Rising regulatory risk squashing M&A deals, say advisers
(Reuters) - Competition watchdogs are stifling those companies still braving economic uncertainty to attempt mergers and acquisitions, say bankers and lawyers who claim the burden of bureaucracy has intensified with the financial crisis.
The European Commission on Wednesday blocked the merger between Deutsche Boerse and New York Stock Exchange (NYSE), feeding worries of tougher merger controls and a trend towards further bans.
Regulators are bearing down more heavily in response to public expectations that they shore up protection for consumers at a time of financial hardship, say lawyers and dealmakers.
"I am receiving many calls from clients worried that regulators might have a heavier hand on merger control," said the head of M&A for EMEA at a major European investment bank, who declined to be named to protect his clients' identities.
The EU Commission, the region's antitrust watchdog, said the way it approaches merger control had not changed.
"The Commission is not toughening its approach to merger control. It is however true that it had to deal with particularly complicated cases recently. But the number of bans or of remedy requirements have not increased since the new team took office in 2009," said EC spokesman Antoine Colombani.
"Bans should not be seen as a toughening. Every decision is based on facts and every case is different," he added, noting that in 22 years, the EC only banned 21 transactions out of 5000 that were reviewed, or 0.4 percent of the cases.
Corporate advisers say however that what the numbers do not show is the complex and lengthy procedure of checking deals that is becoming more burdensome and, more than the threat of a ban, is worrying company executives as well as driving up the cost and the risks involved.
With mining giant Xstrata and commodities trader Glencore announcing on Thursday that they are in talks over a possible merger, there are clearly signs of life in the sector.
But lawyers say that such negotiations must now also encompass lining up more partners for merger-related asset disposals further down the line, an added complication.
In one sign of things getting tougher, EU regulators are increasingly requiring companies to name potential buyers when antitrust clearance is conditional on them shedding assets.
"In some markets, the pool of available buyers who will have the ability and incentive to operate the divested business as an effective competitor may be quite limited, raising a question as to whether the merging parties will actually be able to find a buyer at all," points out Mark Friend, head of law firm Allen & Overy's antitrust department, who noted several cases in the retail sector.
In those kind of situations, he says, it is to be expected that the regulator would insist on seeing a buyer for these assets before approving the deal.
However in the current economic climate, finding buyers is becoming increasingly tough because of the difficulty interested parties can face in securing funding.
And in a vicious circle that in turn is making regulators more insistent that companies tie up asset sales before they will give the nod to their plans.
In June 2011, the UK regulator, the Office of Fair Trade (OFT) had demanded an up-front buyer in 66% of its recent investment cases. Lawyers and bankers expect deal-making in the UK to be hit even harder by this aspect in future.
"I would not be surprised if in 2012 that percentage comes out even higher," said Ajal Notowicz, head of M&A at UK-based law firm Dickson Minto.
DETAILS, DETAILS, DETAILS
UK investigations may take longer than those in the European Union, but they are also fewer owing to a voluntary regime where only the truly problematic transactions are filed with the country's regulator, the Office of Fair Trading.
By contrast, European business chiefs must endure lengthy procedures even when competition concerns are minor, corporate lawyers say.
"Merger control procedures can be very heavy. The Commission usually requires an extremely detailed level of information, even in cases of moderate complexity," said Bernd Meyring, antitrust partner at global law firm Linklaters.
Even just the first step -- being allowed to file the intention to go ahead with a deal -- requires more effort than before. Several European lawyers said the back and forth between them and the European Commission can go on for months before a dossier is deemed "complete."
"Pre-notification discussions tend to be longer than they were a few years ago," Didier Theophile, head of antitrust at Paris-based Darrois Villey law firm said.
Once the review is underway the Commission can still pause it if it needs more material. This happened recently in Google's $12.5 billion bid for U.S. handset maker Motorola Mobility: the EC suspended a January 10 deadline for a decision and asked for more information on the deal.
Although the aim in doing this is to avoid a longer and more harmful "Phase II" investigation, a dragging review can be problematic, often scaring off would-be partners, prompting renegotiation of funding terms or leading to higher legal costs.
"When the investigation lasts too long, the parties become increasingly nervous and it can very well become a deal-breaker," said Arnaud Coibion, M&A partner at Linklaters.
And longer preliminary reviews are no guarantee that the rest of the process will pass more quickly: the European Commission extended its review of Johnson & Johnson's $21.3 billion acquisition of Swiss orthopedic firm Synthes to a Phase II review -- then extended its final verdict by another 10 days to April 2.
In the UK a plan to merge the OFT and the Competition Commission (CC) into a single regulator is also expected to lead to more Phase II investigations, several UK-based lawyers said.
"To date, the prospect of a CC review - and the significant burdens that places on companies - has incentivised the OFT to reach the 'right' answer and avoid unnecessary references," said Alastair Mordaunt, partner at Clifford Chance's Antitrust practice and former OFT director of Mergers.
"This discipline may be diluted in a merged institution - if as the decision maker you're unsure about a borderline case, then why wouldn't you pass it upstairs (or downstairs) for a further look?," he added.
The European Commission has beefed up its senior management team in the wake of three contentious decisions involving Airtours, Schneider/Legrand and Tetra Laval which were acrimoniously contested and overturned in 2002-2003.
Since then, the Commission has made it a point to be seen as "irreproachable" and has hired legions of experts, said Bernd Meyring, antitrust lawyer at Linklaters.
Today, about 110 persons oversee merger control at the EC.
The new competition commissioner Joaquin Almunia, seen as more dogmatic than his predecessor Neelie Kroes, "is personally involved in every antitrust dossier," said an EC spokesperson.
In the interest of navigating the regulatory process companies are now devoting more resources to preparing their case for scrutiny.
"Companies must anticipate antitrust issues as soon as when the deal is in gestation. The smartest ones would try to sound the regulator even before deciding whether to launch a bid to see if the antitrust is manageable," said Lionel Melka who manages Paris-based M&A-driven fund Bernheim, Dreyfus & Co.
(Editing by Sophie Walker)
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