Roundtable: Mergers & Acquisitions 2011
The International Who’s Who of Merger & Acquisition Lawyers has brought together three of the leading practitioners in the world to discuss key issues facing lawyers today.
Participants
Tony Damian
Freehills
Australia
Osler Hoskin & Harcourt LLP
Canada
Skadden Arps Slate Meagher & Flom LLP
France
Recent M&A Activity
Who’s Who Legal: What has the level of M&A activity been like in 2010? What kind of deals has your firm been working on? Which industries are clients investing in?
Pierre Servan-Schreiber: M&A activity has been patchy, but with a rather significant pick-up in the second semester and in particular in the last quarter. We have seen all kinds of transactions, friendly and hostile, public and private, industrial partnerships and buy-outs. So, all in all, it seems that the general M&A activity is more or less back on track.
One particular feature for us, at Skadden in Paris, is the unusually high number of transactions involving BRIC countries, as well as Japan.
In terms of industries, it is almost impossible to identify a specific trend as we have been involved in all kinds of industries for our clients, such as services (Cap Gemini’s acquisition of a controlling stake in CPM Braxis in Brazil or Fosun (China)’s acquisition of a 10 per cent stake in Club Méditerrannée); but also new technologies Rakuten (Japan)’s acquisition of Price Minister, heavy industries (Toshiba’s unsuccesful bid on Areva T&D), pharma (Sanofi-Aventis and Merck in the divestiture of part of their animal health business and Ares Life Sciences in its acquisition of a controlling interest in Stallergenes), etc.
Clay Horner: 2010 was a very strong year for M&A activity in Canada. The strength of the Canadian economy in the natural resource area; particularly oil and gas and mining, both in terms of corporations with operations in Canada and Canadian corporations with significant international assets, has seen robust interest from around the world including continued significant Asian investment. Our firm has been working on a number of transactions in the oil sector both domestically and internationally (some are situation-driven such as purchases by Canadian clients or involving Canadian assets being sold by BP and others involving Chinese and other international clients investing in both Canadian conventional oil and oil sands projects) and mining transactions with Canadian acquirers or targets (ie, Kinross – Red Back and Walter Industries - Western Coal) which have made international headlines. We acted for Magna International Inc in its controversial and successful arrangement eliminating its dual-class share structure. Of course, there was great international interest in 2010 in the failed BHP Billiton bid for Potash Corporation, which was rejected by Investment Canada as not being of “net benefit” to Canada. Canadian banks weathered the financial crisis in fine form and have been active in acquiring banking and wealth management assets in the US, South America and Europe.
Tony Damian: Australian M&A volumes were strong in 2010. During the last year, our firm acted on M&A deals across a range of industries. Unlike previous years, there were less instances of deals driven by financial distress. Rather, acquirers had accepted that while there will always be some uncertainty, the time had come to move on with their growth plans. Many of these deals were also reflective of strong inbound interest into Australia, particularly in energy and resources. Some of the deals that Freehills worked on in 2010 that reflect these trends included acting for Centennial Coal on the A$2.5 billion recommended takeover by Bampu, the TPG/Carlyle A$2.7 billion acquisition of Healthscope, Perpetual on the A$1.7 billion approach by KKR and ASX Limited on the proposed A$8.4 billion takeover by the Singapore Exchange.
Confidence in the M&A Industry
Who’s Who Legal: During our research, interviewees noted that a lack of confidence in the market, rather than a lack of funds, was affecting the volume of activity and size of transactions. Has this been the case in your recent experience? Are private equity groups making a comeback? How does this compare to the activity of strategic buyers in your jurisdiction?
Pierre Servan-Schreiber: Although it has been true for most of 2009 and to a large extent in 2010, it seems that the confidence in the market has become more sturdy since the fall of 2010. In our experience, both strategic and private equity groups have been active and taken their share of the market. Again, the novelty here is not so much the kind of buyers, but their countries of origin as we see more and more buyers from Asia or from emerging countries active on the M&A market.
Clay Horner: A lack of confidence in the market has not restricted overall Canadian activity. We have not seen a lot of private equity transactions based in Canada. Strategic buyers including both private sector actors and state-owned enterprises have been very active in Canada through 2010. Looking forward in 2011 we believe we will continue to see a strong level of activity. Our pipeline coming into this year is materially stronger than it was going into 2011, and we expect a continuation of activity in the natural resource sector and a broadening of activity to include other sectors that have been quieter over the last couple of years. We certainly sense a increased level of confidence on the part of boards and senior management teams looking at transactions.
Tony Damian: Confidence and funding have both returned to the Australian market to some extent. Boards recognise that uncertainty and therefore risk remains, but also that corporate plans cannot be put off indefinitely. There has been sufficient confidence to get many boards over the line regarding acquisitions. In terms of funding, debt has been available for acquisitions and markets in that regard have opened up significantly since the GFC. Private equity groups are making a comeback and we expect them to be prominent in 2011 and beyond. An example of this is the A$2.7 billion acquisition of Healthscope, for which Freehills acted for the private equity consortium bidders and the A$1.7 billion approach to Perpetual by KKR (in which Freehills acted for Perpetual) also reflected this.
Hostile Bids
Who Who’s Legal: Is the current period more favourable to hostile bids than the past couple of years? If so, how is it different from previous times when there was a flurry of hostile deals?
Pierre Servan-Schreiber: I believe that the current period is indeed more favorable to hostile bids than the past couple of years. This is due in part to the fact that there are liquidities available and also that various opportunities for external growth or strategic sale which have been considered for some time are now in a position to be completed with the perception of a lesser risk in the current environment.
It is, however, somewhat different from previous “waves” of hostile deals in the sense that there is still some perception of risk and that equity and debt providers are more reluctant to bear such risks.
In short, hostile bids are back, but with some degree of caution from the players involved.
Tony Damian: In the past couple of years, when there have been more challenges for boards to get comfortable doing major deals, the additional hurdle of having to go hostile did often make a potential transaction too difficult. With the removal of some of those challenges, the issue of a deal not initially being recommended by a target is no longer as important. While a recommended deal is the best outcome, the lack of a recommendation will not be fatal to deals proceeding now. Strategic imperatives and the race for quality assets means some bidders will be left with little choice but to go hostile. The main difference between now and pre-GFC is on the debt side. As some recent deals show, there is still acquisition finance available in Australia, but the financing of deals will be tested more comprehensively than was previously the case.
Looking Forward
Who’s Who Legal: How will law firms fare in 2011? Do you anticipate 2011 to be a more active year? What type of transactions are you expecting to see?
Pierre Servan-Schreiber: I would hope and expect 2011 to be a better year for law firms in terms of activity, both in terms of M&A and strategic litigation or regulatory matters. This being said, the pressure exercised by clients, in great part on the back of increased competition among firms, is not going to ease up, I would think.
Tony Damian: We expect 2011 to be a busy year for top-end M&A in Australia. There remains a very strong demand in the energy and resources sector. Coupled with the return of private equity and broader industrial clients looking to implement their strategic plans, that should provide for very strong volumes this year. We also expect much of that activity to be inbound, though we do expect further domestic to domestic M&A activity.
Emerging Markets
Who’s Who Legal: Which emerging economies are the most attractive to clients and why? Is your firm expanding its operations in these jurisdictions? What is your firm doing to broaden its client base in these countries?
Pierre Servan-Schreiber: My general impression is that the US clients are more focused on selling non-core businesses or acquiring others on their domestic markets, and that European clients are open to strategic moves, be it in the form of industrial alliances, joint ventures or more classic M&A (both on the buy and sell sides), whilst BRIC countries and Japanese companies have become serious contenders on the buy side, principally in Asia, but also in Europe and in other emerging markets such as Africa.
With 24 offices around the world, including five in Asia, seven in Europe and one in Brazil, we feel that we are well positioned to take advantage of the increased globalisation of the M&A market in 2011.
Clay Horner: One of the interesting aspects of the Canadian capital markets has been its success in fostering the creation and expansion of companies, which while incorporated in Canada have most of their activities outside of Canada, including in Africa, the Middle East, South America and elsewhere. This naturally leads to transactions of a cross-border nature often involving coordinating counsel in both established and less established markets. We find that building our relationships with law firms around the world, as well as with international and Canadian investment banks active in these areas, is the most promising way to expand our business. Of course, as always, a track record and successfully completing and advising on these transactions, is the best advertisement for future work.
Tony Damian: We are seeing interest across a wide range of jurisdictions. In particular, in the resources space, we are seeing African assets emerge as increasingly important given the depth of experience in the Australian market regarding resources. We are frequently finding ourselves acting in various roles in relation to those acquisitions abroad, whether it is because the listing is Australian or because of our industry knowledge.