Slow but steady sets the pace
After a somewhat slow start to the year, US M&A deal values were given a major boost in mid-June 2016 when Microsoft announced its largest-ever acquisition: a US$26.2 billion bid for professional social network LinkedIn. This was notable not only for the size of the deal but also because it was one of so few this year—megadeals have been thin on the ground in 2016. The largest H1 deal—pharmaceutical maker Shire’s US$35.2 billion takeover of Baxalta—was the only one on a scale similar to the large transactions seen in H1 2015, such as Anthem’s US$54.2 billion agreement to acquire Cigna, and Charter and Time Warner’s US$55 billion deal. Overall US M&A deal volume was down 11 percent year-on-year, from 2,585 in H1 2015 to 2,291 in H1 2016, according to Mergermarket figures. Aggregate deal value was down 30 percent, from US$822 billion in H1 2015 to US$577.2 billion in H1 2016. This comes against a backdrop of moderate economic growth, with the World Bank expecting the US economy to grow by 1.9 percent this year (compared to 2.4 percent in 2015), slow employment growth at mid-year and the political uncertainty of an election year, as well as the Brexit vote and its aftermath. Inbound US M&A volumes began the year by bucking global trends. While inbound activity was treading water elsewhere in the world, the number of US companies bought by foreign firms in the first quarter of 2016 stood at 224, compared with 197 in Q1 2015. That pace held firm for the remainder of the first half of the year, with inbound M&A reaching 448 deals, up from 420 deals in H1 2015. Inbound deal value in H1 2016 was subdued, however, at US$169.3 billion, compared with US$194.6 billion in H1 2015.
Strategic thinking
According to John Reiss, global head of M&A at White & Case, this is all just strategic M&A in action: “We were incredibly busy in the first half of 2016, even if that seems contrary to what the data suggests,” says Reiss. “While we’ve seen value and volume down this year compared to 2014 and 2015, if you take it from post-crisis years, it’s fairly standard.”
Regulatory headwinds have put a halt to some larger deals. The collapse of the US$160 billion Pfizer-Allergan merger, amid a crackdown on so-called tax inversion deals, was one of the most high-profile casualties of this broader trend. Others that fell by the wayside included a proposed US$34 billion acquisition of oilfield services group Baker Hughes by its rival Halliburton, blocked by the US Department of Justice on competition grounds in April. And CFIUS blocked Asian investors from acquiring a Dutch company’s US-based lighting division on national security grounds. But there are other factors at play, according to Reiss. Some buyers are choosing to take a breather during the approvals process, rather than sustain the hectic pace of M&A witnessed in 2014 and 2015.
Companies from Asia are getting more comfortable with the US environment and processes, with how to come in and buy a company in the US.
Sectors in brief
TMT dominated sector-specific US M&A deal volumes for the first half of 2016—with innovative technology galvanizing buyer interest. TMT’s continued strength and its convergence across other sectors is good news for the M&A market and, as White & Case’s Reiss points out: “Success breeds success”. M&A in the fast-growing tech sector, he argues, has proven resilient despite the risk factors breeding uncertainty in deal markets. Fluctuations in equity markets and the increasing difficulty in obtaining debt do not seem to have affected global tech sector M&A to any great extent in 2016. Technology will affect a broader range of industries, even the more traditional sectors. And, with US companies having raised more than US$50 billion in debt since the beginning of the year—the second-highest amount in two decades—they are likely to be gearing up to strike fresh deals.
“Some of the more forward-thinking, established companies are realizing that in order to compete with the latest technologies—and have the team of talent to maintain them—they have a build or buy decision to make: Are they going to build them organically or are they going to buy them?” asks Arlene Hahn, a White & Case partner who specializes in tech transactions. “Many larger companies are proactively searching for the next big thing in technology. It’s not just financial services anymore, it’s fintech. It’s not just health, it’s digital health.” Finally, across all sectors, there have been fewer distressed asset deals, though there are pockets of activity, particularly in oil and gas, which is struggling with the impact of depressed oil prices. “We’ve got our hands full with restructurings, primarily for service companies. The businesses that rely on payment streams from the big producers are suffering. We are experiencing high volumes of chapter 11 filings” says Gregory Pryor, a partner at White & Case.
John Reiss, Global Head of M&A, White & Case
Buying a US public company: the fundamentals
What particular factors should foreign bidders consider when buying US public companies?
First and foremost, foreign acquirers should be familiar with customary US public M&A transaction structures. The operative M&A document in US public acquisitions is almost always a merger agreement. Mergers either consist of one-step merger transactions or two-step tender offers followed by squeeze-out mergers. Historically, in terms of the form of the transaction, two-step transactions—structuring the acquisition as a tender offer followed by a short form or statutory second-step squeeze-out merger—are completed much faster than one-step transactions. One-step transactions require a proxy statement and target shareholder approval. If the transaction is subject to regulatory approvals and securing approvals would take longer than the traditional two-step process, a one-step transaction structure is typically better for an acquirer, because it provides stronger deal protections against interlopers than a two-step transaction in this context. Acquirers must also decide on the overall structure of the deal, the most common being a three-party “forward” or “reverse” triangular merger. In a forward triangular merger, a target company is acquired by a subsidiary of the purchasing company. In a reverse triangular merger, the acquiring company creates a subsidiary, which then purchases the target company and the former is then absorbed by the target company, effectively creating a new company. In either case, all of the target company assets and liabilities end up being owned by a subsidiary of the acquirer. The direction of the merger (i.e., whether the target company or the merger subsidiary survives the transaction) is largely driven by tax and due diligence considerations. Targets generally prefer structures that maximize speed and certainty of closing. If the acquirer only wants to purchase a subsidiary of a public company or one of its particular lines of business, then deciding between stock and asset purchases becomes relevant. Generally, in a stock transaction, the buyer automatically acquires all of the assets of the target company and automatically assumes all of the liabilities. Asset purchases allow acquirers to purchase particular assets or lines of business and to assume only specified liabilities. But asset purchases can be more complicated when it comes to structure and diligence. In terms of deal consideration, acquirers should expect that shareholders will let the market know if they think that a particular purchase price is inadequate. It is important for acquirers to have a good understanding of the target’s shareholder base and be reasonably comfortable that the transaction will receive shareholder approval.
First half of 2016 shows clear signs of cooling, but there is potential for bigger deals in the second halfUS M&A deal volumes are down 11 percent year-on-year but maintain historically robust levels Values show a sharper decline, down 30 percent ▪
Regulatory challenges have put a halt to some larger deals
Canada, the UK and China have been the most active inbound, while the UK and Canada enjoyed the most outbound activity
Technology is attracting investor attention—expect future US M&A to focus on this sector
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“Some of these big deals take a very long time to approve. You’re not going to be doing much in the interim. And after a really lengthy approval period, you need to digest the results—all in the context of an unprecedented, inflammatory, divisive and uncertain election process,” he says. That sense of greater uncertainty is prompting some hesitation in dealmaking: “In general, people are viewing this year as more unsettled than last, and there is a sense that deal activity is being somewhat affected because of that,” says Mort Pierce, a partner at White & Case. While the Shire-Baxalta megadeal is largely about the entities becoming bigger and more significant in terms of the marketplace, most recent deals have been of a much smaller scale. “If a larger merger makes sense, they will still pursue it, but the bulk of the activity is larger companies looking at smaller companies, wanting to fill the gaps in products and markets they don’t currently have,” says Pierce.
In and out
Inbound deals in H1 were dominated by Canadian acquirers, such as Fortis snapping up ITC Holdings for US$11.3 billion, an energy sector transaction. Total Canadian inbound deal values reached US$50.6 billion, with 73 separate deals. Inbound Asia deals remain a key part of the story, with China ranking third, racking up US$27.5 billion in deal value in H1: “Inbound M&A deals from Asia are still being made—the Asian powerhouses such as China and Japan are doing many deals into the US,” says Reiss. “Companies from Asia are getting more comfortable with the US environment and processes, with how to come in and buy a company in the US.” Outbound deal values reached US$83.8 billion, headed by the UK on US$20.8 billion (with 128 deals), just ahead of Ireland on US$17.3 billion (though the latter total is dominated by the acquisition of Ireland-based Tyco by Johnson Controls for US$16.17 billion).
Shareholder activism in 2016

Shareholder activism has become a major talking point in America’s boardrooms in the past few years. It has been a driver for M&A and has spread beyond its hedge fund origins—even institutional investors now have activist agendas. For example, four directors from activist fund Starboard Value were added to Yahoo!’s board in April 2016, while United Continental appointed two new board members in the same month to pacify agitated activists PAR Capital and Altimeter Capital Management. Board engagement with shareholder activists is ensuring better dialogue in some cases, with a more constructive approach resulting in win-win situations—but win-win is often in the eye of the beholder. “In the US, if you’re an activist, you’re not necessarily trying to get majority control of a board, you’re just looking for a couple of seats. And in all likelihood, you’re going to win them because of the growing influence of proxy advisory services, which will typically recommend a vote in favor of this sort of move,” says Pierce at White & Case. “Boards realize they are likely to lose these contested elections, so they usually settle to avoid the expense of the contest and the loss of management focus on the business. They are not surrendering a majority of the board, just one or two seats. But this change in board composition can have significant influence on the board’s decisions in the future.” It’s too early to say where shareholder activism will take US M&A at the moment, but their influence is certainly being felt. And as their influence rises, activists are facing their own challenges. The US Department of Justice, for example, has recently filed a suit against ValueAct over its possible failure to comply with the Hart-Scott-Rodino Act. However, once shareholders are on the board, they can often rally their cause and push board members in unexpected directions.
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