Anti­trust autho­ri­ties inter­vene massi­vely — USA remains attrac­tive- Chinese inves­tors have a hard time

Frank­furt — The M&A market got off to a buoyant start in the first quar­ter of 2018. The unch­an­ged good econo­mic condi­ti­ons, favorable debt capi­tal and a market with attrac­tive take­over targets ensure dyna­mic tran­sac­tion acti­vity that is unaf­fec­ted by poli­ti­cal and regu­la­tory diffi­cul­ties. This applies in parti­cu­lar to tran­sac­tions with German parti­ci­pa­tion on the buyer, seller or target company side. Despite a slightly lower number of 550 deals compared with the first quar­ter of the previous year, the tran­sac­tion volume for deals with German parti­ci­pa­tion rose to US$82.8 billion. Thus, the market conti­nues to move at a remar­kably high level, accor­ding to the results of the latest M&A Insights by Allen & Overy.

Deal Driver
Deal drivers are prima­rily digi­tiza­tion and auto­ma­tion, which as major tech­no­lo­gi­cal trends ensure that IT compa­nies are very active on the buy side. At the same time, howe­ver, compa­nies in this sector are beco­ming attrac­tive targets for stra­te­gic inves­tors, who are thus expan­ding their product and tech­no­logy port­fo­lios. In addi­tion, as in previous years, the phar­maceu­ti­cal and health­care sectors as well as indus­trial services and tele­com­mu­ni­ca­ti­ons are very active. There is also move­ment again in the banking sector, where there have been few tran­sac­tions in the recent past, not least because of the acqui­si­tion of HSH Nord­bank by a group of inde­pen­dent inves­tors led by U.S. finan­cial inves­tors Cerbe­rus and J.C. Flowers for EUR 1 billion.

From a German perspec­tive, the inten­ded break-up of Innogy was undoub­tedly a high­light of M&A acti­vity. RWE and E.ON, Germany’s two largest energy utili­ties, have agreed to split the former Innogy busi­nesses between them. The deal volume here amounts to 37.86 billion US dollars.

Another bang for the buck in the first quar­ter: Geely’s invest­ment in Daim­ler AG with a tran­sac­tion value of US$8.95 billion.

Anti­trust autho­ri­ties cause M&A deals to fail
The impres­sion that anti­trust autho­ri­ties are inter­vening massi­vely in M&A acti­vity has recently been rein­forced once again. Parti­cu­larly in areas where market shares are too high across all sectors, plan­ned tran­sac­tions are some­ti­mes subject to drastic rest­ric­tions or even fall through altog­e­ther in the end. The most promi­nent recent exam­ple is certainly the failed take­over of Air Berlin subsi­diary Niki by Luft­hansa. This trend is also borne out by figu­res: Accor­ding to an Allen & Overy survey of merger control prac­ti­ces in 26 juris­dic­tions, 38 deals failed due to regu­la­tory vetoes in 2017 alone.

“Tran­sac­tions are getting bigger, but in certain markets the number of compe­ti­tors is getting smal­ler. Where anti­trust autho­ri­ties inter­vene, howe­ver, they feed further M&A acti­vity,” says M&A part­ner Dr. Hart­mut Krause (photo). For exam­ple, Bayer has to make a number of dive­st­ments in order to complete the Mons­anto deal. The Linde/Praxair merger is also subject to strict condi­ti­ons impo­sed by the anti­trust authorities.

More diffi­cult condi­ti­ons for Chinese investors
After 2016, the record year for Chinese corpo­rate acqui­si­ti­ons in Germany, Chinese M&A acti­vity has decli­ned some­what since 2017. As a result, there were only a few, rather small tran­sac­tions in the first quar­ter of this year. Hart­mut Krause explains the reasons: “On the one hand, the Chinese govern­ment issued regu­la­ti­ons some time ago to prevent further capi­tal flight abroad. On the other hand, legal hurd­les pose diffi­cul­ties for Chinese inves­tors. Not least because of the tigh­tening of foreign trade regu­la­ti­ons, the Chinese are curr­ently acting more cautiously on the German M&A market.”

Nevert­hel­ess, experts conti­nue to expect Chinese inves­tors to be invol­ved in signi­fi­cant tran­sac­tions in 2018. “China is stri­ving for global tech­no­logy leader­ship. The tech­no­logy requi­red for this is to be purcha­sed world­wide — inclu­ding in Germany. Tech­no­logy and produc­tion compa­nies in parti­cu­lar ther­e­fore remain at the top of the list of prio­ri­ties for Chinese inves­tors. In banking and finance, on the other hand, they lack expe­ri­ence and do not get a chance in this area,” says expert Krause.

USA remains attractive
Although the USA still prohi­bits tran­sac­tions with Chinese acqui­rers, the situa­tion has deve­lo­ped rather posi­tively under Presi­dent Donald Trump with regard to German acqui­si­ti­ons. The USA will become an even more attrac­tive loca­tion for compa­nies from Europe and thus also from Germany as a result of the tax reform. But the tax burden will also fall for US compa­nies inves­t­ing in Europe, because profits gene­ra­ted there will no longer be subject to subse­quent taxation.

“The contro­ver­sial poli­ti­cal deve­lo­p­ments under Presi­dent Trump are hardly affec­ting M&A acti­vity with the U.S.,” obser­ves Krause. Across the U.S., he said, compa­nies are doing well. And further: “It remains to be seen whether and to what extent U.S. tax reform will actually put U.S. compa­nies in a better posi­tion than their foreign compe­ti­tors when it comes to M&A tran­sac­tions. Clearly, medium- and long-term stra­te­gic busi­ness objec­ti­ves are stron­ger drivers of M&A tran­sac­tions than current poli­ti­cal debates.”

Outlook
Hart­mut Krause is opti­mi­stic about the further course of the German M&A year: “Neither Donald Trump’s US policy nor the approa­ching Brexit are having a nega­tive impact on M&A acti­vity in Germany. Debt capi­tal is still cheap and finan­cial inves­tors conti­nue to have high levels of liquid funds at their dispo­sal. The market could also deal with the conse­quen­ces of an inte­rest rate turn­around. The lights on the German M&A market ther­e­fore remain green.”