A GLOBAL SHIFT. THE AGE OF INFLUENCE: SEPTEMBER 2018 UPDATE Our M&A insights and deal intelligence 2018

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1 A GLOBAL SHIFT THE AGE OF INFLUENCE: SEPTEMBER 2018 UPDATE Our M&A insights and deal intelligence 2018

LOOKING AHEAD TO THE END OF 2018 This year has seen M&A values soar, with nearly US$ 2trn deals announced in the first half, matching pre-financial crisis levels.

2 LOOKING AHEAD TO THE END OF 2018 This year has seen M&A values soar, with nearly US$ 2trn deals announced in the first half, matching pre-financial crisis levels. The global picture is characterised by a slightly smaller number of deals overall, but very high valuations for the most desirable and largest targets. More mega-deals are expected in the final months of the year, as data-driven M&A and consolidation in certain sectors continue. Accessible debt and a steady flow of repatriated cash into US-based multinationals will continue to drive the US market. Headlines of record-breaking M&A values do, however, mask an underlying reality, where economic indicators and very racy multiples are pointing to an overheated market, and politics are increasingly getting in the way. Whilst large US and multinational businesses continue to make bold strategic moves, we are seeing smaller businesses become more circumspect, waiting to see how global and regional politics and related economic and currency impacts might play out. As boardrooms pause, this leaves more room for nimble financial sponsors. As we assess the final months of the year, trade dynamics are in the spotlight. M&A may be negatively impacted as trade relations between the US and the rest of the world deteriorate, and concerns grow around other regional trade dynamics (e.g. the UK/EU). We expect greater protectionism in M&A situations, making deals increasingly at risk of being blocked at the highest political levels. 2 M&A TRENDS 2018 CLIFFORD CHANCE Guy Norman, Global Head of Corporate, Clifford Chance LLP

3 THE TRENDS WE ARE SEEING 2018 TO DATE, AND OUR EXPECTATIONS FOR THE REST OF THE YEAR: Boardroom appetite for M&A starts to falter As boardrooms contemplate sky high multiples and a possible correction in the global markets, nervousness is translating into fewer strategic deals. Deal volumes have declined across every region in the first half of the year as compared to the previous six months. Private equity goes from strength to strength - Record levels of dry powder and availability of debt finance are resulting in creative deal structuring and new sectors targeted (e.g. financial services and energy, as businesses shed assets). Formerly passive investors now compete directly for assets. Pre-emptive bids by PE investors prevail, as speed of process differentiates in a market awash with capital. Trade relations impacting deals We are seeing political tensions and changing trade dynamics having a marked impact on individual deals, for example Chinese intervention on the Qualcomm/ NXP deal in June and July was widely accepted as a consequence of the unfolding US/China trade conflict. China outbound focus narrows Chinese M&A into the US has come to a halt, as political tension between US/China, harsher CFIUS scrutiny on live deals and new US FDI legislation (FIRRMA) keep bidders away. Chinese attention is now firmly on its Made in China strategy and Belt and Road targets through acquisitions in Europe, Africa and Central Asia. Data M&A remains a focus Big data continues to be a key driver for M&A deals, tech and non-tech (e.g. healthcare data player Verscend s agreement to acquire analytics provider Cotiviti for US$ 4.9bn). In China, data titans Tencent and Alibaba are leveraging their data capabilities through domestic and international joints ventures (e.g. Alibaba s announced e-commerce cooperation with Mail.Ru). Shareholder activism stimulates corporate action The proliferation of activism during 2018 can be highlighted by the far-reaching campaigns of one activist (Elliott), which targeted 17 listed companies from the US, Europe and Asia. Thyssenkrupp, Hyundai, Whitbread, Sky and TIM have all been under pressure to spin off businesses, undertake other M&A transactions, or revise existing plans. CLIFFORD CHANCE M&A TRENDS

Now, the scope for intervention is expanding dramatically. Politics and protectionism are taking centre stage.

4 3TRADING PLACES - DOES NATIONAL SECURITY NOW MEAN ECONOMIC SECURITY? Governments historically had relatively limited powers to intervene where there are real national security concerns, such as deals in the defence sector. Now, the scope for intervention is expanding dramatically. Politics and protectionism are taking centre stage. In 2018 several deals have already been caught in the cross-fire of international politics and trade conflict. What s new: Trump widens the scope for government intervention: President Trump has said American strategy recognises that economic security is national security. There is now a sense that this is being reflected in CFIUS* reviews. As such, deals with foreigners in financial services, pharma, telecoms, aeronautics, robotics and other emerging cutting edge technologies are under more scrutiny, particularly when they involve Chinese buyers. In addition, new legislation (FIRRMA**) passed in August expands the scope of CFIUS, introducing a greater focus on critical emerging technologies and bringing passive and non-controlling investments into scope, as well as investments in real estate. China and South Africa to introduce CFIUS style regimes: New laws proposed in China and South Africa would introduce national security review systems, catching a range of transactions. Mission creep: the scope of deals raising national security concerns has expanded in recent years: Political hostilities scupper deals: The failure of the Qualcomm/NXP deal (see opposite) following lengthy delays in securing Chinese merger control clearance may be the first deal to overtly fall victim to growing political hostilities between the US and China. If a full blown trade war develops, US buyers may find dealmaking gets harder for transactions that require filing in China. New steps in Europe to bring more transactions into the net for review: In Germany a new draft law proposes mandatory filing triggered at 15% of a company s shares (rather than 25%). In the UK, any deal giving significant influence over a business or asset, no matter how small, would become reviewable. France intends to expand the scope of national security to include semiconductors, space, drones, AI, cyber security, robotics and large-scale data storage. * Committee on Foreign Investment in the United States (CFIUS) **Foreign Investment Risk Review Modernization Act (FIRRMA) New premise for intervention: Interestingly, we are also starting to see government scrutiny of deals based not on the buyer s nationality, but on the basis of a wider concern that the target s R&D would not be maintained. If this is a new trend, all buyers need to take heed, and not just those linked to China. See opposite for Broadcom/Qualcomm (US) and Melrose/ GKN (UK). Scrutiny in the US remains particularly focused on China, to the extent that even where no obvious China-nexus exists on a deal, any Chinese involvement is now frequently analysed by the parties at the start of an M&A deal as a potentially significant risk factor MILITARY / DUAL USE PRODUCTS CRITICAL INFRASTRUCTURE (e.g. ports, utilities) CRITICAL TECHNOLOGY (e.g. quantum computing, cryptography, 5G, robotics) SENSITIVE DATABASES (e.g. health sector, financial services) Josh Fitzhugh, US Regulatory Counsel, Washington DC 4 M&A TRENDS 2018 CLIFFORD CHANCE

5 DEAL INSIGHTS NEW RISK FACTORS HAVE EMERGED IN 2018, INCLUDING LOW R&D INVESTMENT, ACCESS TO CITIZENS PERSONAL RECORDS AND POLITICAL CROSS-FIRE 2. Broadcom / Qualcomm (Communications chipmaker) - US intervention, March 2018 President Trump issued an Executive Order blocking the acquisition of US chipmaker Qualcomm by Broadcom, a Singapore based business that had committed to relocate to the US. A key concern voiced by CFIUS was that Broadcom would reduce Qualcomm s R&D spending, so allowing Chinese companies to replace it as a leader in 5G technology and standard setting. In this way the intervention was seen in the market as a specific counter to the Made in China strategy, as well as a move to protect the US s own national security interests. 4. Qualcomm / NXP (Semiconductors) - Chinese intervention, July 2018 The US company Qualcomm called off its acquisition of NXP, a Dutch global semiconductor manufacturer, after repeated delays in securing merger control clearance from the Chinese antitrust authorities. The deal had been announced almost two years earlier in October 2016 and had received clearance from eight other antitrust agencies. While denied by the Chinese authorities, it was widely speculated that the deal was a victim of cross-fire in the developing US/China trade conflict, following the Trump administration s imposition of tariffs on Chinese imports. 1. Ant Financial / MoneyGram (Financial Services) - US intervention, January 2018 Ant Financial part of the Chinese Alibaba group - terminated its attempted acquisition of MoneyGram following opposition from CFIUS. A reported concern of CFIUS was that the deal would have given Ant Financial access to 2.4 million bank and mobile accounts of MoneyGram s US customers. This was one of the first examples of access to citizens personal data being cited as a national security concern. Commitments offered by Ant Financial e.g. to keep the information in the US and handled only by US citizens were not sufficient to quell those concerns. 3. Melrose / GKN (Engineering and defence) - UK scrutiny, March 2018 The UK government threatened to subject Melrose s acquisition of GKN to a national security review. Longterm investment and stability in the target s business was cited as a matter of national security, and the (British) buyer s business model in particular Melrose s short term approach to ownership was seen as potentially incompatible with that need. To avoid a review, Melrose agreed pledges on R&D expenditure, HQ location and agreed not to make certain business disposals without Government consent. 5. Yantai Taihai / Leifeld Metal Spinning (Mechanical engineering) - German intervention, August 2018 The German Government authorised the Federal Ministry for Economic Affairs and Energy to prohibit the acquisition by the Chinese firm Yantai Taihai of Leifield Metal Spinning, a manufacturer of mechanical engineering products that are used primarily in the automotive and aviation sectors, but also have nuclear industry applications. The Ministry s concerns reportedly centred on the potential transfer of sensitive know-how and technology to China for military purposes. This is the first ever deal to be formally authorised for prohibition by the German government. CLIFFORD CHANCE M&A TRENDS

6 GLOBAL M&A DATA SET WE REVIEW THE FIRST HALF OF 2018 AGAINST THE PREVIOUS SIX MONTH PERIOD North America US$ 850 billion Europe US$ 610 billion Asia Pacific US$ 391 billion +15% -6% +68% -14% -11% -15% -2% -15% Central and South America US$ 68 billion +37% -29% Middle East and Africa US$ 36 billion Source: Mergermarket Note: Interactive maps showing investment flows into and out of each region are available on the Clifford Chance Global M&A Toolkit M&A TRENDS 2018 CLIFFORD CHANCE

7 US Strong equity markets, low interest rates and solid corporate earnings, together with President Trump s tax reform and optimism about deregulation in certain industries, encouraged domestic strategic bidders and sponsors. M&A is up 15% by value, helped by five domestic megadeals over US$ 20bn in the first half of the year (e.g. Cigna/Express Scripts), as transformative mergers to overcome market disruption continue. However, protectionist headwinds, which began in mid-2017 are impacting cross-border deals, with inbound US M&A falling 45% in the first half of the year as compared to H LATIN AMERICA Intra-regional activity is relatively strong (+73%) but inbound M&A is down. Looking ahead we expect TPP11 (pending ratification) to increase inbound investment into Chile, Mexico and Peru is a year of political upheaval, with several presidential elections. New pro-business leaders in Chile and Colombia are expected to stimulate investment. In Brazil and Mexico, uncertainty may slow M&A activity this year. In Argentina, the investor outlook is unclear given the economic environment and the notebook scandal. Despite political uncertainties, we expect Energy/Resources and Infrastructure to attract continued investment. TMT and Healthcare M&A are also picking up. EUROPE European M&A deal value matched pre-crisis levels at US$ 610bn. The top 5 cross-border deals by value were all bids for European targets Shire; (Ireland); Sky (UK); Abertis (Spain); Energias de Portugal (Portugal) and UPC businesses (Germany). Chinese M&A into Europe was US$ 37.4bn, up from US$ 10.5bn in the previous six months. UK (US$ 153bn) and Germany (US$ 96bn) remain hotspots in terms of M&A values, but deal volumes are declining. Political and Brexit uncertainty in the UK and Germany s shifting approach to FDI may be starting to impact investment. Across Europe financial investors are under investment pressure, leading to highly competitive auction processes. AFRICA As the region starts to emerge from economic recession, investor confidence is returning. Governments continue to implement economic and political reforms, leading to increased M&A activity. US buyers are leading the charge (e.g. Kellogg s US$ 420m stake in Nigeria s Tolaram Africa Foods), influenced perhaps by the US government s policy shift towards bilateral trade relations. The Energy, Power and Infrastructure sectors are expected to remain steady, as the region seeks to address the infrastructure deficit. Rising consumption capacity will fuel increased investment in consumer driven sectors, with opportunities in TMT, financial services, real estate and CG&R. ASIA PACIFIC Asia Pacific M&A is down 11%, with intra-regional activity slowing slightly, as well as investment falling from Europe and US. However, big deals are still being done including Walmart/Flipkart (US$ 16bn) and Carlyle etc/ant Financial (US$ 14bn). China s drive to encourage foreign investment in financial services and certain non-financial sectors may result in increased cross-border activity into China in the months ahead. Asian PE funds raised record levels of dry powder focusing on technology, healthcare and education sectors. Combined with a scarcity of attractive new targets, this is resulting in fierce competition for deals, inflated prices and a strong secondary market. MIDDLE EAST M&A in the region is relatively slow, but we continue to see an uptick in outbound M&A, in the tech sector as well as more traditional sectors such as petrochemicals (for example, SABIC s acquisition of a 25% stake in Clariant). There is greater urgency to effect consolidation in local markets (especially in Abu Dhabi), as part of a heightened focus by governments and public listed companies to seek cost synergies and quicker inorganic growth in what continue to be challenging market conditions (notwithstanding the recent improvement in oil prices). CLIFFORD CHANCE M&A TRENDS

Editors for this publication: CHRISTOPHER SULLIVAN T: +44 20 7006 5050 E: christopher.sullivan@cliffordchance.com ISABELLE HESSELL TILTMAN T: +44 20 7006 1681 E: isabelle.

com DANIEL HARRISON T: +44 20 7006 4136 E: daniel.harrison@cliffordchance.com BRIAN HARLEY T: +852 2826 2412 E: brian.harley@cliffordchance.

8 Editors for this publication: CHRISTOPHER SULLIVAN T: E: ISABELLE HESSELL TILTMAN T: E: ERIKA BUCCI T: E: STEFAN BRUDER T: E: DANIEL HARRISON T: E: BRIAN HARLEY T: E: Clifford Chance Global M&A Toolkit The Clifford Chance Global M&A Toolkit comprises a growing collection of web-based transaction tools, video content and in-depth analysis of the most important market and regulatory developments in M&A regimes across the globe. Available 24/7. Easy to access. Clifford Chance, 2018 Clifford Chance LLP, 10 Upper Bank Street, London, E14 5JJ. This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice. Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC Registered office: 10 Upper Bank Street, London, E14 5JJ. We use the word partner to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications.

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