Besides a fair share of large deals announced or completed between 2019/early 2020, the market experienced an increase in the number of deals, with a decrease in the average value of each transaction, due to an expansion of the venture capital/early stage deals, that reached new highs.
The COVID-19 outbreak, however, brought a marked slowdown in the M&A activity, which was already experiencing a more prudent attitude on the part of the buy-side market operators towards the high valuations sought by the sellers and already led to the interruption of the sale process of several important assets.
Further, it will cause a shift in the market operators focus (especially the investment funds), which will be on the protection of the (portfolio) companies from the impact of the COVID-19 related consequences and measures, and, over the medium term, may create opportunistic acquisition situations for larger players willing to scale-up their business.
The recovery will be mostly driven by the timing of the normalisation once the public health crisis has passed and by the supportive attitude of the debt and equity markets.
In 2019/early-2020, a strong performance by the stock markets and a more mature AIM market led to an increase in the IPO activity.
COVID-19-related uncertainties, including a high volatility in the stock markets, has put the market operators on the defensive, as a result, the IPO transactions in the works will be put on hold and the investment funds that are not fully focused on the portfolio companies protection might still benefit from the prior strong fundraising, and still manageable interest rates, but the attention on the asset quality (already high pre-outbreak) will increase.
More opportunistic operators will be on the watch for valuable acquisition targets that have been impacted by the COVID-19 outbreak and more room for increased shareholders activism could be on the horizon.
M&A activity in life sciences/healthcare and food/wine industries, especially in respect of businesses located in northern/central Italy, as well as in the banking/financial services sector, have been strong throughout 2019.
For 2020, besides COVID-19-related uncertainties, the trend is expected to continue, with:
The most frequent and straightforward way of acquiring a company is the direct purchase of a participation in it.
It is also usual (but is less frequent, due to tax considerations) to proceed with the seller making a contribution to the activities of interest to the purchaser, in favour of a special-purpose corporate vehicle (SPV) and with the subsequent transfer to the purchaser of the participations in the same SPV. This allows a ring-fence of the activities of actual interest for the purchaser, and the target liabilities from the prior regime.
Market takeovers are often preceded by the acquisition of a relevant holding by the (relative) majority shareholders.
In any case, cash is the consideration used in almost all transactions; share deals are rare.
The primary regulators are the Competition Authority (Autorità Garante della Concorrenza e del Mercato - AGCM), which oversees all the relevant concentrations, and the Government itself (Presidenza del Consiglio dei Ministri), which has "golden powers" to block transactions involving companies that are of relevance to Italy’s national security interests or that operate in the energy, transport and telecommunication sectors, in the banking and insurance sector, in the supply of critical inputs, including energy and raw materials (as well as food security), or to make them subject to conditions/undertakings. Until 31 December 2020, the "golden powers" will also apply to transactions carried out by EU operators.
There are further sector-specific authorities, like the Bank of Italy/European Central Bank, with respect to transactions in the banking sector, or the Autorità per le Garanzie nelle Telecomunicazioni (AGCOM), in relation to the media and telecoms industry.
Restrictions on foreign investments are contained under the "Golden Power Law", pursuant to which the Government has the power to block transactions involving companies that are of relevance to Italy’s national security interests or that operate in the energy, transport and telecommunication sectors, or in the banking and insurance sector, in the supply of critical inputs, including energy or raw materials (as well as food security), or to make them subject to conditions/undertakings. Until 31 December 2020, the "golden powers" will also apply to transactions carried out by EU operators.
Antitrust laws provide for the following notification thresholds, to be considered when the transaction does not fall within the EU antitrust regulation:
The EU antitrust regulation serves as an interpretation guide with respect to the Italian national antitrust rules.
Transfers of shareholdings are not subject to works council procedures, while mergers and transfers of businesses/branches of businesses involving more than 15 employees are subject to prior consultation, with the trade unions to ensure that the transferred employees are not deprived of the rights enjoyed prior to the transaction.
A national security review is provided under the Golden Power Law, pursuant to which the Government has the power to block transactions involving companies that are of relevance to Italy’s national security interests or that operate in the energy, transport and telecommunication sectors, or in the banking and insurance sector, in the supply of critical inputs, including energy or raw materials (as well as food security), or to make them subject to conditions/undertakings almost identical to those mentioned in 2.3 Restrictions on Foreign Investments (since the restrictions to foreign investments are given by the national security review rules). Until 31 December 2020, the “golden powers” will also apply to transactions carried out by EU operators.
Reinforced screening is required for transactions carried out by non-EU players in critical sectors, eg, data centres, financial infrastructure, artificial intelligence, robotics, semi-conductors, network security and access to information.
The governmental “golden powers” mentioned in 2.6 National Security Review have been expanded in scope and so as to include - at least temporarily - the transactions carried out by EU operators.
In consideration of the patrimonial and financial stress that the outbreak of COVID-19 has caused (and will cause) on the businesses, until 31 December 2020:
A comprehensive reform of the bankruptcy law is scheduled to become effective in September 2021.
Several provisions of the new law aim to further ease the intervention of third-party investors in the context of the procedure, thereby facilitating the implementation of transactions on the distressed company’s capital or assets.
CONSOB (the Italian financial market regulator) has implemented its 2018 guidelines to ascertain whether a company qualifies as a small or medium-sized enterprise (SME) for the purposes of takeover law, and has set up a public list of such undertakings on its website.
Under takeover law, SMEs:
The new rules have made easier to find out the applicable threshold in respect of a given issuer or in relation to which issuer the foregoing solutions may be implemented.
Stakebuilding is a narrow possibility, due to recent case law and the entry into force of the Market Abuse Regulation.
The crossing (upwards or downwards) of 1% (for large companies only), 3%, 5%, 15%, 20%, 25%, 30%, 50% and 66.6% of a listed company’s voting capital must be disclosed to the target company and CONSOB, which publishes the information on its website.
Further disclosure obligations relate to:
The possibility of lowering the reporting threshold is only granted to CONSOB, and the increase of such a reporting threshold is prohibited.
The bylaws of a limited number of listed companies (usually those that have public relevance, eg, utilities) provide for limits to share ownership.
Dealings in derivatives are allowed, provided that net short positions are disclosed if they are greater than 0.1% (and following 0.1% steps). Long positions must also be disclosed in relation to both cash settled and physical delivery instruments, when the aggregate position (inclusive of the shares owned by the investor) crosses (upwards or downwards) 5%, 15%, 20%, 25%, 30%, 50% and 66.6% of a listed company’s voting capital (no offset with any concurrent short position is allowed).
Derivatives are not counted for the computation of participation thresholds for antitrust purposes. The other reporting obligations are summarised in 4.4 Dealings in Derivatives.
Apart from the information required in the tender offer document regarding the bidder’s future intentions and plans for the target company, and prior to the launch of a takeover bid, any entity that comes to hold a participation greater than 5% (if mandated by CONSOB) 10%, 20% and 25% of the voting capital in a listed company must disclose the following to the target company, CONSOB and the public:
Under the Market Abuse Regulations, and assuming a multi-stage process, a deal must be disclosed the moment there is a reasonable expectation that the transaction will take place ("reasonable expectation test"). Disclosure may therefore take place prior to the execution of binding documentation, but must specify the actual status of the process.
In any event, the parties may delay disclosure if early disclosure could jeopardise the negotiations or the implementation of the deal.
Recent developments under the Market Abuse Regulations are leading to an increase in delaying the disclosure of information, provided that it is possible to ensure the secrecy of the relevant information among the parties involved.
In a negotiated business combination, the scope of legal due diligence is usually very broad, covering the following:
If listed companies are involved, the scope is usually narrower or has higher materiality thresholds, given the large amount of publicly available information.
Exclusivity clauses are the absolute norm, while standstills are frequent for transactions involving listed companies. This avoids insider-dealing issues for listed companies' directors.
If joint parties launch the offer, the terms and conditions are set in a binding agreement between the parties, which are entered into prior to the offer launch and must be disclosed to the public.
If due diligence is to be carried out, the process lasts eight to 12 weeks for the signing of the binding documentation; closing usually takes place five weeks after if antitrust clearance is needed.
The tender offer threshold is set at 25% for large companies (in the absence of another shareholder owning a higher participation) and 30% for SMEs (companies with a turnover of less than EUR300 million or a market capitalisation of less than EUR500 million, themselves to be calculated in accordance with the criteria set forth by CONSOB). The bylaws may provide for different thresholds, but they cannot be lower than 25% or higher than 40%.
The sell-out threshold is set at 90%, while the squeeze-out threshold is set at 95%.
Cash is the most common form of consideration, although some of the recent largest takeover-bids have provided for a share component as consideration.
As a matter of law, mandatory takeover bids cannot be subject to conditions but voluntary bids may be subject to certain terms. The bidder may not be the only party to impose conditions.
Common conditions to voluntary tender offers are acceptance thresholds; to ensure that the offerors achieve control of the target (or its de-listing); antitrust/regulatory clearances; and Material Adverse Change clauses. Sometimes the offerors include a lenders’ waiver to change-of-control provisions under the relevant financing agreements as a condition to the offer.
The usual acceptance threshold is 50% plus one share (to be calculated by also computing any shares already owned by the offeror). However, the offeror may reserve the right to waive the condition if the acceptance levels allow him or her to control the target on a de facto basis.
Save for tender offers, for which a certain funds/cash confirmation letter is required prior to the start of the offer acceptance period, no provisions prevent a business combination being conditional on the bidder obtaining financing, but the instance is unusual.
The most common security measure is an equity commitment letter from the purchaser’s shareholders to cover the amount of the consideration (and, sometimes, the amount of the damages to be paid to the sellers in case the purchaser fails to consummate the closing); break-up fees are rare in Italy.
Minority shareholders are usually granted a board representation and veto rights (at board or general meeting level), aimed at protecting the essential character and risk profile of their investment, as the case may be, covering:
The above veto rights are deemed not to create a joint control with the minority shareholder.
Shareholders can vote by proxy, and proxy solicitations are common in respect of listed companies.
A squeeze-out with the forced and simultaneous purchase of all the remaining shares is the most common way to buy out the shareholders that have not tendered and is allowed if the offeror has come to hold (also considering the target shares owned prior to the offer) at least 95% of the target share capital, after a tender offer (or a sell-out procedure) on all the target shares. The squeeze-out price is determined by law and is usually equal to the price of the preceding offer.
If the offeror has not reached the sell-out/squeeze-out threshold (respectively set at 90% and 95%), he or she may merge the listed target company into a non-listed entity, with the target residual shareholders having a right of withdrawal from the company. However, this mechanism has rarely been used.
Commitments to tender are commonplace in friendly offers and are usually entered into prior to the launch of the offer itself (less frequently during the offer period). Their conclusion and contents must be disclosed to the public.
The shareholder is only allowed to withdraw from the commitment to tender the shares to a competing, higher offer.
A bid is made public as soon as the relevant decision has been made by the offeror or the relevant obligation has arisen, provided that he or she has obtained the financial resources to pay for the consideration.
If the absorbing entity is not listed, the parties to the business combination must make the following available:
In addition, the combination must result from a notarial deed duly inscribed in the Companies’ Register.
If the absorbing entity is listed and the shares to be issued amount to more than 20% of the share capital, it is further mandatory to publish – prior to the issue of the shares – an information document which must be considered by CONSOB (the Italian market regulator) as equivalent to a prospectus and contain:
All parties and all types of company involved in a transaction must disclose three prior annual accounts and transaction reference accounts, while the pro-forma accounts (to be certified and drawn up in accordance with International Financial Reporting Standards and the interpretation provided by the International Financial Reporting Interpretations Committee) are required only when listed entities are involved.
The merger plan is always made available to the public, while the manager's/independent experts' reports are only disclosed to the entities’ shareholders. If listed companies are involved, all the documentation must be made available to the public. The merger resolutions and implementation deed are carried out through public notarial documents.
Besides the general duty to protect the integrity of the company’s equity and to act in good faith, on an informed basis and with no conflict of interest, in a business combination the directors must draw up and approve the merger plan, as well as justify the transaction from a legal and business standpoint.
Ad hoc committees are formally established in more complex transactions; otherwise, the Chief Executive Officer is put in charge of the process and periodically reports to the board. In case of a conflict of interest, eg, in related parties' transactions, the independent/non-related directors must assume a prominent role in the decision-making process.
In the context of a takeover, the target directors in Italy:
Italian law mandates that a court-appointed independent expert must render a fairness opinion on the combination exchange ratio. In addition, the involved entities’ directors may retain their own advisers on a voluntary basis.
One of the most litigated corporate issues in Italy is a director’s conflict of interest. Plus, with respect to listed companies, CONSOB sometimes opens investigations to verify compliance with the related parties' transaction rules.
Hostile tender offers are permitted, but are not common.
Defensive measures are allowed, but may be taken only with the prior authorisation of the shareholders' meeting (restrictions on voting do not apply in such meetings, pursuant to the breakthrough rule). Pre-emptive authorisation in the bylaws is permitted, but has rarely been used.
There is no long history of post-offer defensive measures in Italy. Only once has a target company effectively tried to defend itself from a takeover bid through the conversion of non-voting shares into voting ones, a buy-back programme and the disposal of non-strategic assets, but the proposals were rejected by the general meeting and the offer went through.
However, Italian law does allow for pre-emptive defensive measures, such as multiple voting shares; increased tender offer thresholds set forth in the bylaws (up to 40%); limitations to share ownership; or automatic conversion of special shares if an offer is launched.
Besides the general duty to protect the integrity of the company’s equity and to act in good faith, on an informed basis and with no conflicts of interest, when enacting defensive measures, the directors must obtain the prior authorisation of the general meeting (in the absence of a prior blanket authorisation under the bylaws).
The directors' stance on the offer and their recommendation on whether to tender the shares from a financial fairness point of view is not binding on the shareholders or the offeror. If they seek to enact defensive measures, the directors must obtain the prior authorisation of the general meeting (in the absence of a prior authorisation under the bylaws).
Litigation is not uncommon and mainly relates to violations of the representations and warranties and the related claims for indemnity under the purchase agreement. The purchaser may also sue the prior target company’s directors for mismanagement issues.
M&A litigation takes place after closing.
Given the increased presence of foreign investors on the Italian market, shareholder activism has become a recognisable force. The general climate following the COVID-19 outbreak and the ensuing higher market volatility could open more room for increased shareholders activism.
The focus of activism is aimed at obtaining better overall management of the participated company, direct board representation, or an increase in the tender offer price.
In seeking better overall management and board representation, activists sometimes publish a manifesto in which they recommend that the company enter into certain transactions that, in their view, would boost the shares prices.
Activists have sought to interfere with on-going transactions through proxy fights and/or litigation, as the case may be, in an attempt to block the implementation of a transaction or obtain an increase of the tender offer price.
2019: Quick Review
Coming off a satisfactory 2018, the Italian M&A market slowed in 2019. While transaction volumes were in line with 2018, deal count for big deals was significantly down year over year: according to latest analysis, M&A activity in 2019 fell by 45% to EUR30.2 billion, compared to 2018, with 517 deals closed against 634 in 2018.
Megadeals were usually driven by similar sized companies coming together to enhance scale and better position themselves in the global marketplace: in particular, companies were reluctant to add debt, and this resulted in an increased number of merger of equals discussions, where companies aimed at consolidating similar businesses rather than expanding into new areas.
Political uncertainty was prominent throughout the year and created many headlines, which raised concerns and affected M&A activity, particularly regulatory approvals have become an area of increased concern, with consequent requirement for advanced planning to secure a successful closing.
Large groups continued to focus on core assets, due to increased pressure from shareholders to reconsider diversified businesses; not only, an increasing number of Italian SMEs also have been using M&A as growth leverage: in other words, Italian SMEs are realising that size and scale are key in hedging against competitive forces from multinational groups.
As regards geo-economic trends, in 2019 the most active inbound foreign investors have been from the United States, France and the United Kingdom, meanwhile, inbound activity from China slowed down significantly.
2020: Prospects in a Nutshell
Experts identify various signs of increasing recession risk, such as the length of US financial expansion, the extent of geopolitical and trade tensions, Brexit, the US Presidential election in November and the recent COVID-19 outbreak: however, the fact that Italy’s economy is populated by SMEs, presenting an ample landscape of possible targets, means that, despite a possible recession, deal flow might be affected only in part. In this scenario, it is expected M&A activity in 2020 to be driven by groups, large and mid-sized, aiming at strengthening their businesses.
In particular, it is believed companies of similar size may continue combining in the attempt to enhance free cash flow, dampen earnings volatility, and create larger creditworthy groups able to face risks and uncertainties in the markets: in this framework, the major part of suitor companies are expected to stick to their core competencies rather than entering unproven markets.
Private equity firms will continue being supplied with ample equity and debt capital and hence ready to provide alternative funding sources to companies: private equity players’ appetite for mid cap will remain strong and partly fuelled by succession issues; international funds will also continue turning to Italian targets, due to the reasonableness of Italian prices, especially if compared to other European markets.
Furthermore, if valuation multiples should start decreasing, public companies may find themselves hampered in delivering capital appreciation on their own: in this scenario, an increase in public-to-private transactions is expected; within this context, in addition to PEs, shareholder activists may also play an increasing role in promoting M&A for public groups.
Finally, from a geo-economic viewpoint, Italy is at real risk of being sandwiched between most powerful North America buyers and (if resurging) Chinese suitors: in particular, SMEs in the consumer and industrial sectors that generate a substantial share of their revenues abroad will continue being attractive targets for foreign investors.
Industries: FIGs, Advanced Manufacturing, Technology, Consumer Goods, Real Estate and Automotive
It is believed the above-mentioned risk of recession may suggest companies to grow size and scale within their own industry, avoiding risks associated with cross-sector integration. IT is expected that a group’s desire to increase scale and to pursue technology improvements will be a major driver for M&A in the near future.
This is expected to be particularly true in the financial services industry, where banks may be willing to consider mergers in a bid to boost returns which are insufficient to cover their cost of equity: in particular, continuing pressure from low rates and a possible rebound in loan loss provisions may push financial institutions to consider mergers, now that a first bad loan clean-up has been completed.
Companies operating in the advanced manufacturing sector are expected to continue their transformation, mainly driven by the need to become more efficient and by the rapidly growing potential of digital technologies. In this context, it is anticipated that existing players (especially those controlled by PEs) will carry out M&A in the attempt to differentiate their products and services through innovation, aiming to win competition in an increasingly disrupted market.
Technology M&A is anticipated to continue being upbeat as companies across different sectors will likely view technology-related M&A as the preferred growth engine. In fact, companies may decide to use M&A to explore emerging technologies instead of in-house development, which may be considered slow and risky.
Many groups may try to add technologies and incorporate them to show growth and demonstrate an ability to innovate. In this context, mature technology groups may, on the one hand, turn to transformative deals to unlock value in their portfolios. On the other hand, they may divest non-core tech businesses to effectively refocus priorities on the core business to drive growth.
As concerns consumer goods sector, it is believed appetite will remain stable for acquisitions that are expected to improve the suitors’ infrastructure. To this end, acquisitions of tech businesses may be seen as providing competitive advantage to consumer companies that do not have the ability nor time to create their own technology platforms. As a direct result of the COVID-19 pandemic, an upbeat deal flow is also expected to be seen in respect of the food industry, which will undoubtedly play a significant role going forward.
Before the COVID-19 outbreak, industry experts were unanimous in expecting real estate, particularly in Milan and surrounding areas, as a segment to watch: there are numerous initiatives, in the residential and office-space segments, that can provide sound returns. However, the escalation of the virus outbreak is likely to affect investors’ appetite, at least in the first semester and pending definitive assessment of the situation.
Finally, as regards the automotive sector, it would not be a surprise if the big auto-makers actively looked at more integrated partnerships with their Italian suppliers as a good opportunity to pool resources and expertise, thereby reducing the costs of developing and scaling resultant technologies: to that end, corporate JVs and minority investments may be used as a mean to strengthen commercial ties.
Transaction Structures: Stock Deals, Add-ons and P2Ps, Scale Deals vs Scope Deals
It would not be a surprise if trade buyers accounted for the above-mentioned recession risk when structuring their Italian M&As: in other words, with this in mind, corporate management teams and boards may be willing to prioritise M&A structures that fortify corporate balance sheets, as opposed to higher-upside but riskier cash acquisitions, as such perspective would be more consistent with a defensive posture against a possible recession. Therefore, industrial suitors may look for mergers of equals, using stock as acquisition currency and aiming to create more robust balance sheets with a view to facing prolonged uncertainty.
As regards financial sponsors, the aforementioned risk of recession may induce them to prefer add-on acquisitions to platform deals: in fact, this would enable PE houses to benefit from valuations that are typically lower and would offer them multiple arbitrage. In turn, this would provide meaningful exit opportunities for companies looking to divest non-core businesses.
M&A-driven activism may become increasingly common, calling for companies to sell themselves or divest individual non-core assets, in response to activists’ demand for breakups and corporate clarity. This context, together with retreating valuation multiples and possible constraints for public companies in delivering capital appreciation on their own, may provide a favourable environment for public-to-private transactions.
Finally, it must be noted that, historically, the most part of consolidations were rooted in scale economics, aiming to capture the benefits of cost and customer overlaps by becoming a larger player, while recently the main justification for many deals has shifted to a scope orientation, as more deals are motivated by suitors’ desire to get into faster-growing lines of business or acquiring new capabilities; however, given the relatively smaller size of Italian groups, scope oriented deals might become a priority especially for foreign bidders, whereas scale deals are likely to remain the principal typology in domestic M&A.
Regulatory Scrutiny, Portfolio Management and Post-Closing Integration
As many countries increase their protectionist attitudes, investors may become inclined to look regionally rather than globally to scale their businesses. In a less globalised and increasingly complicated world, it may be easier to complete transactions in areas closer to home, where regulations are more familiar; this is true not only from a regulatory viewpoint, but also industry wise, hence putting pressure on management to concentrate efforts on core businesses and, consequently, on carrying out an efficient portfolio management.
As regards the regulatory side of the said closer-to-home tendency, it must be noted that, following recent enactment by Italian government of stricter golden power regulations, the domestic authorities’ scrutiny may complicate some M&A deals, especially in industries with only a handful of market leaders and where transactions involve technology and sensitive data. In this respect, the COVID-19 outbreak has pushed the Italian government to further tighten the rules regarding FIDs, and this may inevitably play a role in posing a halt to M&A transactions involving sensitive assets.
As to the closer-to-home tendency mentioned above, as base for concentration on core businesses, some Italian groups with successful legacy businesses will decide to focus even more thereon, while other successful groups looking to invest into new growth engines will take vigorous decisions around divestitures. In fact, without divestitures, groups cannot free up the time, energy and capital to concentrate on their core businesses, be they those existing already or new ones; this may lead to entire divisions being put up for sale, in the context of a new wave of portfolio-management driven M&A.
In general terms, within the scope-type of deals, capability-driven deals have accelerated as an increasing number of suitors have chosen to buy new capabilities rather than build them organically. This is the typical scope-type of deals larger groups would carry out when buying out Italian smaller targets. Capability deals are all about combining capabilities of the acquirer and target for a new value proposition: in these deals, targets are usually smaller and more entrepreneurial, that is, with largely different ways of working from the acquirer;
This is even truer in the Italian market, where smaller targets would be usually run by founders or families, with little multinational-group culture (if at all). In such context, the importance of post integration is substantial, and important tools in this regard usually are the development of a joint value-creation plan, and the setting of measures to protect the target’s talent, culture and ways of working, at the same time impelling a swift integration of target into the larger group’s business environment.