Clifford Chance

Bounce in Q4 2012 global M&A activity hints at return of confidence in corporate deal-making

Clifford Chance launches global M&A trends report 2013

• Report highlights include: Global M&A fell by 2.5% in 2012, but Q4 saw a 40% spike in activity compared to Q3, with a 95% jump in European M&A activity
• Emerging and high-growth markets attracted US$ 505bn of deals, nearly a quarter (23%) of global M&A, with 44% of cross-border M&A into high-growth markets coming from Europe
• Whilst European M&A fell by 6% in 2012, in Southern Europe sellers have reduced price expectations, and this has led to increased deal flow – Portuguese deals rose five-fold on 2011 levels

London 29 January 2013 – The global macroeconomic slowdown, continued turmoil in the Eurozone, issues surrounding the US fiscal cliff and the potential for political change in a number of key markets all contributed to suppress the appetite for deal-making in 2012. Global M&A activity fell by 2.5% by value and 4.3% by volume on 2011 levels according to the latest 'Insights into M&A Trends: Global Dynamics' report from international law firm Clifford Chance.

However, an uptick in Q4 showed signs of a potential recovery, with US$ 674bn of deals announced in the last three months of the year, up 40% on the previous quarter. This was particularly evident in Europe, where Q4 saw a 95% increase in deal value on Q3, and in the US.

Analysis by Clifford Chance shows that reduced activity levels in Europe and Latin America principally account for the fall in M&A activity globally in 2012. Within Europe the dynamic is shifting, as evidenced by the fact that M&A activity in non-Eurozone countries amounted to over half (56%) of all European M&A in 2012 - the highest proportion for more than a decade. Despite M&A activity in North America and Asia Pacific remaining flat year-on-year, both regions saw significant increases in the value of activity in the second half of the year. Africa and the Middle East was the only region to see a year-on-year rise.

Matthew Layton, Global Head of Corporate at Clifford Chance said: “2012 will be remembered as another challenging year for global M&A activity, yet the uptick in the final three months of the year is a sign of hope for the future. We are seeing growing confidence amongst US corporates, and whilst the debt ceiling and other fiscal concerns still loom large, we are hopeful that this buoyancy will soon translate into increased M&A activity by US companies in 2013."

“We are also cautiously optimistic about Europe. We are seeing clients weighing up the significant investment opportunities which exist in Europe - where state entities and distressed companies are offering-up quality assets, and valuations are relatively depressed in some countries. But Europe is not a single investment destination – and investors need to look carefully to those parts of Europe that offer attractive opportunities for them. Investors into Europe still have to navigate a number of challenges, including the continued economic slowdown, increased political, regulator and media scrutiny as well as, in some cases, cultural integration issues."

Key regional trends in 2012 include:

• Cross-border M&A into North America grew by 46%, particularly due to bidders from Asia Pacific and Europe. Japan accounted for 60% of inbound M&A from Asia Pacific into the US – driven by strong demand for outbound M&A amongst Japanese trading houses and corporates
• European M&A activity in 2012 was shaped by a number of determining factors. Although the value of M&A into Europe fell by 16%, volumes were only down by 6%. The research showed that bidders from North America were responsible for over two thirds (68%) of inbound M&A into Europe in 2012Total inbound M&A into Asia Pacific fell by nearly a third, with a 51% fall in M&A from European bidders
• Latin America saw a 20% increase in inbound M&A. Total outbound M&A from Latin America more than doubled to US$ 23bn in 2012, with Europe the most popular investment destination
• Africa saw a 39% increase in inbound M&A investment, with 73 transactions accounting for a value of nearly US$ 22bn

Themes and topics covered in the report also include:

• M&A activity in the growth markets performed strongly in 2012, increasing by 5% to US$ 505bn, close to its 2010 peak. This trend is expected to continue into 2013, as Western corporates and financial investors are forced to look outside their established markets to achieve growth. Bidders are expected to come from all regions, with different rationales: Asian buyers typically focus on resources for domestic demand (e.g. in the extractive industries) while buyers from the West target growing consumer classes. Key drivers for M&A into the growth markets include GDP and population growth, rising disposable incomes and an optimistic consumer class, as well as demand for infrastructure development and political stability in many jurisdictions. Africa emerges as an active region, with investors broadening the scope of their deal-doing, outside of the traditional focus on extractive industries (which continues), and towards the value chain which leads to the African consumer. This is true across a variety of sectors, not least, telecoms, consumer goods and retail and financial services.
• Financing challenges. Reduced bank lending, together with a lack of IPO activity and stagnant equity capital markets have forced companies across all sectors to seek innovative methods of financing M&A as alternatives to traditional sources of financing. Companies are finding new ways to finance strategic acquisitions, including joint ventures with strategic investors, supply chain financing, asset swap structures, use of cash on balance sheets, bond issuances and other forms of shadow banking.
• Managing risks in cross-border M&A. Companies planning M&A activity in the coming year face a number of hurdles, over and above the low growth economic environment. The increasingly complex global regulatory environment is a minefield, requiring careful navigation. Protectionism and political pressures are on the rise in some parts of the world and companies are starting to realise the potential impact of reputational and political risk, which can trigger calls for nationalisation or consumer boycotts, even where a company is acting within the law.

“In the short term the M&A landscape will remain volatile – companies need to continue to create shareholder value and outperform competitors, and so will continue to seek suitable opportunities where they can. Looking further ahead there are certainly grounds for cautious optimism - the slowdown in activity over the past few years has resulted in an increasingly congested pipeline and there are many strategic deals to be done when the appetite for deal-doing returns,” Matthew Layton concludes.

Clifford Chance's 'Insights into M&A Trends: Global Dynamics, January 2013' report can be found on  the Firm's Global M&A Toolkit at www.cliffordchance.com/GlobalM&ATrends, together with new Interactive Maps showing investment flows into and out of key regions. The toolkit comprises a growing collection of web-based transaction tools and in-depth analysis of the most important market and regulatory developments in M&A regimes across the globe. Please visit: www.cliffordchance.com/GlobalM&AToolkit where you can also download the new toolkit app.