After a less than impressive 2009, ALB takes a preliminary look at what will be the salient M&A trends for 2010, and which firms are best positioned to take advantage of them
While M&A was largely restricted in the Asia-Pacific region last year to Chinese outbound deals, things are picking up for the region in 2010. Recent Ernst & Young research found that over a third of CEOs of US companies are either likely or highly likely to make acquisitions this year. Boston Consulting Group and McKinsey contend that one in five of Europe’s largest companies are also busily identifying possible acquisition targets across the globe, while other research firms cite similar findings.
In Asia, the outlook is as positive, if not more so, according to lawyers recently interviewed by ALB. “I’m optimistic about the prospects for increased M&A activity across Asia in the coming year, provided there are no seismic meltdowns on the scale of Lehmans,” said Robert Ashworth, Asia head of corporate at Freshfields. And Jonathan Stone, co-head of Skadden’s corporate practice in non-Japan Asia, shares Ashworth’s enthusiasm, saying the stability that seems to have washed over Asia’s financial markets towards the end of 2009 has placed companies in a good position to make M&A deals. “The markets picked up quite well in the second half of 2009 and from what we can see, a lot of companies have met their capital raising requirements and have strengthened their balance sheets,” he said. “There is enough stability around to suggest that deal flow will pick up. Some sovereign wealth funds took some difficult writedowns during the crisis,” he said. “Now they are starting to come back, slowly – but we see private equity coming back more quickly especially with the increased stability on equity markets plus the further availability of credit.”
But while it is impossible to predict just how much 2010 will better 2009 for dealflows, or for that matter whether it will at all, one certainty is that dealmaking will be an entirely different proposition ths year to what it was.
Outbound PRC deals to continue?
One of the most striking trends seen in Asian M&A throughout 2009 was the increase in outbound China deals, headlined by transactions such as Chinalco’s bid for a stake in Australia’s Rio Tinto, China Minmetal’s proposed acquisition of Oz Minerals, and China Nonferrous Metals’ partial offer for Lynas Corporation. These types of transactions were all about securing access to the natural resources required to keep the dragon economy firing for years to come. “Certainly outbound M&A from China has enjoyed its most notable couple of years,” says Freshfields’ Ashworth. “The focus of this activity is ... deals driven by the need for China to secure ongoing supplies of energy and raw materials.”
But while each of the deals above indicate China’s thirst for natural resources and its interest in resource-rich countries, scrutiny shows that they each have something else in common. Each deal fell through, which has led a number of commentators to question if Chinese resource-driven outbound M&A will continue to be as prominent in 2010. Even if these sorts of deals do dry up, Ashworth says that the M&A landscape in Asia’s largest economy is diverse enough to guarantee lawyers across the region busy times for this year. “The other driver [of outbound M&A from China] has been the ability to acquire well-known brands at recession-impacted prices,” Ashworth said. “This has brought about several actual – and prospective – deals in Europe and the West generally.”
Jeanette Chan, a Hong Kong-based partner with Paul Weiss, also warns against pigeon-holing Chinese M&A as either strictly outbound or resource-driven. She says PRC-related deals in 2010 are likely to be pursued as an avenue through which Chinese companies can increase their international exposure and market share. “In areas like the service industry, the domestic Chinese market is extremely competitive with little room left for some Chinese companies to grow,” Chan says. “In some deals in this sector we can see companies looking to expand beyond contracting domestic markets, trying to grab global market share.” Chan cites Shanghai Jin Jiang’s recent acquisition of Interstate Hotels & Resorts (on which Paul, Weiss was lead counsel for Interstate) as a good example. In this US$307m deal, Shanghai Jin Jiang partnered with US-based real estate investment firm Thayer to acquire the NYSE-listed Interstate.
This was a move which was as much financial as it was about building the growing Chinese company’s international credentials. (Interstate has over 232 profitable properties across the world.) “We will see a lot of Chinese companies in the service industries – whether it is hospitality, broad consumer or automobile – look to international targets as a way to internationalise their own service standards and build their brands,” Chan says.
Nick Norris, the co-head of Skadden’s Asia-Pacific corporate and Hong Kong law practices, foresees M&A deals which involve strategic partnerships as becoming increasingly common in the year ahead. “We are doing deals across a range of sectors and with clients now seeing opportunities for strategic acquisitions as well as strategic partnerships,” he said. “Rather than just selling out completely, many of these deals have seen companies use strategic partnerships as leverage to push their businesses to the next stage of development. This is especially relevant to businesses in the PRC and Taiwan.”
Bankrolling M&A in 2010
While predicting what course Asian outbound M&A will take this year may be difficult, speculating as to who will finance the deals is decidedly easier. With banks still apprehensive to finance anything, let alone M&A, the scene is set for greater involvement from both private equity and sovereign wealth funds (SWFs). “2010 is likely to see more involvement in M&A deals from SWFs and private equity houses primarily because each has ready access to capital, and could benefit from rising stock markets,” says Freshfields’ Ashworth. “They have their hands on the money; the funds have been raised, and it’s burning a metaphorical hole in their pockets. The rising share markets now mean greater liquidity, and therefore more open exit options once a business has been acquired and turned around.” But the fact that the GFC was disastrous for a number of SWFs (the woes of Temasek, the GIC and others have been documented widely) means that others see more of a role for private equity.
“Some sovereign wealth funds took a real battering during the crisis,” said Skadden’s Stone. “Now they are starting to come back, slowly, but we see private equity coming back more quickly – especially with the increased stability on equity markets plus the further availability of credit.”
In some M&A deals PE’s unique ability to add greater value to targets may see it favoured over traditional bank lending. “PE will always have a big role to play because it can add value to M&A deals that others can’t,” says Paul Weiss’ Chan. “In the current context we expect to see a number of domestic companies, be they in mainland China or elsewhere, teaming up with PE to go outbound…
“This is a very sound model as it not only adds the management know-how, but also helps company’s tap private equity’s own exposure and often extensive networks.” And one shouldn’t forget that there are also a number of companies with the means to do deals under their own steam. Many companies were quick to slash unneeded overheads in 2009 with the result being that company after company reported reduced revenue and profit that beat market expectations. So much so that the cash pile of Standard & Poor’s 500 companies has grown by well over US$100bn since the Lehman bankruptcy.
And in Asia, Thomson Reuters figures show that Japanese companies raised a record US$57bn through follow-on offerings last year, with similarly impressive figures for companies in mainland China, Hong Kong and Korea. With plenty of cash to spend, little excess fat in the way of overheads to trim, and relatively slow macroeconomic growth in comparison to past years many companies will undoubtedly go after targets alone.
Strategic rather than financial deals will continue to be the most common, according to lawyers ALB interviewed, with competitive auctions becoming just as frequent. “Auctions will continue to feature prominently in the M&A landscape, whether as formal, well-defined bidding processes, or more informal auctions arranged by agents of the sellers,” said Freshfields’ Ashworth. He notes that he expects hostile bids, while becoming increasingly common in Europe and US, will not take off in Asia in the year ahead. “With a few exceptions, hostile takeover activity has never really been a feature of the Asian M&A scene, given the prevalence of closely controlled corporations in many of Asia’s main markets.”
Bad times breed better deals
Changes to deal structure, financing, documents and execution that have been forced upon dealmakers as a result of the financial crisis have actually seen more sound deals coming to market, according to Paul Weiss’ Chan. “The deals being done now are much better than those that were done during the 2007 heyday,” she says. “Back then people did not have a lot of time for execution – now there is a lot of lead time and deals are stronger as a result, because there is more focus on protection.”
This is nowhere more evident than in loan and deal documentation, according to Freshfield’s Ashworth. “The first thing to disappear as a consequence of the financial crisis was covenant-light transactions,” he said. “Banks had been prepared to lend with few borrower covenants, but the days of easy credit have now gone. Sellers are insisting that buyers have financing secured prior to signing any contract. “The costs and risks now fall on the buyer. This means that very few deals that go to market would allow financing conditions or “financing out” to be included.”
One of the most salient trends in this regard is greatly shortened timeframes in which parties want deals executed. “One way in which the downturn has impacted deal timetables is to shorten the period in which the buyers and sellers are prepared to take market risk,” argues Ashworth. “There is pressure from sellers in particular, for simultaneous signing and closing. This in effect means satisfying conditions upfront through pre-conditional structure, pre-packaged financing or increased pressure to waive or remove conditions from documents.”
Challenges
2010 may well be a year in which transactional activity across the region starts to pick up – but it is also set to be a challenging one for lawyers in Asia. From navigating truncated execution schedules to ensuring that document control is achieved, M&A lawyers will need to ensure that they keep their collective ear to the ground for any opportunities that may develop – as well as for any broader macroeconomic changes. “2010 is looking a like a busy year for M&A lawyers in Asia, but it will also be a year in which it will be challenging to run an M&A practice,” said Skadden’s Norris. “M&A lawyers will have to try and anticipate where the work is going to develop and continue to stay on top of the corporate drivers behind M&A in the region – which sectors and industries their clients will be targeting. ALB
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