What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Mergers & Acquisitions (3rd edition)
The (low) interest rate, Belgian tax reform (with further significant tax reductions as from 2020) and the geopolitical climate, e.g. growing protectionism, Brexit and the “trade war” between the USA and China.
There is speculation that the (re)insurance market will continue to provide the majority of M&A activity due to the following:
- continued soft market as well as pressure on terms and conditions in the market;
- purchasers’ desire to increase their global footprint, expand into new products and distribution channels and the need to achieve scale and stronger client relationships;
- the effects of Solvency II equivalence with increased compliance costs and enhance capital requirements requiring larger balance sheets;
- the effects from tax reform which occurred recently in the US and elsewhere; and
- the need to access new lines of business or expertise.
Some of the most significant factors influencing M&A transactions in Colombia over the next two (2) years will include:
(i) The consolidation and outcome of the Colombian peace process. Although international and domestic investors have, in their majority, applauded the entering into a peace process with the FARC (left-wing guerrilla), positive results of the process and a confirmation of the reduction in violence (specially in certain rural areas of Colombia) will influence the manner in which the Country is perceived;
(ii) The results of corruption cases and the effectiveness of the Colombian justice prosecuting such cases will also influence the M&A activity; it will also most probably influence a greater demand for more stringent corruption due diligence and anti-corruption strategies, as they will become key in the undertaking of M&A transactions; and
(iii) Continuance of a positive macroeconomic trend which envisions economic growth during 2019 and 2020.
a) Ongoing privatization strategy
According to the Raiffeisen Bank International market analysis for 2018, the Croatian Government will continue to explore options for companies such as Petrokemija, Croatia Airlines, as well as for a number of tourism-related highly depreciated real estate assets. The announced intentions for the repurchase of MOL’s stake in the oil and gas company INA by the Croatian government as well as the potential sale of 25% stake in HEP are currently on hold. The announced potential sale of the so-called “non-strategic” companies is expected to attract investor interest for targets such as the food producer Podravka, electrical equipment producer Končar and the port operator ACI and Croatia Banka. The ongoing sector consolidation and the privatization in the tourism and hospitality sector will be a key driver of M&A activity.
b) The Agrokor Group’s crisis
The bankruptcy of Agrokor Group has had a negative impact on performance indicators of Croatian economy in 2018. However, it is expected that the Agrokor’s restructuring may bring a number of attractive assets to the market in the course of 2019.
c) Retail sector
According to MAZARS CINOTTI M&A Transactions Overview for 2018, one of the sectors that could be especially relevant for consolidation and business transfer is retail sector. Namely, the retail sector still remains fragmented with couple of relevant players that could be targets for further consolidation.
- Opening of the economy and signing of international trade agreements
- Flexibility of labor legislation
- Monetary stability
Though Austria is a relatively small market, Austrian companies have a strong reputation world-wide for having excellent expertise especially in the high-end technology area. Another reason for optimism is the strong economic position of Austria generally, which also is firmly embedded in the EU. Persistently low interest rates and the existing high liquidity in the market will also continue to push the M&A market forward. Sector-wise we expect further M&A growth for technology and industrial targets. Industrial targets are in the middle of digital transformation and need to reposition themselves to implement digital manufacturing technologies and evolve their business models. Precisely in this area lies an absolute strength of Austrian companies, which thus will continue to pose attractive targets. Overall we expect the Austrian M&A market to remain robust.
One of the biggest developments is that warranty and indemnity insurance is no longer pure theory, but has seen increasing use on the Austrian market. Private equity buyers are at the forefront of this development. Given the bridge function warranty and indemnity insurance serves between buyers needing increased contractual protection and sellers for various reasons not willing to provide this, we expect a further increase in the use of warranty and indemnity insurance.
Earn-outs and escrow also have become more common, but whether a buyer can successfully negotiate this is very deal specific. Whereas locked box mechanisms are common in auction settings, closing accounts often are agreed upon in one-on-one negotiated deals.
The high transaction activity is to be expected both in case of strategic investors expanding their current actives and in case of financial investors, who will continue in searching suitable opportunities for evaluating their free capital. An important trend emerging in the Czech Republic and other Central and Eastern European countries is the sale of family owned businesses. Local businessmen who started their businesses in the 1990s are now considering retirement. Where there is no prospect that their descendants will take over the businesses, they seek a sale. This will, of course, create new opportunities for domestic as well as foreign investors.
British Virgin Islands
The most significant factors influencing M&A activity in the BVI will be (i) the potential impact of rising interest rates coupled with the winding down of central bank liquidity measures, (ii) U.S. tax reforms and (iii) levels of outbound Chinese investment.
We believe that the most significant factors influencing M&A activity in the Cayman Islands will be (i) whether or not interest rates remain low which will determine the availability of accessible debt, (ii) the increase in activist shareholders and their strategies to unlock value and (iii) private equity firms seeking to deploy capital.
First, internal political deadlines (outcome of the vast democratic consultation named "Grand Débat", European elections mid-2019, and local elections in 2020) will inevitably impact the French government's ability to continue reforms and to enhance the French business environment that had been notably improved in the early days of the Macron administration.
Second, cross-border M&A activity by French companies will be influenced by the immediate European environment influenced by the economic policies of populist or conservative governments (e.g. Italy, Austria, Poland, Hungary) and the final outcome of the Brexit negotiations and its potential economic and financial consequences. The latter already comes as a game changer throughout Europe and in France in particular.
Last, the broader international environment will also remain decisive, yet unpredictable:, the normalization of the China-US trade tensions, the possibility to continue or not business with Iran; the possible slowdown of the Chinese economy will also have notable implications on French companies at international level.
The official exit of Greece from the financial restructuring programs in August 2018 it is expected to result in the stabilisation of the country’s economy and lead to more business confidence and investments. This remains to be confirmed by the markets, which do seem to need time and tangible indicators to steadily endorse the positive trend and for that trend to be reflected in the Athens Exchange.
The progressive reduction of the tax rate on company revenues starting 2019 is expected to have a positive impact on business economy. The amended Income Tax Code gradually reduced the tax rate for business profits gained by legal entities, from the current 29% to 25% for income earned in the tax year 2022 and onwards. The rate shall be reduced by one percentage point per year, starting with the income for the tax year 2019, for which the tax rate is set at 28%.
In addition, the draft law on Corporate Transformations simplifies the process of mergers and acquisitions. The draft codifies the scattered legislation on corporate transformations and enables all legal forms of companies to merge, divide and convert into another legal form, for which there have been drawbacks and ambiguities under the current laws. The draft law resolves the issue of irregular M&As, i.e. amalgamations between different kinds of legal entities, and introduces significant flexibility in the conversion, merger and splitting or de-merger processes.
Further, under the new company law 4548/2018, companies have the right to identify their shareholders, which may have a further positive impact on the M&A activity in Greece. Specifically, Law 4548/2018 abolishes the right of SAs to issue shares to the bearer and as a consequence all shares must be registered; any shares issued to the bearer which exist on the date of adoption of Law 4548/2018 must be registered as of January 1st 2020 at the latest.
Furthermore, Law 4548/2018 facilitates the exercise of shareholders' rights both domestically and in other EU Member States, and this is expected to result in more inbound and domestic investments. For example, according to Law 4548/2018, the sign-off of shareholders’ resolutions can be done by exchange of e-mails or by any other electronic means. The new law further introduces a number of transparency measures, which, together with the trend of corporate governance processes being adopted even by non-listed companies (for which it is not compulsory), improve the reliability of the market participants.
First, it goes without saying, but the state of the Japanese economy will influence the Japanese M&A market. For example, because the Japanese market is shrinking in various industries due to the decline in Japan’s population, the recent trend of Japanese companies pursuing outbound transactions is expected to continue for the next few years.
Second, the adoption of corporate governance reforms in Japan may also have an impact on M&A activity. On-going corporate governance reforms are creating pressure on Japanese companies to improve their performance, and as a result, some Japanese companies may become more aggressive in pursuing M&A transactions.
Finally, the development of technology and innovation is expected to affect M&A activity. The development of technology and innovation is expected to not only facilitate an increase in M&A transactions involving venture companies and venture capital (especially in new fields such as artificial intelligence and financial technology (Fintech)), but also affect traditional business sectors. For instance, it would not be surprising to see advances in self- driving and electric vehicles facilitating reorganizations in the automobile sector.
Other than technology disruption and private equity deployment, we consider the three most significant factors for Jersey to be:
- political uncertainties including Brexit in Europe and the midterm elections in the US;
- US and UK tax and regulatory reforms; and
- Chinese government scrutiny over outbound deals.
- the robust regulatory framework for non-banking financial institutions and capital markets in Mauritius;
- the continuing consolidation within the fiduciary sector; and
- government policy.
A key factor likely to influence mergers and acquisitions activity is the extent and manner of implementation of the reforms Myanmar has been undertaking since opening to foreign investment, and the extent to which Myanmar adapts and modernises its local practices and regulatory culture in implementing such reforms.
A second challenge is whether Myanmar can improve its infrastructure to support foreign investment. Around two thirds of Myanmar’s population does not have access to the national electricity grid, and reliable access to power and transport continues to impact the conduct of business in Myanmar.
A final factor likely to affect foreign participation in mergers and acquisitions is Myanmar’s reputation as a place to invest. For example, the US has sanctioned five Tatmadaw and police officers and two Tatmadaw units under the Global Magnitsky Act for human rights abuses, while the EU has sanctioned fourteen Tatmadaw, border guard and police officers. It was reported in October 2018 that the EU was considering removing Myanmar from its “Everything But Arms” program, which provides duty-free access to the European market for a range of Myanmar products, including textiles. While there is no suggestion of broad-based sanctions being applied at this stage, the threat of sanctions can increase risks (including reputational risks) for investors.
The three most significant factors driving deal making activity in the Norwegian market during the next 2 years, will most likely be (i) international commodity prices (oil and gas); (ii) global megatrends; and (iii) board confidence in the global capital markets. Examples of global megatrends that may drive deal activity is digital technology facilitating changes in customer behaviours; boosting eCommerce sales, again accelerating innovation typically within automation, robotization and high tech. Improved oil and gas prices will lead to increased deal activity in Norway.
We believe that the investment of foreign companies in the agriculture and fishing sectors in Peru will increase the commercial activities in these economy sectors making them more dynamic and attractive to investors. In addition to this, the political factor will also be a significant actor for the M&A market. As the government is fighting to promote the mining and infrastructure projects that were put on hold due to the uncertainty economy and corruption scandals during 2018, we expect an increase in transactions on that sector. Likewise, local construction companies are under great financial stress due to the aforementioned factors, so some of their assets might be for sale during the year.
With a relatively strong macroeconomic performance and positive rankings from international credit-rating agencies, the Philippine market is becoming more attractive to foreign investors that are keen on merging with or acquiring Philippine companies and vice-versa. The Philippine market’s attractiveness to foreign investors is bolstered by the enactment of the Ease of Doing Business Act which simplifies and expedites the setting up of businesses in the Philippines. The new law has standardized deadlines for government transactions, provided a single unified business application form, created a business one-stop shop, implemented a zero-contact policy to avoid potential corruption, and established a central business portal and the Philippine Business Databank.
Further, the ASEAN integration has eased up doing business among member-states. This economic integration has thus made M&As attractive within the region, especially in the Philippines which ranks 5th among Southeast Asian countries in terms of competitiveness, 3rd in labor market competitiveness and macroeconomic stability, and 4th in innovation capability and financial systems. With the increase in the thresholds for M&As needing clearance from the PCC, corporations would become less averse to engaging in M&As that might trigger PCC regulation.
Isle of Man
We believe the three most significant factors will be:
- continuing consolidation and private equity investment, particularly within the fiduciary sector;
- the value of sterling; and
- global investor confidence.
Technology: will allow a swifter, more efficient and accurate analysis of the information provided about a target. This will allow contractual parties to complete their transactions in a quicker, more certain and less risk-prone manner.
Economic cycle: expected market corrections may generate good business opportunities, especially for those investors that have funds to deploy, but may also result in the delay or even cancelation of certain planned investments and create financing constraints to other investors.
Global politics: relevant changes in international trade deals, the introduction or change in tariffs, application of sanctions and embargos or limitations to the investment in certain sectors by investors in particular countries will also play a significant role in the M&A activity in the near future. These factors have already had a significant impact in the nationality of investors and type of investments in Portugal.
The global economic trends and the stability of the Romanian government and its policies (especially tax policies) appear to be the challenges to be faced by the Romanian M&A market in the next couple of years.
Geopolitical and internal political situation will be one such factor. Also, the dynamics of oil and gas prices and, by extension, of the Ruble exchange rate will continue to be a major factor – as always in Russia.
It should be noted that the Russian economy shows certain concentration tendencies. State corporations are becoming the main players in M&A markets, and the state has substantially increased its influence in the banking and financial sector.
In addition, it should be mentioned that the 2017-2018 trend was increased governmental supervision over acquisitions by foreign parties of stakes in Russian companies in all sectors and sometimes attempts to limit participation of foreign companies in M&A deals and, more generally, in business activities in Russia.
Firstly as is to be expected, M&A activity in South Africa is directly linked to the political and economic environment, both domestically and internationally. Secondly, South Africa being a commodity producer, M&A activity has a strong correlation with commodity prices. Thirdly, a significant restructuring of state owned enterprises, particularly in the energy sector, should have a material favourable impact on the economy. Linked to this, is an expectation that there will be significant expenditure on infrastructure enhancement.
The three most significant factors driving M&A activity in the Swedish market over the next two years are likely to be (i) the value of the Swedish currency in relation to foreign currencies, (ii) securities market valuations and the general state of the financial markets, and (iii) eventual changes with respect to capital accessibility or the overall risk willingness.
The current political tensions and uncertainties (incl. the trade war between the US and China as well as Europe, the ongoing negotiations and tensions around Brexit as well as the economic and political development in certain large European countries such as Italy and France) will continue to have a significant influence on M&A activity in Switzerland and abroad. A slowdown in the global economy in 2019 (incl. China) may also have an effect on M&A activity Switzerland. Notwithstanding this, considering the strong constitution of Swiss corporates , Swiss companies may also take an active role as potential bidders for targets at lower valuations than were seen in the last couple of years.
In our opinion, the three most significant factors that will influence M&A activity in Thailand over the next 2 years will be (1) the attractiveness of the investment environment and privileges and political stability in Thailand; (2) the development and expansion of Thailand’s infrastructure; and (3) international economic conditions, including the expansion of Chinese investment in Thailand.
The adoption of the FDI law in the UAE is likely to be the key driver for deal flow in the country, in particular as the implementing regulations are adopted and as deal flow brings with it greater understanding of the investment regime.
In addition, it is anticipated that increased investor interest around the Expo 2020 event is likely to be a major factor influencing potential inbound investment, while the continued focus on diversification of the economy away from an oil based market will continue to create investment opportunities – both for UAE and international investors.
The three most significant factors influencing M&A activity over the next 2 years are likely to be the large market India offers for sales of products and services, acquirers wanting to acquire competing companies and growing inorganically, and various opportunities offered by companies undergoing insolvency proceedings.
In our view, during the next two years the three most significant factors influencing M&A activity in Vietnam are likely to be:
(i) the increasing numbers of listed and unlisted public companies taking advantage of the availability of State Securities Commission approval to increase the permitted foreign ownership percentage of those public companies from 49% to 100%, which has only recently become a possibility;
(ii) the increasing liberalisation and rationalisation of the regulatory landscape in Vietnam, which is already making and will continue to make the implementation of M&A transactions faster, easier, and less bureaucratic (in particular, the entry into force of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the execution of the EU-Vietnam Free Trade Agreement); and
(iii) the continued and more expeditious implementation by the Vietnamese Government of its programme of equitising (privatising) State-Owned Enterprises in Vietnam and divestment of State shareholding interests in many former State-Owned Enterprises which have already been equitised, operating in a wide range of industry sectors, which gathered excellent momentum during 2018 and is expected to achieve major progress during 2019 and 2020.
We expect M&A activity in the U.S. over the next two years to be heavily influenced by the state of the U.S. economy and political risk. A number of macro-economic indicators are signaling caution ahead. Although that may lead to the Federal Reserve slowing its path of tightening monetary policy, lower interest rates may not compensate for a slower economy in the U.S. and internationally.
On the political side, uncertainty about the direction of trade policy, particularly as it applies to China and Europe, will likely drag down M&A activity.
- Macro-economy and fund-raising market. Financial investors are a significant driver of M&A activity in China. They contribute materially to the selection and development of investment targets and tend to lead overall investment trends in specific industries. It is widely accepted that the highly competitive PE and VC markets in China contributed to China’s record high valuations for start-up companies in 2018. However, as a result of China’s deleveraging efforts, the Chinese PE/VC funds have recently experienced fund-raising difficulties. The fluctuations in the Chinese macro-economy and the ability of financial investors to raise investment funds will have a significant impact on M&A activities going forward.
- International and domestic policies. The decline in PRC outbound M&A in 2018 has been imputed to international and PRC policies. For example, direct outbound M&A transactions are believed to have decreased partly due to more stringent CFIUS rules issued in the US, and new FDI restrictions adopted by European countries. Simultaneously, many Chinese investors have also experienced difficulties in PRC regulatory approval procedures for outbound investments, possibly owing to China’s efforts to maintain a steady foreign exchange reserve. However, we are cautiously optimistic that the optimisation of M&A policy and other policy reforms in the PRC and internationally – some of which may correlate with the loosening of trade tensions between the US and China – could help to spur market activity.
- PRC capital market. The Shanghai composite and the main Shenzhen index dropped by more than 20% and 30%, respectively, in 2018. Many PRC public companies defaulted on debt and are generally facing financial difficulties. Therefore, PRC investors (especially state-owned enterprises) have become more active in attempting to obtain control of public companies in 2018. However, not many deals were closed due to stock price fluctuations and disagreements on key deal terms. The Science and Technology Innovation Board was recently announced and is expected to be launched by the SSE soon. It will be aimed at providing an easier listing board for high-tech companies than those currently existing in the SSE and SZSE, which may also stimulate M&A activities in high-tech sectors.
To encourage private sector participation, equity investments and foreign direct investments, the Egyptian market must continue to provide an attractive investment landscape where the private sector takes the lead.
Ensuring that the current reform program continues at a steady pace and that the ensuing side effects including inflationary pressures can be absorbed and efficiently managed through the social solidarity and protection programs adopted by the government. Political, economic stability and clarity as to the applicable legal framework is necessary in order to provide the M&A players, whether private equity, funds, FDI’s or multinationals with certainty needed to manage and mitigate the risks effectively.
There are fragmented businesses and sectors in Egypt that could be ripe for consolidation within strong holding local entities. Interest rate regimes and availability of acquisition finance options at reasonable terms could support rapid execution of M&A transactions leading to consolidation and growth.
Finally, the strategy adopted by the ECA will also make a difference in relation to consolidation practices. Under the Competition Law, no prior approval is required for an acquisition or a merger to take place, only a simple notification to ECA is required to be made within thirty days from the execution of the merger or the acquisition. Despite the foregoing, the ECA has recently adopted an aggressive approach and an expansive interpretation of its powers requiring main market players who are contemplating to merge to seek ECA prior approval to avoid being fined for anti-competitive behavior.
We believe the three most significant factors will be:
- the continuing changes to the regulatory framework for banks in the UK;
- the continuing consolidation within the fiduciary sector; and
- the value of sterling and global investor confidence in a post Brexit world.
Given the popularity of the Hong Kong market with mainland Chinese investors, levels of M&A activities are generally tied to regulatory and economic developments in China, and China’s relationship with other countries.
We anticipate that the three most significant factors to influence M&A activity through Hong Kong over the next 2 years will be: (1) the pace of China’s economic growth, (2) the availability of overseas investment opportunities for Chinese businesses or funds, particularly in a more stringent global regulatory and anti-trust environment, and (3) the prevalence of H-shares and red chips continuing to make use of their listing vehicles in Hong Kong for M&A activity.
The three most significant factors, we believe, will be Brexit, global economic uncertainty and US/China tariffs.
Brexit continues to cause uncertainty with it being unknown whether the UK will leave with a deal, no deal or delayed for a period of time. Businesses have begun taking preparatory action in the event of a “no deal” scenario. Notwithstanding this, Brexit poses opportunities for overseas investors seeking to capitalise on cheaper UK assets.
Linked with Brexit is the wider chill of a potential economic downturn, with Germany, the EU’s largest economy, recently posting a flat increase in GDP growth and revising down its economic forecast for 2019. Emerging markets and Asia are also experiencing a decrease in output which could adversely affect the US and have wider consequences for the global economy and M&A activity.
The ongoing imposition of tariffs on US and Chinese exports continues to raise the costs of goods or cause supply issues and squeezing businesses. The intention behind such tariffs is, of course, to promote local production and purchases which might, in turn increase the cash balances of corporates, while those companies struggling as a result could become potential targets.
The stability of the financial sector in Cyprus and the respective growth of the economy have been significant factors contributing in the increased volume of M&A activity and are likely to contribute to future development. Furthermore, the uncertainty relating to BREXIT and the effect it may have on the business may lead to an increased level of inbound merger activity.
Further developments at a European Union level and future regulatory reforms would also have a significant effect on the fortune of M&A activities and the restructuring of several large international structures with a strong presence in the Republic of Cyprus.
Current trends on the market are expected to continue. Real Estate is foreseen to remain an active sector, and domestic transactions are expected to continue dominating the market.
From a legal point of view, transactions will definitely be affected by the application and interpretation of Hungary’s new civil law codex, the Civil Code, which came into effect 5 years ago, as well as the new competition law regulation introduced two years ago, changing merger control thresholds.
Transactions may also be affected by a new legislation on national security screening of foreign investors. According to such new act, foreign investors are (i) persons from outside the EU or the EEA or Switzerland and (ii) persons from the EU or the EEA or Switzerland, that are subject to the majority influence of a person outside these areas. In certain strategic sectors, foreign investors may acquire, directly or indirectly (a) a share in a Hungarian company exceeding 25% (or in case of a public company: 10%) of the company’s registered capital, or (b) dominant influence as specified under Hungarian law, subject to and after the express approval of the competent minister of the Hungarian Government. The same rule applies if, in the strategic sectors, a foreign investor intends to acquire a minor share but, together with other foreign investors who already own a share in the relevant company, foreign investors would reach the above thresholds. The agreements aiming at such acquisitions by a foreign investor shall be reported to the minister, and the acquisition may be completed, and shareholders’ rights based on the relevant shares may be exercised, only after the transaction has been approved by the minister. The new legislation entered into force in 2019, and, although similar legislation is already in force in other EU member states, its operation in practice as well as its effects on Hungarian M&A transactions is to be seen in the coming months.
(a) The need for rationalisation of the number of local banks (which are all listed) is likely to be a significant factor going forward. This has already commenced with the Barwa-IBQ merger
(b) The decision by Qatar Petroleum to focus more on core business activities will have a significant effect.
(c) The ongoing political issues are likely to have effects on investment and activities in the region generally.
We believe that the biggest risk which could negatively influence M&A activity in Slovenia over the next two years is political instability not just in Slovenia but also in other European countries. Slovenia as a small economy is very exposed to external factors stemming from other countries usually members of the European Union. We are also witnessing a turnaround in US policy which, as one of the biggest economies could also mean a greater risk for the European economy as a whole. There is also a threat of volatility in global capital markets which cannot be predicted and prevented but it still must be taken into account. We also estimate that the monetary policy of the European Central Bank could have a huge influence on M&A activity over the next 2 years.