Trends in the Corporate Market 2016

In 2015, mega deals were back on the table as companies gained in confidence due to the improving economy. In the first half of 2015 alone, 28 deals valued at more than $10 billion took place – together amounting to $678.1 billion, the highest value and deal count for any H1 period on Mergermarket’s record, and a mammoth 87.2 per cent leap in value with 12 more announcements compared to H1 2014. Overall, 2015 saw almost $4.9 trillion worth of deals according to research by McKinsey & Company: a 37 per cent rise in deal value from 2014.

merger

A bumper year for M&A

Among the mega deals, highlights include Shell’s $81.5 billion bid for BG Group, the largest takeover in the oil and gas sector for 17 years and the largest deal between two British companies ever on record. Winning key roles on the deal were Slaughter and May, who advised Shell (with support from Cravath Swaine & Moore on US law and De Brauw Blackstone Westbroek on Dutch aspects) and Freshfields Bruckhaus Deringer, who advised BG.

Two further record-breaking deals were announced. The first of these was the merger agreed upon by Pfizer and Allergan in November 2015, in a record $160 billion deal, to create the world’s biggest drug maker. The transaction is structured so that Dublin-based Allergan is technically buying its much larger partner, which allows for the company to locate its tax address in Ireland for tax purposes, while keeping its operational headquarters in New York. (It is important to note that this deal was abandoned in April 2016 amid plans to change US tax laws.) Second to be announced was Anheuser-Busch InBev’s $117 billion acquisition of SABMiller, a deal that would create a brewing company that would sell roughly one in three beers worldwide, has also yet to close. The Justice Department issued a second request for information in January, and the deal is expected to close in the second half of 2016.

So why all the activity?

According to Skadden Arps Slate Meagher & Flom partner Steve Arcano, in a recent discussion titled Insights Conversations: M&A: “The environment continues as of year-end to be conducive to M&A activity, particularly in the US… Corporate balance sheets are in good shape, equity markets have been relatively stable for most of the year, and access to debt financing has been generally available on attractive terms”.

Arcano is well placed to comment; according to Mergermarket’s legal adviser league tables, Skadden took first place in the first half of 2015 by deal value, followed by Latham & Watkins and Sullivan & Cromwell. Freshfields was the only magic circle firm to make an appearance in the top 10 coming in at number four.

However, when comparing the legal advisers by the number of deals they advised on during H1 2015, it’s a very different story. DLA Piper comes top, followed by Jones Day, Kirkland & Ellis, Latham & Watkins and Skadden Arps Slate Meagher & Flom. Freshfields falls to number 12, but competitor magic circle firms Allen & Overy, Linklaters and Clifford Chance come in at seven, eight and nine respectively. 

It comes as no surprise that many of the firms advising on the global deals are themselves international firms with a network of offices throughout Asia, Europe, North America and the Middle East. Operating across an international platform ensures clients’ matters can be handled in-house in each jurisdiction and it’s a popular firm strategy among those vying to be in the global elite.

Despite this, many national firms also perform at the top end of the market with Wachtell Lipton Rosen & Katz in New York standing out as an example. The firm has a pre-eminent reputation and is firmly one of the elite law firms for M&A transactions. Firms with a national footprint work closely with others worldwide, often allowing the client to dictate which firms are used in which jurisdiction or recommending firms they have “best friend” relationships with.

The graph below indicates the leading firms by the number of lawyers listed in the M&A section of this guide by geographical region. While all but two of these firms are truly international, it is clear their more highly regarded practitioners in the market are still located mostly throughout Europe, North America and Asia-Pacific. One possible explanation is that lawyers in the new offices or regions might be less well known in the international market and as such receive a lower level of feedback than their peers located in more markets. Furthermore, the larger offices of firms tend to be in the more established jurisdictions and legal centres. It will be interesting to see whether lawyers in the more developing regions are recommended to the guide as the offices and markets mature. 

Activist campaigns grow in number

Lawyers reported concern over activist shareholders which are becoming a growing problem for CEOs. While not a new phenomenon, in the past many companies dealt with activists by refusing to meet or speak with them. Today, activists are buying into companies specifically to engineer shake-ups and appear to have no reservation when it comes to denigrating companies in public. The total amount of money invested in these hedge funds is estimated at $120 billion. Moreover, activist campaigns outside of the US have increased in number and proportion of the total of outstanding campaigns over the last five years. The UK currently accounts for nearly two-thirds of those conducted in Europe.

Activist tactics are seen as damaging and boards are beginning to call in lawyers to address issues even before the agitation begins. Data from Activist Insight show that companies have settled within 56 days on average after an activist demands board representation, compared with 67 days last year and 74 days in 2013. This would appear to support claims that companies are deciding to compromise rather than mount aggressive defences and have been putting activists on the board early to avoid reputational damages risked in a potential proxy fight.

The goals of these investors often encourage one of four types of change according to PwC’s 2015 report Shareholder Activism:

  • a change to the board’s governance policies or practices, or a change to the board composition;
  • a change to the company’s executive compensation plans;
  • a change to the company’s oversight of certain functions; and
  • a change to the company’s behaviour as a corporate citizen.

These called-upon activities can often lead to M&A activity. For example, Rolls-Royce is currently under pressure from US-based activist fund ValueAct which now has a 10 per cent holding in the company, making it Rolls-Royce’s biggest investor. The activist investor is reportedly calling for the sale of its marine business and has asked for a seat on the board, a request which has been rejected. Swiss Engineering group ABB’s second largest investor is activist fund Cevian Capital who are requiring ABB to streamline business units to boost efficiency and agility. Chief executive Ulrich Spiesshofer has hinted the company might sell off some operations.  

According to those we spoke to, shareholder activism is expected to continue into 2016 and remain a high-level concern for CEOs as they look at ways in which to prepare and respond to activist investors while also engaging with the company’s key shareholders to tell the company’s story.

Crystal gazing – what’s in the pipeline for 2016?

What does the deal pipeline look like for 2016? Well, so far, so good. Despite a few early hurdles caused by volatility in the Chinese market in January, the lineup of deals for the lawyers we spoke to looks promising. However, as always uncertainties in the global economy and equity markets, as well as other factors could dampen activity levels.

On the top of lawyers list of “causes for concern” are rising interest rates, China’s economic slowdown, and the UK’s BREXIT referendum.

Despite these possible hurdles, lawyers are cautiously optimistic that strategic corporate transactions should continue, in large part because the need for growth, consolidation and a global footprint aren’t going away. Moreover, many of the bigger deals in 2015 were stock-for-stock transactions so financing considerations were not at the forefront. Also, investment grade and high-yield issuers have continued to have access to the credit markets at favourable pricing.

However certain types of transactions will remain more difficult to get done such as leveraged and private equity transactions. If interest rates go up, fixed charges become higher which causes concern for lenders who are cautious about overleveraging companies; meanwhile private equity will have to pay more for the loans underlying acquisitions, and so will want to pay less for their acquisitions. This could cause private equity firms to drop out of the market for a short time until a new balance is reached. Finding financing on acceptable terms for lower-rated issuers is also becoming more difficult.

So despite not all market participants being active, and Europe still lagging behind the US in its recovery and share of deals, 2016 is expected to be another good year for M&A.   

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