The effects of increasing regulatory scrutiny are becoming clear: a 50% increase since 2020 in deals reviewed by the Committee on Foreign Investment in the United States (CFIUS), 15 deals blocked since 2021 by the Federal Trade Commission and US Department of Justice, and a seven-month increase in average EU deal duration since 2016. These are just a few of the findings of a PwC trend analysis of more than 300 mergers and acquisitions between 2020 and 2022. Much of this scrutiny has zeroed in on the technology, media and telecommunications (TMT) sector.
This is perhaps no surprise, given the global expansion of both competition and supply chains as well as the ubiquity of digital technologies in everyday life. Acquisitions have allowed TMT companies to fast-track growth, but the sector already faces a challenging deals outlook in 2023. We’re now living in a new regulatory era — one trending toward more protectionist policies — that requires new strategies to successfully close deals.
In addition to general competition in the markets as historically reviewed, regulatory authorities are focused on a number of high-profile issues.
The scope of deals under review has also expanded. While antitrust regulators have historically been concerned with horizontal deals minimizing competition, we’ve seen several vertical deals challenged in the United States as well as in Europe, the Middle East and Africa. Increased enforcement, combined with the 2021 withdrawal of the Federal Trade Commission’s (FTC’s) Vertical Merger Guidelines, signals an era of uncertainty for vertical transactions that, in the past, would have closed with very few concerns.
As data compliance due diligence becomes a common process in M&A transactions in the EU and the US, China is following closely behind. With its Personal Information Protection Law (PIPL), China has ramped up legislative efforts surrounding cybersecurity and data protection; these new regulations pose additional challenges for dealmaking. In addition, the Chinese government recently passed an amendment to its Anti-Monopoly Law that significantly expands antitrust review and increases the penalties for noncompliance. In 2021, China issued 107 fines for such violations, eight times as many as in 2020.
As we consider the implications of the 2023 regulatory environment, dealmakers can benefit from a solid understanding of the regulatory authorities and their focus areas.
The new regulatory environment poses a number of new considerations at each phase of the deal: diligence, post-sign/pre-close, and post-close. While this doesn’t necessarily require a dramatic change in dealmaking tactics, it does highlight the need for thorough portfolio analysis with an eye toward divestitures. This is key not only to facilitating M&A in the current regulatory climate, but also to unlocking significant deal value. Let’s look at further adjustments your company may need to consider as you embark on transactions that may be subject to a more lengthy and detailed review.
Once your target has been identified and diligence is underway, it’s important to take the time up front to understand the relevant regulatory authorities and how they’re likely to view the transaction. Find comparable deals in similar or adjacent markets or subsectors to benchmark timelines. Determine whether administration or legislation changes are anticipated during the coming months that could influence evaluation and scrutiny.
An overarching risk assessment to identify key data, geographies, compliance and ESG policies should be conducted early in the dealmaking process. It’s always better to identify red flags sooner than later. Here are several areas to consider.
Global nature: In which geographies do the buyer and the target operate? Which regions do their supply chains touch? Regulators are more likely to assert themselves in deals involving companies with global supply chains and operations as well as cross-border transactions that could be perceived as a national security risk.
Competition: Where is there potential overlap in customers or target markets? Is the target viewed as a competitor? What will the combined market share of the two companies be for a given sector? Both the US Department of Justice and the FTC have created divisions to solely review technology and digital platform mergers, with a focus on “killer” acquisitions and operations overlap.
Data: What data does your target collect and how is this managed? Has the target been subject to recent cyber or data breaches? Would the acquisition allow foreign parties access to sensitive data that could affect national security? Mergers involving personal data are likely to be reviewed with extra scrutiny, and regulators will aim to ensure data privacy laws are being followed.
Critical technologies and infrastructure: Would the deal include US companies involved with critical technologies and infrastructure as defined by the US Treasury Department? CFIUS has the power to unwind completed transactions or require two to five years of ongoing reporting and compliance. It’s in your best interest to address national security concerns and notify CFIUS early.
Policies: How often have the target’s policies been reviewed? For US targets, compliance with both federal and state laws is important as well as checking emerging technologies comply with requirements.
ESG: What’s your target’s ESG impact? Does the target report on this periodically? What’s its sustainability practice? Evidence that ESG is a priority may be reviewed favorably by regulators. This is also a key area to review for synergies and growth.
Be flexible on which assets are being acquired or sold in order to get the deal done — especially when dealing with a large, cross-border transaction.
Buy-side view: Buyers should be ready with creative solutions when faced with regulatory scrutiny. These remedies can be either structural or conduct related. Structurally, a company may need to explore options to divest or spin off certain business units or assets to complete an acquisition with the goal of ensuring long-term, healthy competition in primary markets. To weigh the pros and cons of each structural scenario, consider the value of the combined business, the value of the spun business, as well as high-level estimates for one-time cost impact, taxes and stranded costs. It may be in your company’s best interest to shrink to grow. After all, divestitures can drive value. Alternatively, regulators may be satisfied with injunctive provisions to effectively regulate post-merger business conduct and mitigate anti-competitive behavior, such as committing to guarantee nondiscriminatory access to the public, not bundling new products, or not enabling collaboration with competitors.
Sell-side view: Keep options open to flex the sale based on different interested buyers. Regulatory bodies will view the acquisition differently based on whether the buyer is from the same industry or a different one, whether it’s a private-equity buyer or a corporate, and whether it’s buying the whole company or just part of it. If the aim is to sell the whole company, a divestiture of additional assets that would be seen as competing with the acquirer’s business may be required. Consider these before meeting with buyers to position the opportunity in the most advantageous manner.
With a few exceptions in recent history, the sign-to-close period has been one that’s approached with great certainty that the deal will close — and as fast as the parties can operate. That isn’t the case anymore. Companies now may face an extended period of regulatory scrutiny as well as uncertainty regarding operational integration or whether the deal will close at all. Taking longer to close a deal also may erode value. A new approach is necessary to maximize the use of critical time, while also proceeding with caution in the event the deal cannot be completed.
The regulatory authorities will request data as well as narratives to support the acquisition and ensure continued competition. These requests will be both time consuming and time sensitive, requiring input ranging from products to financials to customer volume and more. Your integration management office should look to establish a cross-functional team that has focused responsibility on efficiently and consistently responding to regulatory requests. This will require teams on both sides of the deal to ensure the right data is presented to the authorities, so this needs to be a collaborative effort.
If the transaction is international, multiple regulatory reviews may occur during the sign-to-close period, which further complicates matters. There may be more specific questions about personnel and data privacy, given the differences in laws, so having local knowledge will be helpful in streamlining these requests.
For the buyer, the integration team should concentrate on closing the deal as top priority — and move quickly as regulatory approvals are received. Day One essentials, or activities that are required to take control of the business, are paramount. These include control of cash, financial reporting, vendor/partnership transition, and internal and external messaging. Longer-term integration activities — such as product optimization, system integration and organizational planning — can be addressed later, once there is more certainty around the close of the deal.
For the seller, managing value traps is key to preserving deal value. While closing a deal more quickly post-announcement is typically associated with positive excess returns, that may not always be possible. One way to capitalize on an extended and more intensely scrutinized sign-to-close period is to assess whether it’s possible to execute separation activities that can better position the seller at close without transition service agreements (TSAs). This may include separation of core functions (finance and accounting or human resources) as well as logical system separation to minimize commingled confidential data (most notably sales and financial data). Reducing reliance on TSAs will be good for both parties, as they tend to result in dual processes and duplicate costs. In addition, these separation activities will appear favorable to the regulatory bodies working to ensure the (eventual) competing entities will not have access to confidential data. This also allows the seller to have a more nimble business in the event the deal cannot close and they need to pursue a new deal with a different buyer.
If longer-term integration planning is something the buyer wants to immediately pursue to work toward achieving deal objectives, leveraging a cleanroom can enable preparation while a deal is under regulatory review. A third party can provide analysis of key customer, product and vendor data that will allow for planning around strategic sourcing, pricing, sales channel alignment and product planning. This may be a risky investment given uncertainty, but the return on investment of this strategy may allow deal value to be unlocked faster if parties believe it’s highly likely the deal will close. This same philosophy may be applied to other aspects of long-term integration, such as back-office process and systems integration (leveraging proper test data and limiting access), where a cleanroom isn’t necessary.
Regulators look favorably upon mergers that capitalize on ESG factors. This can be demonstrated through integration planning during the sign-to-close period that incorporates ESG-related synergies, strategic growth opportunities and supply-chain efficiencies. This should also include evidence of ESG reporting and transparency as well as sustainability strategies.
Deal success is often driven by how companies retain and engage key talent, as these people are responsible for driving product optimization, the overall go-to-market approach and cost synergies to get the most value out of the transaction. And, as PwC’s 2020 M&A Integration Survey showed, retention is getting harder with only 10% of organizations reporting they were significantly successful at retaining key talent.
Effectively navigating regulatory approval processes and planning timelines requires strong communication and momentum. Delayed timelines can contribute to fatigue, uncertainty and doubt across buyer and target teams. Consequently, it’s important to establish a construct where both teams stay coordinated through robust information exchange as well as stakeholder messaging. Communication is critical especially during delays as the personnel involved will undoubtedly question what happens if the close date continues to push — or never happens?
Establish a regular communication and planning cadence for both buyer and target companies to address during this period. Aligning on messaging to both customers and employees around the transaction can help to enable stability, reduce disruption and stave off competitor attempts to poach customers or talent.
For employees, communications should be focused on highlighting the benefits of the transaction, but with a measured tone. They should reinforce operational do’s and don’ts of integration planning during regulatory review and be as transparent as possible about the process. This requires a robust change-management program that takes into account organizational design and company culture. The greater the uncertainty, the greater the need for change management throughout the transition, starting at the screening phase of the deal.
For customers, maintaining existing intimacy and communications is key. It also will be necessary to highlight the potential benefits of the proposed transaction, while countering any competitor messaging designed to peel off existing or potential customers.
Establish strong governance processes, such as clean teams, with involvement from buyer and target company leadership to maintain confidentiality when reviewing sensitive or competitive data. This is important to confirm compliance with regulatory requirements and to address the aforementioned risks. Additionally, a robust governance process and structure can provide stakeholders an avenue to seek clarity or to escalate questions and concerns.
Buyers should contemplate alternatives in the event the transaction is not approved and should be prepared to engage key stakeholders with the appropriate messaging. Ultimately, it’s critical for both parties to establish clear guidelines at the outset and to confirm they can document compliance during and after completion of the regulatory review process.
On the sell-side, a target company may face higher risks associated with deal uncertainty. In-flight deals may be slowed as customers seek greater clarity on the potential transaction. A target will need to craft communications to customers that address two primary scenarios: one where the acquisition is completed and a second to address implications of the target remaining independent due to regulatory intervention. While the latter scenario may not be outwardly communicated, strategic alternatives should be developed as a contingency. In some extreme cases, a target company may be reluctant to engage resources in integration planning or in sharing information with the buyer. We’ve observed that low engagement levels at the start of the regulatory review process often increase as certainty of a transaction becomes more likely.
While there are no specific processes to navigate these challenges, these factors will be important to consider and should be taken into context by both buyer and target. In some cases, there may be differing perspectives on what actions to take, and both the buyer and the target should be aware of this.
As 2023 kicks off facing strong macroeconomic headwinds and continued uncertainty in the deal market, one thing is likely to hold true: Regulators will be watching closely across TMT. Employing the tactics outlined in this playbook can help you position your deal for success and achieve increased value. As the regulatory environment continues to evolve, dealmakers should pay close attention to the latest policy developments. They should remain nimble and seek creative solutions, sometimes through carve outs or joint ventures. All of this can help your company not only to complete the transaction, but to complete the right transaction for your business.