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Sullivan & Cromwell
Sullivan & Cromwell
Frank Aquila spoke to Global M&A Network about the increasing number of cash rich global companies that are pursuing strategic growth initiatives post the economic crisis, the changing character of cross-border dealmakers, the evolving nature of unsolicited bids and the best takeover defense.
Q.: What are the chief drivers of global M&A deal activity in today's markets?
Mr. Aquila: Deals at the moment are highly strategic, while also focusing on short-term revenue and profit growth. After almost three years of difficult economic times, companies understand that acquisitions can provide access to markets, products, and technologies that might otherwise be available only after many years of significant capital investment. The largest global public companies have more than $3 trillion in cash reserves on their books, and that number is growing every day. In addition, these companies have access to trillions of dollars in debt financing that is currently available at extremely low rates and on very favorable terms. Recessionary times have also required that companies identify their weak spots, and strategic acquisitions are an effective means of filling those gaps.
Q.: What sort of buyers / sellers are dominating the global M&A marketplace?
Mr. Aquila: Given the length and severity of the economic downturn, many companies have not performed as well and are for sale, shedding assets, or vulnerable to an unsolicited bid. Not only will corporations be doing deals in 2011; but, private equity groups have also become increasingly active in the past few months, and they will likely continue to be busy.
Q.: What sectors do you expect to be most active this year?
Mr. Aquila: I believe that there are certain sectors that will experience significant consolidation. In particular, I would be focused on healthcare, energy, basic materials, retailing and consumer products as sectors that will see a greater level of merger activity than some of the other sectors.
Q.: What are your observations on some of the important trends in cross-border acquisitions?
Mr. Aquila: Cross-border M&A today has become truly global. While traditionally cross-border deals were among companies in the US, western Europe and Japan, today we are seeing acquisition activity around the globe. Mirroring the globalization of world trade, companies from Latin America and Asia have increasingly become active acquirers in the US and Europe, which is something we have not seen before. Latin American and Asian companies in many sectors, from high tech to energy to basic materials to entertainment have grown dramatically in their local and regional markets. These companies are now looking to become global players and they can do so through acquisitions. This is an across the board trend and a pattern that will likely continue to increase in the years ahead.
Q.: How can companies minimize cross-border transaction risks?
Mr. Aquila: Every deal has some level of risk and cross-border deals are no different. Yes, sometimes the risk can be very significant in a cross-border deal. But the rewards are usually greater as well. Clearly a well developed due diligence process is key. In a significant cross-border deal the buyer needs to focus on the key cultural, political, regulatory and tax issues. Beyond due diligence, a well tailored post-closing integration plan is essential to achieving the benefits of the deal.
Q.: Does the rising concern about "protectionism" influence multinational acquisition strategy?
Mr. Aquila: As cross-border M&A increases, particularly in an environment of low growth and high unemployment, the temptation to block deals on protectionist and national security grounds increases. While there have been a few high profile examples of this behavior over the last couple of years, blatant protectionist behavior has been thankfully few and far between. Companies preparing for a cross-border deal should take into account the potential for protectionist resistance and be fully prepared to respond to any efforts to block the transaction.
Q.: How are the tactics of unsolicited cross-border takeovers different today?
Mr. Aquila: The tactics and objectives of unsolicited offers in the 1970s and 1980s justifiably evoked images of raiders and pirates. Yet while these terms continue to be used - hostile bidder, bear hugs, poison pills and white knights - today's strategic buyers have little in common with the greenmailers and corporate bust-up artists of that era. Today, such buyers view unsolicited bids as just another tool in their chest to achieve strategic objectives. While no two deals are ever the same, planning will always be crucial. Once the plan has been developed, it must be implemented with skill and discipline.
Q.: What is your advice to global companies in assessing their takeover vulnerability?
Mr. Aquila: Unfortunately assessing takeover vulnerability is not a "one size fits all" exercise. It is important to stress that takeover defenses will not, nor are they intended to, prevent a takeover proposal that is fully financed at a full and fair price, supported by the shareholders. Defenses provide the board of the target company with the time to evaluate the bid and consider all alternatives. This was clearly noted by Chancellor Chandler in his recent decision in the "Airgas" case.
Q.: If the target company cannot ward off unsolicited bid, what can they do?
Mr. Aquila: Takeover defenses do not prevent unsolicited bids and do not eliminate the obligation of directors to exercise their fiduciary duties. They do provide the target company board with leverage in order to maximize shareholder value. Advance preparation and familiarity with the legal landscape will permit directors to respond to any unsolicited proposal effectively and promptly, and in a manner consistent with their fiduciary duties. Ultimately, the best takeover defense is a strong share price and good relations with the shareholders.
Q.: On a personal note, what book are you currently reading?
Mr. Aquila: I just finished reading the Last Lecture by Randy Pausch. What an amazing book and I highly recommend it. It's an emotional and articulate view of life written by someone who had the time to know that his own life was coming to an end. Pausch makes you think about all aspects of life and how and why we do things, what it is we should be doing and how we should be interacting with those who are most important to us. Pausch's widow is now writing a book and I look forward to reading it when it is published. I have just started reading City of Thieves by David Benioff.
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