Japan and the EU – Latest cross-border M&A trends and outlook
The increasingly unpredictable political, regulatory and economic environment faced by investors has led commentators to suggest that 2019 may see a downturn in global M&A activity. But while uncertainty will definitely present significant challenges for investors, we believe there will be just as many opportunities for those who remain agile and ambitious.
CO-AUTHORED
Tokutaka Ito, Partner, Allen & Overy, Tokyo
Osamu Ito, Counsel, Allen & Overy, Tokyo
Giovanni Gazzaniga, Partner, Allen & Overy, Milan
Paolo Nastasi, Partner, Allen & Overy, Milan
Uncertainty in China – Opportunity for Japanese investors
Geo-political turmoil will inevitably continue to be a significant factor for investors this year. The China-U.S. trade war is having a clear impact, coming on top of tighter domestic controls on outbound investment by the China government and growing protectionism against Chinese investments in key markets, notably the U.S., but also in certain parts of Europe. Although we expect that in 2019 Chinese companies will be targeting more friendly regulatory markets such as parts of Europe, South East Asia and markets covered by the “Belt and Road Initiative”, Chinese companies are no longer the dominant force they were at the heights of the outbound investment boom in 2016. This has opened the way for other investors, notably from Japan.
Japanese companies continue to look outwards for three main reasons - an ageing and shrinking domestic market, huge reserves of corporate cash (estimated to be worth some USD900bn) and cheap debt, and a steely belief - which has paid dividends in the past – that good, attractively priced assets become available at times of greatest uncertainty.
Choosing markets and targets is becoming more tactical, too, with attention increasingly switching from the Asia Pacific region to opportunities in Europe and the U.S., with a focus on mature, well-run companies in these markets. The financial services, automotive and life sciences sectors are slated to be particularly active this year. In Europe, whilst Japanese companies still see opportunities in the UK in certain sectors, the UK, thanks to Brexit, is no longer seen as a bridgehead into the EU, spurring investment directly into Continental Europe.
“Choosing markets and targets is becoming more tactical, too, with attention increasingly switching from the Asia Pacific region to opportunities in Europe and the U.S., with a focus on mature, well-run companies in these markets. The financial services, automotive and life sciences sectors are slated to be particularly active this year. In Europe, whilst Japanese companies still see opportunities in the UK in certain sectors, the UK, thanks to Brexit, is no longer seen as a bridgehead into the EU, spurring investment directly into Continental Europe.”
Proliferation of national interest tests
The growth of antitrust and other regulatory interventions in an increasing number of jurisdictions will be a challenge for deal completion in 2019 and ahead. When these are purely rules-based, investors know where they stand and what remedial action to take. When political considerations are driving interventions – as we see with the proliferation of national interest screening across the world, including in Europe – the risk becomes much harder to read and to manage.
While risks are often characterised as threats to ‘national security’, increasingly, governments are taking a broader view on what exactly that means: it’s no longer just about the defence sector; now sensitive technologies, utilities, media and ‘critical infrastructure’ are equally under the spotlight.
New EU foreign investment legislation adopted in March 2019 marks the first time that the EU has taken a co-ordinated approach to the vetting of investment from outside the EU on security and public order grounds across EU Member States.
The EU’s move is part of a wider global picture, with investors facing a rapid proliferation of national interest screening across a growing number of jurisdictions around the world. The UK is looking to replace the existing public interest screening regime with a significantly expanded national interest regime. Other jurisdictions, such as the U.S., France and Germany, have also been strengthening their existing review mechanisms.
As new initiatives, like those from the EU and the UK, roll out, the risks and complexities for investors are only likely to increase.
Technology disruption
Technology disruption is boosting activity in two senses. The big tech companies continue to aggregate technologies on their expanding platforms, investing heavily and at great speed. At the same time traditional industry players are investing in technology, often through acquisition or joint ventures, not just to stave off disruption impinging on their operations but also to embrace more efficient business models.
The car industry is a classic example. Leading car manufacturers in both Japan and Europe are adopting wide-ranging digital strategies that will transform them from being car manufacturers to providers of tech-enabled mobility services.
Significant deal activity by the tech companies is driving up asset prices and changing the way deals are done. Traditional investors are being forced to relinquish their conservative approach to deal-making to deal with the super-quick, “buy first, fix it later” tactics of the tech companies.
Transactions supporting this activity are by their nature complex. But the need to stay in touch with customers and ahead of rivals in a fiercely competitive environment requires heavy investment – an investment many companies, new and established, are clearly willing to make.
That, we think, makes it highly likely that disruption will increasingly become a significant catalyst for ventures, partnerships and, increasingly, full M&A transactions in the era of digitalisation.
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Published 2019