FINANCIER MERGERS & ACQUISITIONS ANNUAL REVIEW ONLINE CONTENT AUGUST 2016 R E P R I N T F I N A N C I E R W O R L D W I D E. C O M

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1 R E P R I N T F I N A N C I E R W O R L D W I D E. C O M ANNUAL REVIEW MERGERS & ACQUISITIONS REPRINTED FROM ONLINE CONTENT AUGUST Financier Worldwide Limited Permission to use this reprint has been granted by the publisher PREPARED ON BEHALF OF FINANCIER WORLDWIDE corporatefinanceintelligence

2 UNITED KINGDOM DANIEL WAYTE MILBANK, TWEED, HADLEY & MCCLOY Q HOW WOULD YOU DESCRIBE M&A ACTIVITY IN THE UK OVER THE LAST MONTHS? WHAT FACTORS ARE DRIVING DEALS IN THE CURRENT MARKET? ARE CERTAIN SECTORS MORE ACTIVE THAN OTHERS? WAYTE: 2015 was a record year for UK M&A, including the ongoing 79bn takeover of SAB Miller by Anheuser-Busch InBev. By most accounts, activity was strong across all sectors, and especially energy. In 2016 the market has softened as investors have faced uncertainties as to the outcome of the UK referendum on membership of the EU and, subsequently, the results of EU exit negotiations. Energy investors are also being deterred by uncertainty in government energy policy. However, the fundamentals of UK investments are unchanged and the devalued pound may create opportunities. It is too early to say if deals put on hold in view of the referendum will materialise but there are positive signs, notably SoftBank s 24.3bn cash offer for ARM Holdings and GSK s announcement of a 275m investment in two UK manufacturing sites. Q HOW WOULD YOU CHARACTERISE THE APPETITE OF STRATEGIC AND FINANCIAL BUYERS FOR M&A? BROADLY SPEAKING, WHAT FUNDAMENTAL ASPECTS OF A BUSINESS ARE THEY LOOKING FOR WHEN IDENTIFYING A PROSPECTIVE TARGET? WAYTE: Strategics have an eye to the earnings impact of acquisitions but are typically most interested in long-term benefits, such as access to new markets, technologies and skills, synergies and achieving the scale to compete. The London Stock Exchange merger with Deutsche Boerse is predicated on creating the scale and network necessary to serve customers globally. Financial buyers share strategic concerns when considering longterm investments but have a more defined need for return on investment. The returns by which funds are assessed and carry hurdles naturally drive many funds to investments with enhanced opportunities for return and asset-backed industries with higher yields, such as distressed investments and aircraft leasing. However, if finance costs increase, leveraged investors may be driven away from capital intensive sectors. REPRINT FINANCIER WORLDWIDE AUGUST 2016

3 UNITED KINGDOM DANIEL WAYTE MILBANK, TWEED, HADLEY & MCCLOY Q WHAT STEPS SHOULD A BUYER TAKE TO MINIMISE TRANSACTIONAL RISK IN A DEAL? IS THOROUGH DUE DILIGENCE AN INDISPENSABLE PART OF THE PROCESS? WAYTE: M&A generally involves assuming the known and unknown liabilities of the target business, so due diligence is essential to avoid nasty surprises. However, diligence cannot identify liabilities that are undisclosed and, to be effective, it must reflect the materiality of potential risks. It is rarely appropriate to audit compliance with law, for instance. The risks arising from limitations in disclosure and diligence should be shared by the seller via warranties or an indemnity. English law will not allow a claim for a breach of warranty of which the buyer was aware, so any un-remedied issues must be covered by an indemnity, or reflected in the price. To cover a material issue arising between signing and completion the continued accuracy of the warranties should be a condition to closing. Recently, with low premiums and developments such as zero liability for sellers, warranty insurance has overcome classic concerns with insurance to become a popular means to bridge a buyer s need for broad warranty coverage with a seller s desire for a clean exit. Q HOW WOULD YOU DESCRIBE THE BANKING AND FINANCE ENVIRONMENT, IN TERMS OF ITS APPETITE TO SUPPORT M&A DEALS IN THE UK? WHAT IS YOUR ADVICE TO ACQUIRERS ON DESIGNING AND NEGOTIATING THE OPTIMAL CAPITAL STRUCTURE? WAYTE: Brexit uncertainties may constrain capacity and access to capital markets and so increase financing costs in the short term for businesses with significant UK exposure. However, this is counterbalanced by a seemingly healthy appetite for paper a number of loan and bond investors have capital to deploy as evidenced by the recent surfeit of opportunistic refinancing or re-pricing transactions, and some deals being reverse flexed. Any shortfall may also be met in part by the increasing range of alternative finance providers, which are financing ever larger and more novel transactions, including early stage investments and bank s regulatory capital requirements, and everything from first lien debt to common equity. To maximise their options, buyers are advised to seek early engagement with a financial adviser. AUGUST 2016 FINANCIER WORLDWIDE REPRINT 8

4 UNITED KINGDOM DANIEL WAYTE MILBANK, TWEED, HADLEY & MCCLOY Knowledge of UK law and practice is also essential to maintaining competitiveness and to avoiding an off market deal. Q HOW IMPORTANT IS LOCAL MARKET KNOWLEDGE WHEN IT COMES TO CLOSING DEALS IN THE UK? WAYTE: Buyer s need expert UK financial and legal advice at a very early stage if they are considering buying a company listed or recently listed in the UK, known as a takeover. Takeovers are regulated principally by the UK Takeover Code, which comprises principles and rules to ensure fair treatment of target shareholders, and is enforced by the UK Takeover Panel. The Code requires careful interpretation in view of takeover practice and the spirit, not just the letter, of the rules timely action, careful control of information and open consultation with the Panel. Private acquisitions are subject to few legal formalities and English courts seek not to intervene in contracts between properly advised parties but local advice is always important. Certain UK rules will apply regardless of the law of the contract, such as the need for EU merger approval for larger UK deals with an EU dimension and the possibility employment contracts may transfer automatically on an asset sale. Knowledge of UK law and practice is also essential to maintaining competitiveness and to avoiding an off market deal. Q MOST EXPERTS AGREE THAT EARLY INTEGRATION PLANNING IS VITAL TO DELIVERING THE BENEFITS OF A MERGER. WHAT ARE THE MOST COMMON OBSTACLES THAT ARISE IN THIS CONTEXT? WAYTE: There are many practical challenges for integration planning, such as the difficulty of quantifying business cultures and unavoidable changes in management, but the biggest issue is likely to be the cooperation of the counterparty and access to information. In mergers subject to the Code, the target has a duty to provide equal information to any rival bidder. This can result in more limited information being made available to a bidder, even in a recommended takeover scenario, due to the fear of a rival bidder that may be hostile or a trade competitor. In addition, before the transaction has been approved, the gun-jumping rules enforced by the European Commission and the need to avoid inadvertent anti-competitive coordination of strategies, will prevent buyers having certain veto rights in respect of target businesses or access to particularly sensitive information, such as pricing. Q COULD YOU OUTLINE ANY RECENT DEVELOPMENTS IN M&A REGULATIONS THAT WAYTE: Recent regulatory changes have not had huge significance for UK M&A. Softbank has made a binding undertaking in respect of ARM s future UK employment the first under the Code rule created in 2014 following Pfizer s possible bid for AstraZeneca. We are likely to see more REPRINT FINANCIER WORLDWIDE AUGUST 2016

5 UNITED KINGDOM DANIEL WAYTE MILBANK, TWEED, HADLEY & MCCLOY WILL AFFECT TRANSACTIONS IN THE UK GOING FORWARD? of such undertakings as pressure grows to keep UK business in the UK. In response to the recent liquidation of BHS with a very significant pension deficit, we may also see a strengthening of directors duties and the powers of The Pension Regulator to intervene in transactions such as dividends and share sales, which would have implications for financial investors especially. Changes to EU-based regulation will follow the EU exit process, expected to complete in late Although, the substance of the regulations should be largely unchanged, given the time it has been in force, market familiarity, effectiveness, the UK s role in its design and the likely need to maintain equivalent regulation as a condition to access to the EU common market. The EU exit will also return sole jurisdiction over UK mergers currently shared with the European Commission on larger deals to the UK Competition Authority. This may result in greater flexibility as the UK is a voluntary filing regime, so a deal can complete with the buyer taking the risk it is required to make divestments. Daniel Wayte Special Counsel Milbank, Tweed, Hadley & McCloy +44 (0) dwayte@milbank.com Daniel Wayte is a special counsel at Milbank, Tweed, Hadley & McCloy and a member of the firm s Corporate Group. Mr Wayte focuses on mergers and acquisitions (public and private), joint ventures, equity fundraising and corporate governance. AUGUST 2016 FINANCIER WORLDWIDE REPRINT

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