Teamwork at the heart of Nomura’s cross-border M&A success
Nomura’s EMEA M&A advisory team has led several complex deals in recent months, including one shaking up the German takeover market.
Even if globalisation has been halted by the Covid-19 pandemic, as some maintain, complex international mergers continue to take place. Nomura’s Europe, the Middle East and Africa (EMEA) mergers and acquisitions (M&A) team has been very busy with cross-border deals recently, and may even have solved the ‘prisoner’s dilemma’ that plagues German takeovers.
The Japanese bank no longer tries to compete across all products with bulge-bracket firms in the US and Europe. In Europe it has withdrawn from traditional cash equity trading and distribution, though it owns the electronic trading platform Instinet and it remains active in debt capital markets across the board.
History of success
In European M&A advisory, however, the bank is very much a presence. At the heart of its team are three managing directors whose relationship dates back a quarter of a century, to when they worked together at Deutsche Morgan Grenfell.
“The three of us go back 25 years,” says Nomura’s head of EMEA advisory, Guy Hayward-Cole, who also worked for Merrill Lynch before joining Nomura in 2013.
Henry Phillips, managing director of M&A and a cross-border specialist, left Deutsche Morgan Grenfell to join Lehman Brothers, whose European and Asian business was acquired by Nomura in 2008. Jürgen Krieger, now head of M&A for Germany and Austria, did likewise. The Morgan Grenfell alumni persuaded Mr Hayward-Cole to come aboard at Nomura.
Their long association generates “complete continuity and trust”, between the investment bankers, Mr Hayward-Cole believes. “We mostly work on our own deals with our own clients,” he says. “But sometimes, with large and highly complex transactions, we are perfectly comfortable working together to provide the best team for the client.”
What we are best at is complex cross-border deals which require experience in local markets
Recent examples include the €4.9bn recommended cash offer by Japan’s Renesas Electronics for Frankfurt-listed Dialog Semiconductor. Nomura acted as sole financial adviser to Renesas, with Mr Phillips working on the deal alongside Mr Hayward-Cole.
Mr Phillips and Mr Krieger worked together on a recommended €4.4bn cash offer by Taiwan’s GlobalWafers for Germany’s Siltronic. Nomura was sole financial adviser to GlobalWafers, one of the ‘Big Five’ silicon wafer makers listed on the Taiwan Stock Exchange. Frankfurt-listed Siltronic is one of the world’s largest manufacturers of hyperpure silicon wafers and a constituent of the MDAX and TecDAX indices.
“What we are best at is complex cross-border deals which require experience in local markets,” Mr Hayward-Cole says. Few markets demand more local know-how than Germany, where takeover rules are particularly complicated.
Prisoner’s dilemma
Public takeovers in Germany are structured as tender offers, which means there is no shareholder vote as in other jurisdictions, Mr Krieger points out. Most include a minimum acceptance threshold — if this is not reached, the offer fails. Sometimes bidders then make a second offer with improved terms, creating part of the dilemma.
The other part is in the shape of the so-called ‘domination agreement’. “This is a very specifically German concept which allows a bidder to fully control the target company,” Mr Krieger says. “In return, the bidder needs to offer minority shareholders a guaranteed dividend, or a promise to acquire their shares for a certain cash compensation.”
Hedge funds play a major role in German takeovers, because they often buy target shares after a takeover has been announced. They want the takeover to be successful so that, by playing the long game, they can benefit from a domination agreement further down the road.
If they are to benefit from the domination agreement, however, they cannot tender their own shares to help the offer succeed. “The prospect of a domination agreement creates a situation where non-tendering shareholders may enjoy a future benefit, but only if the acceptance threshold is reached by other, tendering shareholders.”
Needless to say, this complicates the process. “The prisoner’s dilemma acts as a perverse disincentive for shareholders to accept takeover offers — unlike, say, in the UK,” Mr Phillips observes.
Solving a problem
GlobalWafers was a long-standing client of Nomura, which advised on its $683m purchase of US firm SunEdison Semiconductor in 2016. In December 2020, it secured the agreement of Siltronic to a takeover, with the aim of creating a global leader in semiconductor silicon wafers.
Siltronic’s largest shareholder, Wacker Chemie, signed an irrevocable undertaking to tender its 30.8% stake, which was a good start.
After increasing the offer at the end of the original offer period, GlobalWafers made three public declarations to get around the prisoner’s dilemma. “One was that this was its best and final offer,” Mr Phillips says. “The second was that, if it was unsuccessful, it would not bid again — which was a first for Germany. And the third was that it would do nothing to put in place a domination agreement for at least three years.”
This made it less attractive for hedge funds to stay in, Mr Krieger says. “The offer achieved a final acceptance level of 70%, one of the highest levels in recent years,” he notes. “One hedge fund said we had ‘flipped the chessboard’.”
The Renesas bid for Dialog, which is listed in Frankfurt but headquartered in the UK, would have had to conform to Germany’s takeover code (including the prisoner’s dilemma) as well as the UK code if Brexit had not intervened.
While Renesas comprises the former chip units of Hitachi, Mitsubishi Electric and NEC, Dialog’s largest customer is Apple. After Brexit, given Dialog’s domicile, the transaction could be structured as a scheme of arrangement under the UK Takeover Code alone. It is awaiting anti-trust and other clearances, and is expected to close in the second half of this year.
Closing deals
A feature of the Renesas deal was the speed with which it moved when required. “There is a myth that, because of their cautious culture and slow decision-making, Japanese companies can’t react quickly enough to compete with Western buyers in a takeover battle,” says Mr Hayward-Cole. “Renesas blew that myth away.”
With more than one party in the bidding, Renesas had to keep to the timetable or lose the deal. “They did everything that was required,” Mr Hayward-Cole says. “It’s fantastic for Japan Inc to know that they can do this.”
Japan Inc has been particularly active in the latest round of cross-border deals, which has played to Nomura’s advantage. Chinese outbound M&A has been falling, thanks to trade tensions and security concerns. Japanese companies, by contrast, are sitting on a record cash pile of $5.6tn, which is bigger than Japan’s gross domestic product.
The offer achieved a final acceptance level of 70%, one of the highest levels in recent years. One hedge fund said we had ‘flipped the chessboard’
Domestic growth is constrained and companies are being urged to find growth opportunities further afield. “Their shareholder base is changing, with more international institutions looking to invest in Japan Inc,” says Mr Hayward-Cole. “They are applying pressure on companies to use their cash, driving a greater desire to spread their wings.”
The team acted as sole financial adviser to Outsourcing, a large Japanese human resource solutions provider, when it acquired Irish-listed human resource business Cpl for €318m late last year.
The availability of cheap capital is expected to keep M&A lively, with private equity and special-purpose acquisition companies sitting on large kegs of dry powder.
“‘Covid winner’ sectors are booming,” Mr Hayward-Cole says. “Among ‘Covid losers’ we will see industry consolidation. Recovery will take time, and a growing number of firms may be tempted to merge with competitors to take out costs and accelerate a post-Covid bounce-back.”
Mr Krieger makes the point that at a time when it is only possible to carry out limited due diligence, thanks to the pandemic, it is easier to buy competitors that you know well. Companies are getting used to doing due diligence remotely, relying more on consultants and carrying out site visits with drones.
Whether driven by consolidation or private equity, Mr Krieger and Mr Phillips are expecting a busy year ahead, judging by the pipeline of deals they are already discussing.
“Private equity clients are beginning to ask us to show them ideas in some unloved sectors which have not gone through asset inflation,” Mr Hayward-Cole reports. “With areas like technology being well-bought, they are starting to see more value in contracyclical industries.”
