The call of corporate consolidation

Big M&A deals are still going through in spite of the generally twitchy markets, and the battlegrounds are shifting. Selwyn Parker investigates the industry, looking at where it’s most prominent, and what the potential pitfalls may be

Larry Pope and Matthew Slaughter
Larry Pope (L) of Smithfield Foods, and Matthew Slaughter, Director of the Centre for Global Business and Government, answer questions on the sale of Smithfield Foods to Shuanghui International  

It’s highly unlikely that the average American consumer had heard of a company called
Shuanghui International until the middle of this year – but they certainly will over the next few years. The Hong Kong-based but mainly China mainland-owned company is a producer of meat products that only got going 30 years ago. As for its Shuanghui brand (Shineway in English), it was launched barely 20 years ago.

But in September, Shuanghui pulled off the biggest-yet takeover of an American company by a Chinese one when US regulators approved its $4.72bn acquisition of Smithfield Foods, a global conglomerate. Shuanghui, led by Managing Director Zhijun Yang, who worked his way up from the shop floor, had to fight for the deal. The notably defensive committee on foreign investment (CFIUS) signed off on the takeover only after senior representatives of both parties in Congress took a long and hard look at it under what they described as a “thorough review” of the deal.


Global M&A transactions, 1985


Global M&A transactions, 2010

According to M&A lawyers, politicians would have got investigators to give the Chinese company a forensic examination, including finding out the location of Smithfield’s processing plants. If they are near military bases, for example, the takeover may have been pushed off the table. After all, the foreign investment committee has blocked at least three transactions since 2009 that would have had Chinese companies owning premises near sensitive locations.

But with the committee satisfied that Shuanghui is only concerned with selling Smithfield’s products around the world, and especially in China, rather than steal military secrets, the transaction is seen as a landmark in global M&A. As Forbes contributor Jack Perkowski pointed out, the deal can only be of benefit to America because it opens up the vast mainland Chinese market to US producers. “This is the beginning of an important new trend – look for more transactions [like it] in the future,” he commented.

The Shuanghui-Smithfield transaction is, however, only one example of something of a stampede by highly acquisitive Chinese companies to do M&A deals outside their own borders. Indeed, it is the most significant development of a more buoyant M&A sector in 2013 as global deals, whether by Chinese or other companies, finally began to approach the size they achieved before the financial crisis.

Even by halfway through the year, it was clear that a seismic shift was occurring in the global M&A market. By then Chinese companies had wrapped up no less than 98 cross-border transactions valued at $35.3bn, according to data from consultant Deloitte Touche Tohmatsu China. The two main target markets were Europe and the US, with mega-deals – anything above $1bn – accounting for well over a dozen transactions. And since then the deals have kept rolling in. With just one month remaining in 2013, Chinese companies had splashed nearly $61bn on foreign acquisitions, the highest on record.

China value of deals graph

According to the consultant’s local M&A expert, Stanley Lah, China’s increasingly bold move offshore (see area graph) is a reflection of growing confidence built on the back of more demanding and affluent consumers. Reflecting the nation’s thirst for premium European whiskies and spirits, they want higher-quality products made by prestige brands. “With US, European and Chinese economies having shown signs of growth, it should be no surprise that Chinese companies are becoming more optimistic,” Lah wrote in a report.

Big deals Stateside
Significant as they are, China-inspired deals do not top the charts for 2013. Indeed, they pale in size when compared with those taking place in the US. With interest rates at historically low levels because the US Federal Reserve has pumped so much money into the economy, acquisition-hungry American companies could not resist the temptation of low single-digit loans to fund raids on rivals or complementary businesses.

“The silver lining [in M&A by US companies] is that the Fed has made it clear they’re not going to pull back on easing near-term,” Paul Parker, Head of Global Corporate Finance and M&A at Barclays, told Reuters in September. “Therefore companies do have a window to take advantage of the rate environment, which is still historically low.”

The towering acquisition of the year of course was Verizon Communication’s $130bn purchase of the US wireless business of Vodafone (see bar chart). Launched in late August, it involved Verizon buying the UK telecommunications group’s 45 percent interest in Verizon Wireless. The price was irresistible – Vodafone will return £54bn to its shareholders, including £22bn in the UK. As Chief Executive Vittoria Colao said, echoing the basic rationale behind most M&A transactions: “We got an offer that was thought was in the interests of our shareholders to accept – at the end of the day it’s as simple as that.”

World's biggest M&A deals

Until Verizon’s mammoth deal, it seemed that the top three would be the $28bn takeover of food group HJ Heinz by Warren Buffett’s Berkshire Hathaway and 3G Capital, followed by Michael Dell’s buy-back of his computer manufacturing company for $25bn and the $23.3bn acquisition of Virgin Media by Liberty Global.

But as people live longer around the globe, it was the rush for healthcare and life-science companies that dominated the top 10. In fourth place was Life Technologies after it was snapped up for $13.6bn by New York exchange-listed Thermo Fisher Scientific. Other top 10 healthcare deals in the sector include Onyx Pharmaceuticals (bought for $10.4bn by Angen), Bausch + Lomb ($8.7bn by Valiant Pharmaceuticals International), and Ireland’s biotech group Elan ($8.6bn by Perrigo).

The number of global deals may have fallen by around 10 percent to 25,374 compared with 2012, but nearly all of these are below the radar, well under the $100m mark by value. It is however the size of the transactions that is instilling a growing confidence in most markets as well as China.

“Overall deal activity is a good barometer of chief executive and board confidence,” explains Patrick Ramsey, joint head of Americas M&A at Bank of America Merrill Lynch. “But big-deal activity – $10bn and plus – is the best barometer of confidence. And we’ve seen more big-deal announcements this year-to-date than in any year since 2008.”

Rush to debt
Quite apart from the fact the M&A market is generally healthier, one of its most noteworthy aspects is how the big deals have been funded. For the first time in a long time, investors are rushing to back big-ticket debt splurges, as Verizon’s acquisition shows. After the transaction was approved, the US communications giant went to the market to raise the money. It offered $49bn in bonds to investors, a daring three and a half times the $14bn raised by Apple a few months earlier. At the outset it looked like the tactic could be a mistake – but Verizon took the plunge and got swamped. In a week-long debt-buying frenzy, Verizon’s brokers received about $100bn in bids.

For the first time in a long time, investors are rushing to back big-ticket debt splurges

According to underwriter Morgan Stanley’s Paul Spivack, Global Head of Investment Grade Syndication, the level of interest was a shock. “We had orders in this book that exceeded anything we’ve seen before”, he told the Wall Street Journal.

After years of investor nervousness about mega-transactions, the ease with which Verizon’s gargantuan acquisition was funded suggests the debt markets are regaining confidence and everybody is winning as a result. First, Verizon gets cheaper and more predictable debt than it otherwise would through loans organised by a syndicate of banks. Second, investors book a higher-yielding return from the corporate bonds than they would from, say, buying US Treasury bills.

And finally, the dealmakers – the Wall Street firms that oiled the acquisition – booked a total of $265m in fees. According to public filings, Barclays, Morgan Stanley, Morgan Chase and Bank of America took around $41m each for leading the debt sale.

More transactions, more regulation
Despite the bigger transactions, M&A consultants say the deal-making climate is changing. Just one fly in the ointment is the eagle-eyed attention of regulators. In Europe, Brussels’ bureaucrats usually involve themselves in sizeable transactions, while the US Justice Department has been particularly active. Its anti-trust lawyers only withdrew in November their objections to the merger of American Airlines with US Airways. And as the price of approving its $20.1bn acquisition of Mexico’s Modelo group, they forced brewer Anheuser Busch Inbev to sell off one of the company’s breweries, among other conditions.

“We’re seeing more activism out of the anti-trust regulators”, says Scott Barshay, Head of the Corporate Department at law firm Cravath, Swaine & Moore. “As a result, fewer deals are being pursued because of fears the regulators will just turn them down or demand too high a price.”

[T]he sun could be about to come out in Europe after five years of M&A gloom

In fact, some regulators are trampling all over transactions on the skimpiest of authority. The UK’s competition authorities are a case in point. When Netherlands-based specialty chemicals group Akzo Nobel tried to buy all of Metlac, an Italian competitor, in July, the Competition Commission jumped in boots and all. Even though both companies were based outside Britain, it blocked the merger on the grounds that the companies make sales in the UK. Of nine competition authorities that could have intervened, the UK regulator was the only one to take such a step.

As multinational law firm Norton Rose Fulbright points out, this was a landmark ruling. After all, Akzo Nobel did not ‘carry on business’ in the UK, which is the usual requirement for such intervention. The overriding lesson, warn consultants, is that firms should hire a lawyer well before launching a cross-border M&A – and incurring considerable costs. Regulators are adopting increasingly generous interpretations of commercial law to get involved in M&A deals.

As lawyer Vera Rechsteiner of Houston-based law firm Andrews Kurth explained in a November note to clients: “[In the US] A transaction may be [deemed] ‘cross-border’ for any number of reasons, including foreign deal participants, non-US assets or the application of non-US laws, to name a few.”

Raking the ashes
Without the jump in interest from Asia, particularly China, and the UK, deal making in mainland Europe would languish even further than it does. M&A activity collapsed by nearly a quarter during the year in Europe to a total of $383.3bn, despite Vodafone’s €7.7bn takeover of Kabel Deutschland, and – the big deal of the year – the $35bn merger of French advertising agency Publicis with America’s Omnicom.

And opportunist investors are raking over the ashes of the financial crisis. As the employees of Spain’s Panrico, one of the world’s biggest doughnut manufacturers, will vouch, a fast-emerging phenomenon in Europe is the distressed M&A. In the case of Panrico, which collapsed earlier this year, Los Angeles-based Oaktree Capital snapped up the debt and, with it, the assets. Immediately, the private-equity firm launched a painful restructuring that involved lower wages and redundancies, triggering protests by employees.

Howard Marks, Chairman of Oaktree Capital Management
Howard Marks, Chairman of Oaktree Capital Management, which subsumed and then restructured Panrico Donuts

But this is a Europe-wide phenomenon, even in the EU’s economic powerhouse. “Distressed M&A transactions are currently en vogue – especially in Germany,” confirm researchers Juergen van Kann and Rouven Redeker of New York-based law firm Fried Frank Harris Shriver & Jacobsen. Right now, there are several high-profile examples – energy group Solarworld and DIY chain Praktiker, to name just two.

New insolvency laws in Germany have made it easier for opportunistic funds to jump into the fray and acquire assets on the cheap. Alarmed at the way some insolvency specialists were plundering assets through sky-high fees at the expense of creditors, Bonn passed a law in early 2012 that among other things gave creditors more say in post-collapse proceedings. Any important creditor can be elected to the creditors’ committee, including third parties such as vulture funds that are often highly adept at rescuing a company in trouble, albeit at a price.

However, the sun could be about to come out in Europe after five years of M&A gloom. “All things seem to point to a future increase of activity,” says Gilbert Pozzi, Goldman Sach’s Head of M&A for Europe, the Middle East and Africa. Indeed, in late November, Germany’s third-biggest cable company, Tele Columbus, made an offer for junior rival Primacom.

Some things don’t change though. As French-born Harvard Professor Marc Bertoneche pointed out recently in a review of mounting M&A fever, these deals often come unstuck. And he cites a range of causes, including overvaluations, clashes of culture, absence of a disciplined post-M&A strategy, and inability to resist pressure from banks and others with a vested interest in a deal.

“All the studies agree on the conclusion that 50-70 percent of M&A transactions do not create value, a statistic that is nearly as high as the rate of failure in the marriage and partnership of Hollywood stars,” he said. So, 30-50 percent of all that money will be wasted.