The global M&A market has experienced a rollercoaster of activity over the past few years. Commentators hailed 2015 as the year of the mega-deal, but 2016 – perhaps due to the extent of political uncertainty – saw a slowdown around the time of the Brexit vote. However, the European market has since picked up: although M&A values dropped globally in 2017, in Europe the numbers have risen by 14 per cent since 2016, according to Mergermarket.
Lawyers are particularly noticing a rise in strategic transactional activity, most notably from the US and the Far East. During our research, lawyers highlighted that US and Asian clients are looking increasingly to take stakes in European companies and are seeking opportunities in the market, especially when it comes to publicly listed targets. This growth in activity not only comes off the back of a weakened sterling, but also stems from increasing uncertainty from clients about where to invest – will they need to invest in Europe in order to maintain a foothold there? Europe also bucked the trend in 2017 when it came to mega-deals (deal value over US$10 billion), the number of which dropped globally, but remained a prominent feature of the region’s M&A market and, according to Mergermarket, posted its highest figure since 2008.
Although Europe has seen an uptick, the US experienced a striking decrease in M&A activity in 2017, down by 14.9 per cent by deal value. In 2016, one of the largest proposed M&A deals of the year collapsed. The merger of pharmaceutical companies Pfizer and Ireland-based Allergen was aborted due to new rules introduced by the US Treasury to combat tax inversion deals. Some sources indicated that the slowdown across the US is in part driven by post-tax reform uncertainty; however, others were quick to highlight that the past year has seen a change in the type of players investing in the US market.
In October 2017 the Economist Intelligence Unit (EIU) produced a report sponsored by Herbert Smith Freehills. Conducted with over 200 senior M&A practitioners around the world, it explored the many factors currently affecting the nature and rate of global M&A activity. When asked about the impact of the Trump administration on M&A over the next one to two years, 42 per cent of respondents selected “negative” (compared to 20 per cent saying “positive” and 38 per cent “no impact”). Indeed, the impact of Trump’s national interest policy has made headlines over the past year, most notably in September 2017 when he blocked Canyon Bridge Capital Partners, a Chinese-backed private equity firm, from acquiring US chipmaker Lattice Semiconductor Corp. Trump’s protectionist outlook may not yet be directly impacting M&A on a large scale; however, it is certainly an important factor that those looking to conduct transactions in the US must now take into account when assessing the situation.
Chinese outbound M&A has also changed in nature over the past year. There was a tremendous uptick in activity from Chinese companies in 2016, reaching a high of US$170.1 billion and exceeding inbound investment, according to the EIU’s report. However, 2017 saw the introduction of measures to stem capital outflows, restricting Chinese entities’ involvement in global M&A. These measures seek to limit not only the amount of outbound dealmaking but also the places where it is occurring, trying instead to encourage investments that align with the country’s Belt and Road Initiative. On the whole, sources note that Chinese companies are still engaging in outbound investment, but their approach has become much more selective.
The past year has seen a particular increase in M&A activity in the technology space, most notably in relation to artificial intelligence (AI). This comes as no surprise considering data’s growing role as one of the most valuable resources in the global market, with many considering it “the new oil”. Mergermarket’s M&A Report FY 2017 indicates that although M&A overall in the US dropped, the computer software market bucked the trend, with 771 related transactions throughout the year. However, it is the extent of and the speed with which such acquisitions are taking place that is particularly notable. Many sources we spoke to pinned the driving force of this trend down to the growing role of private equity in the M&A space.
The growth of private equity players in M&A has become a major trend in the past few years with sources highlighting it as one of the key drivers of activity. They note that they are still seeing private equity auction processes with players keen not to miss out on significant deals, thus paying higher prices for quality assets. Indeed, they also underline the intensifying competition between private equity entities and large strategics, with one lawyer noting, “It’s extremely interesting to see the strength of their appetites.” For private equity players, deal sizes have been getting bigger and the industry is maturing, thus paving the way for what sources hope will be a more diverse and competitive M&A landscape over the coming years.
The past few years have seen a growing move within companies towards increased independence in the boardroom with “dissentient shareholder action”. The rise of shareholder activism in recent years, which one lawyer describes as “the single greatest trend in the M&A market”, has caused a shift in the nature of deals. Not only are transactions now more contentious, but the dealmaking process has adapted. Lawyers highlighted that before, there were only really two seats at the table in M&A transactions: the buyer and the seller. Now, the situation has become “much more fluid, more dynamic and involves many more interested parties”. Shareholders are becoming a major factor in M&A, with clients now being advised on how to get the deal done while paying great attention to who their shareholders are and their stance on the deal.
Shareholder activism has evolved, bringing with it the rise of activist funds in the space. In numerous cases in recent years, many deals have proceeded in part as a result of activists, despite resistance from management. Jana Partners’ interaction with Whole Foods Market, and more recently Third Point’s work with Nestlé, are just two examples of high-profile activist funds engaging with major corporates in a bid to encourage M&A activity and capitalise on their own shares in the companies. In the case of the former deal, Jana Partners made roughly US$300 million profit from its investment. The high returns for activist funds make this an incredibly attractive growth area, and this trend is unlikely to abate any time soon. As sources note, “Large shareholders are now instrumental in pushing companies towards M&A activity.”
The development of additional players and interested parties in M&A transactions has created another dimension for lawyers whose advice must now encompass a range of ever-increasing elements. The M&A landscape has changed dramatically in recent years, most notably in relation to those factors driving activity. As one lawyer put it, “M&A is a different animal to what it was 10 years ago.”
An undisputed global trend over the past few years has been the rise in cost-consciousness on the part of clients across numerous industry sectors and practice areas. The situation is no different for those practising in M&A and governance law. Indeed, lawyers are currently witnessing “incredible fee pressure”, with clients now requesting alternative fee arrangements and structures such as capped fees. Many consider this change to have opened up the market to a more diverse set of players, noting that it has shifted and intensified the way in which firms now compete. As was the trend last year, the introduction of AI systems is one way in which many firms are looking to bolster their offering and respond to the need to minimise costs and increase efficiency, particularly when it comes to due diligence work. Despite these developments in the legal landscape, however, lawyers remain positive about the amount and scale of corporate work that will be available in the coming years.
The past year has witnessed many changes across the M&A and corporate governance spaces, including diverse levels of global transactional activity, the growth of shareholder activism and increased investment in the technology space. As global economies around the world continue to recover and the number of players involved in major cross-border transactions grows, the M&A and corporate landscape over the next few years seems set to be as busy and dynamic as ever.