Tax changes scupper record deal

BY Richard Summerfield

After several years of bluster and two rounds of legislative measures, the Obama administration had, until very recently, failed wholly to put a stop to tax ‘inversions’. Indeed, the number of US companies inverting has been rising, with 2015 bearing witness to a record number of corporate inversions.

A typical inversion sees US companies acquiring an overseas rival, redomiciling to that company's country and adopting its lower-tax level. The practice has drawn the ire of both sides of the aisle in Washington and has been decried as one of the “most insidious tax loopholes out there” by President Obama.

However, this week the US Treasury finally announced a third tranche of measures which may actually curb inversion transactions. To that end, the new measures have already claimed a major scalp, causing the cancellation of the $160bn merger between US pharmaceutical manufacturer Pfizer Inc and Irish firm Allergan Plc.

“Pfizer approached this transaction from a position of strength and viewed the potential combination as an accelerator of existing strategies,” said Ian Read, chairman and chief executive of Pfizer. “We remain focused on continuing to enhance the value of our innovative and established businesses. Our most recent product launches, including Prevnar 13 in Adults, Ibrance, Eliquis and Xeljanz, have been well-received in the market, and we believe our late stage pipeline has several attractive commercial opportunities with high potential across several therapeutic areas. We also maintain the financial strength and flexibility to pursue attractive business development and other shareholder friendly capital allocation opportunities.”

Pfizer would have stood to cut its tax bill by around $1bn annually by redomiciling in Ireland; however, now that the controversial merger has collapsed it will be required to pay Allergan $150m to reimburse the firm for expenses incurred during the transaction.

The Treasury hopes its measures tackle what it calls “serial inverters”, or foreign companies that have rapidly acquired multiple US companies. It will do this by limiting companies’ ability to participate in an inversion deal if they have taken part in one in the previous three years. Allergan, for the record, has been party to a number of inversion deals in that time period. The Treasury has also set out to reduce the tax advantages of inversions by curbing 'earnings stripping' — the use of intercompany loans to reduce US tax bills.

Now that the Allergan deal is dead in the water, Pfizer said 2016 will be a year of reflection. The company is contemplating spinning off its multitude of generic medicines into a separate businesses. Though the Allergan deal was due to delay that decision until 2019, the collapse of the merger will hasten Pfizer.

“We plan to make a decision about whether to pursue a potential separation of our innovative and established businesses by no later than the end of 2016, consistent with our original timeframe for the decision prior to the announcement of the potential Allergan transaction,” added Mr Read. “As always, we remain committed to enhancing shareholder value.”

News: Pfizer Announces Termination Of Proposed Combination With Allergan

Global M&A 1Q 2016 preliminary figures released

BY Fraser Tennant

Developments and trends in the global M&A space for the first quarter of 2016 are at the heart of a preliminary report published this week by Dealogic.

In ‘Global M&A Review: First Quarter 2016’, Dealogic reveals that the total M&A value seen in 1Q 2016 was $701.5bn – a 25 percent year-on-year drop on the previous three quarters which saw $1 trillion volume.

In terms of the key regional headline data, the Dealogic review of global M&A in 1Q 2016 reports that US targeted M&A volume was $248.2bn (accounting for 36 percent of global M&A volume) – down 40 percent year-on-year and the lowest 1Q share since the 30 percent seen in 2012. Turning to Europe, the Middle East and Africa (EMEA), targeted M&A volume was $217.9bn – 31 percent of global M&A and the highest quarterly share since 2Q 2013.

Cross-border activity accounted for a quarterly record high of 43 percent share of global M&A, some $302.6bn, falling just short of the record $314.6bn seen in 1Q 2015. China outbound M&A volume was $104.3bn, again, just short of the annual record high of $106.4bn set last year.

Leading the M&A advisor rankings is Goldman Sachs with transactions totalling £214.2bn, followed by JPMorgan on $153.1bn and UBS with $98.7bn.

Technology was the top sector with a total of $100.3bn, the second highest 1Q volume on record behind 1Q 2000 ($190.8bn). Conversely, the healthcare sector saw the biggest drop among the top five sectors in 1Q M&A volume, down 56 percent year-on-year to $58.7bn. 

The top 10 announced M&A transactions in the quarter were led by China National Chemical Corp’s  $48bn acquisition of Syngenta in February. This was the largest agribusiness deal and China outbound M&A deal on record. A distant second on the list is the $16.6bn acquisition of Tyco International by Johnson Controls, the largest telecom deal in the US since the Time Warner/Charter Communications transaction in May 2015.

The final 1Q 2016 M&A figures are scheduled to be released by Dealogic in early April.

Report: Global M&A Review - First Quarter 2016

People are the problem – report

BY Richard Summerfield

Global M&A activity has been one of the most notable stories of recent years. Dealmaking activity climbed sharply in 2015, rising to $4.7 trillion, up 42 percent on 2014. Companies have engaged in deals in new and complex markets, lured by the promise of reduced costs and value creation opportunities.

However, dealmaking today is rife with risk. A new report from Mercer, ‘People Risks in M&A Transactions’, looks at one of the most potent areas of risk: individuals often fail to adapt to organisational transition brought about by M&A, and this can create turmoil. 

If left unchecked, the inability of individuals to manage uncertainty and embrace change brought about by deal making can have a profoundly negative impact on an organisation.

Issues such as employee retention, cultural integration, leadership assessment, compensation, benefit levels and overall talent management are significant. Fifty-five percent of buyers surveyed by Mercer said that employee challenges continue to present significant risks in M&A deals.

Companies are completing deals in a highly competitive and demanding economic landscape. Increased competition and the influence of activist shareholders, for example, are combining to greatly curtail the length of time in which companies can carry out their due diligence procedures. They are under pressure to get deals done quickly.

Forty-one percent of acquiring companies claimed they have less time to complete due diligence compared to three years ago. Furthermore, 33 percent of acquirers believe sellers are providing less information about assets for sale.

“Both buyers and sellers tell us they need rich data, unique insights and practical guidance to maximise transaction value and reduce people-related risks. The goal of our research is to enable business leaders, inside and outside of the HR function, to make more informed people decisions in the current challenging global deal environment," said Jeff Cox, Mercer’s global M&A transaction services leader.

According to Mercer, companies should invest in their employees with the same enthusiasm they have for managing their balance sheet and other investments. By focusing on staff, companies can minimise disruption and increase value in people related areas.

Report: People Risks in M&A Transactions

Mylan’s long deal wait over – shares plummet

BY Richard Summerfield               

Generic and speciality drug company Mylan N.V. has been in an acquiring mood for some time. In November the firm attempted a hostile takeover of rival drug manufacturer Perrigo, offering $26bn but being rebuffed.

However, last week Mylanannounced a deal for Swedish drug maker Meda for $9.9bn, including $2.7bn worth of existing debt. The agreed price for Meda’s shares – SKr165 per share – was more than double the company’s closing price of SKr86.05 on the day before the deal was announced.

Once completed, the transaction will see the combined company boast more than 2000 products including brand-name drugs, generics and over-the-counter medicines. The firm will have a presence in more than 165 countries.

“This transaction builds on everything we have put in place around the world, including our recent acquisition of the Abbott non-US developed markets specialty and branded generics business. Meda brings us greater scale, breadth and diversity across products, geographies and sales channels, and together we will have an even stronger global commercial infrastructure,” said Mylan’s chief executive, Heather Bresch.

But the acquisition has met with dismay among Mylan’s shareholders, partly because Mylan has offered more than 12 times Meda’s EBITDA. Analysts have suggested that the company may have been better off using the cash for other means, such as buybacks.

Following the announcement of the deal, shares of Mylan traded in the US plummeted, eventually closing down 18 percent at $41.42. The company also posted fourth quarter earnings last week, which were sluggish and lagged behind market expectations.

Meda’s shareholders, however, expressed their satisfaction at the transaction. Shares in the company, which are traded in Stockholm, rose 70 percent to $17.41. The company’s largest shareholders, Stena Sessan Rederi AB and Fidim S.r.l., which collectively own 30 percent of Meda, have already accepted the deal.

Despite the concerns of Mylan’s shareholders, and the high transaction value, the acquisition could make strategic sense in the long term, according to a number of analysts and industry observers. Mylan will significantly enhance its position in a number of key markets, including China, Russia and Southeast Asia.

Ms Bresch moved quickly to dismiss fears that the company had overpaid for Meda, “It will take a little time for everyone to catch up with the opportunity,” she said. “I think over the next days and months the value will be realised."

News: Mylan to Acquire Meda

M&A deals drop in oil & gas space

BY Richard Summerfield

Strong headwinds in the oil & gas markets and wider global economic uncertainty have made a significant impact on deal making over the last two years. Indeed, mergers and acquisitions activity in the US oil & gas industry plummeted to its lowest fourth quarter period in five years, according to a new report from PwC.

PwC’s Q4 Oil & Gas Deals Analysis noted that Q4 2015 saw 42 deals in the oil & gas space with values of $50m and above. Those deals recorded in the final quarter of last year were worth $31.6bn. The previous year saw 70 deals worth $103.4bn during the same period. 2015 saw a 69 percent decline in total deal value year on year.

Doug Meier, PwC’s US Oil & Gas Sector Deals Leader, said, “Accelerating declines in oil and gas prices coupled with the closing of the capital markets for oil and gas companies during the second half of 2015 drove management teams to focus on cash preservation. As oil prices stay lower for longer, cash flow will stay constrained resulting in companies operating in survival mode with a focus on realigning their strategies and business models. This internal focus resulted in a steady decline in oil and gas deal activity leading to the lowest fourth quarter in five years, a period that is typically strong for oil and gas deals.

"While the headlines appear depressing, deal-making opportunities exist for companies with dry powder and who are willing to use their equity as currency for doing deals. Looking at the subsectors, midstream companies, including MLPs, were hit with a devastating left-right combination of dramatically lower stock (unit) prices and closed capital markets, resulting in a precipitous decline in the fourth quarter midstream deal activity," he added.

The difficulties seen in deal making in the US in Q4 were experienced the world over last year, according to PwC’s data. In 2015, worldwide power and renewables deal value reached $199bn, a decline of 16 percent from the $236.2bn recorded in 2014. However, in spite of this decline, renewable activity boomed in 2015, nearly doubling year on year from $28.3bn in 2014 to $55.3bn in 2015. Renewables’ share of deal value rose from12 percent in 2014 to 28 percent in 2015.

Europe and the Asia-Pacific region were the most popular locations in terms of number, by both bidder and target in 2015, with 313 and 318 deals in each region respectively. The US led the field on total deal value.

Looking ahead, PwC expects Europe to be a strong focus of activity in 2016 as the region continues to provide the highest volume of global power and renewable deal activity, although deal numbers and value dipped in 2015.

Report: PwC’s Q4 Oil & Gas Deals Analysis