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Global 100 European M&A focus: Riding a black swan

‘What has happened to us?’ An M&A veteran shakes his head incredulously, having uttered the now ubiquitous phrase: ‘stay safe’ to conclude a Zoom call with Legal Business.

This time last year, rainmakers could hardly have imagined being forced into a neverending merry-go-round of video conferencing, let alone ending each conversation with something reminiscent of a BBC Crimewatch catchphrase.

In 2019, corporate hands were bemoaning a lack of marquee European M&A deals leading to a 22% slump in total deal value to $770.5bn for the full year, but were consoled in part by a sectoral uplift in tech, which saw deal count top 1,094 and $76.1bn, a 26% increase on 2018. Another silver lining came with a 9% uptick in deals with a pharma, medical and biotech slant, with the sector accounting for a record 21% of all bid activity in 2019 when deals totalled $163.6bn.

Looking at M&A activity for the first three quarters of 2020, deal lawyers may be scratching their heads. How could such a black swan event as a global pandemic have had anything less than a catastrophic effect on the market?

While inescapably hindered by months of curtailed dealmaking during lockdown and swathes of cancelled or lapsed deals, the figures according to Mergermarket are surprisingly upbeat. This optimism does not immediately play out in the headline stats that show global deal value in the first three quarters of 2020 tumble 28% to $1.86trn compared with $2.58trn for the same period in 2019 and deal volumes down 27% from 15,306 to 11,214.

In Europe, M&A totalled $467.2bn in the first nine months of the year, down 21% compared to the same period in 2019 when $589.6bn of deals were announced. It is the lowest year-to-date value since 2010 when $392.2bn was recorded as markets struggled to shake off the tumult of the global financial crisis.

Farah O’Brien

‘To get a deal of this size and importance away, and with most of the team working remotely, is incredibly impressive for all parties.’
Farah O’Brien, Latham & Watkins

What is striking is the market resurgence in Q3 that saw global deal value soar 140% quarter-on-quarter to $891.4bn, from $372.2bn. The spike was largely down to a preponderance of huge US deals and even surpassed the same quarter of 2019, which stood at $677.4bn.

No tech glitch

For its part, European M&A’s bounceback was less dramatic, with Q3 yielding 1,244 deals worth a combined $164.6bn, a 55% increase on the previous quarter. The saving grace for the year so far was the announcement in September of four deals worth more than $5bn, including the largest transaction in Europe so far this year – NVIDIA’s £38.5bn proposed acquisition of UK-based Arm from SoftBank (see box). This ensured tech M&A was the most active sector by value so far in 2020 and shows no signs of abating, with $85.1bn spent across 769 deals, representing 19% of the market compared with 14% in 2019.

This buy-side mandate was partly responsible for Latham & Watkins careering up the European adviser league tables to pole position from number seven, relegating Kirkland & Ellis from the top spot to number eight over the first three quarters of the year. Morrison & Foerster (MoFo)’s lead role advising SoftBank on the sale was solely responsible for an incredible 1,816% increase in the value of deals it acted on to $39bn, catapulting it into the top 20 European legal advisers where in Q1-3 2019 it had been at number 173.

Advising NVIDIA, the Latham deal team was led by M&A partners Josh Dubofsky and Charles Ruck in Silicon Valley and New York, and a London contingent led by Ed Barnett and Farah O’Brien.

‘There is a lot of big M&A but the problem is it’s more risky – there’s much more of a chance of it falling down. There has not been enough bread-and-butter stuff.’ Tihir Sarkar, Cleary

Acting for SoftBank Group and SoftBank Vision Fund, the MoFo team was co-led by Ken Siegel, managing partner of the firm’s Tokyo office; Eric McCrath, San Francisco corporate partner and co-head of the firm’s corporate department; and London corporate partner Gary Brown. Cleary Gottlieb Steen & Hamilton also brought its formidable antitrust offering to bear in advising on competition matters, led by Francisco Enrique González-Díaz in Brussels and veteran adviser Maurits Dolmans in London.

Latham’s O’Brien notes: ‘If you reflect on what has happened this year in M&A, March and April were quite challenging months. To go from that to getting a deal of this size and importance away, and with most of the team working remotely, is incredibly impressive for all parties. The tech sector is one of the sectors that is consistently resilient. Despite, and in fact because of, the current climate, tech companies are attracting very healthy valuations.’

With the NVIDIA deal and Cleary acting for Abu Dhabi Investment Authority as part of the consortium acquiring ThyssenKrupp’s elevator business for €17.2bn, the firm advised on two of the biggest deals of the year so far (albeit antitrust advice on NVIDIA) and soared to second place in the European M&A league table with a 51% increase in deal value to $89bn.

The ThyssenKrupp deal also benefited Kirkland, which advised fellow consortium members Advent International, Cinven and the RAG foundation, while Linklaters acted for ThyssenKrupp in Düsseldorf.

Whereas small and mid-market deals have been thin on the ground – deals below $500m totalled $82.3bn this year – the lowest year-to-date (YTD) value since 2009 ($77.5bn) – ThyssenKrupp is part of a trend that is seeing private equity houses deploy increasingly large sums for the right strategic plays. $131.3bn was spent by private equity this year, representing 28% of the total European M&A value, its highest market share on record.

Meanwhile, Freshfields Bruckhaus Deringer held onto a top-three slot for European M&A in spite of a 33% YTD reduction in deal value to $130.9bn, thanks in part to its lead role advising Aon on its all-stock combination with Willis Towers Watson with an implied combined equity value of roughly $80bn.The Freshfields team working with Aon general counsel (GC) Darren Zeidel was led by partners Julian Long, Martin McElwee, Andrew Murphy and James Smethurst.

Black sky thinking

There is little doubt that Global 100 firms, like the rest of the world, are facing the greatest uncertainty since the financial crisis, forced to ride out myriad challenges posed by a potential no-deal Brexit, an indefinite pandemic and a second lockdown in the UK. That is before you even think about any impact of a new Democrat administration under incoming President Joe Biden. However, most are able to see the upsides and opportunities of a market that could have spiralled into freefall but has mostly remained resilient. So far.

One City corporate veteran’s view is more cautious: ‘Unfortunately the rest of this year has been dominated by a second spike and lockdown. There is clearly a big cloud as Covid rates keep going up and the risk that things won’t fully return to “normal” until a vaccine is rolled out.’ Nevertheless in recent weeks an effective vaccine has for the first time seemed within reach as scientists continue to make inroads with trial patients to administer the first shots in the UK.

A corporate veteran at a US firm believes that America’s control of the pandemic, which has wrought over 13 million cases and more than a quarter of a million fatalities at the time of writing, will be far more crucial to ensuring continued deal activity than any adversity it may face through a change in administration to a Biden-led government.

Charles Hayes

‘We might see earn-outs reappearing in some transactions, aligning pricing expectations across that delta, and giving buyers confidence to take that leap of faith.’
Charles Hayes, Freshfields Bruckhaus Deringer

Meanwhile Cleary M&A partner Tihir Sarkar has been prolific of late, recently acting for longstanding client Euronext in its €4.3bn acquisition of Borsa Italiana from the London Stock Exchange.

‘There is a lot of big M&A but the problem is it’s more risky – there’s much more of a chance of it falling down. There has not been enough bread-and-butter stuff,’ says Sarkar, echoing a common sentiment.

Closing deals remotely has been a steep learning curve for most and has had its fair share of challenges and rewards.

Notes Philip Cheveley, head of corporate M&A and ECM at Travers Smith, which racked up 39 deals totalling $3bn to be ranked number six for UK deal count: ‘From a practical perspective, there are challenges around how you do due diligence when you can’t look around and also in how you win market share and dislodge incumbent advisers when there are fewer opportunities to get in front of the CEO to unearth new opportunities.’

Sarkar counters that the new way of working can have its advantages. ‘Normally when you talk to the GC about something they go off and talk to the CEO and get back to you later. Now the CEO just joins the Zoom. You get that high-end contact straight away and you get to know the clients a lot better. It’s been great.’

The most cited difficulty is around valuations. Says Cheveley: ‘There has been an increase in overseas bidder interest in spite of the possibility of a no-deal Brexit, they are still willing to invest, particularly in tech assets. There is a lot more haggling around valuations. We don’t know how long this thing’s going to be around but the imperviousness of some investors is truly staggering.’

But where there’s a will, there’s a way.

Charles Hayes, global co-head of Freshfields’ financial sponsors group, also notes the delta in pricing expectations between buyer and seller, but maintains that businesses with resilient, stable cash flows, especially in life sciences, healthcare and tech, will remain in high demand.

‘Financial sponsors will continue to get there for the right assets; but we might see earn-outs reappearing in some transactions, aligning pricing expectations across that delta, and giving buyers confidence to take that leap of faith.’

Paul Dolman, Travers’ co-head of corporate and head of the firm’s private equity and financial sponsors group says that the continued profusion of dry powder among financial sponsors has led to an uptick in cross-fund transactions, as seen in a deal which saw longstanding client TA Associates acquire a 20% stake in IFS, an Illinois-based global enterprise software provider, alongside EQT Funds VIII and IX on a transaction that exceeds €3bn in aggregate.

‘Private equity has always been resilient. It bounced back very quickly after 2009. It has a way of reinventing itself and the latest way of doing that is through cross-fund deals. This happens when financial sponsors realise they already have good assets and can’t find such good ones in the current market so they decide they could just buy what they already own on an arms-length basis,’ he says.

Private equity catching up for lost time has provided a buffer for the market in Q3, however there is wide expectation that, in the UK, government support drying up for beleaguered businesses will lead to the long-postponed boon in restructurings and bankruptcies. Now dealmakers have their eyes on an effective coronavirus vaccine roll-out, tantalisingly near on the horizon, that could stabilise market confidence. They are staying safe, for now, but volatility looks set to continue for some time. LB


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Largest European deals Q1-3 2020

NVIDIA’s $36.5bn acquisition of Arm (SFV Holdco)

Bidder: Latham & Watkins; Cleary Gottlieb Steen & Hamilton

Seller: Morrison & Foerster

Target: Hogan Lovells

Aon’s $35.6bn merger with Willis Towers Watson

Bidder: Freshfields Bruckhaus Deringer; Latham & Watkins; Arthur Cox

Target: Herbert Smith Freehills; Matheson; Skadden, Arps, Slate, Meagher & Flom; Weil, Gotshal & Manges

Cinven, Advent, RAG-Stiftung’s and Abu Dhabi Investment Authority’s $18.8bn acquisition of ThyssenKrupp Elevator

Bidder: Allen & Overy; Cleary Gottlieb Steen & Hamilton; Kirkland & Ellis; NautaDutilh; Yulchon; Zhong Lun Law Firm

Seller: Freshfields Bruckhaus Deringer; Sullivan & Cromwell

Target: Linklaters

Siemens’ $17.5bn spin-off of a 55% stake in Siemens Energy to shareholders

Seller: Clifford Chance; Freshfields Bruckhaus Deringer; Hengeler Mueller

Virgin Media’s $12.4bn merger with Telefónica O2

Allen & Overy and Shearman & Sterling for Liberty Global. Ropes & Gray (financing)

Clifford Chance and Herbert Smith Freehills for Telefónica

Europe Q1-3 2020 M&A by ranked deal value

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Europe Q1-3 2020 M&A by ranked deal count

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Global 100 headcounts

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Global 100 lawyers by region

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About Nathalie Tidman

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