Record Foreign Takeovers Mean Scrutiny for Davos BankersAaron Kirchfeld
Cross-border merger and acquisitions increased to a record portion of all takeovers last year. That’s good news for dealmakers, except at the same time those foreign transactions have spurred tougher scrutiny from regulators and politicians.
For bankers, the colliding trends mean devoting more time to weighing a deal’s political and antitrust considerations, with many using meetings at the World Economic Forum in Davos, Switzerland to network with politicians and such A-list antitrust watchdogs as Europe’s Joaquin Almunia, Jon Leibowitz of the U.S. and China’s Chen Deming.
“Political and regulatory intervention is tripping up more deals, so by definition, bankers are spending more time on those relationships,” said Scott Matlock, chairman of international M&A at Morgan Stanley and a Davos attendee this year.
Citing domestic competitive concerns, regulators have in recent months blocked several big proposed cross-border deals.
United Parcel Service Inc., the world’s biggest package-delivery company, this month scrapped its 5.16 billion-euro ($6.9 billion) bid for TNT Express NV, after the European Union said it would oppose the deal. Last October, German Chancellor Angela Merkel, concerned about the loss of jobs and influence, scuttled the planned merger of European Aeronautic, Defence & Space Co. and BAE Systems Plc to create the world’s largest aerospace and defense company.
In the U.S., the Justice Department is closely reviewing the proposed $20.1 billion takeover by Anheuser-Busch InBev NV of Mexico’s Grupo Modelo SAB to determine its competitive impact, two people familiar with the matter said on Jan. 15.
“It’s important to understand how politicians and regulators think,” said Henrik Naujoks, a partner and head of European financial services at consulting firm Bain & Co., who said he packed in three meetings with politicians in a day-and-a-half in Davos. “Government and regulators have become more critical in affecting corporate strategies.”
The shift to more protectionist policies may result partly from an increase in foreign deals, bankers said. Cross-border transactions accounted for 50.3 percent of total deals last year -- even though global M&A fell 7 percent to $2.24 trillion, the lowest level since 2010, according to data compiled by Bloomberg.
In Europe, antitrust chief Joaquin Almunia, a Spanish socialist, is looking tougher after blocking the UPS deal and last February thwarting Deutsche Boerse AG and NYSE Euronext’s plan to create the world’s biggest exchange in a $9.5 billion combination.
Still, Almunia rejects being labeled as tough, pointing to the hundreds of deals he’s approved.
“We are authorizing 99.8% of the mergers we are analyzing every year,” Almunia said on Bloomberg TV today. “In my track record of two years, we have two negative cases and hundreds of positive authorizations. It’s logic, unless the proposed merger creates significant impediments to competition in the markets.”
While the EU’s overall share of scuttled deals remains minimal -- 22 deals out of 4,600 reviews -- three years into his term, Almunia has axed as many transactions as Dutch predecessor, Neelie Kroes, who held the post for 5 years.
“It suggests greater hurdles for consolidation plays in Brussels,” said Peter Hahn, a lecturer at Cass Business School in London and a former managing director at Citigroup Inc. “There seems to be an anti-large company sentiment in Europe at the moment.”
Such instances aren’t limited to Europe. Canada introduced new foreign-takeover guidelines last month to protect oil-sand reserves on the same day it approved Cnooc Ltd.’s $15.1 billion takeover of Nexen Inc., the largest-ever foreign acquisition by a Chinese company.
“On the one hand, you want to protect assets and jobs and have national champions, but on other hand you’re desperate for inward investments,” said Alastair Mordaunt, a London-based partner at Clifford Chance who specializes in U.K. and EU competition law.
U.S. regulators and lawmakers have also shown that they won’t hesitate to scrutinize deals. Reports filed by the Federal Trade Commission and the Department of Justice’s antitrust division showed that more than 250 takeover filings triggered deal investigations in 2011, a 15 percent increase from 2010. And the number of cases where additional information was requested rose 25 percent.
Regulators have also gained in importance in developing market economies like China, Brazil and India, said George Washington Law School Professor William Kovacic, a former FTC general counsel.
“It’s a huge challenge for the traditional market economies to persuade the newer competition systems like China and Brazil that caving in to political influence is not the way to do business,” said Kovacic.
Glencore International Plc’s $36 billion purchase of Xstrata, the biggest deal last year, creating the world’s fourth-biggest mining company, has been delayed while awaiting regulatory approval in China and South Africa. South Africa just cleared the deal this week and in China, government officials have said it is set to win approval.
“The majority of transactions touch tons of geographies, which naturally creates more questions about regulation and local legislation,” Martin Wittig, chief executive of consulting firm Roland Berger, said in an interview at Davos. “We may see more political stumbling blocks for deals due to increased nationalism.”