The International Who’s Who of Mergers & Acquisitions Lawyers has brought together four of the leading practitioners in the world to discuss the key issues facing lawyers today. In this feature Adam Green of Mannheimer Swartling, Katarína Čechová of Čechová & Partners, Ira Andamara Eddymurthy of Soewito Suhardiman Eddymurthy Kardono and Yang Wantao of Zhong Lun address questions on the current state of the M&A market in their jurisdictions and point to future developments.
LEVELS OF ACTIVITY
Who’s Who Legal: What kind of deals has your firm been working on, and which industries are clients investing in?
Adam Green: “The new normal”, “a bumpy ride”, “erratic”, “manic-depressive”: call it what you will, 2012 was a year of distinct ups and downs for M&A in the Nordic region. The first half felt like we were carrying momentum from a surprisingly robust 2011, but the market seemed to chill over the summer and didn’t really show signs of life until well into the fourth quarter. One could name the usual suspects (eurocrisis, constrained bank credit, depressed boardroom confidence in the face of macro uncertainty, fiscal cliff anxiety, mismatched price expectations on the buy and sellside, etc), but each of these has its counter-indicators and I find it hard to identify a red thread that was clearly driving the market. More likely it was the combined ebb and flow of all of these factors that set the appetite for deals.
Katarina Cechova: It was significantly higher than in 2011, but still substantially lower than in 2007–2008. We have worked on several acquisitions of Slovak companies and businesses particularly in machinery, public transport, construction, logistics, pharmaceutical and IT industries, market research and consulting services industries, telecommunication industry.
Ira Andamara Eddymurthy: International investors have shown keen interest in the Indonesian market over the past 12 months, despite the many issues faced by foreign investors – in particular those related to infrastructure, transparency, policy changes and bureaucracy. We started with surprisingly robust M&A growth in the first quarter. From the first to the third quarter of 2012 there was significant growth of over 180 per cent in M&A deals in Indonesia, compared to 2011. It seems that M&A cross-border transactions are continuing to drive Indonesia’s economy, although there are more acquisitions than mergers. Our firm has worked extensively with clients that are investing in the mining, banking and finance, cement and retail industries.
Is there a lack of funding, or are new sources of investment entering the market? Are private equity groups more active? Have the eurozone crises, regulatory environment or other factors affected deal flow?
Adam Green: It is tempting, but ultimately very hard, to pick out a single driver of deal flow and deal size. One interesting fact is that corporates seem to be a bit on the rebound, with more of them active on the buy side and succeeding in deals where financial sponsors perhaps have either opted out or simply not been able or willing to put a sufficiently high number on the table. We have also seen a move away from very broad auctions with lots of bidders invited in to either classic bilateral deals or rather scaled-back (and rather discreet) processes, and it may be that in this context sellers are more confident approaching corporates, who of course can include synergies in their valuations. It should be said that financing does seem to be available locally (at least for sub-$1 billion deals), and a growing local bond market is beginning to emerge as an alternative to long-term LBO bank financing.
Yang Wantao: In 2012, while we still see a lot of PE deals, the pace has slowed, for a variety of reasons. Those worth noting include, firstly, an exit through China’s A share market listing (which frequently offer a higher valuation than listings in overseas markets) becomes challenging because there were hundreds of companies’ IPO applications pending. Investors are concerned about the decreased chance of listing. Secondly, Chinese regulators put more extensive regulations on PE fund raising and investment in China, eg, a registration requirement for almost each RMB PE fund and tighter rules regarding offshore fund manager’s raising RMB funds in China. Thirdly, tigher US regulation on financial institution-sponsored PE funds decreased the players. It is also encouraging to note that in December 2012, the China Security Regulatory Commission issued rules paving the way for Chinese companies listing overseas. Given the long waiting list at China’s domestic stock exchanges, this new rule offers room for hope. Another important milestone in China’s PE investment industry is that the National Supreme Court confirmed, for the first time, that the generally used valuation adjustment mechanism in PE investment contracts are valid under PRC law. That could reduce legal uncertainty in PE investment.
Katarina Cechova: Unfortunately, negatively political factors and changes in Slovak tax laws, such as cancellation of income flat rate, increase of VAT, etc, [have had an effect]. Private equity groups continue to be active, but in general there is a lack of new investments and funding. We do not see the negative impact of the regulatory environment, but the eurozone crises have had negative effects.
Ira Andamara Eddymurthy: The banking and finance, mining, consumer goods and retail sectors were particularly active in terms of M&A deals – which is to be expected given the population of more than 230 million people and Indonesia’s abundant natural resources. A great market and natural resources are the two most significant factors affecting M&A transactions, since Indonesia is a very attractive market for investment. The fact that Indonesia’s business environment is becoming more sophisticated and investor-friendly also plays an important role.
Who’s Who Legal: Is the current period more favourable to hostile bids than the past couple of years?
Katarina Cechova: Unfortunately not, again mainly due to political reasons, [such as] the Slovak Social Democratic government, several governmental decisions and amendments of laws threatening foreign investments in Slovakia, attempts to change existing privatisation agreements.
Ira Andamara Eddymurthy: Hostile bids were rare in 2012, even in the past couple of years. Friendly takeovers taking minority shareholders and stakeholders into account are generally more common.
Adam Green: To be honest, historically we have had very few hostile bids in Sweden. It is hard to identify exactly why this should be so. There is nothing in our takeover regulation that is particularly chilling to hostile bids, and if anything the reasons seem to be cultural: Sweden is generally a consensus-driven jurisdiction, and if “the Board is not on board” it probably means that the major institutional holders aren’t either, and vice versa. So even though a lot of our listed companies are currently valued well below their historical highs, a hostile run (in the sense of one that does not have board support) is and has been unlikely to be launched.
Yang Wantao: The hostile takeover has never been a routine acquisition approach in the China market. The legal and regulatory regimes are far from supportive, and the hostile takeover of a public company needs to go through some very burdensome procedures. For a private company, a takeover may be more difficult because the uncooperative shareholders may have more influence in the operation and management of the target company. In a very high-profile hostile acquisition case, an investor acquired shares in a private company indirectly through upper level share transfer. The other shareholder actually filed suit in court trying to unwind the indirect share transfer.
Who’s Who Legal: Do you anticipate a more active year in terms of the number and size of deals? What type of transactions are you expecting to see?
Yang Wantao: While the business is expect to continue to grow, the number of law firms and lawyers in the market are increasing at quicker pace. There has been great pressure on legal fees. In addition, many newcomers are willing, on a selective basis, to charge nominal fees to build up their credentials in China’s legal market. Therefore, it is expected to be active year for law firms, but probably with decreasing profitability.
Adam Green: It seems we are all “cautiously optimistic” these days, so for many it is a question of whether the emphasis should be on the “cautious “or the “optimistic”. I will, however, bravely throw caution to the wind and predict a comparatively strong 2013. Even if it is right that the eurozone problems will take a number of years to work out, the time of a true teetering-on-the-brink crisis is (hopefully) behind us. The US economy appears to have turned the corner, and – at least as of this moment – consumer confidence seems to be heading in the right direction. That said, very few people I have spoken with think that the huge run-up in deal volume that peaked in 2007 was anything but anomalous. So at least at my firm, we have tried not to try to read the tea leaves too closely (especially when there isn’t much tea being made!) and stick to a steady-as-she-goes strategy. We predict continuing strength of corporates on the buy side, and fewer secondary exits by local PE players in the coming year.
Katarina Cechova: Law firms will have to offer high-quality services for lower prices; the number of lawyers and law firms is still increasing and pressure from clients’ side to decrease fees for legal services, too. Despite that, we believe in keeping our involvement similar size of deals. There will be an increase of assistance on the side of sellers – several investors to Slovak strategic industries (gas, steel production, electricity distribution and production) publicly announced their intentions to leave the country, to sell their participations in Slovak companies.
Ira Andamara Eddymurthy: The crisis in the US and most European countries has made Asia a more attractive investment destination, so we are very optimistic and excited about the businesses that will come into Indonesia. We are confident that the Indonesian legal market will continue to provide a lot of opportunities in 2013, despite the challenges that we will face from Indonesia’s constant policy changes, particularly as we approach the 2014 presidential election. We are expecting to work on M&A transactions in the banking industry, energy sector, manufacturing in various industries and the retail sector. We are also expecting to assist clients in conducting foreign direct investments in Indonesia.