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Complexity rules in M&A overseas, although there's hope for reform in hot spots like China and India.
Avital Louria Hahn, CFO Magazine
March 1, 2008
When YRC Worldwide Inc. decided to acquire Chinese trucking company Shanghai Jiayu Logistics Co. last year, the U.S. transportation giant discovered that it would have to travel a very long bureaucratic road. Because Shanghai Jiayu operates in 12 of China's 31 provinces, the $40 million acquisition needed 12 green lights and then final approval from the central government. "It is one thing if you are dealing with a manufacturing company that has one site and one provincial government," says YRC Worldwide CFO Stephen Bruffett of the pending transaction. "But when you are dealing with a network, as we are, an exponential amount of complexity comes into the transaction."
The explosion in the number of jurisdictions — national, regional-government, or other entities with the right to evaluate a deal's antitrust implications — is emerging as a potential obstacle for global transactions.
As more jurisdictions enact full-fledged antitrust laws, filing merger-and-acquisition documents with multiple agencies has become the new reality worldwide. More than 100 separate jurisdictions now conduct such legal reviews, versus just 16 in 2001, according to the International Competition Network (see "Country Codes" at the end of this article). The ICN is one of several groups providing the world's regulatory authorities with a forum for addressing regulatory concerns.
While many small countries now qualify as jurisdictions in which the anticompetitive possibilities of deals may be reviewed — Honduras is the latest to join the ICN, for example — giant economies such as India and China are getting into the act in a bigger way. (In China, which has many antitrust rules already, comprehensive legislation to expand measures to block potential monopolies takes effect August 1.) The European Union remains a significant force for U.S. companies proposing transatlantic deals. DoubleClick's $3 billion acquisition by Google, for example, faced EU review after the deal cleared in the United States, and Microsoft's travails continue to drag on.
Taking Longer, Costing More
These new regulatory hurdles come at a time when the relatively tame U.S. antitrust environment could turn mean. During the Bush Administration, most deals have sailed through. (The few exceptions: the Department of Justice's failed attempt to block the 2004 acquisition of PeopleSoft by Oracle, the still-pending $14 billion deal between XM Satellite Radio Holdings and Sirius, and the Federal Trade Commission's unsuccessful challenge to Whole Foods's $565 million deal for Wild Oats.)
It's unclear whether having a new Republican in the Oval Office would change the climate. If the White House goes to a Democrat, though, says Joel Grosberg of Washington, D.C., law firm McDermott Will & Emery, "CFOs should expect that antitrust enforcement will be more aggressive."
"Conventional wisdom says the Democrats will be tougher," says Boon Sims, head of M&A for the Americas at Credit Suisse, "but I don't think that is necessarily the case."
Globally, acquisitions almost certainly will involve more delays. "The most important thing for a finance chief to know is that a transaction of any significant size is likely to be subject to preclosing antitrust filings in probably more than one jurisdiction," notes Stephen Smith, a law partner at Morrison & Foerster.
A Chinese M&A Record
This is perhaps to be expected, given the growing number of cross-border mergers. Even as the purchase of Chinese companies hit a record $77 billion in 2007, 65 percent above the previous year, M&A also climbed in faraway places like Malta and sub-Saharan Africa, according to business research firm Thomson. New antitrust and merger rules enable these countries to encourage competition and monitor their job markets.
"Governments are evolving," says Bill Velasco, director of global consolidations at Irving, Texas-based pump and industrial-equipment manufacturer Flowserve Inc. When they see an acquisition coming, he explains, they want it to add some value to the jurisdiction.
Flowserve, which recently made acquisitions in Australia, China, and the Czech Republic, finds that regulatory scrutiny and standards see to vary not just by country but by industrial sector.
The variety of standards and requirements creates a situation in global M&A that's "like having 20 different officials on the football field," says Tad Lipsky, an antitrust attorney at Latham and Watkins. The ICN, for one, is trying to reduce that problem by promoting voluntary best practices. Rationalizing the standards used by the new regulatory entities around the globe could greatly help acquisition-minded companies at a time when mergers require larger numbers of filings.
No matter how complex dealmaking becomes overseas, however, it will remain a vital growth component for many U.S. companies. "CFOs should be thinking about the global business," says Sims of Credit Suisse. He notes, for example, that IBM's 10 percent rise in fourth-quarter earnings was driven by overseas operations, and suggests that Big Blue and others will need to keep international diversification front-of-mind.
They should also factor in the costs of longer review times. "The CFO has to take into account that you cannot close the transaction until these processes are completed," says Morrison's Smith.
YRC's Bruffett hopes to conclude the Shanghai Jiayu deal by mid-2008. He recognizes that "when you make an acquisition in China you have to be patient. There are many requirements, and you have to be methodical and work in a certain order to get everything done." Put another way, "We have to eat the elephant in chunks. Otherwise we would overwhelm our resources."
In China's recent antitrust reforms, the national government has tried to incorporate best practices by consulting the ICN and other international bodies, along with the American Bar Association and the International Bar Association. Still, some are concerned about China's regulatory path. "On its face it is not radically different from other competition laws," says one big U.S. company's legal officer, who asked not to be named. "The question is how it will be interpreted and enforced."
There is even more concern about developments in India, where existing rules have no minimum thresholds for filing a potential acquisition, and call for a long (210-day) review period. That means that even "if your deal raises no issues, you could be held up for seven months," says McDermott's Grosberg.
India is now considering revisions that differentiate between large and small deals, a "positive development," in Grosberg's view. But while in the United States courts can rule on regulators' decisions, in India, the antitrust authorities themselves hold all judicial powers, a worry for some U.S. acquirers.
Avital Louria Hahn is a senior editor at CFO.
All the World's a Review Board
Number of separate jurisdictions ruling on antitrust issues:
Some of the jurisdictions studying deals for anticompetitiveness
Source: The International Competition Network