Despite a fall in overall global dealmaking, M&A in the US has proved resilient, as megadeals and domestic activity boost the market
It has been a busy year for M&A involving US companies. While global deal value dropped compared to 2018, the US maintained its year-on-year total and took a greater share of the overall deal market.
Confidence in the US economy and the opportunities it offers companies for growth and investment led to a market driven by megadeals (valued at US$5 billion or more), with the life sciences and TMT sectors leading the way. Indeed, a full 58 percent of the US$1.5 trillion worth of deals involving US companies qualified as megadeals, up from 47 percent in 2018. And nine of the top ten deals for 2019 were domestic, suggesting that US corporate executives see plenty of opportunity in their home market.
Last year was also characterized by a growing breadth of M&A market participants. Private equity (PE) remained active, buoyed by strong fundraising and high liquidity in the debt markets. Family offices continued their expansion into direct deals. And sovereign wealth funds, many of which had pulled back from direct investing, returned to M&A markets, with the US as a target.
Rising stock markets and competition for deals led to further increases in company valuations in both public and, in particular, private markets. Many corporates opted for deals involving stock consideration to mitigate high pricing, while PE players sought smaller platforms through which to execute buy-and -build strategies as well as hunting opportunity in taking public companies private. These trends suggest that dealmakers are proceeding with confidence but also caution when it comes to pricing.
Talk of a downturn has been muted somewhat as we head into 2020—at least regarding the first half of the year. Economic growth will settle at 2.1 percent, according to the Conference Board. Unemployment is predicted to remain low, and financing for deals will continue to be widely available and low cost. However, with a presidential election in November, as well as ongoing headwinds such as trade wars and unrest in the Middle East, there is no room for complacency.
US dealmakers steer a steady path through global headwinds
As the rest of the world backed away from the deal table, confident US corporates continued buying businesses—especially in the life sciences and TMT sectors, and particularly in the domestic market.
In line with the wider US M&A markets, PE deals held firm through 2019 with 1,329 buyouts, worth US$208 billion, representing a decline of 9 percent by volume, but just a 4 percent fall by value relative to 2018.
Sector overview: Tech and healthcare take the top spots
In terms of value, the technology and healthcare sectors—separately and, sometimes, in tandem—have ruled the M&A markets in 2019. Meanwhile, the consumer industry faced tough times—though there could be a rebound in 2020.
SaaS, cashless and convergence drive tech to the top
Technology continued to be among the most active subsectors for US M&A in 2019, with 1,138 deals announced worth a total of US$206 billion. This represents a marginal decrease of 3 percent in volume and 7 percent in value compared to 2018 activity.
The trend for megadeals in US real estate continued in 2019, with 38 transactions in the sector, worth a total US$56.6 billion—but overall deal volume was down 17 percent and deal value fell 25 percent year-on-year.
The healthcare sector (incorporating pharma, medical and biotech) has seen M&A valued at US$256.5 billion across 645 deals in 2019. This is a decrease of 9 percent by volume, but an increase of 121 percent by value.
Genuine Parts: Acceptance of termination fee does not prevent further remedies
In September 2019, the Delaware Chancery Court refused to dismiss claims against Essendant in connection with its terminated transaction with Genuine Parts Company (GPC), even though Essendant had previously paid GPC a US$12 million termination fee. The decision highlights the importance of clearly drafted exclusive remedy provisions, as well as parties' responsibilities to comply with their contractual obligations.
Essendant and GPC signed a merger agreement in April 2018 that would have combined the two competitors in the office supply wholesale business. Shortly after the merger agreement was signed, however, a PE buyer who had previously expressed an interest in acquiring Essendant, made a formal offer at an alleged premium to GPC's offer.
The Essendant board rejected the offer, but, according to the Chancery Court, the PE buyer sweetened its bid by assuring that more would be offered if diligence justified an increased bid. The Essendant board determined that this renewed offer would likely lead to a better deal than the one it had agreed to with GPC. After the PE buyer completed confirmatory diligence, Essendant terminated the merger agreement with GPC, paid a US$12 million termination fee as required by the merger agreement, and closed its deal with the PE buyer.
GPC maintained, however, that the termination fee was neither an exclusive nor adequate remedy to compensate for its losses following Essendant's termination of the merger agreement. GPC alleged that the PE buyer's winning proposal was the result of Essendant's material breach of the merger agreement—in particular, the non-solicitation clause. When GPC brought an action seeking damages, Essendant moved to dismiss, claiming GPC's exclusive recourse was the US$12 million termination fee.
The Chancery Court declined to dismiss, GPC's claims, finding that the merger agreement does not "clearly and unambiguously" provide that GPC's remedy is limited to the termination fee when it has well-pled that Essendant breached the merger agreement's non-solicitation provision.
Following a detailed review of several interconnected provisions, the Chancery Court determined the termination fee should serve as the exclusive remedy only in connection with a competing transaction that did not arise from a material breach of the merger agreement's non-solicitation covenant. The Chancery Court found, at the pleadings stage, that GPC had adequately alleged enough in total to infer that Essendant, at least indirectly, encouraged or facilitated a proposal in breach of the non-solicitation covenant. As a result, the Chancery Court allowed GPC's claims for further damages to proceed.
This decision highlights that parties intend for pre-agreed termination fees to act as exclusive remedies and bar claims for additional damages, therefore extra attention must be paid to ensure that such intentions are accurately reflected in the underlying agreements.
Askari: Attorney-client privilege regarding pre-merger communication remains with seller
In November 2019, a New York appellate court issued an important decision with respect to the treatment of attorney-client privilege in the context of M&A transactions. The decision highlights the different ways Delaware and New York approach the issue, and how courts will determine which state law to apply.
In Delaware, in the merger context, control of any privileged communications, including those between seller and its counsel related to merger negotiations, passes to the acquirer unless the parties agree otherwise in the merger agreement.
In New York, however, an exception applies to privileged communications relating to the deal negotiations, and control of such privilege stays with the seller after closing.
In this recent case, the New York appellate court applied New York law to evaluate which person owned pre-transaction privileged communications in connection with a corporate reorganization that ultimately transferred ownership of a corporation formed under the laws of New York to a limited liability company formed under the laws of Delaware, even though some of the documents involved in the underlying transaction contained Delaware choice-of-law provisions.
The Court found that the choice-of-law provisions were not implicated, as the cause of action simply pertained to the plaintiff's right to documents in counsel's possession. In such circumstances, the Court held that New York will apply the law of the forum where the evidence will be introduced at trial or the location of the proceeding seeking discovery. In this case, the privileged communications were being sought in a New York action; the communications were made in New York between New York–based attorneys and a New York corporation; and involved the New York corporation's then majority shareholder and president, a New York resident. As a result, the Court applied New York law.
While New York law provides sellers protection not found under Delaware law, parties are encouraged to specifically consider, and expressly reflect in appropriate documentation, how information subject to attorney-client privilege will be handled following M&A transactions.