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Regulators and politicians have always played a role in mergers and acquisitions, particularly regarding deals that affect competition or involve high-profile national champions. Antitrust concerns will continue to dominate, particularly at a time when a higher proportion of the deals involve strategic buyers, but anti-corruption investigations are becoming an increasingly important part of the calculation. The impact of stepped-up regulation of banks and other financial services companies is harder to predict, but lawyers say they expect to see knock-on effects.
New people and regimes in the US, European Union and China have put competition concerns front and centre. “Both buyers and sellers are taking a closer look at antitrust concerns – [to determine] how likely a deal is to get through,” says Victor Lewkow, M&A partner at Cleary Gottlieb, the law firm.
He says more time is also being spent hammering out what the two sides would do if authorities raised concerns, such as whether one side would pay the other if the deal was blocked, and what divestitures might be made to assuage regulatory concerns.
In the US, Democrats appointed by President Barack Obama now lead both the Department of Justice and the Federal Trade Commission, and most lawyers expect they are likely to be tougher on competition issues than their predecessors in the Bush administration.
“Given all that has been said by Mr Obama about [former president] George W. Bush, it is inevitable that he will be tighter than Mr Bush,” says James Killick, antitrust partner at White & Case, the law firm. “The question is: how much? We haven’t had enough deals to see.”
Statistics on such deals are not yet available for Mr Obama’s first year in office. In the EU, most lawyers do not expect the new European Commission taking office to be drastically different from the old one, but they believe the easing of the financial crisis will return the focus to competition concerns. They argue companies should not put too much emphasis on the cases of Alitalia and Air One or Lloyds and HBOS, where mergers were waved through despite competition concerns.
“The new commission has been at pains to show it will apply the usual tough standards,” says Antonio Bavasso, antitrust partner at Allen & Overy, the law firm. “Merger controls were suspended but now it is very much business as usual.” China is even harder to predict. It has just set up its antitrust regime, but the consensus is that getting deals through will only become harder as more countries get involved.
“Generally, mergers are likely to take a lot longer,” says Hans Jürgen Meyer-Lindemann, a Brussels-based antitrust partner at Shearman & Sterling, the law firm. “More than 70 countries have enacted merger control statutes, and the number continues to grow. This means deals involving large companies often give rise to merger filing obligations in numerous jurisdictions.”
While competition remains the single biggest regulatory headache for deals, concerns about overseas bribery and corruption are growing. The US has been enforcing laws against bribing government officials elsewhere since the 1970s, but it is only during the past couple of years that many European countries have cracked down. The trend is most apparent in the UK, where parliament is adopting a bribery bill and the Serious Fraud Office has announced plans to step up enforcement.
The increased attention is driving up pre-deal diligence costs and making many companies warier about taking on operations in countries where corruption is endemic.
“Companies are seeing growth, including through acquisitions, in the very markets that are seen as having the greatest corruption risks,” says Geoff Nicholas, head of global investigations at Freshfields, the law firm. “Couple this with the significant increase seen in investigations by the US authorities, and the passage of new bribery legislation in the UK, and the reasons for tensions created through acquisitions are clear.”
The US has been clear it expects would-be acquirers to look carefully for potential problems, and then clean up any mess they find. If they do anything less, they can be held responsible. “The enforcement authorities have shown a distinct lack of sympathy for companies that fail to conduct adequate due diligence and find themselves new owners of a business with legacy corruption issues,” says Philip Urofsky, a partner with Shearman & Sterling in Washington come home to UK companies even if they have no US connections. The Serious Fraud Office has said it expects companies to self-report if they discover corruption issues affecting new acquisitions, and to make serious efforts to put in place new controls and policies. If companies fail to do so, and problems are later discovered, the acquirers will be held responsible.
As a result, “some deals are going to get more expensive and some are not going to get done”, says Alistair Graham, UK partner at White and Case. “Sometimes the company will decide it really can’t be bothered to do the deal.”
The other big area of regulatory ferment – the proposed financial services regulations – is not directly aimed at M&A. But the proposals, which range from restrictions on proprietary trading for US banks to higher capital and liquidity requirements around the world, are likely to affect which deals get done.
Lawyers in the sector say the government plans to address the problem of institutions that are seen as “too big to fail” through additional taxes or localised capital, and liquidity requirements could drive new deals. Some institutions may look to spin off less profitable overseas subsidiaries or proprietary trading desks, while smaller asset managers may feel the need to combine to meet tougher regulatory requirements.
Barney Reynolds, London partner at Shearman & Sterling, says: “There will be a dampening of globalisation as global institutions will be required to be multilocal, to the degree that they have local pools of liquidity and capital available where they have significant presences. This may lead to spinoffs where this is uneconomic for institutions.”