Clifford Chance

Opportunities exist for global M&A in uncertain economic environment

Latest global M&A insights report from Clifford Chance highlights trends
from 2011 and drivers for M&A activity in 2012

Highlights from 2011[1]:

• Global M&A transactions totalled US$ 2.18 trillion in 2011, the highest total since 2008
• Cross-border rebounded strongly, with 41.5% of global M&A activity in 2011 (cross-border between individual countries). Deals between regions up 20% on 2010
• North America (including Canada) saw highest growth in M&A in 2011 (up 12.6% on 2010), followed by Europe (up 4.8% on 2010)
• Q4 2011 saw a 31.9% drop in Asia-Pacific M&A, and a 28.7% drop in European M&A compared with Q3 2011
• BRICs represent two thirds of total emerging markets M&A
• Energy, Mining and Utilities most active sectors -  US$557.7 billion deals
• Australia became the single largest investment destination for Chinese investment
• 2011 was strongest year for private equity buy-out activity since 2008, but Q4 2011 saw large drops compared to Q3
• 2011 was least hostile period for public M&A since 2007

London 30 January 2012: Global economic uncertainty and regulatory change will continue to impact M&A activity in the coming year, according to the latest trends insights by Clifford Chance. Worries about sovereign debt, global economic slowdown and the continued lack of a resolution to the Eurozone crisis are contributing to an unsettled global picture.

However M&A is continuing despite the challenging environment, and in some areas, Clifford Chance expects to see significantly more confidence in doing deals as the year progresses.

Matthew Layton, Global Head of Corporate at Clifford Chance, said:

“The first half of last year showed that there is an appetite for companies to pursue M&A activity. This tailed off at the end of the year in correlation to events in the global economy. Once confidence returns, the fundamentals are certainly in place for M&A activity to increase significantly as we move through 2012 and into 2013. In particular there are significant cash reserves on corporate balance sheets in North America and Europe, and liquidity in PE funds seeking deal opportunities. Equally on the sell-side regulatory change will increasingly drive the need for continued consolidation in some sectors, particularly financial services.

“Relatively low valuations mean we could see more unsolicited transactions and innovative deal structures." 

Other key drivers for M&A activity in 2012:

• Divestments and privatisations in the Eurozone
• Continued fight to secure natural resources and energy assets
• Increased shareholder pressure to deploy cash sitting on corporate balance sheets
• Continuing drive to access the growth markets
• Investors looking for greater returns from emerging and high growth markets

Deal trends and challenges for 2012:

• A return to the more prolonged deal-doing processes as buyers require more due diligence and more downside contractual protection
• Reverse break fees and go-shop provisions more prevalent, particularly in the US
• Protectionist measures were seen on some key proposed deals during the past year, and will continue to impact deal flows in 2012
• Impact of political environment on deal flow is uncertain – forthcoming Presidential elections in the United States, Russia and France and leadership transition in China
• Shareholder pressure and activism an increasing influence on transactions
• Antitrust regulation continues to rise: as more countries develop merger control regimes, the opportunities for divergence are expected to increase, now over 100 merger control regimes across the globe

Sector and regional trends for 2012: 

• Interest in the Energy, Mining and Utilities sectors is continuing to drive investment in the emerging and high growth markets (with Africa the new oil and gas superstar region)
• Shale gas M&A has been particularly strong and is expected to remain so into 2012
• If the negative effects of the Eurozone situation continue, the growth markets represent the greatest opportunity for increased M&A activity in 2012
• Corruption and compliance issues are of ever increasing importance in the due diligence process, particularly for entrants into new emerging and high growth markets. This is having a particular impact on sectors which encompass a high degree of interaction with government officials – such as the healthcare sector
• A combination of the strong Yen and slow growth in the domestic economy is driving outbound M&A from Japan. A succession of household name Japanese corporates made high profile acquisitions in 2011, and this trend is expected to continue. Already in 2012, Sumitomo Mitsui purchased RBS's aircraft leasing business[2]
• 2012 is also expected to see continued growth in outbound Chinese M&A, driven by a desire to secure natural resources, expand into new markets, and acquire technology and brands

Matthew Layton concludes: "What we are hoping for in 2012 is stability in the economic markets, and a decrease in geo-political risk, which will have the effect of encouraging buyers and sellers to re-engage in M&A discussions. Without these factors, there is unlikely to be any major uptick in general levels of activity and the current caution surrounding transformational, "bet the shop" deals will continue."

"Even if that is the case though, we anticipate a continued focus on cross border M&A and opportunities for increased activity around strategic alliances, asset swap deals and other transactions with lower risk, as well as spin-offs and deals arising from corporate debt restructurings and regulatory change."

Clifford Chance's Insights into Global M&A Trends document is part of the Firm's Global M&A Toolkit. 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. Coming soon on the Toolkit will be the Cross-Border Acquisition Guide for China, and a range of interactive M&A tools.

 Visit: www.cliffordchance.com/GlobalM&AToolkit

[1] Statistics sourced from mergermarket M&A Round-up for Year-End 2011

[2] Clifford Chance advised RBS on this disposal. For more information, please visit: http://www.cliffordchance.com/newsandevents/news/2012/01/clifford_chance_advisesrbsonthesaleofitsaviationcapitalbusinessf.html