- Dealmaking: The outlook for global M&A in - FM
- Related Securities
- Political and Regulatory Considerations
What should private equity funds do to deliver deal certainty? Your browser does not support the video tag. How has US tax reform changed the playbook? If your inquiry relates to a legal matter and you are not already a current client of the firm, please do not transmit any confidential information to us. Before taking on a representation, we must determine whether we are in a position to assist you and agree on the terms and conditions of engagement with you. Until we have completed such steps, we will not be deemed to have a lawyer-client relationship with you, and will have no duty to keep confidential the information we receive from you.
Dealmaking: The outlook for global M&A in - FM
Thank you for your understanding. Because each cross-border deal is unique, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation. Much investment into the U. This is particularly so if the target company operates in a sensitive industry; if post-transaction business plans contemplate major changes in investment, employment or business strategy; or if the acquiror is sponsored or financed by a foreign government or organized in a jurisdiction where a high level of government involvement in business is generally understood to exist.
High-profile transactions may result in political scrutiny by federal, state and local officials. The likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties should be thoroughly considered and, if possible, addressed before any acquisition or investment proposal becomes public. Similarly, potential regulatory hurdles require sophisticated advance planning. In addition to securities and antitrust regulations, acquisitions may be subject to CFIUS review, and acquisitions in regulated industries e.
Finally, depending on the industry involved, type of transaction and the geographic distribution of the workforce, labor unions will likely continue to play an active role during the entire phase of the process. Pre-announcement communications plans must take account of all of these interests.
It is essential to implement a comprehensive communications strategy, focusing not only on public investors but also on all of these other core constituencies, prior to the announcement of a transaction, so that all of the relevant constituencies may be addressed with appropriately tailored messages. It will often be useful, if not essential, to involve experienced public relations firms at an early stage when planning any potentially sensitive deal.
Structures that may be helpful in sensitive situations to overcome potential political or regulatory resistance include no-governance and low-governance investments, minority positions or joint ventures, possibly with the right to increase ownership or governance rights over time; partnering with a U.
Use of debt or preferred securities rather than common stock should also be considered. Even seemingly more modest social issues, such as the name of the continuing enterprise and its corporate location or headquarters, or the choice of the nominal legal acquiror in a merger, can affect the perspective of government and labor officials. Some provisions of the new law took effect upon enactment, while others will require formal rulemaking by CFIUS.
While the full implications of the new law will depend on the yet-to-be-implemented provisions, the changes are expected to increase the number of CFIUS filings and result in longer overall review periods for many transactions, thus further increasing the potential impact of CFIUS in cross-border deals.
As a result, it will remain critical for foreign acquirors to factor into deal analysis and planning the risks and timing of the CFIUS review process. Although practice varies, some transactions in recent years have sought to address CFIUS-related non-consummation risk by including reverse break fees specifically tied to the CFIUS review process. In some of these transactions, U. Cash is the most common form of consideration in cross-border deals into the U. However, non-U. For example, publicly listed acquirors may consider offering existing common stock or depositary receipts e.
When U. Creative structures, such as issuing non-voting stock or other special securities of a non-U. It is essential to understand the custom and practice of U.
- How abundant capital, not the economy, will shape M&A in 12222.
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Knowing how and at what price level to enter the discussions will often determine the success or failure of a proposal; in some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues. In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pressure might be the only way to force a transaction.
Takeover regulations in the U. Permissible deal protection structures, pricing requirements and defensive measures available to U.
Consideration also may need to be given to the concerns of the U. Finally, often overlooked in cross-border situations is how subtle differences in language, communication expectations and the role of different transaction participants can affect transactions and discussions; preparation and engagement during a transaction must take this into account. Where the target is a U.
Because of its debtor-friendly reorganization laws, the U. Among other advantages, the U. Large non-U. Bankruptcy Code, which accords key protections from creditors in the U. Firms evaluating a potential acquisition of a distressed target based in the U. Transaction certainty is critical to success in a distressed context, and non-U. Acquirors must also be aware that they will likely need to address the numerous constituencies involved in a bankruptcy case including bank lenders, bondholders, distressed-focused hedge funds and holders of structured debt securities and credit default protection, as well as landlords and trade creditors , each with its own interests and often conflicting agendas.
Acquisition financing markets have become increasingly stressed in the later part of , with high-yield borrowers particularly affected. Substantial commitments to finance acquisitions for high- to mid-investment grade issuers remain available albeit at somewhat higher yields. However, low-investment grade issuers have received increased scrutiny, in part for fear that economic stress could result in downgrades to high yield. These considerations may drive the mix of consideration that will be seen in successful deals in , and will make more important developing structures and approaches to minimizing requirements to refinancing existing debt of an acquiror or target.
Moreover, creative approaches to allocating financing risk between buyers and sellers may also be helpful to getting deals done, as the cost and availability of acquisition financing adapts from the strong markets over the past few years to the current environment. In partial offset to these challenges, the effect of lower corporate taxes in increasing the amount of cash that corporations can dedicate to debt reduction after an acquisition should help provide some comfort to jittery lenders, and the increased availability of offshore cash should also continue to reduce the amount of debt necessary to finance acquisitions.
In a year when the acquisition financing playbook that relied on an abundance of low-cost debt will need to be changed, doing deals in with leverage will require careful planning, creative deal making, and thoughtful approaches to negotiating a financing commitment. Important questions to ask when considering a transaction that requires debt financing include: Shareholder litigation accompanies many transactions involving a U.
In most cases, where a transaction has been properly planned and implemented with the benefit of appropriate legal and investment banking advice on both sides, such litigation can be dismissed or settled for relatively small amounts or other concessions. Sophisticated counsel can usually predict the likely range of litigation outcomes or settlement costs, which should be viewed as a cost of the deal.
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While well-advised parties can substantially reduce the risk of U. Sophisticated litigation counsel should be included in key stages of the deal negotiation process. In all cases, the acquiror, its directors and shareholders and offshore reporters and regulators should be conditioned in advance to the extent possible to expect litigation and not to view it as a sign of trouble. In addition, it is important to understand that the U. Here again, planning is key to reducing the risk. Likewise critical is careful consideration of the litigation aspects of a cross-border merger agreement.
The choice of governing law and the choice of forum to govern any potential dispute between the parties about the terms or enforceability of the agreement will substantially affect the outcome of any such dispute and may be outcome-determinative. Parties entering into cross-border transactions should consider with care whether to specify the remedies available for breach of the transaction documents and the mechanisms for obtaining or resisting such remedies.
Tax legislation enacted in December fundamentally altered the landscape for U. Key statutory changes include: In addition, the new law made sweeping changes to the U.
Political and Regulatory Considerations
Importantly, the new law did not change the general U. In fact, the new law contains harsh additional rules intended to deter inversions. Thus, tax reform has further exacerbated the complexity of U. And, while the U. Department of the Treasury and the Internal Revenue Service have issued extensive administrative guidance in , significant uncertainty regarding the interpretation of the new law is likely to remain until such guidance is finalized. Potential acquirors of U. This will typically require a detailed understanding of existing and planned related-party transactions and payments involving the target group.
In particular, the combination of the reduced corporate income tax rate and new limitations on the deductibility of interest expense generally make it less attractive than in the past to push acquisition debt into the U.