Deal completion fails to match M&A appetite

BY Mark Williams

The world’s largest companies are expected to maintain a healthy appetite for M&A over the next six months, according to KPMG’s M&A Predictor, released in August 2014.

Price-to-earnings ratios have climbed 16 percent during the last year. At the same time, corporates are continuing to pay down debt and have an increasing amount of cash with which to fund deals. Although these factors create a fertile environment for dealmaking, appetite and increasing capacity are yet to result in the expected level of deal completions, says KPMG.

Despite the increase in announced deals through Q1 2014, which signals the return of a strong appetite for M&A, deal completions remains static, and the value of these deals continues to fall. Part of this is due to political interference in the deal market, evidenced by the proposed Pfizer deal in the UK and the GE deal in France.

That said, KPMG believes the overall the picture is a positive one. “Appetite remains strong, capacity is going up and we are starting to see an increasing number of deals being announced,” says Tom Franks, KPMG’s Global Head of Corporate Finance. “There is a danger, though, that domestic protectionism, certainly in markets like the UK, France and Canada, could damage the recovery. Furthermore, whilst increasing political instability in North America, the Middle East and Ukraine has not yet appeared to impact sentiment it remains a very real threat,” he added.

Report: KPMG M&A Predictor August 2014

Murdoch turns back on Time Warner

BY Matt Atkins

In an uncharacteristic move, Rupert Murdoch, the 81-year old chairman and CEO of Twenty-First Century Fox (Fox) has abandoned plans to buy Time Warner Inc for $80bn. A Fox statement has blamed Time Warner for the deal's implosion, saying the media giant "refused to engage with us to explore an offer which was highly compelling".

A merger between the two would have created one of the world's largest media conglomerates, significantly altering the media landscape in the US. The acquisition offer was seen as a way for Fox to stay competitive as other industry players begin to accelerate their M&A strategies.

The deal, however, has not been popular among Fox shareholders ­– the firm's share price has declined by 11 percent since the potential deal was announced – and many suspect a desire to retain shareholder approval nixed the proposal. Investors sent shares soaring by over 7 percent after Fox authorised a $6bn share repurchase programme in the wake of the deal's failure.

On the other side of the transaction, shares in Time Warner dropped by more than 11 percent after news of the withdrawal was made known. The company's board remains defiant. "Time Warner's Board and management team are committed to enhancing long-term value and we look forward to continuing to deliver substantial and sustainable returns for all stockholders," said a Time Warner statement.

Mr Murdoch's decision to walk away has shocked many. The success of the merger would have proved a career-capping masterstroke on the part of the media mogul. “We viewed a combination with Time Warner as a unique opportunity to bring together two great companies, each with celebrated content and brands," said Mr Murdoch in a statement. "Our proposal had significant strategic merit and compelling financial rationale and our approach had always been friendly.”

However, whether the deal is firmly in the grave is up for debate. Some still suspect the decision to walk is part of an attempt to drive down Time Warner's stock, before a renewed takeover attempt at a future date.

Press Release: 21st Century Fox withdraws its proposal to acquire Time Warner Inc

UK to tighten foreign takeover rules

BY Matt Atkins

UK Business Secretary Vince Cable has announced his intentions to tighten rules dealing with the foreign takeover of UK firms. The news comes after controversy which surrounded the failed takeover bid for British-based AstraZeneca, by US drugs giant Pfizer.

Speaking to the BBC, Mr Cable said foreign firms must be given no opportunity to shirk their responsibilities to UK workers and business interests. Foreign firms reneging on any promises made during a deal should be subject to financial penalties, under any new regime governing takeovers.

The enforcement of any new regime would also require legislative change, said Mr Cable, and he revealed broad agreement across the government for such measures.

Tighter laws to strengthen the 'national interest test' could also be in the pipeline, after concerns about the acquisition of major UK firms. As a 'last resort', the government needed to be able to intervene in dealmaking if transactions do not appear in the public interest. Currently, a formal public interest test only allows ministers to intervene when financial stability or media plurality are threatened.

Pfizer’s bid for AstraZeneca, raised concerns of job cuts as well as the loss of vital research and development carried out at the UK company. "What the government did then was to engage in negotiations to seek assurances. Where we now have to strengthen that is to make sure that where commitments are made, there is no wiggle room," Mr Cable told the BBC's Andrew Marr.

Pfizer gave a five-year commitment to complete AstraZeneca's new research centre in Cambridge, retain a factory in northern England and put a fifth of its research staff in Britain, but stipulated these pledges could be dropped if circumstances changed "significantly". To ensure in future that such assurances would be binding, Mr Cable said "we may well get into the area of having financial penalties" as a means of ensuring that companies stood by their takeover promises.

Such guarantees would prevent a repeat of a situation in 2010, which saw US foods group Kraft make a successful bid for British rival Cadbury with a promise to keep one of Cadbury's factories open. Kraft went back on this pledge shortly after the deal was completed.

News: Britain plans to remove 'wiggle room' in foreign takeover rules - minister

France wins EU merger law approval

BY Richard Summerfield  

The French government has won the approval of the EU for a controversial new law which grants the government more power to block takeovers of French companies in strategic industries.

The decision, announced by French economy minister Arnaud Montebourg, was based around the government’s move to extend its control over mergers and acquisitions in industries which have been deemed key to France's national interests. The new law was inspired predominantly by the deal that saw General Electric Co (GE) successfully acquire the energy assets of French group Alstom.

“The European Commission in recent days notified the French government of its approval of the decree as perfectly in line with European treaties,” said Mr Montebourg in a conference speech in France. “It was used in the GE-Alstom case. It will be used again in certain sensitive sectors such as water, health, national defence, gaming, transport, energy and telecommunications" he added.

Although the European Commission, the EU’s executive body, has approved the law, it is not willing to provide the French government with carte blanche to veto deals in the future. Indeed, the Commission has announced that it intends to closely monitor the situation in the months ahead. A spokeswoman for Europe’s financial services chief Michel Barnier wrote "We recall restrictions on free movement of capital can be justified if the objective pursued is one of public policy and public security. Any action taken to restrict free movement needs to be proportionate and serve the public interest. We will closely monitor any use of the law, i.e. systematically monitor any application of the investment screening legislation, and check in particular that it is not used to achieve purely economic objectives."

Following a protracted negotiation period, GE’s takeover of Alstom was finally approved at the end of June. The company was forced to overcome a number of hurdles in order to finally get the deal ratified. Most notably, the $17bn takeover of Alstom’s energy assets was only approved after one of Alstom’s existing shareholders, Bouygues, agreed to sell a stake in the firm to the French government. As per the government’s terms, Bouygues will be required to sell as much as 20 percent of Alstom to the state. GE beat out competition from Siemens AG and Mitsubishi Heavy Industries, which tabled a rival bid for Alstom’s assets.

News: France says won EU backing on takeovers law, EU says will monitor

Cyber risks still overlooked in dealmaking

Cybersecurity is now one of the most pressing concerns among the spectrum of risks arising in the M&A process. Intellectual property, operational efficiency, and financial controls are all at stake when companies embark upon a transaction without properly managing this risk. Recent large-scale attacks and the notoriety they have gained may be increasing awareness of these issues, but understanding how best to address them requires expertise that may be lacking among dealmakers.

FW moderates a discussion on cyber-security risks in M&A between Adam Pang at Merrill DataSite, David Stanton at Pillsbury Winthrop Shaw Pittman LLP and Timothy J. Nagle at Reed Smith LLP.

TalkingPoint: Managing cyber-security risks in M&A