(Illustration by Mark Airs)
Cross-border megamergers are getting tougher for law firms and their corporate clients because of broadening definitions of national interest, Am Law 100 mergers and acquisition experts say.
Increasingly, countries including the United States are using reviews intended to address antitrust and national defense as a means of protecting domestic jobs and industries as well, those experts say.
Law firms are having to proactively anticipate obstacles that could thwart major deals, including cybersecurity concerns: Some parties, including possibly state-sponsored groups, have hacked into company and law firm computers looking for confidential information on cross-border transactions, according to news accounts.
To be sure, on the whole the number and value of M&A deals has been rising and recently reached a postfinancial crisis high, according to various sources.
But a recent survey by Freshfields Bruckhaus Deringer found that 57 percent of 214 corporate law departments, investors and legal services departments in the U.S. and Europe said they had been involved in an aborted deal in the past 12 months.
“One of the big changes is that though we used to be mostly concerned about competition among companies, it is now competition among countries for jobs and protectionism,” Richard Steuer, an antitrust partner at Mayer Brown in New York, says. “It is a whole new world. Counsel must have tremendous peripheral vision.”
Law firms handling cross-border transactions must anticipate opposition from all directions, have a response ready, and government relations and press relations people lined up. “Expect this is going to happen,” Steuer says.
“Nationalism is becoming an increasing factor in M&A,” adds Robert Profusek, a global head of mergers and acquisitions at Jones Day. He says the number of countries seeking premerger antitrust notification and review requirements have gone from “high single digits about 10 or 15 years ago to more than 100 countries today,” citing data compiled by his firm’s antitrust experts.
Watching out for cyberthreats
Because nationalist and protectionist concerns increasingly are entering the transactions, the potential for additional problems such as cyberattacks and data theft also is involved, the lawyers say. The vast majority of M&A deals under $250 million don’t encounter big problems, Profusek says. But headline-grabbing multibillion-dollar deals involving perceived strategic interests, in industries such as energy, mining, agriculture and technology, increasingly are getting a closer going-over by regulatory panels, leading to costly delays. The additional reviews can add $10 million and more to the total costs of a transaction, the lawyers say.
Worse, the regulatory bodies making the decisions, such as the United States’ Committee on Foreign Investment in the United States (CFIUS) and China’s Ministry of Commerce (MOFCOM), are not often transparent about their reasons for opposing the deals, which doesn’t give companies involved an opportunity to overcome their objections, says Christian Fabian, a partner at Mayer Brown specializing in cross- border transactions. China began to take a distinctly more protectionist bent starting in 2008, when a new antimonopoly law in China gave MOFCOM a more active role, the law firms said.
“Your entire deal can collapse for reasons that you don’t understand,” Fabian says. “They won’t even come out and say why a lot of time. It adds a lot of uncertainty to cross-border transactions.”
For instance, in 2012, President Obama and CFIUS blocked a firm owned by Chinese nationals, Ralls Corp., from buying four wind-farm projects in Oregon, citing national security concerns because of their proximity to a naval installation. It was the first time in at least 22 years that a U.S. president had cited national security to scuttle a foreign investment, according to The Wall Street Journal. But the president did not detail the reasons for rejecting the bid. In 2013 a federal judge threw out a lawsuit filed by the company, claiming that it was denied due process and seeking to learn why CFIUS had rejected the deal. But last month a federal appeals court ruled that the president had overstepped his authority, and sent the lawsuit back to the D.C. district court, ordering the government to provide any unclassified evidence as to why it rejected the deal, in a ruling that legal observers said was significant.
In such an environment, more entities have reason to want to gain nonpublic information about all the players involved. Companies and law firms involved in mergers and transactions are attractive targets for data thieves seeking access to nonpublic information for whatever purposes, experts say.
Some prominent cross-border deals that failed recently, coincidentally or not, also involved serious cybersecurity breaches during the negotiations. That is a growing concern because companies and law firms involved in mergers and transactions are attractive targets for thieves seeking access to nonpublic information for whatever purposes, experts say.
Freshfields cited the following instances:
•In November 2010, hackers targeted Saskatchewan government computers, apparently attempting to gain confidential information about Australian company BHP Billiton’s Ltd.’s $40 billion takeover bid of Potash Corp., based in the province. The proposed merger collapsed when the Canadian government in Ottawa rejected it. The Globe and Mail newspaper reported much later, in 2011, that at least seven law firms also were hacked at the time.
•In 2012, Bloomberg reported that hackers accessed Coca-Cola’s computer systems during its attempted $2.24 billion acquisition of China’s Huiyuan Juice Group in 2008. The Chinese government rejected the proposed merger days after the FBI alerted Coke of the hack in March 2009, according to the Bloomberg account. The Chinese antitrust authority said the merger would have an adverse impact on competition.
• In May 2013, a laptop belonging to London-based mining company Euraian national Resources Corporation, whose operations are mainly in Kazakhstan, was stolen and internal data accessed during a period when a company had received a takeover offer but also was under investigation by U.K. regulators.
Even deals among companies located in countries that normally are strategic allies can run into protectionist opposition.
The law firm M&A experts cited this month’s GE-Alstom $17 billion merger as a prominent example of a recent deal that ran into protectionist headwinds. In order to overcome threats to block its purchase of a gas turbine business that the French government regarded as a strategic asset, General Electric ultimately agreed on June 19 to create joint ventures with Alstom in three other areas—nuclear steam turbines, renewable energy and the electrical grid—and to hire 1,000 French employees. The French government also intends to take a 20 percent stake in Alstom for $3 billion, becoming its biggest shareholder, according to news reports. Alstom had revenues of $28 billion last year and employs 13,000 workers in France, according to The New York Times. GE also agreed to sell its signaling unit to Alstom.
In the United States, mergers with foreign companies are getting more pushback from lawmakers and media over so-called tax inversions, when merged corporations shift their headquarters overseas as part of a tax-reduction strategy.
Most recently, the U.S. Congress has been casting a critical eye at deals such as Medtronic’s $42.9 billion bid for Irish company Covidien, which would allow it to reincorporate under Ireland’s lower tax rate; and Pfizer’s bid for Astra Zeneca, which has prompted a proposed bill in Congress to change the rules for tax inversions.
How to respond
M&A experts say it is important to surface potential issues early, to find out whether the buyer can live with, for example, spinning off work that raises potential national security risks or isolating it in a subsidiary to overcome a government’s objections to a deal. Buyers don’t want to lose an auction to a lower bidder because they haven’t addressed the execution risk, says Fabian, the Mayer Brown partner.
Included in the contingencies should be strong cybersecurity precautions, others say. For one thing, there are more jurisdictions that have applicable data regulatory requirements whereas they didn’t five years ago, said Chris Forsyth, cohead of Freshfields’ international cybersecurity team, in a recent interview.
Yet the Freshfields survey found that while 90 percent of respondents said that they believed cyberbreaches would result in a reduction of deal value, and 83 percent believed that a deal could be abandoned if cybersecurity breaches were discovered during due diligence or mid-transaction, 78 percent also said that cybersecurity is not an issue that is currently analyzed in depth or dealt with in due diligence at their workplace.
Forsyth said the disconnect between dealmakers’ recognition of the growing threat of cyberattacks and action to address that risk has been closing more recently.
“It is an actual and real change in the M&A process.” Forsyth said. Several years ago, it would have been unusual for clients and attorneys to discuss cybersecurity protocols. Now, he said, it’s not.