Near record levels of M&A over the last 18 months suggest a rosy outlook for the global economy, with companies seeking top line growth through acquisition strategies. Yet those headlines hide a more complicated picture. As global transactions evolve, so do the factors that determine their success. The proliferation of regulation and increasing popular scepticism towards globalisation and its associated business practices, has placed large mergers under the spotlight, with an abundance of stakeholders weighing in from all sides.
As such, dealmakers find themselves facing two distinct challenges: negotiating the transactional complexities themselves and then demonstrating deal value both within and outside the organisation. Here, Baker McKenzie explores strategies for success on both fronts, drawing on conversations at the firm’s recent M&A seminar, its work with companies at the coalface of some of the world’s largest mergers and its relationships with the regulators who police those deals.
Successfully closing a complex deal is difficult. Putting aside, for the moment, all other considerations, securing clearance from competition authorities alone can be a daunting task. On the one hand, the number of jurisdictions with merger filing requirements is growing steadily and authorities appear increasingly willing to intervene in a deal. In the UK in 2016, 71 mergers were filed and 16 of those deals saw remedies imposed, while another two were abandoned by the merger parties.
At the same time, however, none of those deals were blocked outright, and tie-ups that reduced the number of players in the market from five-to-four, and even four-to-three, managed to secure regulatory approval. The BT Group/EE merger was approved despite opposition. In reviewing the effectiveness of the UK competition authorities, economists KPMG recently suggested that in some cases, competition authorities have in fact been too lenient, with certain deals, including the tie-up of Zipcar and Streetcar, found to have led to higher prices for consumers.
In the light of these findings, the UK’s Competition and Markets Authority (CMA) may consider reforming its merger assessment regime. Global consolidation across a broad range of sectors – from beer, to heavy industry, to chemicals – may therefore feel the glare of even closer regulatory scrutiny in the coming years, and dealmakers should expect higher hurdles to securing competition clearance.
In this climate, it is now incumbent upon companies to take a more substantive assessment before pursuing a deal that could otherwise amount to little more than a costly diversion for the business. Part of that assessment requires analysing what might be sacrificed to win merger clearance. That is, at what point do potential merger remedies reduce the value and efficiencies of a deal to such an extent that the merger no longer makes commercial sense?