Who's Who Legal hosts a discussion between four leading merger and acquisition lawyers that appears in The International Who's Who of Merger & Acquisition Lawyers.
Sullivan & Cromwell LLP
Luthra & Luthra Law Offices
Current Nature of M&A Work
Who’s Who Legal: Has the global downturn altered the type of deals your firm is working on? Have any areas remained particularly busy?
Frank Aquila: The global downtown has affected all aspects of deals and dealmaking. Deals are taking longer to diligence and negotiate. Often with longer to close. Financing continues to be challenging for all but the largest, most well capitalised companies. While private equity buyers have been relatively quiet, they have been doing deals. Distressed M&A has continued to be active.
Juan Javier Negri: In Latin America in general, and in Argentina in particular, the global downturn has not affected the M&A market as strongly as it did elsewhere. Brazilian companies continue to expand overseas, due to the strength of the country’s economy and the easy access to credit for those wishing to acquire assets in other Latin American countries. The expansion of Brazilian interests in Argentina is worth noting. The Argentine market, in turn, has not been so much affected by the international crisis (due to the fact that Argentina is financially isolated) but by its domestic political and economic volatility. As a consequence, the only M&A players are local investors wishing to take advantage of the temporary weakness of cash-short entrepreneurs.
Mohit Saraf: There has been a marked increase in companies opting for India-bound strategic acquisitions, with acquirers wanting to exploit the cost arbitrage in India. The intense activity seen in the pharmaceutical and the IT sectors in India over the past couple of quarters is a case in point. Global companies that have weathered the recession and having cash on their balance sheets are eyeing Indian targets and the potential high-growth trajectories that these entities come with.
This stands in contrast with the trend that was observed up until early 2009 where there were a significant number of outbound M&A transactions from India into the developed markets, which was a fairly new phenomenon then. However, with global fund availability drying up, this trend has tapered off, along with inbound activity into India driven by PE funds. The only exception in relation to the general wane in outbound M&A from India seems to be in the energy and commodity sectors where there has been significant activity driven by the need to secure more resources for the economy, and the downturn has made valuations in these sectors more attractive.
David Quigg: In New Zealand the global downturn has significantly changed the M&A market. There are considerably fewer “high value” transactions. However, mid-sized deals, especially those involving trade buyers, have been steady. Additional work involving capital markets transactions (especially capital raising) and restucturing has meant we are still busy.
Looking to the Future
Who’s Who Legal: Does the Kraft/Cadbury merger herald a return of big-ticket deals? What type of deals are you expecting to see in the near future?
Juan Javier Negri: To the extent most Latin American countries seem to have avoided the worst consequences of the global downturn, it is likely that some large big-ticket transactions involving large Latin American companies may take place in the near future. The Brazilian market looks interesting due to its huge size, Chile’s reconstruction may attract the interest of some specialised investors and the Colombian market, free from political uncertainty now that Uribe is out of the presidential race, may also be viewed with interest. Oil and gas, and foodstuffs appear to be the industries most attractive to out-of-the-region investors.
David Quigg: The Kraft/Cadbury transaction is seen in New Zealand to indicate a possible pick-up in the international M&A market however it is too early to guage its impact on New Zealand’s M&A scene. Recent involvement by international private equity players in international deals may perhaps indicate that financial participants might again become more active in the M&A market.
Frank Aquila: The pipeline is becoming full and it should be a busy, although not a record, year.
Mohit Saraf: It may be a little soon to label the Kraft/Cadbury merger as the herald of big deals the world over. Rather, it is a case of industrial consolidation, driven by the need for gaining access into markets and diversify portfolio within the overarching sector in which both of these companies used to operate.
I see an increase in volumes of inbound M&A activity in India. Even though the recession itself may be in retreat, the industrial numbers and projections in the developed markets are not encouraging. In comparison, India is set to have a growth rate in the region of over 7 per cent. And in this, combined with the almost limitless potential consumer market that India has and cost-arbitrage, one finds the rationale as to why investments into assets and companies in India would seem attractive to global companies.
Sources of Finance
Who’s Who Legal: Do you foresee the return of high levels of private equity investment? What other sources of finance are likely to drive deals in the near future?
Frank Aquila: Private equity has been back since the middle of ‘09. Deals will be leveraged, but at more traditional levels. The highly leveraged transactions we saw a few years ago have not returned and are unlikely to return. Financing is available to the extent that there is sufficient equity and a solid cash stream.
Juan Javier Negri: I agree with Frank’s comment (ie, leverage will return to more traditional levels; highly leveraged transactions are unlikely to return). However, in certain Latin American countries such as Brazil there are active state policies to assist local companies in the acquisition of assets in foreign jurisdictions.
Mohit Saraf: Even though private equity activity has been subdued in the recent months, many of the private equity firms continue to hold substantial cash in their portfolio which will have to be deployed in the near future. Hence, I do see the return of high levels of private equity investments in the coming months. However, unlike the yesteryears, I expect to see a lot more prudence in this area with the risk appetite of these PE players substantially reduced by the recession. One of the ways this is going to manifest itself is that we are going to see a lot less complicated and more defensive financing structures. I am in agreement with the comments above that we are unlikely to see highly leveraged acquisitions or transactions involving high-value short-term loans in the near future.
Who’s Who Legal: Which countries or regions do you expect to be busy in the coming years?
Frank Aquila: Cross-border activity will continue to increase, but it will be truly international. Buyers will be as likely to be from Asia and Latin America as they are from North America and Western Europe. In fact, Asia and Latin America are likely to be the most active M&A markets in the next few years.
David Quigg: I agree with Frank. In New Zealand and Australia, Asian buyers are more evident and this phenomenon is likely to grow.
Juan Javier Negri: I agree with both previous comments. It appears, however, that while out-of-the-region purchasers are likely to appear throughout Latin America, they will have to compete with a strong Latin American player: Brazil. Countries such as Venezuela, Ecuador, Bolivia and Argentina are likely to be frowned upon as possible targets by out-of-the-region investors.
Mohit Saraf: I expect to see a lot of dealmaking in the Indian markets, both in terms of inbound investments as well as outbound.
With the need to fuel an economy developing at a fast pace and wisened by the heavy price fluctuations witnessed over the past decade, Indian companies have been scouting and investing into energy and commodity resources in the emerging markets especially in countries in south east Asia, Latin America and sub-Saharan Africa. These countries are more attractive than the developed markets for resources, in terms of valuations.
The investments into India, on the other hand, will emanate substantially from the developed markets where conservative companies with robust balance sheets will want to capitalise on the Indian growth story and consolidate in technology and intellectual-property intensive sectors such as pharmaceuticals and information technology.