Big-name M&A lawyers are bullish going into 2005, with more deals of an increasingly complex nature expected to build on the renewed dynamism set down in the Asian market last year. Those active in the space report a busy year in 2004, with a 45% rise in the value of transactions announced in Asia ex-Japan to US$147.9 billion across 3,597 deals.
The upswing in activity has been more marked in the Asia-Pacific region's most developed markets - Australia and Japan - which saw deals announced worth an aggregate US$110.2 billion and US$159.3 billion respectively. Deals announced in both these jurisdictions last year represent a more than 70% increase on comparative figures for 2003, at US$63.4 billion in Australia and US$93.2 billion in Japan.
Whilst impressive, the numbers only tell half the story of the region's reenergized M&A market. Coupled with deal volumes not seen since the heydays of the technology boom in 2000, transactions crossing lawyers' desks in 2004 have also tended to be more complex. This is particularly so in Asia ex-Japan, where we have witnessed a growing number of cross-border deals in line with local companies' more aggressive expansion. Reinforcing the latter, there were six hostile takeovers or bids launched in Asia in 2004, compared to none in 2003.
The maturing of the Asian M&A market is music to the ears of local lawyers. More complex and cross-border deals not only generate the highest fees for legal advisers, but also ensure that skill-sets remain honed to the progressive-end of the market. As Linklaters' managing partner for Asia, Simon Davies, says: "Just doing the plain vanilla work tends not to be too inspiring. It is the more complex and cutting-edge work that is challenging to lawyers and more remunerative."With a full range of deal-types popping up in Asian boardrooms in 2004, the scene has been set for a bumper year in 2005. One lawyer predicts that we may even see China's first leveraged buyout sometime this year, reflecting the growing sophistication of the country's debt market. And while the largest deals continue to go down in Japan - typified by Sumitomo Mitsui Financial Group's continuing US$29.2 billion hunt for UFJ Holdings - smaller markets have also brought in some big fish. Nowhere is this more true than in Australia, where the US$21.6 billion merger of Westfield Holdings' three listed entities represented the region's second largest deal.
Despite a convergence of Asian M&A along lines of greater deal sophistication, the market remains highly heterogeneous. Indeed, deal-drivers are diverse throughout the region. Restructuring, for example, remains a major force in Indonesian M&A, while growth is the main impetus behind Chinese transactions. The Australian and Japanese markets, on the other hand, continue to be shaped by forces of consolidation.
Big Deals, Big Business?
The diversity of the Asian market is immediately apparent in the statistics. The average size of announced bids in Australia and Japan, for instance, tends to be larger than elsewhere in the region, at US$90.9 million and US$104.5 million respectively. The more developed debt and capital markets in these countries ensure a higher number of larger-scale M&As, in particular buyouts. Reflecting this, the average size of announced bids in Asia ex-Japan in 2004 was a comparatively paltry US$41.1 million.
Despite the bigger size of bids in Australia and Japan, it is only in the former where we see firms converting this advantage in the league tables. Indeed the top three firms in the Australian league table - Mallesons Stephen Jaques, Skadden Arps Slate Meagher & Flom and Allens Arthur Robinson (AAR) - advised on 73% of deals announced in the country, at US$80.4 billion.
Mallesons' role alongside US$42.5 billion worth of deals was more than three times that of the top firm in Japan - Sullivan & Cromwell - which advised on US$13.8 billion in announced transactions. The top three firms in Japan, which alongside Sullivan & Cromwell included Jones Day and Fred Frank Harris Shriver & Jacobson, accounted for 18.6% of announced deals, at US$29.7 billion. This suggests a far more even spread of work in the land of the Rising Sun than Down Under.
The deal-spread among firms in Asia ex-Japan, whilst not egalitarian, gives all the firms at the top of the table a decent piece of the pie. Here the top three firms accounted for 35% of the announced deal total, or US$51.9 billion. Linklaters came in at the top of the table in 2004, edging out Freshfields alongside US$22.7 billion in announced deals. This represents a 65.7% increase on the US$13.7 billion in announced deals Linklaters advised on in 2003. The firm has thus outstripped the aggregate growth of deals announced in Asia ex-Japan between 2003 and 2004 by more than 20%. Freshfields, conversely, advised on less announced deals in 2004, coming in second on the league table alongside US$16 billion worth of transactions.
Alongside Linklaters, Shearman & Sterling has been another impressive mover on the league table, jumping 19 positions on the ladder to number three and advising on US$13.2 billion-worth of announced transactions. Shearman's US counterpart, Sullivan & Cromwell, also continues to rank well in Asia ex-Japan, coming in at number four as legal counsel to US$12 billion in announced deals. Simmons & Simmons, meanwhile, rounded out the top five, advising on US$10.2 billion in announced deals, compared to US$1.6 billion in 2003.
China Remains Focus of Growth
All of the top 10 firms in the Asia ex-Japan (including Australia) announced deals league table reported their representation alongside the bidder(s) or target(s) in the region's largest deals in 2004. Outside of Australia, the biggest of these took place in China. China Telecom's acquisition of 10 mainland provincial telecommunication networks from its parent company - China Telecommunications Group - topped the list. Completed in June 2004, the US$8.2 billion deal made China Telecom the largest fixed-line operator in the country, with over 160 million access lines.
Advising China Telecom in its significant takeover were Freshfields, Linklaters, Simmons & Simmons and Sullivan & Cromwell. "The deal was essentially a large asset injection and to that extent followed a familiar track," says Freshfields partner, Rob Ashworth, whose firm worked on the transaction. "As advisers we were mostly involved in valuation," he notes, "though as China Telecom is a publicly listed company we had to pay particular attention to taking care of the various shareholders."Michael DeSombre and William Chua from Sullivan & Cromwell, who also worked on the deal, concurred that whilst it was not the most exciting of transactions, China Telecom's acquisition still maintained significance. "The M&A component was not actually that involved," says Chua, "It was very much a case of more structuring and less negotiation." Chua and DeSombre isolated the concurrent financing and purchase of the assets as a particularly unique aspect of the deal. Indeed, at the same time China Telecom picked up the provincial networks, it issued HK$13.45 billion-worth of new shares to fund the acquisition. "This is the first time, to our knowledge, that financing has been carried out simultaneously with an acquisition," notes DeSombre.
It was not only China's largest fixed-line operator that was on the acquisition trail in 2004. The country's most prominent mobile operator, China Mobile, also spearheaded a significant transaction during the year, taking over 12 mobile operators from its parent - China Mobile Communications Corp - for US$4.1 billion. Linklaters and Shearman & Sterling advised the Hong Kong-listed China Mobile on this transaction, which was completed in July 2004.
While the China Telecom and China Mobile transactions were wholly domestic affairs, there were a number of important M&As in China through 2004 instigated by foreign companies. Probably the most important of these was HSBC's landmark acquisition of a 19.9% stake in the mainland's fifth largest bank, the Bank of Communications (Bocom), for US$1.75 billion.
Taking over three years to complete, the deal marks the largest foreign investment in the mainland's financial services industry to-date. The transaction set a benchmark for future foreign acquisitions in the industry, involving complex negotiations with the government. Before signing on the dotted line, HSBC negotiated with the government to take US$6.4 billion in non-performing loans (NPLs) off Bocom's books. As an additional sweetener, the government also injected US$2 billion in equity into the bank, further shoring up its capital adequacy ratio.
Advising Bocom in the acquisition - which was named Best China Deal for 2004 by Asiamoney - was the M&A team from Sullivan & Cromwell. Freshfields, meanwhile, advised HSBC in the transaction, which bank chairman John Bond named as one of the most important the group has ever made. "This deal was a real trailblazer," says Ashworth from Freshfields. "It helped redraw China's financial landscape, setting a benchmark for other investors that will undoubtedly follow in HSBC's footsteps."DeSombre from Sullivan & Cromwell accorded the deal similar respect, saying that it was one of the most important he had worked on in recent years. "The deal basically took up half my life last year," he confesses. "It was rewarding, however, working for a client that appreciated your hard work. Bocom worked very hard to reach agreement with HSBC, because of the strategic value that HSBC's investment and involvement would bring to Bocom immediately and in connection with any future IPO."
Both DeSombre and his colleague, Chua, agree that there are plenty of investment opportunities in the mainland banking sector, with a number of institutions looking for strategic partners. However, they each agree that "non-performing loans remain a significant problem in the sector."
Another foreign acquisition attracting significant attention in China in 2004 was US-brewer, Anheuser-Busch's, US$740.7 million takeover of Harbin Brewery. The deal hit the headlines, coming in response to the first ever hostile takeover bid launched on a mainland company.
After Anheuser-Busch came to the side of the government-controlled brewer in June 2004, significant shareholder, SABMiller, launched a hostile bid on the company valuing it at US$4.30 a share. Anheuser-Busch eventually took over Harbin at US$5.58 a share, representing a 30% premium to the SABMiller valuation.
Freshfields represented Anheuser-Busch through its lengthy negotiations with Harbin Brewery in its assertive takeover. Richards Butler acted as Hong Kong counsel to SABMiller, while Maples and Calder Asia assumed the same role on Cayman Islands' legal aspects. Reflecting the high-pace nature of the transaction, Freshfields' Ashworth says the deal reminded him "of the heady days in the UK when you followed the progress of a deal every day in the paper."Considering the higher profile nature of the deal, Ashworth acknowledges that there were concerns that the government's sale of its substantial stake in the brewer to a foreign private equity company [which was subsequently flipped to Anheuser-Busch] might come under undue scrutiny from the authorities. To his relief, however, this did not happen, with the deal "handled with utmost transparency". "What made the transaction more interesting," he notes, "was the fact that it was a contested bid between two foreigners. Considering it also started off on an uneven playing field - with SABMiller holding a 29.4% stake in Harbin since July 2003 - the takeover was especially challenging," he says. Ashworth expects to see more "Harbin-type deals" in China as the M&A market becomes increasingly competitive.
With so much foreign money flowing into China these days - indeed it is the world's largest recipient of foreign direct investment attracting US$60.6 billion in 2004 - it is easy to underestimate the importance of money flowing out of the country. The proliferation of cash-rich mainland companies on the foreign acquisition trail is a trend that is here to stay, say local lawyers. This trend will be conspicuous, they say, in the natural resources sector, with more and more mainland companies expected to make defensive natural resource acquisitions amid mounting commodity prices.
Already we have seen mainland energy companies going beyond their borders to secure valuable assets and resources. One of the largest such deals in 2004 was China Huaneng Group's (CHG's) US$227 million purchase of a 50% stake in the Australian power generation company, OzGen. Mallesons advised CHG in the deal, which represents the first offshore acquisition by a mainland power enterprise. "The deal will enhance CHG's bargaining power in coal purchasing by striking a strategic partnership with a major foreign coal supplier," says the firm.
Mainland technology companies are also making strides offshore, picking up valuable IP that they would otherwise have to develop themselves. In one of the boldest illustrations of this trend yet, mainland computer manufacturer, Lenovo, announced in December 2004 that it has agreed to take over IBM's personal computer division. Encompassing US$650 million in cash, US$600 million in stock and US$500 million in debt, the US$1.75-billion transaction rounded out the top 10 deals in Asia ex-Japan.
Clifford Chance partner Roger Denny, whose firm's M&A team worked alongside Lenovo in its acquisition, says the deal has "caught peoples' imagination in view of the brand involved and it being the most significant Chinese overseas acquisition." He rates the transaction as "one of the most important that the firm worked on in 2004". Denny also singles out the deal as one of the more involved of the year, given the size of the acquisition relative to Lenovo's total assets. Indeed, the transaction was subject to a number of 'conditions precedent' required by the Hong Kong Stock Exchange, including approval from shareholders at an extraordinary general meeting.
Lenovo's acquisition, which will give IBM an 18.9% stake in the company through the share-swap, has also drawn harsh scrutiny from the US' Committee on Foreign Investment. Indeed, there is now doubt that the deal will get the go-ahead by the middle of this year, as planned, with Republicans in the US Congress pushing for a full security review of the sale on the basis that it could lead to the transfer military-related technologies to Beijing.
Other Markets Peripheral, But No Less Important
While China remains the engine behind the Asia ex-Japan M&A train, a number of important deals were also transacted elsewhere in Asia. The most significant of these was Citigroup's US$2.7 billion takeover of KorAm bank in April 2004. Linklaters advised Citigroup on the deal, which came in as the seventh largest in Asia ex-Japan in 2004.
Representing the second-largest foreign investment ever in Korea, the Citigroup-KorAm deal is destined to shape the market for some time to come. Already the transaction - voted M&A deal of the year by Asiamoney - has catalyzed renewed foreign interest in the country's financial services industry. This was illustrated most recently by Standard Chartered's US$3.3 billion takeover of Korea First Bank.
With such credentials, it is not surprising that Linklaters' Davies rates highly the firm's work alongside the financial giant in its Korean push. "I think one of the reasons Citigroup used us on the KorAm deal," acknowledges Davies, "was the way we handled their January 2003 acquisition of Shanghai Pudong Development Bank, which was the first major deal to hit a New York standard in China."
As something Citigroup demands on all its franchise deals, the KorAm deal was also done to a New York standard. "At one point we were working with up to 100 Citigroup employees on the ground in Korea," says Davies emphasizing the complexity of the transaction. Linklaters' Korean partner, Sanghoon Lee, was centrally involved in both managing and executing the KorAm transaction, notes Davies. "Lee's experience in the transaction management aspects of the market, such as knowing what 'soft approvals' are required, was key in getting the deal done," he says.
Alongside the financial services sector, the natural resources industry also played host to a number of M&A deals through 2004. The largest of these was UK-based International Power and Japan's Mitsui's US$5.5 billion acquisition of Edison Mission Energy's international power generation portfolio. Covering six jurisdictions, including Australia and Indonesia, the deal attracted services from a number of law firms. These included Munger Tolles & Olson, Jones Day and Shearman & Sterling on the side of the target and Ashurst Morris Crisp, Clifford Chance and Linklaters on behalf of the acquirers.
Russell Wells, who co-led the Clifford Chance team on the Edison deal from Singapore, says that it was "probably the biggest in the natural resources sector that the firm has worked on." Whilst acknowledging the complexities of the cross-border nature of the deal, Wells was quick to point out the advantages of its unique bidding procedure. "The use of a virtual data room for bidding," he says, "made the due-diligence process a lot easier." Virtual data rooms allow due diligence to be conducted online and are expected to become a popular feature in the Asian M&A market in the near-term.
Lawyers across the board expect to see a further uptick in natural resource-related M&A deals in 2005. As already mentioned, transactions in this sector will increasingly be at the behest of mainland Chinese companies. They can expect to enter a highly competitive market, where long-time players have built a reputation for quick deal-making. Singapore Power, for example, assembled its successful US$3.72 billion bid for TXU Australia in just 18 days. Working within this tight time-frame, in what constituted Asia ex-Japan's ninth largest deal in 2004, was Dewey Ballantine alongside Singapore Power, and Minter Ellison alongside TXU.
Lawyers expect Singaporean companies, alongside their Malaysian counterparts, to continue making major plays in the regional M&A market in the coming year. The Singapore government's investment arm, Temasek Holdings, will be a major force in this trend, continuing its aggressive acquisition drive. The cash-rich investment company made a number of high-profile purchases in 2004 and is a good client for any firm to have on its books.
Linklaters, through its Singapore joint venture with Allen & Gledhill, is one firm that has done a lot of work with Temasek over the years. With significant investments in 2004 in Korea's Hana Bank, Malaysia's Telkom Malaysia and India's Matrix Laboratories, to name but a few, Linklaters' Davies feels that companies like Temasek have set the tone for the region in the coming year. "Expect to see South-east Asian companies expand more aggressively beyond their borders in 2005," he says.
Deal Central, Down Under
In what can only be described as a stellar year for Australian M&A, we have seen most activity confined to the property trusts sector. One deal in particular - the US$21.6 billion mega-merger of Westfield Holdings' three listed entities in July - catalyzed significant consolidation in the market. Head of M&A for Allens Arthur Robinson (AAR), Ewen Crouch, puts this down to the "internalization of the management of property trusts and their encouragement of 'in-house development pipelines'." Such has been the level of consolidation in the Australian properties trust sector that analysts now expect to see so-called mega-trusts, like Multiplex and Westfield, to go on the hunt for acquisitions offshore in the near future.
Highlighting the prevalent trend in the Australian market in 2004, four of the top 10 bids through the year were in the property trusts sector. As the top M&A adviser in Australia, Mallesons has worked, or continues to work, on three of these, including the Westfield merger. "The merger involved stapling three entities - a company and two trusts," says Mallesons partner Jason Watts who worked on the deal. These included Westfield Holdings, Westfield Trust and Westfield America Trust.
Emphasizing the complexity of the deal, Watts says the three entities "had not only their standard issued securities to take care of but also a host of different options with varying parties. There was quite a bit of preliminary work done at the structuring stage," he continues, "ascertaining how best to deal with the different option holders. Some were ultimately dealt with by private agreement, while others were dealt with through the court-approved scheme and informal sub-scheme."
"One of the obstacles with trust mergers," adds Watts's colleague Tim Blue, "is that the scheme of arrangement under the Corporations Act does not apply to managed investment schemes. Thus, the unit-holders had to approve changes to the constitution that governs their rights, giving the manager of the scheme the right to do things on their behalf. There was also a raft of US tax issues that had to be considered in conjunction with Australian tax issues," he adds.
"Springing directly out of the Westfield deal," says Blue, "was Lend Lease's merger bid with General Property Trust (GPT)." However, in what he terms "quite an unusual situation," just before the Lend Lease's estimated A$3.72-per-unit merger bid was to go before GPT shareholders for approval in early November, the trust received an unsolicited bid from Stockland Trust Group. The latter has offered 0.608 securities units for each of GPT's, valuing the target at A$3.64, based on Stockland's five-day volume weighted-average trading price to January 24 of A$6.00.
Crouch from AAR, who has been representing GPT throughout the Lend Lease and Stockland bidding process, says that it has been "a fascinating deal." What has made it "especially interesting," he says, "is the unusual situation, where although a majority of GPT's unit-holders (68.5%) approved the Lend Lease offer, it was turned down as it didn't reach the required 75% threshold." Thus Stockland's hostile bid - in which Mallesons has been acting as legal counsel - has been able to proceed. It had received just 0.8% shareholder acceptances as of January 27, prompting calls for Stockland to increase its bid.
Another potential merger on which both AAR and Mallesons are working on is Macquarie Goodman Management's proposed amalgamation with Macquarie Goodman Industrial Trust. The US$3.7 billion bid was the fifth-largest launched in Australia in 2004. The merger's approval by unit-holders at the 25 January unit-holder meeting "could be a prelude for the company moving into Asia," says Crouch, whose firm is working alongside Macquarie Goodman Industrial. Indeed the company may be keen, says this lawyer, to sink its teeth into the region's burgeoning real estate securitizations market.
With the phase of consolidation in Australia property trusts market nearing an end, lawyers on the ground in the country are looking for M&A growth from other sectors. One such sector is natural resources - a veritable staple of the Australian economy. AAR and Mallesons are currently working on opposite sides of Switzerland-based Xstrata's US$6.7 billion bid for WMC Resources, which Watts says is "one of the largest cash-only bids to ever hit the Australian market." Eyes are also fixed on the possible relaxation of media laws on July 1, "which could unleash a number of deals" according to Blue.
Blue is also confident in the continued role of private equity funds in the Australian market place. "A lot of funds recorded successful exits in 2004 and were able to raise new funds as a result," says Blue. "Many of these new funds have been oversubscribed, meaning that there is a significant amount of money floating around the private equity space at the moment." With competition for quality assets among private equity players on the rise in Australia, Blue anticipates that "we will start to see bigger deals in the market."
Consolidation Catalyzes Growth in Japan
Private equity is also a key driver in the Japanese M&A market. In late 2003 the country witnessed the largest leveraged buyout it had ever seen when Ripplewood Holdings bought Japan Telecom from Vodafone for US$2.33 billion. Davies from Linklaters, who worked alongside Vodafone in the deal, says that it was a "key illustration of how foreign private equity funds can be a catalyst for change in the Japanese marketplace."
Private equity funds are increasingly building a reputation for adding value to Japanese companies, says Davies. This was well illustrated by Ripplewood's sale of Japan Telecom to Softbank for US$3.01 billion in July 2004. The transaction, which was the ninth-largest in Japan in 2004, was completed just 11 months after Ripplewood's purchase, at a 29% premium to what the fund paid.
Alongside private equity activity, consolidation was a defining feature in Japan's M&A space through 2004. This trend was most noticeable at the apex of Japan's banking sector, where an unprecedented hostile battle for Japan's fourth-largest bank, UFJ Holdings, has emerged. Indeed, Sumitomo Mitsui Financial Group's one-for-one stock offer for UFJ represented the largest bid in Asia in 2004, at US$29.2 billion.
Sumitomo Mitsui's unsolicited bid came in response to an earlier agreement between UFJ and Mitsubishi Tokyo Financial Group to merge by October 2005. Though Mitsubishi Tokyo has yet to reveal its proposed merger ratio, it has agreed to infuse US$6.3 billion into the troubled bank to lighten its bad-debt load. Either way, whether UFJ merges with Mitsubishi Tokyo or Sumitomo Mitsui, it will herald the creation of the world's biggest bank with assets topping Citigroup's US$1.19 trillion.
Consolidation has by no means been limited to Japan's finance sector, with the country's second-largest announced merger taking place in the pharmaceutical sector. In February 2004, Yamanouchi Pharmaceutical agreed to take over Fujisawa Pharmaceutical for US$7.9 billion. The latter is to be dissolved into a new entity created by the two companies - Astellas Pharma - in April this year. Top-ranking M&A firm in Japan, Sullivan & Cromwell, has been advising Fujisawa on the creation of this merged entity, which will become Japan's biggest drug maker by sales.
As in the rest of Asia, lawyers in Japan are confident of another bumper year for the M&A market in 2005. Positive news came through in October, with the Legislative Council of the Ministry of Justice approving a proposal that will permit the acquisition of Japanese companies through cross-border share exchanges. This change in Japan's Commercial Code, taking effect in April 2006, "will catalyze further consolidation in the market over the short term as preemptive action against potential foreign takeovers takes hold," says one lawyer in Tokyo. Over the longer term, we can expect more foreign investment in Japan to further stimulate the local economy. This is good news for lawyers in Japan, who can expect yet more work in the coming year.