M&A: A new bottleneck; Dealmaking is growing more complex, with companies needing to win approval from regulators in up to 100 countries

August 27, 2013 8:12 pm

M&A: A new bottleneck

By Anousha Sakoui and David Gelles

Dealmaking is growing more complex, with companies needing to win approval from regulators in up to 100 countries

Hands clasped tightly, Warren Buffett and Wang Yang posed for the classic picture portrait, framed against a backdrop of a Chinese mountain scene. Few foreign dignitaries, let alone businesspeople, make it into the Zhongnanhai leadership compound next to Beijing’s Forbidden City. It is a mark of Mr Buffett’sinternational influence that China’s vice-premier welcomed him there in mid-May. It was only the fourth visit the 82-year-old chairman and chief executive of Berkshire Hathaway had made to Beijing. The conversation with Mr Wang covered not only the billionaire’s view of China but also the future of one of America’s most recognisable brands. One reason for the visit, people familiar with the agenda said, was to help secure China’s support for the $28bn bid for Heinz, the ketchup maker that Mr Buffett had announced he was backing earlier this year.US regulators had already brushed aside the most obvious argument against the deal – that Mr Buffett and private equity group 3G, which also owns Burger King, might use the combination to raise Heinz ketchup prices for rival fast-food chains. But Mr Buffett and his Brazilian private equity investor partners still needed approval from regulators in 14 different countries – including China – to close the deal.

China approved the Heinz deal by the end of May. (Mr Buffett did not respond to requests for comment on the meeting.)

It is hard to imagine Chinese regulators having much sway over a western merger even a decade ago. But China’s voice is growing louder in international dealmaking. Last week, the biggest business lobbying group in the US, the Chamber of Commerce, spoke outabout the frustration companies face doing business in China and how it seemingly uses its competition laws to target foreign companies. Antitrust lawyers have noted a change in rhetoric among some officials, raising hopes that US policy makers were giving the issue greater attention.

But China is not the only country whose regulators are becoming more assertive over international M&A. The Heinz takeover even faced scrutiny from Russian authorities, who questioned whether the tie-up might pose a security risk owing to the microbiological processes used by Heinz to produce baby food.

The Heinz saga reflects a new challenge for global dealmakers: companies must now win approval from regulators in as many as 100 countries before they can close a transaction. M&A activity has slumped as companies have grown conservative in an uncertain economic climate. The mushrooming global regulatory obligations, with their layers of legal work and sometimes costly remedies to satisfy the demands of local authorities, are not helping.

“Whether the regulatory filings are motivated by policy concerns, a desire to raise revenue or political objectives, if a company wants to be a global player and does business around the world, it has to respect the regulatory regimes of the countries in which it operates,” says Frank Aquila, an attorney at Sullivan & Cromwell in New York who advises on megadeals.

For companies wanting to grow through acquisitions, or industries wishing to consolidate to confront a downturn, regulatory and political hurdles are hindering progress.

“Increasing uncertainty around regulatory timetables in certain jurisdictions means that buyers and sellers are more cautious about executing deals which involve regulatory scrutiny in those jurisdictions,” says Piers Prichard-Jones, a partner at law firm Freshfields.

In early 2012, Xstrata confirmed plans for a merger with Glencore, the world’s biggest commodity trader. At a combined value of $90bn, it was the largest deal in the mining sector.

More than a year later, advisers were still working to secure the approval of regulators. For investment bankers and M&A lawyers, the mining deal has been a crucial test of how regulators view deals, particularly in China.

The Anti-Monopoly Bureau of China’s Ministry of Commerce is one of the world’s youngest and least understood regulators. Headquartered on Beijing’s Chang’an Avenue, Mofcom consistently rankles dealmakers. Even if the companies involved generate little revenue from China, they still need Beijing’s approval.

One explanation for its slow pace of approvals, advisers say, is that Mofcom is understaffed, with only about 15 employees reviewing merger cases. This bottleneck means Mofcom is often the last regulator to clear a big deal, even if neither buyer nor seller is a Chinese company. Mofcom recently announced plans to streamline and clarify its processes.

Yet Beijing’s rulings are still seen as influenced by industry and by other ministries, making China’s antitrust process less independent and predictable than those of other countries. Its rulings are viewed as tools to further industrial policy goals or access to resources.

“This is a very subtle tool by which China interferes in global M&A, and I think a lot of people [in China] have realised that and they are using it,” says a lawyer who asked not to be named.

Deals in the resources sector draw particular focus from Mofcom. It extracted a hefty price from Glencore, forcing it to sell a Peruvian copper mine owned by Xstrata. This potentially reduced its power to set copper prices in the Chinese market, as well as guarantee a flow of important commodities, such as zinc, into the country.

Adrian Emch, a partner at Hogan Lovells in Beijing and an antitrust specialist, cites food, natural resources and high technology as areas of concern for Mofcom. “In certain sensitive sectors, reliance on imports can be a key factor in China’s merger control analysis.”

China is not the only concern for dealmakers. Brazil last year updated its antitrust regime from a “post-merger” approval system to a more conventional “pre-merger” framework. That brings Brazil in line with the US and China but creates another jurisdiction that has the ability to suspend deals. There are fears, too, that Cade, the Brazilian antitrust regulator, is also understaffed.

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Comesa, the Common Market for Eastern and Southern Africa, began operating this year and requires a review of any deal where at least one party operates in two or more Comesa states. With a list of nations that includes Egypt, Ethiopia and Kenya, many global deals will meet this threshold but it has yet to hold up a merger.

“When doing a transaction involving a true multinational, you may have to analyse the regulatory schemes in sometimes well over 100 jurisdictions,” says Mr Aquila. “In most cases you only have to be truly concerned about five or six approvals. Having said that, you still have to make the regulatory filings in all of the countries where they are required.”

Even the biggest markets for M&A – the US and Europe – can present challenges. One lawyer complained of an increasing lack of certainty on timing in these jurisdictions.

“There is currently widespread concern at the possible review timetables in China, but closer to home the EU timetable is not without its problems,” says Shaun Goodman, a partner at Kirkland & Ellis who advised on the Heinz transaction. “The EU can similarly take time to get up the learning curve and accept that it has sufficient information formally to commence its review. Often, information is requested in either jurisdiction that is of limited obvious relevance other than buying time.”

The US can be equally stubborn. When AB-Inbev, the Belgium-based brewer, moved to acquire Modelo, the Mexican producer of Corona, the justice department made AB-Inbev sell a high-tech brewing plant in Mexico before approving the deal. Theoretically, the move was meant to bolster rival brewers in the US market.

Mr Wang, who has responsibility for commerce, was discussing US-Sino investment just two months after his meeting with Mr Buffett.

The same week that Chinese officials visited Washington to agree, among other matters, on a two-way investment treaty, US lawmakers used a congressional hearing to raise concerns about Chinese meat processor Shuanghui’s proposed $4.7bn purchase of Smithfield Food, the largest Chinese takeover of a US company. While the US and other foreign companies in China have complained about restrictions on their investments there, Chinese companies have also questioned whether their investments in the US are welcome.

China had backed off international M&A after Cnooc’s $18bn bid for US energy producer Unocal was blocked in Washington. In 2009, within the first year of coming into being, Mofcom blocked Coca-Cola’s planned acquisition of China Huiyuan Juice, the country’s leading juicemaker. The decision sent shockwaves through the business world and sparked complaints that the new laws were being used to block foreign investment.

Some lawyers argue, however, that unlike China, the US is unlikely to be accused of blocking inbound bids on the basis that they are foreign.

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Today Shuanghui is testing the strength of Sino-American relations again, as its bid for Virginia-based Smithfield hangs in the balance. Although it has made pledges to retain the US group’s management team, its plants and 46,000 employees, as well as maintain all of the company’s US contracts with family farmers, the Chinese takeover still faces scrutiny from various US government committees.

The deal may move a step further next month when shareholders meet to approve the transaction. However, it would still require the clearance of the US Committee on Foreign Investment, which will review the transaction to assess its potential impact on national security. A bipartisan group of senators has asked for the Cfius review to consider broader issues such as food security, food safety and biosecurity.

Smithfield says that it welcomes the full and fair review of the deal, which it does not believe poses any national security threat. “We’re not exporting tanks and guns and cyber security,” says C Larry Pope, Smithfield’s chief executive. “These are pork chops.” The committee has extended its review until mid-September.

Investment bankers and M&A attorneys – along with their clients – are adjusting to this tougher environment. Even deals that might, on the surface, pose no antitrust concerns will probably still fall under the gaze of regulators around the globe. According to Ronan Harty, a partner at Davis Polk, “if Coca-Cola was buying a car company it could take up to four months to approve”.

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China: Foreign investors fear they are clear targets

As western bankers complain about rising activism from China’s antitrust authorities – whose reviews may delay approval of a deal – the leading US business lobby is levelling a more serious charge, write FT reporters.

“China is wielding its antitrust law in a discriminatory manner targeting foreign companies,” says Jeremie Waterman, executive director for China policy at the US Chamber of Commerce.

Five years after China introduced its anti-monopoly laws (AML), frustration is building in both countries about restrictions that prohibit their respective companies from investing in the other. Both China and the US can point to examples where government action thwarted the ambitions of one of their companies.

But US business says the problem is not just American companies being blocked from doing international mergers by China but also how Beijing uses its laws to monitor price competition. Foreign investors in China have grown concerned that they are being targeted in official investigations of pricing practices. This month Chinese authorities fined six baby formula manufacturers – five of them multinationals – $110m for alleged price fixing. This first high-profile enforcement of Article 14 of China’s AML came just weeks after a police investigation into alleged bribery by staff at GlaxoSmithKline , the UK pharmaceuticals group. The National Development and Reform Commission, which monitors pricing practices, has previously denied targeting foreign companies in its investigations.

Steve Cernak, of US law firm Schiff Hardin, says that while many provisions of the AML would be familiar to those experienced with US antitrust or EU competition laws, some “provisions have no American counterparts, such as special rules for state-owned enterprises and a goal of ‘promoting the healthy development of the socialist market economy’.”

But the US is not expected to launch an aggressive push for China to water down its antitrust regime.

“The overall picture that has emerged is not one of the US government being ahead of the curve in terms of addressing these growing antitrust challenges with China, but perhaps being a bit behind the curve,” says Mr Waterman.