M&A

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Digital due diligence becomes increasingly important when buying digitally native beauty brands.

By Deborah J. Kirk, Linzi Thomas, Camilla J. Dutton, Laura Kichenside, Catherine Campbell, Tom Evans, and David Walker

Recent high-profile beauty M&A deals, coupled with current economic uncertainty, have brought renewed interest in the “lipstick effect”. Much cited in the aftermath of the 2008/09 downturn, it describes how consumer demand for relatively affordable luxuries, such as lipstick, continues or even increases during challenging economic times. There are signs that the global beauty industry may once again prove resilient, with nail care being coined the “COVID-19 lipstick effect”, following double digit growth.

Attractive Opportunities

The global beauty industry, worth around US$532 billion prior to the COVID-19 outbreak, is expected to be worth US$805 billion by the end of 2024, according to Euromonitor data. The industry has demonstrated recession-resilience with continued growth (including during 2008/09), driven by digitalisation, social media and increasing demand from emerging economies. Investors are taking note — beauty deals offer attractive opportunities in growing companies with potential to generate significant margins at scale. PE accounted for 47% of 2019 beauty M&A deals.

By Richard Butterwick, Nick Cline, Robbie McLaren, Terry Charalambous, and Catherine Campbell

In a complex and competitive market, minimising and mitigating risk in M&A is a key concern for deal teams. High demand for assets saw strong deal volumes and values in 2019, following a standout year in 2018. The search for opportunity has brought large corporates face to face with new or rapidly expanding businesses whose risk and compliance processes may not have kept pace with other areas of growth. New risks are gaining in size and profile — meaning companies must remain alert to value-compromising issues and inherited liabilities within targets. Corporate veil cases, as well as big-ticket regulatory fines for competition failures and data protection breaches, all indicate that corporates are in the firing line.

Considerations for non-US acquirers looking to buy a publicly traded US-based company in a negotiated (i.e., friendly) transaction.

By Thomas W. Christopher, Bradley C. Faris, Alexander B. Johnson, Amanda P. Reeves, Les P. Carnegie, Kristin N. Murphy, and Kaitlin Verber

In 2019, the public M&A market in the US continued at a strong level. A total of 198 M&A deals with equity values over US$100 million were announced with US public company targets in 2019, worth a combined total of more than US$909.7 billion[1]. Non-US acquirers continued to represent a meaningful portion of US public company acquirers, accounting for approximately 25% of public company buyers since 2017[2].

The acquisition of a US public company by a non-US acquirer is a transformational transaction for the target and likely a significant transaction for the acquirer. There is no standard formula for such a transaction, and the legal considerations that arise require careful analysis on a case-by-case basis. Latham’s guide, Acquiring a US Public Company, summarizes such considerations for acquirers contemplating such a transaction.

Buyers’ best defence against M&A fraud requires rigorous, pre-closing due diligence — when fraud is suspected, deal teams should seek legal advice and proceed with caution.

Oliver Browne, Richard Butterwick, Alanna Andrew, Frederick Brodie, Connor Cahalane, and Catherine Campbell

Recent high-profile fraud cases gravely illustrate how a failure to detect fraudulent activity can cause lasting damage to corporate value. In January 2019, publicly listed bakery chain Patisserie Valerie collapsed following allegations of a £40 million accounting fraud.

In our view, instances of fraud in the context of acquisitions are more common than is often thought. There can be (or have been) allegations of artificial inflation of reported revenues, revenue growth, and gross margins or other distortions — underlining the high stakes and public nature of M&A fraud allegations.

The best protection against fraud comes from specialist due diligence and an early emphasis on fraud detection pre-closing. Where concerns arise post-closing, English law provides some innate protections, but deal teams should seek legal advice early on to help navigate this complex area without causing further damage.

Firms targeting assets divested by conglomerates still face obstacles, though barriers to PE investment in Japan are gradually falling.

By Stuart Beraha, Noah Carr, Tom Evans, Hiroki Kobayashi, Ivan Smallwood, David Walker, and Catherine Campbell 

Many hurdles that traditionally challenged private equity firms looking to invest in Japan have been lowered in recent years. The Japanese government is increasingly supportive of overseas buyers, addressing legal, structural, and cultural obstacles and creating renewed interest in the country’s conglomerates, many of which house non-core assets ripe for acquisition. While the environment for foreign private equity buyers has improved considerably, deal teams should be aware that significant general and target-specific challenges remain.

By Greg Bonné, Jonathan Parker, Richard Butterwick, Terry Charalambous, and Catherine Campbell

As the UK Competition and Markets Authority (CMA) prepares to assume sole jurisdiction for UK competition reviews post-Brexit, M&A deal teams must evaluate the competitive consequences of deals bridging the Brexit period and update their competition strategy accordingly.

Corporates may not be able to implement the same merger control strategies as in the past.

By Jonathan Parker, Jana Dammann, Steven Croley, Calum Warren, Richard Butterwick, Terry Charalambous, and Catherine Campbell

In June 2018, the UK adopted new powers to review certain technology related deals on national security grounds, extending the scope and breadth of its control regime to those that concern computing hardware, or quantum technology for supply in the UK (see Latham Client Alert: 12 June 2018). In July, the UK government went a step further and published a White Paper on a potential new and significantly extended foreign investment notification regime, which will likely lead to wider and closer scrutiny of many transactions, including strategic M&A deals. These potential new UK rules are part of a wider global trend, with heightened scrutiny of foreign investment control increasing in a number of other jurisdictions.

The government’s White Paper proposes expanding the jurisdiction over transactions subject to potential national security review, with most areas of the economy within the proposed enlarged scope, supported by new information-gathering powers, longer review periods, and stricter penalties for non-compliance. Although the recommendations in the White Paper have not been enacted into law, changes could come into effect as early as next year, and we expect that deal teams will be assessing the implications for M&A deals in 2019 and beyond.

By Paul Davies, Richard Butterwick, Terry Charalambous, and Catherine Campbell

In recent years, China has taken significant steps in developing its environmental policy. In 2014, China’s Premier Li Keqiang declared a “war on pollution”, which began in earnest in 2017. Since then, regulators have been more proactive in enforcing environmental regulations. Factory closures have become a key part of this strategy, causing significant disruption to the global supply chain this year.

In our view, M&A dealmakers and corporates should carefully consider environmental and supply chain due diligence in China, as companies work out how to navigate the factory shutdown process. Corporates should, as part of their environmental, social, and governance (ESG) strategy, review whether their group entities and target companies are likely to be affected in the event that critical supply chains are broken. Engagement with environmental agencies in China is useful, but environmental policy and consistent regulatory enforcement are still maturing. The appropriate level of due diligence could prove to be critical to a company’s ongoing operations.

By Catherine Drinnan, Shaun Thompson, Richard Butterwick, Terry Charalambous, and Catherine Campbell

This year has seen a significant number of business failures, particularly on the high street, as businesses have struggled in the face of market fragility and Brexit uncertainty. When a UK company is underperforming, the presence of a defined benefit pension (DB) plan with a large deficit can be a significant problem. Companies with large pension deficits require contributions that affect cash flow and make exiting more difficult when the time comes to sell.

If a business slips into distressed territory, however, there are mechanisms whereby a company can divest itself of a DB scheme. As companies respond to Brexit and challenging conditions in some sectors, we believe that 2019 will see more of these types of arrangements. In our view, corporates and M&A deal teams should consider how to respond if companies are at risk. While the mechanisms can be effective in allowing a company to continue trading (in some form), corporates should note a number of important factors before deciding to attempt this.

Shifting environment presents the chance to unearth value and should pave the way to boost the number of mid-market deals.

By Manuel Deó

The Spanish M&A market in 2018 has been characterised by a series of large-cap transactions, helped by an abundance of cheap financing for the right deals. The total deal value on large-cap transactions in 2018, including ACS and Atlantia’s €32.1 billion takeover of Abertis, has already surpassed 2017 totals.

In the year to October, 772 transactions closed in Spain, compared to 791 in the same period last year. Yet, deal values totalled US$98.6 billion this year to October, dwarfing the US$36.7 billion total in the same period last year. IFM’s €2.16 billion acquisition of OHL Group’s concession business, which closed in April, was just one of several significant buyouts in a country known for mid-market M&A.

Buyers scouring the market for consolidation opportunities in 2018 have been particularly active in real estate, energy, healthcare, and infrastructure sectors. While Spain has enjoyed a host of deals above the €1 billion mark, the mid-cap market remains healthy with abundant opportunities likely to appear over the next 12 months. Sellers want to transact quickly, and there is strong competition for each asset.