Global Round Table Highlights Uncertainty in M&A Environment but Provides Reasons to be Optimistic
A recent international round table discussion focused on mergers and acquisitions involved members of Alliott Group’s Corporate Finance / M&A Group and explored reasons for the decline in overall deal volume in 2016, trends in the market and the impact of reforms and regulations implemented at national and international levels.
New York, NY – November 23, 2016. Participants in the round table discussion, who included representatives of Farkouh, Furman & Faccio, agreed that it was always going to be difficult to match the record levels of activity seen at the top end of the market in 2015, and that prevailing market uncertainty has generally slowed the flow of “mega deals” in 2016.
General M&A Sector Uncertainty
The following were cited as factors in the slow-down and uncertainty: stock market volatility, the humanitarian crisis, instability in Europe including “Brexit,” the economic standstill in China, the U.S. presidential situation and the anti-tax avoidance BEPS program initiated by the OECD and G20. Participants agreed however, that lower levels of activity were perhaps to be expected after record levels of global deal making in 2015 that have skewed the figures.
Fred Farkouh, partner at FF&F, attributed the uncertainty in part to a lack of clarity over the direction to be taken by President Trump: “There will be a continued slow-down in transactions until the true policies of Donald Trump are known.” He added: “International transactions will be greatly influenced by the BEPS initiative and U.S. anti-inversion legislation and earnings-strippings rules that will greatly impact the types of deals taking place and the strategies previously used to reduce the worldwide effective tax rate.”
Benjamin Gould, partner at Chicago law firm member Masuda Funai comments: “An environment has been created in which a transaction that once appeared to be a sure winner has to be re-examined more closely.”
On the impact of Britain’s proposed EU exit or “Brexit”, Dan Bowtell, co-chair of the alliance’s Corporate Finance / M&A Group and a partner at UK accounting firm member Smith Cooper, comments that the consequences “are more likely to be felt at the larger deal size.”
And in Mexico, Guillermo Villegas, partner at Monterrey accounting firm member Villegas y Villegas describes “a difficult year due to widespread global economic problems.”
The Mid-Market M&A Sector is More Buoyant
Across the world, there was general agreement that momentum in the mid-market M&A sector has been maintained so far in 2016. Bowtell commented: “Mid-market M&A in the UK is holding up pretty well in 2016 on the whole, even after the UK’s decision to leave the EU in June. We are seeing similar deal volumes to 2015, and anecdotally we are seeing similar statistics and commentary from other corporate finance and M&A firms. The latest CMBOR figures for Europe more broadly support this assertion that the mid-market is performing well.”
In the U.S. Gould comments that “most of the deal activity so far in 2016 occurred in the lower end of the middle market, with deal values between US$25-500 Million.”
Technology Remains Hot
Participants around the world were also generally in agreement that companies operating in sectors driven by technology remain attractive targets for investors. FF&F provided perspective from the U.S. market: “It’s probable that technology, which has seen exponential growth both domestically and globally in recent years, could become the most prominent market.”
In China, a predilection for sport is driving investment in Europe’s sporting clubs. Caroline Berube, partner at HJM Asia Law comments that investment is being encouraged at government level, particularly in European football clubs that are in need of new injections of capital. According to Berube, a growing middle class is also fuelling an appetite for foreign luxury brands and growth in the technology sector.
In the UK, a resilient real estate sector remains popular with foreign investors according to Sherrards Solicitors’ Senior Associate Andrew Cooke, while in Italy, the hotel and leisure sector continues to attract interest from foreign buyers.
Overall, round table participants commented that the sectors most popular with investors are life sciences / biotech, fintech, pharmaceuticals, cybersecurity, media, healthcare, telecoms, IT and energy.
Regulatory Reforms: Helping and Hindering Cross-Border M&A
In the U.S., Gould comments that the number of terminated transactions has risen due to factors including antitrust scrutiny and the adoption of new anti-inversion tax rules by the U.S. Treasury Department: “Prior to the issuance of these rules, there were a significant number of inversion transactions completed and being evaluated for the purposes of increasing the tax efficiency of those companies considering such transactions.”
Gould also comments that “Difficulties in completing acquisitions can stem from foreign companies having to negotiate different employment practices, employee benefit plans and multiple levels of regulation due to the federal structure of the U.S. legal system.”
The Outlook for Cross-Border M&A is Good
There was a consensus among participants that there are reasons to be optimistic about the future. Gould believes that with more and more U.S. business leaders having global experience, they are “quicker to see opportunities and act upon them.” He pointed out that domestic mid-market and family businesses are under pressure from globalization: “If they don’t expand with their own customers, they risk losing them to foreign suppliers at some point.”
In the Netherlands, Gerrit-Jan van Meeteren of law firm member VMBS Advocaten sees a positive environment with rising confidence and high levels of cash on corporate balance sheets. In his view, there will be a further rise in cross border transactions as “US Companies seem to show an interest in buying middle market European businesses.”
Umesh Pandey, partner at B.M. Chatrath & Co, also sees reasons to be positive in India: “The deal pipeline is likely to increase further in the next 12 months, with M&A activity being driven by an improving domestic economy and expectations around distressed asset sales.”