Simon Branigan, Global Head of Corporate at Linklaters, discusses the current M&A climate, including the current impact of regulation on dealmaking.
To mitigate any risk, you need to make sure you have your most trusted colleagues in the front and center of the deal process, to manage both the conversations with the regulators and clients’ expectations on the other side. If you don’t, then this can present real risks to the successful completion of the transaction.Simon Branigan, Global Head of Corporate, Linklaters
Broadly speaking, what is the current state of the global M&A market? There has obviously been a lot of ups and downs over the past few years, and we’ve seen a significant drop compared to a record 2021. Where do we stand now?
While M&A activity is certainly down compared to a blockbuster 2021, we are still seeing considerably high volumes of activity. This is both what we’re seeing in the market and what we’re hearing from some of the large investment banks – which is actually more positive than you might be hearing from the commentators. Based on our own experience, we’re seeing this activity across a wide range of sectors. It is true that while activity is slightly down compared to last year, it still continues to be incredibly busy. Yet the environment is complex, and it remains to be seen how many deals go through to a successful completion. I’m an optimist, but also a realist.
Speaking of this optimism in the market, are there any particular sector where you expect to see a recovery towards the end of this year?
There remains a lot of capital to deploy among financial sponsor clients, and this will drive activity over the next six to nine months. I expect energy dealmaking to be particularly buoyant, whether this is in relation to the energy transition or consolidation among energy suppliers. We also will likely see some Russia-related M&A, as large global players look to divest their Russian assets, while also diversifying away from fossil fuel. Healthcare dealmaking also looks set to be very busy, with a number of large deals coming through at the moment. Telecoms and technology – in particular digital infrastructure – have been incredibly hot over the past few years and will continue to drive M&A activity over the next 12 months and beyond.
While operating in a tougher macroeconomic climate, there is an argument to say that corporates will have more of a pressing strategic region reason to conduct M&A than PE firms. Do you think this could result in corporate M&A increasing, while private equity takes a pause?
I think that pressure will still be on financial sponsors to deploy capital. That is not to say that there will be lower volumes on the corporate side. Looking into the medium to long term, I do think there will be a continued increased in volumes in mainstream corporate M&A. Assets are relatively low value at the moment, and I think there are a number of bargains out there, which, of course, will appeal to financial sponsor players. I think there will be an increase on both sides.
Rising energy prices across Europe are currently putting huge pressure on energy firms across the region. Do you expect to see more distressed or rescue-type transactions in the sector over the next year or so?
Definitely – it is a trend we’re already seeing play out across continental Europe, particularly in countries particularly badly hit by the Russian-Ukraine crisis, such as Germany. I suspect this trend is less likely to happen in the UK, where a lot of the large energy firms are profiting from rising oil and gas prices, and which has recently led to political intervention. I think for these energy companies who are not in a distressed situation, we will actually see a rise in strategic M&A as they continue to source deals to help further their ESG goals and diversify their assets away from fossil fuels. Pressure from shareholders and activist investors will increasingly drive this need. I think there will be an increase in deal opportunities in this area.
We have witnessed an increase in regulatory intervention over the past few years – both merger control and FDI. Has this affected the types of transactions dealmakers are pursuing?
It is correct to say that anti-trust regulators, whether in the UK, EU, China, or the US, are becoming much more interventionist. The vast majority of transactions we are seeing going to phase two merger clearance review will fail. It’s quite a high risk. One thing this has taught me is to make sure to involve top-class anti-trust colleagues at a very early stage in the deal process. For many deals that we are involved in, the client will say there are no anti-trust issues – no overlap. This may be true on the face of things, yet once you start to dig a bit deeper there are issues one may not have previously considered.
To mitigate any risk, you need to make sure you have your most trusted colleagues in the front and center of the deal process, to manage both the conversations with the regulators and clients’ expectations on the other side. If you don’t, then this can present real risks to the successful completion of the transaction.
And what about on the foreign direct investment side? We have seen a rise in protectionist sentiment over the past five or six years. Is this something that is affecting your work day-to-day?
Yes – it is a something within particular sectors and geographies that needs to be considered when looking to eliminate executional risk and the ability to successfully complete transactions. In that sense, it does affect our day-today operations in terms of its impact on transactions. That impact will depend on the nature of the assets and the sector. Obviously, sectors such as defense or technology will raise potential alarm bells, depending on the jurisdictions involved.
Again, it goes back to my previous point in ensuring that the right anti-trust specialists are brought in right from the very start of the transaction. If there’s even the slightest complexity with foreign direct investment, then it’s absolutely key to make sure that you have those specialists to help clients navigate those challenges.