- Taking the Pulse of the U.S. and Global M&A Market
- September 19, 2013 | Author: Harvey Jay Cohen
- Law Firm: Dinsmore & Shohl LLP - Cincinnati Office
Global mergers and acquisitions (M&A) during the first half of 2013 was down 8 percent from last year's tally, but recent developments have changed the outlook for the rest of the year, thanks to a pair of massive telecommunications deals. The top transaction was Verizon Communications (VZ) agreeing to buy a 45 percent stake in Verizon Wireless from joint venture partner Vodafone PLC, in a deal valued at a whopping $130 billion. It's the third-largest M&A deal of all time, and was followed by Microsoft (MSFT) announcing that it will acquire Nokia's phone unit for nearly $7.2 billion. After a slow start, the summer’s activity has pushed global M&A activity across all sectors to $1.55 trillion so far in 2013, according to Thomson Reuters. That is a 1 percent bump over the same period in 2012. Global telecom M&A is now $231.6 billion, which is its highest YTD level since 2006. Other blockbuster deals are rumored or have since been announced.
U.S. dealmakers were off to a busy start in 2013 as some of corporate America’s most recognizable names were involved in M&A activity. American Airlines, Berkshire Hathaway, H.G. Heinz, and Dell were all companies that were active early in the year. The U.S. market saw a surge in fierce competition over a number of megadeals, not least the battle to control Sprint Nextel and the continuing fight over the future of Dell. There also has been a burst of intense shareholder activism forcing a number of big U.S. players to take strategic stock, including PepsiCo, Microsoft and oil giant, Hess. M&A deal value reached $690.3 billion in Q1 2013 - up 18 percent compared with the same period in 2012. The 2013 figure was bolstered considerably by the competing bids for Dell Inc., worth a combined $66 billion. Despite the high aggregate value, only 8,396 deals were completed during Q1 2013, the lowest quarterly figure since 7,990 deals were completed in Q3 2005. The 2013 figure also represents a drop of 26 percent on 2012’s 11,370 deals during the same period.
U.S. M&A activity was down in Q2 for a number of reasons. Interest rates are rising and the U.S. equity and bond markets have been erratic, reacting to concerns about the Federal Reserve's tapering-off of its long-running bond-buying program. The volatile equity markets in Japan and concerns surrounding a credit crunch in China are not helping to reassure investors. Combined with political turmoil in Latin America and the Middle East, macro events deterred potential investors and as a result, the volume and value of M&A deals in the U.S. each sank by about 25 percent from the first quarter.
Cross-border M&A transactions and clients can be far more complex than purely domestic transactions and there are a number of issues that dealmakers need to be aware of. Cross-Border M&A is a continuing trend and it represented approximately 41.5 percent of global M&A Activity in 2011 and 44.3 percent of global M&A activity in the third quarter of 2012.
Heightened regulatory scrutiny has touched every corner of the financial markets and M&A is not exempt from its reach. Certain transactions which could result in foreign control of companies engaged in interstate commerce in the United States may require notification to the Committee of Foreign Investment in the United States. Many jurisdictions have some form of regulation or government approval process for foreign investment into particular sectors such as energy, power, natural resources, defense, telecom, aviation and media. Those engaging in proper due-diligence should undertake a significant risk assessment. There must be mechanisms that allow for an out or the ability to restructure the deal if the necessary approval is not granted.
Tax considerations often drive transaction structure and tax planning should take into account not only the tax consequences of the transaction itself, but also the implications of operating the newly-acquired business after closing. A non-U.S. acquirer may be able to use several techniques to reduce the effective rate of tax imposed on the future profits of an acquired U.S. business. In certain cases, the parties will be able to make an election to “step up” the tax basis of an acquired U.S. company’s assets, including goodwill. The tax basis of goodwill can be written off over 15 years. Non-U.S. acquirers often benefit from devising a strategy to repatriate the profits of an acquired business without significant tax leakage. For example, some U.S. treaties eliminate U.S. withholding tax on dividends by an 80 percent U.S. subsidiary.
As enforcement agencies and U.S. investors abroad continue to focus on corrupt business practices, first-time investors in the United States should recognize that their exposure to risk under the Foreign Corrupt Practices Act (FCPA) could increase significantly if they acquire a U.S. business. The FCPA makes it unlawful for a U.S. person to make a payment or provide anything else of value to a non-U.S. government official for the purpose of obtaining or retaining business. Government officials can include officials of state-owned enterprises. This often proves difficult because of cultural norms and the general customs involved in doing business in some countries. It is also important to be sure that U.S. businesses are in compliance with U.S. economic sanctions, which is an area of regulation with which non-U.S. business may not have substantial experience. The focus on corrupt practices means deep-dive diligence on targets and first-class compliance programs are more vital now than ever.
Because laws designed to protect intellectual property rights are not harmonized across jurisdictions, valid ownership of intellectual property in the United States does not necessarily mean that the ownership will be respected outside of the United States. Similarly, valid ownership of intellectual property outside of the United States does not necessarily mean that the ownership will be respected in the United States. If an acquirer’s business plan depends on a particular technology, the acquirer should carefully consider whether that technology is, or can be, protected both within and outside of the United States.
Massive telecom consolidation has breathed new life into an otherwise slow year for M&A. Although the recent deals bring value to the M&A industry, nonetheless, the number of overall M&A transactions has significantly decreased. There is some optimism that the recent mega-deals in Q3 are indicators of a changing climate, but it is unclear if deal flow will ever return to pre-2009 levels.