September 2018 Update
“This year has seen M&A values soar, with nearly US$ 2trn deals announced in the first half, matching pre-financial crisis levels. The global picture is characterised by a slightly smaller number of deals overall, but very high valuations for the most desirable and largest targets. More mega-deals are expected in the final months of the year, as data-driven M&A and consolidation in certain sectors continue. Accessible debt and a steady flow of repatriated cash into US-based multinationals will continue to drive the US market.
Headlines of record-breaking M&A values do, however, mask an underlying reality, where economic indicators and very racy multiples are pointing to an overheated market, and politics are increasingly getting in the way. Whilst large US and multinational businesses continue to make bold strategic moves, we are seeing smaller businesses become more circumspect, waiting to see how global and regional politics and related economic and currency impacts might play out. As boardrooms pause, this leaves more room for nimble financial sponsors.
As we assess the final months of the year, trade dynamics are in the spotlight. M&A may be negatively impacted as trade relations between the US and the rest of the world deteriorate, and concerns grow around other regional trade dynamics (e.g. the UK/EU). We expect greater protectionism in M&A situations, making deals increasingly at risk of being blocked at the highest political levels.”
Governments historically had relatively limited powers to intervene where there are real national security concerns, such as deals in the defence sector. Now, the scope for intervention is expanding dramatically. Politics and protectionism are taking centre stage. In 2018 several deals have already been caught in the cross-fire of international politics and trade conflict.
Trump widens the scope for government intervention: President Trump has said ‘American strategy recognises that economic security is national security’. There is now a sense that this is being reflected in CFIUS* reviews. As such, deals with foreigners in financial services, pharma, telecoms, aeronautics, robotics and other emerging cutting edge technologies are under more scrutiny, particularly when they involve Chinese buyers. In addition, new legislation (FIRRMA**) passed in August expands the scope of CFIUS, introducing a greater focus on critical emerging technologies and bringing passive and non-controlling investments into scope, as well as investments in real estate.
China and South Africa to introduce CFIUS style regimes: New laws proposed in China and South Africa would introduce national security review systems, catching a range of transactions.
Political hostilities scupper deals: The failure of the Qualcomm/NXP deal (see opposite) following lengthy delays in securing Chinese merger control clearance may be the first deal to overtly fall victim to growing political hostilities between the US and China. If a full blown trade war develops, US buyers may find deal-making gets harder for transactions that require filing in China.
New steps in Europe to bring more transactions into the net for review: In Germany a new draft law proposes mandatory filing triggered at 15% of a company’s shares (rather than 25%). In the UK, any deal giving significant influence over a business or asset, no matter how small, would become reviewable. France intends to expand the scope of ‘national security’ to include semiconductors, space, drones, AI, cyber security, robotics and large-scale data storage.
New premise for intervention: Interestingly, we are also starting to see government scrutiny of deals based not on the buyer’s nationality, but on the basis of a wider concern that the target’s R&D would not be maintained. If this is a new trend, all buyers need to take heed, and not just those linked to China. See opposite for Broadcom/Qualcomm (US) and Melrose/GKN (UK).
* Committee on Foreign Investment in the United States (CFIUS)
**Foreign Investment Risk Review Modernization Act (FIRRMA)
“Scrutiny in the US remains particularly focused on China, to the extent that even where no obvious China-nexus exists on a deal, any Chinese involvement is now frequently analysed by the parties at the start of an M&A deal as a potentially significant risk factor”