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International corporates look for growth through acquisitions of discounted targets in Europe

27 September 2012

International corporates look for growth through acquisitions of discounted targets in Europe

·         Low growth economies look to tap into consumer spending power in higher growth markets

·         Big tech firms continue to drive sector activity

As the end of Q3 2012 approaches, Clifford Chance highlights the latest trends in global M&A and what we can expect to see from the coming months. Three prevalent themes emerge:

1. Discounted M&A opportunities in Europe

Deal flow into Europe is set to grow towards the end of 2012 and into 2013 as overseas buyers, including those in Asia Pacific, North America and South America target discounted European M&A opportunities.

Arndt Stengel, M&A partner in Frankfurt explains: "We expect to see a rise in European M&A activity driven by increasing investment opportunities in Europe. High quality assets are becoming available at competitive valuations as European sellers, including distressed sellers, are disposing of non-core assets.  This is attracting larger international buyers with a strong cash position, looking for the right opportunities to expand and grow their core business".

Roger Denny, Head of Corporate in Asia Pacific continues "Companies in many parts of Asia, including China, Japan and Korea, are assessing opportunities to snap up discounted targets in Europe, often targets with exposure to higher growth markets in other regions. Of course, integration planning needs to be carefully considered upfront, and is sometimes the stumbling block for these potential opportunistic purchases".

2. Regulatory change and healthy balance sheets drive cross-border M&A activity

Clifford Chance expects that global M&A in Q4 will continue to be driven by high levels of cash on the balance sheets of companies with the appetite and opportunity to access growth through cross-border transactions. Regulatory change in the financial institutions sector continues to underpin FIG M&A activity across all regions, as institutions dispose of non-core assets to strengthen their capital positions and to comply with changing regulatory requirements.

Matthew Layton, Global Head of Corporate explains "We are continuing to see companies in the low-growth developed economies looking to drive higher returns by accessing the higher growth and emerging markets with the increasing spending power of their consumers - just this week it was announced that Diageo is in talks to acquire a stake in India's premier distiller United Spirits, following recent deals in other emerging markets - Turkey, Brazil, China, Vietnam and Tanzania.  We have also seen a string of outbound M&A deals by Japanese corporates in the last quarter, and several FIG deals motivated by the changing regulatory landscape".

"Cross-border strategic mergers are also emerging, such as the proposed Glencore/Xstrata merger in the natural resources sector, and the potential tie-up between EADS and BAE Systems*."

Tim Wang, Corporate partner in Beijing adds "There's an appetite for buyers from the higher growth markets for opportunities in the developed economies to access technology, customers and of course brands – as we have seen recently from the acquisition of Weetabix by China's Bright Food, and Mayhoola (the Qatari royal family's investment vehicle) acquiring Valentino. In Asia we are also seeing a notable uptick in intra-Asian M&A and in outbound M&A into the Southern hemisphere, including Australia and Africa".

3. Tech sector activity remains healthy

Whereas energy and natural resources M&A has continued to dominate global M&A from 2011 into 2012, we have also seen significant activity levels in the TMT sector, with the value of technology sector M&A representing an increasing proportion of global M&A. 

Thomas Vinje, Chair of Clifford Chance's global antitrust practice and Head of the technology practice, comments on current drivers for tech M&A: "In some cases, particularly in the software sector, U.S. acquirers have accumulated large reserves of cash abroad, which they can more effectively use to fund acquisitions abroad than repatriate to the U.S. due to tax considerations - for example the Google/MMI deal.  Acquirers are in some instances also looking to obtain technologies they cannot as effectively and rapidly develop in-house, and increasing scale in terms of breadth of offering and installed base is also an important driver for M&A activity."

Joachim Fleury M&A partner and Head of Clifford Chance's TMT sector group continues: "The increased emphasis on cloud services is a further catalyst for tech M&A in the IT sector.  Q3 deals such as VMWare's acquisition of Nicara, Oracle's acquisition of Xsigo and Lenovo's acquisition of Stoneware all show that strengthening cloud services offerings is a major rationale underlying activity. The current economic climate is also presenting opportunities for acquirers to snap up distressed assets - witness Micron's acquisition of Eplida.  Financing is not the major issue for many potential IT sector acquirers – finding suitable targets is."

These themes along with a detailed analysis of the latest M&A data and current M&A trends will be explored in further detail in the next edition of Our Insights into Global M&A Trends – Global Dynamics, to be published in early January 2013 on Clifford Chance's Global M&A Toolkit.