Cross-border M&A has always been long-winded, costly and risky, but several deals that closed in 2018 stretched beyond reasonably foreseeable timescales. What is making these mergers more painful? Kat Van Hoof investigates the mechanics of antitrust in mega-mergers and the rise of protectionism.

M&A mega deal

Two years, millions of pages of paperwork and $9bn-worth of divestments. That is what it took to get Bayer’s $66bn takeover of Monsanto, a US-based seeds and pesticides business, across the finish line. In the meantime, Bayer’s share price slid by 25% to 40%, depending on whether it is counted from the initial announcement or from when rumours of the takeover started to swirl.

Nevertheless, Werner Baumann, the German pharmaceuticals giant’s CEO, has said he has “absolutely no regrets” regarding the deal. At the same time, court battles regarding the potential health risks of Monsanto’s flagship Roundup pesticide are mounting and Bayer’s 2018 earnings are set to come in lower than forecast. Investors could be forgiven for asking themselves: was the two-year-long battle worth it?

Cross-border complexity

Bayer was by no means alone in plunging into such a protracted acquisition process. Irish chemical company Linde’s merger with US rival Praxair and UK media firm Sky’s takeover saga also came in close to the two-year mark. In 2010, Fox predecessor Newscorp first made takeover overtures towards what was then BSkyB before dropping its bid, only to pick the issue up again in 2016. In September 2018, Fox was eventually outbid by US cable giant Comcast. Fox itself is being taken over by Disney, which will sell Fox’s existing 39% share in Sky to Comcast, to complicate matters further.

“This is the new normal,” says Michael Reuther, board member responsible for corporate clients at Commerzbank, adding that with businesses becoming increasingly global, there are more and more facets to consider when doing mergers and acquisitions (M&A). “The world is also becoming more political across the board,” he says.

Juan Manuel Ramírez, co-head of corporate finance for Spain and Portugal at Société Générale, agrees. “In general, the world is becoming more careful around compliance issues and more conscious of the potential legal consequences of going too easy on deals, especially if listed companies are involved,” he says. 

It is almost a given that antitrust reviews and public authorisations are going to take a long time, particularly when the US or China are involved. “Cross-border deals are harder, so buyers have to build the longer timelines into the deal negotiations, the pricing and the due diligence strategy,” says Roland Boehm, head of international corporates at Commerzbank.

In Bayer’s case, the delays were manifold and painful. The extended merger control review in Europe and massive US-led structural remedies package pushed the takeover into June 2018. Bayer missed out on Monsanto’s second-quarter earnings, the most lucrative season for agriculture when farmers in the northern hemisphere plant their crops. Add a €6bn rights offering to finance the deal in the same month and Bayer was forced to revise its earnings per share downwards to $7.72 from the original $7.84.

All of this is not necessarily putting anyone off, however. EY’s Global Capital Confidence Barometer for the second half of 2018, which surveyed 2600 executives across the globe, shows 90% believe the M&A environment will improve over the next 12 months. At the same time, a much smaller 46% said they were actively looking to pursue M&A over the same period.

Maybe executives are pausing for breath to wait out some of the thornier issues ahead. “I am cautiously optimistic about Europe, the US and Asia in the next six months,” says Michel Driessen, senior partner at EY’s transaction advisory services. But the mood has become more cautious in the UK, with many CEOs in wait-and-see mode, he admits.

Navigating the antitrust world

As companies have become more globalised, the task of identifying all of the merger control agencies that require notifications and providing them with the necessary filings and documents has become a gargantuan task. Lining up the merger reviews, which all have diverging timelines, approaches and possible points of delays, to get clearances around the same time has become nearly impossible.

“The size and complexity of these deals, and the cross-geographies they cover, mean you are dealing with different national governments, different regulations and also different attitudes, which can all contribute to a longer lead time,” says Mr Driessen. Granular merger control reviews, more stringent remedy packages, an increased focus on due diligence and possible government intervention are making them a more challenging and costly undertaking.

Not only has the nature of the deals become more complex, the enforcement environment, including merger control, has become tougher over the past couple of years, according to Jenine Hulsmann, a partner at Clifford Chance focusing on antitrust. “Scrutiny in relation to large deals has focused on whether they deliver on the claims of efficiencies and benefits, not just for shareholders, but for consumers,” she says.

European commissioner for competition Margrethe Vestager has been vocal about the importance of protecting consumer rights and establishing trust. The emphasis on the end-user reflects a wider trend where politicians are looking to reconnect with the public. “The C-suite will need to react to the consumer trust agenda, which can be good for business if handled right,” says Ms Hulsmann.

Mr Driessen adds: “It all comes down to reputation. Government bodies want to demonstrate to the public that there is a high level of scrutiny on deals.”

Companies have to be able to model and provide strong evidence of the consumer benefits of a merger to the European Commission (EC). Brussels has been leaning increasingly towards the US system of relying on internal documents to identify possible issues, Ms Hulsmann says. “In both US and EC reviews, the scope of the investigation into potentially millions of documents is huge and takes a lot of time,” she adds.

There has been some convergence lately between the processes of the main antitrust bodies. The EC is looking more at internal documents, the US is more open to pre-notification-style discussions and China streamlined its process by merging three antitrust agencies into one overarching body, called SAMR. While there may be more communication between the EC and the US Department of Justice (DoJ), the reviews remain separate and independent.

The more global the company, the more merger control agencies are likely to be involved. Therein lies the main problem, as most delays happen between signing and closing acquisitions, according to Mr Ramírez. Some of the so-called peripheral antitrust agencies, such as those in Mexico and Brazil, also scrutinise deals more closely now than they used to, he says, adding that the process can take eight months in Brazil.

Rise of the remedies

Another major cause of delays is the approval and execution of structural remedies, almost always inevitable in cross-border mega-mergers in the same industry. It is easy to be surprised on the downside, says Charles Honnywill, transactions partner and divestiture leader at EY. In the case of one US/UK manufacturing mega-merger, he says: “The parties underestimated significantly the extent to which antitrust regulators would require mitigating disposals. I wonder whether they would have priced or structured the deal differently if they knew at the outset where they would end up.” 

The EC has recently become more demanding about concessions in merger reviews, according to Mr Boehm. In the case of the tie-up between Linde and Praxair, the remedies package was more severe than anticipated and posed a real danger to the merger being called off. “In some cases, it becomes a matter of questioning the industrial logic of a deal, if the proposed divestitures are severe,” says Mr Boehm.

Data provided by Acuris’ PaRR service backs up the claims that remedies timelines have stretched. The EC has taken increasingly longer to approve remedy buyers, taking an average of 44 calendar days in 2015, but taking 53 days in 2016 and 56 days in 2017. The buyer approval process is arduous, particularly in the case of pharmaceutical companies – taking an average of 534 days from announcement of the main deal to obtaining final buyer approval.

Actually carving out and disposing of an asset can be a tricky, long-winded process in itself. “Corporates often underestimate the length of time it takes to carve out a business and sell it, particularly if they are aiming to sell it to private equity,” says Mr Honnywill. Private equity buyers require a fully independent standalone business, with granular data on the preparation process, he adds.

Antitrust agencies have also ramped up forward-looking competition reviews, whereby bodies such as the DoJ and the EC are not just looking at existing competition issues, but anticipating future bottlenecks. “Particularly in the healthcare and technology space, there are some concerns about ‘killer’ acquisitions aimed at killing future competition,” says Ms Hulsmann. She stresses that the evidence suggests this is rare and that an in-depth review of internal documents can prevent this from happening.

Proactive attitudes pay off

It is important to keep a cool head about merger control in general, says Mr Boehm. “We are still operating in a free markets world,” he adds. Moreover, the best way to handle potentially protracted competition reviews is to prepare diligently. “Anticipating antitrust issues, potential remedies and being prepared for a long process in the due diligence phase mitigates any negative impact,” he says.

Companies looking to engage in M&A will need to brace themselves in more ways than one. With Brexit, EU elections, tensions in France and Italy and a possible reignition of the Russia-Ukraine conflict in Europe, as well as turmoil in US trade relations, particularly with China, several tense situations are set to come to a head in the next 12 months.

Despite some of the bleaker prospects for geopolitical stability in 2019, all of the interviewees for this article were positive about the general M&A outlook for the first six months of the year. “Instability spurs companies into action to get in front of these events and they will want to focus on those sectors and geographies that will drive investment flow,” says Mr Ramírez.

“Depending on your deal rationale and overall strategy, now may be the time to act to position yourself for potentially harder times,” says Mr Driessen, who adds that the UK economy will have a tougher ride for a period because of the lingering uncertainty over Brexit. It has also historically been seen by international companies as the gateway to Europe, but some are now rethinking that, he says.  

Populism and protectionism

Political rhetoric across many European countries, in the US and China is veering towards nationalism, which can translate into protectionism. The recent G20 meeting may have resulted in a temporary truce in the ongoing US-China trade war, but dealmakers will not rest easy about the possibility of further tariffs. The omission of an anti-protectionism pledge in the draft statement was conspicuous.

The increase in populism in Europe is something that is worrying for international investors, especially from Asia, according to Mr Ramírez. US investors are also being encouraged to stay at home because of recent tax reforms.

The trend is to keep things in country, Messrs Driessen and Boehm agree. Global M&A activity was up 24% on 2017 as of November 2018, according to Acuris’s Mergermarket research. But much of this was driven by domestic consolidation, up 30%, as opposed to cross-border deals, which have also increased but at a much slower rate.

Potential acquirers appear more wary of pursuing high-profile cross-border deals, due to increasing government intervention, the research suggests. EY’s survey reflects this. Respondents deem "an increase in barriers to cross-border dealmaking" the third main theme in M&A over the next 12 months, after active private equity buyers and tech-driven cross-sector M&A. “Technological advances are causing disruption in every sector. I think the days of large global deals are still with us, it’s just that the drivers are different,” says Mr Honnywill.

There is yet to be significant intervention in the M&A landscape, though politicians are ever more eager to protect ‘national champions’. The question is: how far are nationalist governments willing to go with this? “In some sectors size matters, so they have to be willing to build these up big even if they are failing. This creates the danger of an inefficient organisation that will be in trouble if the government is no longer willing to prop it up,” says Mr Driessen.

So far, the impact on deals between European countries has been limited, but tensions have run high even there. The Spanish government briefly tussled with Italian company Atlantia over strategic infrastructure asset Abertis, while in the UK, there has been much to-do about French state-owned EDF’s investment into British nuclear asset Hinkley Point. The latter is further complicated by the involvement of Chinese state-run firm CGN.

The China question

National security is one area where protectionism has shown its teeth. Governments have sought tighter controls to curb foreign buyers scooping up sensitive assets. The US leads the vanguard through the Committee on Foreign Investment in the United States (CFIUS), which has blocked several high-profile deals, often involving Chinese acquirers.

In Europe, the focal point is also incoming investment from China, according to one investment banker. Opposition to ‘the Chinese threat’ is still high and deals involving Chinese buyers are likely to be more controversial than two European national champions joining forces, he says. Although the subject has been discussed, it is not likely that the EU would put in place an overarching CFIUS-like body. It seems content to leave matters of national security in mergers to individual member states.

Options for Chinese investors are narrowing, with US president Donald Trump creating deal uncertainty in the US and Brexit creating political and economic instability in the UK. “China has been looking more closely at Germany as a good investment haven and has been surprised by some of the backlash,” says Mr Reuther.

When Chinese appliances company Midea announced a takeover bid for German robot-maker Kuka in 2016, it caused a stir. Questions regarding the use of data and intellectual property rights, as well as concerns about Midea’s commitment to keeping jobs and operations in Germany, were cited. Midea agreed concessions on each count and the deal went through, but the Chinese were caught off-guard by the negative reaction. In November 2018, Kuka long-time chief executive Till Reuter left over strategic differences.

The issues are broadly limited to key technologies and sectors strategically off-limits due to national security concerns, says Mr Boehm. Things have changed in Germany over the past couple of years. “Corporates are more interested in Chinese buyers now, as they are often stable, long-term and entrepreneurial-driven owners,” he adds.

UK reforms

CFIUS has undeniably become tougher in recent years, according to Ms Hulsmann, but the EC and the UK have been moving in the same direction. Particularly in the UK, there are proposals for expansion of the government’s power to intervene in mergers under the auspices of national security concerns. “It is not likely to affect overall M&A levels within the UK significantly, but the proposals would add more grist to the mill for many deals with a nexus in the UK,”  says Dominic Long, a partner at Allen & Overy.

In practice, it will be a voluntary, not mandatory, regime, but this also means the regulatory body will probably need to trawl through a large amount of benign notifications unnecessarily. The government expects 200 notifications each year – of which 100 will require full national security assessments, and of which 50 are expected to be subject to conditions. “We think 200 is an underestimate of the notifications the government will receive,” says Mr Long.

A major risk of the proposed changes is the need to establish a proper decision-making body, which is well staffed, to be able to process incoming enquiries as well as notifications, Ms Hulsmann agrees. The white paper on merger control reforms made it clear that the new body does not envisage blocking many transactions, she says. 

Mr Long agrees the risk of a deal being blocked is likely to remain low, but it may reduce the field of buyers (particularly overseas investors) for certain sensitive UK assets, if they are not willing to go through a CFIUS-style review.

Cybersecurity concerns

The new body is more likely to ask for commitment to undertaking, according to Ms Hulsmann, who says: “These are likely to revolve around governance, information rights, security clearance and cybersecurity.” There may be costs attached to adjustments in these areas and companies will need to be realistic and flexible to get deals cleared. 

Mr Driessen says. “Cyber-security has become an integral part of M&A, as parties are much more aware now of the risks of not having proper cyber boundaries and the possible reputational risks attached,” he says.

Clients have not exactly been enthused by another layer of merger control and execution risk, nor the costs involved, according to Mr Long. “The national security elements of the UK merger control system have been perceived as relatively liberal up to now, so there is an argument that the proposed reforms would close the gap with the regimes in France, Germany, the US and Australia – but the change to a more interventionist regime is likely to cause some deal friction,” he says.

The government wants to retain as much optionality as possible and has refused to sharpen the currently nebulous lines and definitions of the proposed changes, which is creating uncertainty. Changes to the existing regime appear inevitable, but could be more targeted and less cumbersome for investors, according to Mr Long. “There is a clear political dimension to the reforms, which plays into a Brexit-related theme of ‘taking back control’, although the government – ironically – seems to envy the national security regimes of France and Germany,” he says.

The proposals are still going through a consultation phase, so any changes are a little while off yet. But the message to the M&A community is clear: buckle up. The world is undeniably on a nationalist and protectionist wave, says Mr Driessen. “But the global train was set in motion a long time ago and I don’t think it can be stopped,” he adds.

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