Corporate M&A 2020 features 53 jurisdictions. The guide covers recent developments in the M&A market, the regulatory field, recent legal developments, stakebuilding, negotiation, structuring, disclosure, duties of directors, defensive measures and litigation.
Last Updated: April 20, 2020
While the start of 2020 marked the slowest start of deal making in seven years – the value of announced mergers in the first quarter is down 25% compared to the first quarter of 2019 – the overall merger volume came to a virtual standstill in March. It is clear that the COVID-19 pandemic has hit the brakes on deal making. Even absent the pandemic, however, the pause in M&A activity to begin this decade should not strike anyone as a surprise, as tightened regulatory frameworks for foreign investments and merger control continue to unfold in one jurisdiction after another and share valuations reached peak levels at the beginning of the year. In any event, a seven-year M&A boom does seem too good to be true, but the “reports of M&A’s demise are greatly exaggerated”, to adapt a phrase of Mark Twain's. With the major geopolitical turbulence that cautioned deal makers in 2019 dwindling, and many factors that have been driving an upward trend of M&A holding strong, hope remains that there will be a turnaround of deal volume when life regains normalcy.
M&A Volume Trend in 2019
Although 2019 was a very busy year in many ways, it was a year of vicissitudes. It started off on the heels of global stock markets’ plunge and a partial US government shutdown, and chugged along in the shade of cross-border trade tensions, Brexit and the fear of an imminent economic recession. Despite all this, worldwide M&A value totalled approximately USD3.9 trillion in 2019, which – although a 3% decrease compared to 2018 year-end levels – marked the fourth strongest year for deal making and the sixth consecutive annual period to surpass USD3 trillion.
Mega-deals contributed significantly to deal volume in 2019. Deals valued at more than USD10 billion totalled USD1.2 trillion, surpassing 2018 by 28% and accounting for 31% of announced M&A value during 2019, lifting 2019 to the strongest annual period for mega-deals since 2015. Among the top 20 deals announced in 2019, 15 were US domestic deals across a wide range of industries, including Bristol-Myers Squibb’s USD93 billion acquisition of Celgene, AbbVie’s USD84 billion buy-out of Allergan and United Technologies’ USD90 billion merger with Raytheon. The total value of US domestic M&A reached USD1.8 trillion, which accounted for almost half of the total global M&A value in 2019.
In contrast, cross-border M&A value plummeted to USD1.2 trillion during 2019, a 25% decrease compared to 2018 and the lowest level for cross-border M&A since 2013. European and Asia Pacific markets shared a similar downward trend. The total value of M&A transactions for European targets in 2019 decreased 25% as compared to 2018 levels, although European outbound M&A value in 2019 increased by 28.3% compared to 2018, driven by deals such as the USD27 billion tie-up between London Stock Exchange and Refinitiv and LVMH’s USD16.2 billion buyout of Tiffany & Co. Asia Pacific total deal value in 2019 declined 14% compared to 2018, reaching a five-year low, although Japan significantly outperformed the wider Asia Pacific region with a 40% increase of its M&A activity compared to 2018.
The year marked the strongest annual period for private equity deals in the last decade, with an increase in take-private deals to USD158.3 billion in 2019, the highest value since 2007. In terms of industry performance, deal making in the pharmaceutical and healthcare sector and the technology sector remained active, including Bristol-Myers Squibb’s USD93 billion acquisition of Celgene, AbbVie’s USD84 billion tie-up with Allergan and Novartis’ USD29.8 billion spin-off of Alcon in the pharmaceutical and healthcare space, and Safesforce.com Inc’s USD15.7 billion acquisition of Tableau Software, Fidelity National Information Services Inc’s USD42.7 billion acquisition of Worldpay Group PLC and Fiserv Inc’s USD22 billion acquisition of First Data Corp. in the technology space. Notably, consolidation in the luxury-retail and consumer goods industry finally took the stage in 2019, led by the buyouts of Sotheby’s and Tiffany.
The murky geopolitical and economic environment kept deal makers on their toes in 2019. However, despite the ups and downs in M&A activity levels throughout the year, overall, 2019 did not disappoint, adding a significant amount of deal volume to the historic M&A boom enjoyed since 2014.
Factors in Favour of M&A in 2020
In today’s environment, with easy availability of capital and extremely low interest rates, there is good reason to be confident that M&A activity will come back strong when the world recovers from COVID-19.
Markets in Europe, Japan, China and the USA are in a phase of slow growth. Unable to rely on organic growth in order to meet performance goals, companies in these markets can be expected to turn to M&A activities in order to gain strategic advantages, increase revenue, consolidate costs through synergies and expand into new markets (both horizontally and vertically).
Large corporate cash reserves, record-setting amounts of dry powder ready for deployment and near-zero (and zero) interest rates across major markets in Europe and Asia will make it possible to fund deals in a variety of ways. Low interest rates also generally shrink bank profit margins, which may lead to a surge of deals in the financial services sector as banks look to offer new products to broader consumer bases, transact to reach new markets or consolidate for survival. BB&T’s acquisition of SunTrust Bank and Morgan Stanley’s proposed acquisition of E*Trade are recent examples of banks seeking profitability through M&A.
As we edge closer to the 2020 US presidential election, uncertainty concerning its outcome is likely to spur M&A activity, as companies seek to close deals before the election and avoid the risk of a less favourable post-election regulatory environment, especially in the case of mega-deals, many of which are facing delays due to heightened regulatory scrutiny.
The 2016 Brexit vote and subsequent UK–EU negotiations have hung over cross-border deal makers for three years, casting serious uncertainty over prospective transactions. As of 31 January 2020, the UK has formally left the EU. While negotiations to hammer out a new UK/EU trade agreement are expected to continue through the implementation period until the end of 2020, companies that had sidelined deals due to uncertainty as to the UK’s departure from the EU can move forward with confidence now that Brexit has formally occurred.
The shift towards cleaner energy and broad societal concern for the health of our environment will continue to prompt M&A activity. Climate change is increasingly on the minds of chief executives and directors, as the economic and regulatory impact of the environment becomes more pronounced. The expected USD30.7 billion merger of France’s Peugeot with Fiat Chrysler Automobiles is representative of M&A activity driven at least in part by these concerns, as the manufacturers seek to cope with the costs of producing cleaner vehicles that can pass increasingly strict emissions standards.
Companies in the middle of the supply chain are also exploring deals in order to better weather the shift towards environmentally friendly hybrid and full-electric vehicles, as evidenced by BorgWarner’s proposed USD3.3 billion acquisition of Delphi Technologies. Established companies with healthy balance sheets may find it is cheaper to buy their way into the green energy sector than it is to build their own green technology in-house, given the current ease of financing deals. In 2020, we can expect companies in carbon-intensive industries (such as concrete, steel and airline transportation) to increasingly look towards M&A as a means to profitability in the face of climate-related concerns.
Shareholder activism will continue to drive M&A activity. In 2019, activists spent 60% of their total deployed capital on a record 99 M&A-related campaigns. As these campaigns succeed, activists can be expected to continue committing resources to weigh in on proposed transactions.
Headwinds for M&A in 2020
While there are a number of reasons to be optimistic about the pace of M&A activity going forward in 2020, there are some challenges that will continue to shape how deals are made, as detailed below.
Driven by growing concerns over national security and intellectual property, foreign investment reviews are becoming more common, with cross-border deals becoming more challenging. For example, the US Department of the Treasury has adopted rules implementing President Trump’s Foreign Investment Risk Review Modernization Act, which has expanded the breadth of transaction subject to mandatory CFIUS filings.
The USA is not alone in this trend: the EU now considers the national security implications of foreign investment part of its regulatory purview. France has broadened its scope of control over foreign investments to include IT/cybersecurity, artificial intelligence and semiconductors as “strategic” sectors requiring pre-approval for foreign investment. In November 2019, Japan passed a bill cutting the threshold for mandatory prior approval of foreign investment in a Japan-listed company from 10% to 1%. This trend is expected to discourage companies from investing in high-profile assets outside of their home markets in the coming years.
Merger enforcement actions are also becoming more frequent, which may dampen deal-making confidence. For the first time, the US Federal Trade Commission (FTC) issued a split decision along party lines, allowing a largely vertical merger of office-supply giant Staples Inc and wholesaler Essedent Inc. The UK Competition and Markets Authority (CMA) issued its first unwinding order during a merger probe in November 2019, requiring Bottomline Technologies to unwind part of its completed acquisition of the Experian Payments Gateway business. The EU has been active with merger enforcement as well, blocking the merger of the train-making operations of Germany’s Siemens AG and France’s Alstom SA, as well as the merger of India’s Tata Steel Ltd’s European business with Germany’s Thyssenkrupp AG.
Beyond specific enforcement actions, merger controls are tightening up across major markets. In early January, the US Department of Justice and the FTC proposed new guidelines for the review of vertical mergers for the first time in 36 years. The UK CMA has updated its guidance on interim measures to enhance adherence to procedural rules (intended to prevent pre-clearance integration of parties to a transaction), and Germany and Austria have both introduced lower transaction value thresholds in order to intervene in the case of so-called killer acquisitions in digital markets – ie, transactions wherein large companies acquire smaller targets in order to discontinue the development of disruptive technology that poses a competitive threat.
In the current socio-economic climate, the global view of trade may take a back seat to shorter-term agendas focused on domestic constituencies. Furthermore, even in cases where deals ultimately do receive regulatory approval, the review process can significantly delay deal closing. Uncertainty surrounding the outcome of regulatory review – whether divestitures are required, and whether the length of the review will jeopardise the transaction – will shape deal flow in this new decade, as companies navigate new and yet uncharted regulatory waters.
Geopolitical tensions create a risky environment for cross-border deal making. The recent degradation of US–Iran relations is a reminder of the unpredictable nature of these risks. Additionally, trade tensions persist between the USA and China. The interim trade deal currently being discussed is unlikely to appease either party’s concerns regarding protections for intellectual property or China’s industrial policies; it is expected these concerns will continue to influence deal makers contemplating cross-border investments that are sensitive to this trade relationship.
While markets have responded well to finally receiving certainty in the wake of the UK formally leaving the EU at the end of January 2020, the implementation period during which the UK and the EU are set to negotiate new trade agreements is expected to last until the end of the year; any number of points under consideration may give rise to serious concern during the next year.
The emergence of COVID-19 has had a significant effect on the global economy, and can be expected to continue slowing production, reducing consumption, and disrupting typical supply chains and workflows. To date, the full extent of the spread of COVID-19 (in terms of number of cases and their geographic spread) is yet to be seen, but the World Health Organization officially declared it a pandemic (as of 11 March) and the financial costs of the virus are clear. Manufacturing shutdowns, widespread stay-in-place orders, and restrictions on non-essential activities are impacting communities across the world. Deal making is also largely on pause. It has become paramount for companies to conserve cash, and even if there are deal opportunities that make strategic sense, execution of deals will be challenging: little debt financing is available as banks are faced with more urgent client needs to keep companies afloat, deal pricing will be even more contentious than usual due to volatile stock prices and negotiations between geographically distant or cross-border parties are difficult to carry on as business travel is greatly reduced. Containing the spread of COVID-19 through increased testing and treatment will be an important international goal that is expected to weigh on the global consciousness through 2020; at the time of writing, this is very much an ongoing situation.
The rapid global spread of COVID-19 is set to shape the world’s economic trajectory in 2020, as stock indices are roiled by news and unemployment increases. COVID-19 is not the only new uncertainty to rise to the forefront: post-Brexit negotiations are just beginning, another US presidential election looms, and the medical response necessary to curb the virus’s spread has the potential to inflict disastrous damage to global economic growth.
Economic slowdown or not, it is clear that governments are demonstrating an ever-greater willingness to involve themselves in large corporate transactions. Navigating regulatory challenges is poised to become a more important component of closing M&A transactions in 2020 as governments cast greater scrutiny on mergers; this is expected to be especially true for mega-deals.
Companies contemplating cross-border acquisitions may find their efforts hindered by travel restrictions and burgeoning anti-globalist sentiments in major markets, and negative public sentiment towards the world’s largest companies may dampen M&A efforts as governments attempt to prevent the consolidation of corporate power. Merger reviews are likely to take a long time – even for eventual approvals – and companies will need to plan for regulatory approvals to meaningfully delay deal closings.
While there is reason for concern, there is still reason for continued optimism in 2020. Whatever the eventual economic impact of COVID-19, in today’s environment of slow organic growth, companies will continue to need to make acquisitions as a tool to acquire talent, develop innovative technology and, most importantly, generate outsized growth in 2020 and beyond.