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Defying gravity: US M&A H1 2019

What's inside

A rise in US mega-transactions more than made up for a drop in volume in the first half of 2019

Foreword

After a drop in activity in the second half of 2018, US M&A has recovered strongly in the first two quarters of 2019, demonstrating the appeal of dealmaking—despite uncertainty.

In spite of several quarters of growing uncertainty about macroeconomic headwinds, US M&A deal value grew again in the first half of 2019. Overall value for the first six months of the year was up 9 percent compared to the same period in 2018. And US deal value took up a larger share of global M&A, making up 53 percent of total global deal value, up from 41 percent in H1 2018. US deal volume, on the other hand, was down 21 percent compared to 2018, a record year for deal volume.

This is good news, particularly since global activity declined on both value and volume measures this year. But the future seems more uncertain today than it has in some time, particularly since there are strong reasons for both caution and optimism.

There are some signals warning that we are due for an economic correction, despite a US economy that remains healthy. US Federal Reserve Chairman, Jerome Powell, recently hinted at rate cuts, highlighting that uncertainty over trade policy and weakening global growth continue to have negative implications. Trade troubles persist, particularly with China. An inverted yield curve suggests that the market expects a downturn on the horizon. And, after a lengthy period of frenzied dealmaking, valuations are high.

Yet the US economic backdrop remains favorable, at least for now. Capital markets are at record levels and there is plenty of financing available for companies who need it to fund dealmaking. Private equity firms continue to amass capital to deploy.

Though deal volume has dropped for three quarters in a row, viewed in the longer-term context, activity remains robust.

Whether the second half of the year can sustain the same level of activity as H1 remains to be seen. The year-on-year growth in M&A value suggests that dealmakers still have appetite, as well as the capacity, to execute deals if the strategic rationale makes sense.

A break in the clouds: M&A in the first half of 2019

The US M&A market delivered a surprisingly robust first half, with total value rising 9 percent year-on-year. Volume, on the other hand, dipped 21 percent

Private equity slows in 2019 as valuations continue to rise

Despite accumulating a vast, historic pile of capital for acquisitions, private equity has moderated its pace of buyouts in the first half of the year

Sector watch

Sector overview: Pharma and TMT lead the pack

The pharmaceutical, medical and biotech sector was number one by value, followed by technology, media and telecoms (TMT). TMT led by volume, followed by industrial and chemicals.

Pharma chases innovation through deals

The need to replenish intellectual property has pushed the pharma industry to the highest-performing sector by M&A value

Technology dealmaking stays buoyant

H1 2019 has seen deal value continue to climb in technology M&A, as digital disruption overtakes segments of the market such as fintech and Big Data

Retail M&A falls as sector migrates online

M&A activity in the retail sector fell sharply during the first half of 2019, as uncertainty and digital disruption continue to put pressure on the sector

Megadeals drive oil & gas M&A

Concerns about the price of oil have left the industry reluctant to strike deals, bringing down volume and value in H1

Real estate M&A drops, but hopes are higher for H2

After a standout 2018, real estate M&A has dropped significantly in the first half of 2019, but segments of the market such as logistics and hotels have remained attractive

In Focus

Three key M&A decisions from Delaware courts

The first half of 2019 saw several decisions from the Delaware courts that will affect M&A dealmaking

SEC proposal would ease burden of certain financial disclosures on public companies

Proposed revisions to current financial statement disclosure requirements for business acquisitions and dispositions would simplify compliance while ensuring investors get the information they need

Conclusion

Can the good times last? Four factors shaping M&A in the second half of 2019

Many of the factors that have underpinned recent M&A activity remain in place, but concerns are mounting

SEC proposal would ease burden of certain financial disclosures on public companies

Proposed revisions to current financial statement disclosure requirements for business acquisitions and dispositions would simplify compliance while ensuring investors get the information they need

Insight
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5 min read

In May 2019, the Securities and Exchange Commission (SEC) proposed amendments to its rules governing disclosure of financial statements by public companies or in initial public offerings in connection with significant business acquisitions and dispositions. When a public company acquires or disposes of a business that is "significant," it may have to disclose audited financial statements and pro forma financial statements. Preparing these financial statements may be time-consuming and expensive and require various parties to cooperate, which could affect the overall transaction timeline. The proposal is part of the SEC's ongoing initiative to improve the information investors receive, facilitate access to capital, and reduce complexity and compliance costs.

 

Amendments to "significance" tests

Generally, the more significant the acquired business, the greater the disclosure required. Significance is determined by applying three tests, the "Investment Test," the "Asset Test," and the "Income Test", and an acquired business is considered significant if it exceeds a threshold under any of three tests, two of which are proposed to be substantively changed.

  • Investment Test. Currently, this test compares the purchase price of the acquisition to the value of the filer's consolidated total assets. The proposal would replace "total assets" with the "aggregate worldwide market value" of the filer's common equity (i.e., its total market capitalization). This approach would reflect the "fair value" of the filer more effectively than using the value of a company's total assets, which is not reduced by the value of its liabilities. 

  • Income Test. Currently, this test compares the acquired company's income from continuing operations before taxes with that of the filer. By focusing only on income, which can include non-recurring or infrequent expenses, gains or losses, this test can produce anomalous results. To address this, the proposal would split the test into two components: (i) a revenue component, which would compare the revenues of the acquired business and the filer, providing some relief to filers with little or negative net income, and (ii) an income component, which would be amended to use income from continuing operations after taxes, allowing companies to use line items directly from their financial statements. If the filer and the acquired business have recurring annual revenues, the acquired business must meet both components, and the lower of the two would be used to determine the significance level. If not, the income component would apply on its own. 

The SEC also proposed amendments to the disposition threshold. Currently, financial statements are required if a disposed business exceeds 10 percent significance. The proposal would raise the threshold to 20 percent, in line with the minimum acquisition threshold.

If implemented, these changes would, among other things, eliminate the need for financial statement disclosure in certain circumstances by defining "significance" to more accurately reflect the relative economic impact of the acquisition on the filer, and reduce the burden on companies with low or negative net income for whom acquisitions often qualify as "significant" under existing rules.

 

More flexibility to account for benefits in pro forma financial statements

Under existing rules, pro forma financial statements do not generally include the forward-looking benefits of a transaction. The proposal would allow management to present, in a separate column, adjustments detailing a transaction's potential operational benefits and synergies from integration, such as the effect of closing facilities, discontinuing product lines, terminating employees, and executing new 
or modifying existing agreements. This column would include both recurring and non-recurring impacts. Each such adjustment would require disclosure of material uncertainties, underlying material assumptions, material resources required and the anticipated timing.

The proposed revisions will allow public companies to better make the case to investors for pending acquisitions with detailed synergy disclosure. However, this disclosure will require additional judgment and analysis by management, and may increase preparation time. The new category of adjustments also could expose issuers and other offering participants in capital markets transactions to potential liability for forward-looking information that relies on judgments by management and estimates that are inherently uncertain.

Although the ultimate outcome of these proposed rule changes has yet to be determined, the proposal represents a clear willingness on the part of the SEC to ease the burden faced by many public companies in complying with financial disclosure requirements for acquisitions and dispositions, while continuing to encourage the flow of material information to investors.

 

 

 

 

This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2019 White & Case LLP

 

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