Navigating private M&A transactions
- In spite of Brexit, elections in France and Germany, as
well as the geo-political standoff between North Kore and the
US, markets are still open for business albeit with a slight
change in the mix of M&A towards more inward deals
(coming into the EU);
- There have been strong deal volumes in the insurance
space (20% up on last year), and also the financial services
sector as companies have to shrink the size of their balance
sheet by divesting/selling assets. In the energy sector,
which is dependent on government policy, it’s a
- Companies in the financial services sector are expected
to parcel up and dispose of the smaller parts of their
businesses because of regulatory requirements: "We are
worried about passporting rights like all banks so
there’s a lot of uncertainty," said one
- Brexit has caused UK clients to look into ringencing
risk: by introducing Brexit break clauses and by acquiring EU
businesses to secure passporting rights. EU and US companies
are also taking advantage of the weak pound to buy UK
counterparts, to have a presence.
- There used to be an assumption that locked box mechanisms
were primarily preferred by sellers, but now buyers are
asking for it as it creates a certainty of price before the
deal is announced (70% of deals in the EU ate believed to
include this provision). The seller doesn’t want
to be left with legacy disputes.
Financial services M&A
- There is no unified M&A strategy across the banking
sector: some are in disposal mode to become leaner, some have
other priorities than acquiring a company. The key question
is whether M&A is the best form to create
- Some banks prefer making a minority investment: "If we do
M&A, we worry we may stifle the innovation in the
target," said one panellist. There are also legacy issues and
systems, technical challenges and regulatory issues to take
- Asking an unregulated company to solve your own
regulatory issues is an interesting concept. The problem is
compliance isn’t a revenue generating area so
it’s hard to tell to shareholders.
- Potential M&A activity is expected with big banks
wanting to be first movers in implementing the second Payment
Services Directive, the Directive on Security
of Network and Information Systems, and the General Data
Focus session: Merger control: Steering a safe
- The increasing scale of M&A activity, higher volumes
of deals and more cross-border deals all contribute to
pushing up merger control activity. Increasing market
concentration is also a factor.
- Competition agencies rely on a static definition of the
market structure in terms of market share to make their
decisions - they discount tech disruptions, new
entrants/entry barriers and transaction synergies (these
criteria don’t play strongly in merger
- The intensity and basis of an authority’s
intervention can change: loss of innovation/conglomerate
theory/access to data are distinct from the competition
argument but which come into play in regulatory
- Merger control is affected by how the transaction is
structured but it shouldn’t be this way: joint
ventures attract more difficult proceedings; consolidation of
a market where there are only a handful of companies is
difficult too, so the 'do it first and do it
big’ mantra applies. Mergers in neighbouring
sectors are often easier to get approval for.
1) Develop a merger clearance narrative
early – why do customers benefit from merger?
2) Be realistic about time and about lack
of control when it comes to dealing with regulators.
3) Plan for implementation but
don’t implement the plan – be
Focus session: Shareholder activism
- Activism in the EU has grown its own roots, with EU
home-grown activists. There has also been a spillover from
the US in terms of more funds flowing into activist
- There were 342 global campaigns outside the US in past
year (compared to 50 in 2010), with a focus on strategic and
operational campaigns now – activism
isn’t just about board composition anymore.
- Institutional investors are feeling the pressure to
become more active and in parallel, companies are engaging
shareholders more. 'Engaged shareholder’ is also
a term that is increasingly being used.
- FTSE 350 companies have to put remuneration policy up for
review, which encourages more disclosure and
- Taking the Market Abuse Regulation is also important
here: when do companies need to make an announcement of a
takeover approach? It’s a case-by-case situation
and depends on the size of company, shareholder base etc.
However, corporates should err on side of caution.
Private equity exits
- IPO is the preferred goal as there is flexibility as to
when a full exit can take place and it usually reaps the
highest return, but is not the most common method –
only 17% of European PE divestments were via IPO in
- They have their downsides too – there is a lot
of uncertainty, they can be time-consuming and subject to
heavy disclosure requirements.
- Secondary buyouts via trade sale have been more
- Reverse mergers with a listed company are also popular as
they afford the same exit result without the IPO
- The use of special purpose acquisition companies for
reverse mergers became common in the US and are now being
used in Europe.
- They help ease a lot of the uncertainty surrounding an
IPO with the target still becoming public by the end and are
often seen as a fast-track process.
- As there are multiple parties including Mofcom, the NDRC
and SAFE and no direct regulations governing Chinese M&A,
parties should consider how the different rules all fit
- Since December 2016 there has been a focus on
acquisitions of $10 billion or more, acquisitions of under
10% of an overseas listed company, and transactions over $1
billion that are outside the PRC investors’ core
business, for instance, a property investment by a tech
- This increased scrutiny is an attempt to limit high
levels of capital outflows that have become a problem in
- Encouraged investments include Belt and Road
infrastructure projects, agriculture, oil and gas –
all things that will benefit China in some way.
- This all has a big impact on deal timetables –
it can take over two months just to complete the submission
package for filing, then 40 business days with the NDRC and
30 business days with Mofcom once the filing has been
- Reverse break fees, generally not popular with Chinese
buyers but increasingly demanded, must be kept offshore ahead
Bridging the value gap
- "An earnout often converts today’s
disagreement over price into tomorrow’s
litigation over outcome" is a harsh but broadly fair
representation of how earnouts work in practice.
- They can be difficult to negotiate and usually result in
extensive post-closing monitoring and reporting.
- A common earnout-related dispute is either side arguing
that the other has made it impossible for post-acquisition
targets to be met, for instance changes to workforce,
- Parties should on the whole try to avoid earnouts; if
that’s not possible then approach them expecting
problems and if none arise, be pleasantly surprised.
- For a successful earnout, take detailed instructions from
the business, keep it simple and ask accountants and
litigators to review the documentation. A lot of fallouts
arise from accounting problems.