2020 5月 05

Terminating Takeovers: Governments Should Think Twice Before Pulling up The Hatches

Blocking takeovers is the latest hype.

Concerns over the economic ransacking of businesses hit by the coronavirus pandemic have triggered initiatives world-wide to ramp up both protectionist rhetoric and, in some cases, policies.

In the U.S., Sen. Elizabeth Warren and Rep. Alexandria Ocasio-Cortez are proposing to temporarily block deals during the coronavirus crisis as a way of stopping large companies from exploiting the pandemic to buy up their smaller rivals on the cheap.

The French government also has plans to tighten restrictions on non-European investments in French companies, to limit foreign control over strategic sectors and technologies.

“In this period of crisis, some companies are vulnerable, some technologies are fragile and could be bought by foreign competitors at a low cost. I won’t let it happen,” Finance Minister Bruno Le Maire told LCI television.

Germany is also getting worked up. The cabinet last week approved legislation to lower the threshold for reviewing and blocking foreign takeovers of strategically important companies.

Those plans, already in motion before the coronavirus crisis, have now been accelerated as companies struggle to protect their profits amid the economic crisis.

Both France and Germany have long called for a change in the EU’s competition rules after state-owned or state-linked Chinese companies embarked on a string of acquisitions in Europe.

After announcing France’s own fiscal stimulus plan to help fight the consequences of the virus, Le Maire said he had made for French President Emmanuel Macron a list of 20 French companies deemed strategic, and to be protected against eventual foreign acquisitions.

Even Australia, where mergers and acquisitions activity is limited in the best of times, has tightened its rules on foreign takeovers on concerns that strategic assets could be picked up cheaply as a result of the coronavirus crisis.

Much of the agitation is political. Warren and Ocasio-Cortez are suspected of looking for ways to reassert themselves after the representatives of the Democratic Party’s left wing lost in the presidential primaries.

Depicting bidders as asset strippers is always an easy populist hit when times are tough.

The proposed Pandemic Anti-Monopoly Act, which would place a moratorium on deals by companies with more than $100 million in revenues and those owned by private equity or hedge funds, is unlikely to gain traction in the Republican-controlled Senate.

“As we learned after 9/11 and during the financial crisis, flexibility is crucial during crises. Proposals to block M&A during the Covid-19 crisis reduce flexibility when it is needed the most,” Frank Aquila, global head of M&A at international law firm Sullivan & Cromwell, told Barron’s.

“The proposed Pandemic Anti-Monopoly Act is bad public policy and worse economics,” he added.

That was the logic of Britain’s competition authorities, which earlier in April provisionally cleared Amazon’s investment in Deliveroo after the food delivery startup warned it could collapse without receiving new funds.

The Competition and Markets Authority (CMA) had launched a detailed investigation into the deal in December, amid concerns it would limit competition in the takeaway and ultrafast grocery delivery markets, with customers.

But on April 17, the CMA said Deliveroo had informed it that the impact of the pandemic on its business meant it would fail financially and exit the market without the Amazon investment.

At the time, one analyst dubbed it the first “coronavirus bailout” from the CMA.

Investors will be watching to see whether U.K. regulators will take the same attitude toward a proposed merger between Telefónica’s O2 and Liberty Global’s Virgin Media. If successful, the deal would create one of the country’s largest entertainment and telecommunications firms with a combined value of almost $35 billion , including debt and anticipated synergies, and reshape the telecoms landscape.

“From what we’re hearing, regulatory agencies will continue to review and scrutinize transactions, especially regarding anticompetitive behavior, said Merlin Piscitelli, chief revenue officer for Europe, the Middle East and Africa at Datasite, a software services provider focused on the life cycle of M&A.

“That said, there are potential negative impacts of not permitting M&A, especially if it means having distressed businesses, or those approaching that status, take on more debt, which could result in layoffs or furloughs , as well as maintain less cash flow, which could have a ripple effect on supply chains,” Piscitelli added.

The prospect of a resumption of M&A activity is, however, moot at the moment. Global deal making has collapsed to its lowest level in seven years, as companies focus on liquidity and preserving cash amid the coronavirus crisis. There were just $789.8 billion in deals announced world-wide during the first four months of 2020, down 39% compared with last year and the lowest year-to-date level since 2013, according to data from Refinitiv.

“Over the course of the last 40 years of records, we’ve encountered a number of unprecedented events and we’re now squarely back to the depths of the Great Recession, with U.S. companies seeing the lowest monthly level of merger activity in 11 years,” said Matthew Toole, director, Deals Intelligence, Refinitiv.

But as countries brace themselves for months of deeper crisis, governments might want to think twice before they pull up the hatches just when additional capital is needed to boost growth and create new employment prospects. Taxpayer-financed bailouts and subsidies can only last so long.

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Marta Carraro

Vice President, Communications

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Jennifer Percy

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