Alan M Klein is a partner at Simpson Thacher and Bartlett LLP, and a member of the firm’s corporate department with extensive experience in mergers and acquisitions, shareholder activism and corporate governance matters. He assisted Microsoft in its US$24.6 billion acquisition of LinkedIn, ChemChina in its US$46.6 billion acquisition of Syngenta, Tyco in its US$27.7 billion merger with Johnson Controls, Inc and The ADT Corporation in its US$12.3 billion sale to Apollo Group Management. In addition to the LinkedIn transaction, he represented Microsoft on its US$7.2 billion acquisition of Nokia’s phone business, its US$8.5 billion acquisition of Skype and its investment in Barnes & Noble’s Nook business. Other clients have included Tyco International, Best Buy, Chinalco, Gas Natural SA, Portugal Telecom, Gerdau Ameristeel, Bavaria SA and Owens-Illinois. In 2012, The American Lawyer named him a ‘Dealmaker of the Year’. He is a frequent commentator on M&A issues. Klein is co-head of the firm’s mergers and acquisitions practice.
The first nine months of 2018 have been a boom to some areas of mergers and acquisitions activity and have been verging on a bust for other areas. Different analysts apply a variety of different methods of measurement, but overall they agree that global deal volume for the first three quarters of 2018 was up from the same period in 2017, with approximately US$3 trillion of activity through the end of September. However, the 2018 third quarter was essentially flat in global activity from the 2017 third quarter and a marked decline from the second quarter of 2018. In looking at the year overall to date, a slower first quarter and a robust second quarter, together with a notably slow third quarter globally, only tell part of the story, however. The total number of worldwide deals this year to date slightly declined, but at the same time, there has been a significant increase in transactions with a value of over US$5 billion, totalling US$1.4 trillion for the first three quarters of 2018, and more than doubling in levels from the same period of 2017. Additionally, some sectors such as communications, energy, technology and basic materials have had steep increases in activity from 2017. Cross-border activity also had its most active nine months since 2007, totalling US$1.3 trillion and accounting for 41 per cent of the first nine months of 2018 M&A activity, the highest proportion of the global M&A market since 2007.
An area that continues to slip dramatically from 2017 is Chinese investment into the United States, with a 54.7 per cent drop in value along with 20 fewer deals for the first nine months of 2018 compared to the same period last year. Several factors account for the steep decline in Chinese-led activity. First, the Chinese government’s capital outflow curb with its application of harsher standards for approving investments, particularly acquisitions that may appear to be outside of the core business of a company. Secondly, the Trump administration’s aggressive stance on foreign investment policy, leading to the potential delay or termination of a wide range of foreign transactions that would be deemed a threat to national security, including minority stakes and joint ventures in technology, telecommunications and other cutting-edge companies. Speculation alone surrounding heightened foreign investment regulation is impacting Chinese investment into the United States. This was apparent when Xcerra, a Massachusetts-based provider of computer chips and circuit boards, withdrew from its US$580 million sale to an investment group backed by a Chinese state-controlled fund, stating that the deal was unlikely to receive regulatory approval due to national security concerns. This heightened degree of regulatory oversight is impeding potential Chinese buyers and dissuading potential sellers from entering into agreements with prospective Chinese buyers.
M&A activity in the leisure and consumer sector continues to be affected by changes in consumer habits. As consumers become more health conscious and aware of environmental ethics, companies are shifting and reconsidering their current business models to reflect such trends and to offer more environmentally conscious alternatives in an effort to meet the demands of their customers. Two of the most high-profile deals of the third quarter of 2018 reflect such efforts in this sector: Coca-Cola’s US$5.1 billion acquisition of Costa and PepsiCo’s US$3.2 billion takeover of SodaStream. This trend is further reflected in the bids by Coca-Cola, Nestlé and Unilever for GlaxoSmithKline’s nutrition business in an effort to secure the company’s Horlicks malted drink brand. Despite the trend of adapting to changing customer tastes, the global consumer sector for the first nine months of 2018 totalled US$181.4 billion with 1,409 deals, which is a significant decline in both deal value and deal count from the previous year which totalled US$380.8 billion with 2,248 deals.
“While many sectors had a slower third quarter for 2018, the energy, mining and utilities sector is the one sector that continues to be strong globally, recording its fifth consecutive quarter of deal value over US$100 billion.”
While many sectors had a slower third quarter for 2018, the energy, mining and utilities sector is the one sector that continues to be strong globally, recording its fifth consecutive quarter of deal value over US$100 billion. The sector saw a significant increase in activity during the first nine months of 2018 relative to the comparable period of 2017. A total of US$194.9 billion of transactions in the sector were announced in the third quarter alone, setting the highest quarterly value since the fourth quarter of 2016. The third quarter value pushed the year-to-date value of 2018 beyond the 2017 full-year value of US$531.7 billion. The strength of this sector is particularly apparent in the United States as the Trump administration’s pro-fossil fuel stance together with rising commodity prices appear to be encouraging activity in such sector within the region. The United States alone accounted for 63.6 per cent of the sector’s global value, where four of the five largest deals by value were in connection with targets in the United States.
European M&A markedly declined in the third quarter of 2018, with a record low of quarterly value since the first quarter of 2013. Although the region had a number of mega-deals in the first six months of 2018, including the US$48.4 billion acquisition of Sky PLC by Comcast Corp, there were no mega-deals in the third quarter. The largest deal by value in the third quarter totalled US$9.5 billion, with Europe accounting for only 19.8 per cent of global M&A activity, setting a record low quarterly share since the second quarter of 2009. The political uncertainty surrounding Brexit negotiations and the relationship between the United Kingdom and the rest of the European Union undoubtedly continues to impact European M&A activity to some degree. Despite the seemingly bleak outlook reflected by the third quarter results, financial sponsors in the region were more active during the first nine months of 2018 compared to the similar period of 2017. In the third-quarter alone, 11 buyouts worth at least US$1 billion were announced, including Global Infrastructure Partners’ US$5.9 billion 50 per cent takeover of Hornsea 1, a North Sea offshore wind farm.
“How M&A activity finishes the year remains to be seen, but the crystal ball for 2019 remains quite clouded.”
Asian activity in the first three quarters of 2018 increased by 8.5 per cent relative to the comparable period of 2017. The industrials sector led the Asian market in the first nine months of 2018, setting a record high of US$107.8 billion in value. As the region continues to undergo a transformation from a low-cost manufacturer to an economy driven by high-tech development and manufacturing, particularly in fields such as robotics, the industrials sector will likely continue to be a leading sector by value for the region. Additionally, private equity activity continues to remain active, with activity increasing 8.2 per cent from the same period last year. Given Blackstone Group’s US$3.1 billion takeover of Australia REIT Investa Office Fund, the financial services sector is set to be the most active sector for buyouts in 2018. Japanese outbound activity increased by 130.1 per cent from a year ago as companies investing abroad are taking advantage of quantitative easing and low borrowing costs. Chinese outbound activity declined from a year ago, with various political headwinds previously described with respect to China attributing to such decline.
Overall, global deal economy for the first nine months of 2018 was a picture of areas of strengths and weaknesses, with strength in various industrial sectors offsetting weakness in others. Private equity activity continued to be active, to some degree cushioning declines in certain regions and sectors. How M&A activity finishes the year remains to be seen, but the crystal ball for 2019 remains quite clouded. Deal-makers are eager to do transactions, but the concerns that resulted in a levelling off of activity in the third quarter of 2018 may continue to hold them back from returning to the levels of activity seen in the first two quarters of 2018.