is a sign of how markets have developed. After the Morrisons/Safeway deal [announced in 2003] people thought that no-one else could do a deal like that. But low-cost retailers like Lidl and Aldi, as well as delivery houses like Ocado, have brought interesting developments and have changed the market.’
Browne also points to Virgin Money’s £1.7bn sale – generating roles for A&O, Slaughters and Clifford Chance (CC) – as indicative of bank M&A moving back on the agenda.
Still, while the marquee deals grab headlines, City veterans note that underlying activity levels are more subdued. CC head of corporate Guy Norman observes: ‘The press is reporting an M&A bonanza, but what we are seeing is a small number of very large transactions driving up the deal value but a declining M&A volume.’
‘There seems more willingness to do hostile deals. Bidders can take that risk and it’s not necessarily the end of the road for the CEO.’
Andy Ryde, Slaughter and May
European deal count for the first half of the year is at its lowest level in five years. Year-to-date figures provided by Mergermarket show the 3,199 deals announced in Europe in H1 2018 were 17% fewer than the 3,856 deals announced in H1 2017 and 15% fewer than for H1 2016. It is the lowest count since H1 2013, when 2,808 transactions were announced.
And in the UK, the government’s failure to make meaningful headway in Brexit negotiations is more likely to weigh on commercial sentiment in the crucial post-summer period.
Says Norman: ‘There is clearly some nervousness around Brexit, hence the drop in volumes. We still see opportunities, but in the last few weeks [since mid-July], the greater potential of a no-deal Brexit has rattled people even more than in the last two years of negotiations.’
Transatlantic tribulations
Mergermarket data points to growing barriers to cross-border transactions amid trade tensions and protectionist rhetoric, with cross-border M&A relatively subdued in favour of large, domestic deals. The impact of the Trump administration’s scrutiny of deals with China as trade tensions escalated into 2018 has been clear, with Chinese bids for US companies nosediving 94.3% by value in H1 2018 compared with the 2016 peak, while deal count almost halved.
As Ryde notes: ‘The Trump administration has been turning down almost every Chinese inbound deal. This protectionist stance is a negative factor for global M&A. The Broadcom/Qualcomm merger did not have a Chinese party, but there is little doubt that it was blocked by the US over fears that it would allow the Chinese to become a rising force in the sector. That was one of several deals being blocked and there are many more that are not even attempted.’
John Adebiyi, Skadden, Arps, Slate, Meagher & Flom partner, foresees similar complications as the UK tries to define its competition stance post-Brexit. ‘The UK government’s July 2018 white paper on national security and foreign investment makes it pretty clear what the direction of travel is going to be in the UK.’
If a more interventionist investment policy is moving from the US to Europe, the role of activist shareholders in M&A is following a similar trajectory. Guy Potel, White & Case corporate partner, says: ‘Event-driven activism has been bubbling for some time now and has come of age. Activists, however, don’t always operate alone. Often they will act with the support of, or even at the request of, long-only funds. When they park their tanks on your lawn, it can represent a carefully-analysed strategic challenge backed by a significant part of the register. Their demands cannot be dismissed lightly. Boards need to be on their toes. These strategies are sometimes seen as driving shareholder value through sharpening management’s focus on value-accretive actions. The question, however, is often whether the value being created is short or long term.’
Norman points out that fewer deals have been aborted in recent months, a testament to a heightened level of consideration. ‘The trend might mean that buyers are a lot more focused on potential challenges in their deals, for example antitrust or political issues, and are tackling these challenges up front. If the challenges appear insurmountable, the deals might not launch at all.’
If there is one sector that appears immune to such external disruptions, it is private equity, which continued its boom through the year. Private equity in Europe posted its highest-valued post-crisis six-month run this year, with an H1 figure of $80.7bn from 635 ranked deals (against 717 deals valued at $72.8bn in the first half of 2017). European buyout activity is set to top $100bn for the fifth successive year.
Nevertheless, beyond a promising autumn period, the 2019 outlook for the wider M&A sector remains cloudy; after all, an environment that seems a little too good to be true makes seasoned M&A hands wary. While the current strength of economies in the US and mainland Europe settle nerves, it is hard to get complacent when newspapers this summer report on potential charges against the leader of the free world after Donald Trump’s former lawyer Michael Cohen in August admitted to making illegal campaign payments related to the 2016 presidential election. Potel, for one, is trying to stay upbeat: ‘When will the music stop? Without tempting fate, I would say benign conditions could yet endure.’
nathalie.tidman@legalease.co.uk
Top ten firms in Europe by M&A value
| Ranking | H1 2018 | ||
|---|---|---|---|
| H1 2018 | Firm | Value | Deal count |
| 1 | Freshfields Bruckhaus Deringer | $246,538m | 89 |
| 2 | Linklaters | $242,853m | 77 |
| 3 | Davis Polk & Wardwell | $185,492m | 22 |
| 4 | Slaughter and May | $162,915m | 29 |
| 5 | Herbert Smith Freehills | $131,233m | 43 |
| 6 | Clifford Chance | $124,994m | 83 |
| 7 | Allen & Overy | $120,362m | 101 |
| 8 | Latham & Watkins | $111,342m | 68 |
| 9 | Ashurst | $89,539m | 24 |
| 10 | Ogier | $86,019m | 3 |
Top ten firms in Europe by deal count
| Ranking | H1 2018 | ||
|---|---|---|---|
| H1 2018 | Firm | Value | Deal count |
| 1 | DLA Piper | $58,718m | 143 |
| 2 | CMS | $32,033m | 103 |
| 3 | Allen & Overy | $120,362m | 101 |
| 4 | Baker McKenzie | $37,581m | 95 |
| 5 | Freshfields Bruckhaus Deringer | $246,538m | 89 |
| 6 | Clifford Chance | $124,994m | 83 |
| 7 | Linklaters | $242,853m | 77 |
| 8 | Latham & Watkins | $111,342m | 68 |
| 9 | Kirkland & Ellis | $72,274m | 67 |
| 10 | White & Case | $30,717m | 67 |
Source: Mergermarket