M&A, PE Continue to Flourish in Q3

The U.S. M&A market enjoyed a strong third quarter, continuing a year where dealmakers have shrugged off a contentious political environment to sign up a solid stream of transactions. "We saw a real burst of activity in August," said Stephen Arcano, the New York practice leader of the M&A group at Skadden, Arps, Slate, Meagher & Flom LLP, which ranked second among M&A legal advisers in The Deal's league tables for the quarter. "I'm a little bit surprised at how strong the market has been. The $1 billion to $5 billion deals seem to keep getting done."

Skadden advised Rockwell Collins Inc. (COL) on its agreement to sell to United Technologies Corp. (UTX) for $30 billion, the largest deal of the quarter, as well as Vantiv Inc. (VNTV) on its $12.42 billion agreement to buy Worldplay Group plc (WPG) and Gilead Sciences Inc. (GILD) on its agreement to pay $11.19 billion for Kite Pharma Inc. (KITE), the fourth and fifth largest deals of the period.

Activity was spread among a number of sectors, with utilities and healthcare having strong quarters, though technology was a conspicuous laggard, as none of the 20 largest deals of the quarter was a pure tech transaction. That continues a slow year for tech, at least on the high end, as deal value fell by 56% in the first half of the year.

But in another sense tech permeates the deal market as it does the economy. "All of these industrial companies are tech companies or want to be tech companies or are being disrupted by technology," said Arcano, who in September advised Ash Grove Cement Corp. (ASHG) on its $3.5 billion agreement to sell to CRH plc (CRH). "Technology disruption is on the mind of every CEO in America, even if the company is making nuts and bolts."

One indication of the M&A market's health is that two of the quarter's largest deals were contested situations. Sempra Energy (SRE) beat out Berkshire Hathaway Inc. (BRK) to land Oncor Electric Delivery Co. LLC for $18.1 billion, and Discovery Communications Inc. (DISCA) outlasted Viacom Inc. (VIAB) to strike a $14.6 billion agreement to buy Scripps Networks Interactive Inc. (SNI)

Jonathan Levitsky, a partner at Debevoise & Plimpton LLP who advised Discovery on the deal, expects the activity to continue. "In media and telecommunications in particular, technological changes are reshaping the industry," he said, "M&A is one key element of the toolkit the players are using to respond. We are also seeing strategics who would not traditionally be viewed as technology companies looking for relevant ways to enter the space in order to adapt to the changes affecting their businesses." Debovoise & Plimpton ranked 21st among M&A legal advisers. 

Private equity is on pace for its best year since 2007, though at a level that should prove more sustainable. There were several PE deals among the quarter's top 20, including a deal where Bain Capital LLC and Cinven Ltd. teamed up in an agreement to buy Stada Arznelmittel AG for $6 billion; one where Energy Capital Partners LLC, Canada Pension Plan Investment Board and Access industries Inc. plan to buy Calpine Inc. for $5.6 billion (CPN); a deal in which Hellman & Friedman LLC led group that agreed to buy Nets A/S for $5.3 billion; and purchases by Leonard Green Partners LP and KKR & Co. LP, which had a flurry of activity this summer.

The PE activity persists despite relatively high valuations. As a result, PE firms and strategic buyers are starting to team up on deals to capitalize on opportunities for synergies, said Peter Martelli, a partner at Kirkland & Ellis LLP in New York who also advised the Scripps family on the sale of Scripps Networks. He pointed to the breakup of Advisory Board Co. (ABCO), which on Aug. 29 announced an agreement to sell its education business to Vista Equity Partners LLC, a longtime Kirkland client, for $1.55 billion and its healthcare business to Optum Inc., a unit of UnitedHealth Group Inc.(UNH), for $1.3 billion. Martelli says there are similar deals in the pipeline.

The U.S. market is anomalous. In the rest of the world, M&A activity has declined this year. Cross-border activity has dipped as well, especially activity by Chinese companies in the U.S. as the Chinese government has warned companies to spend less money overseas and U.S. politicians have become more wary of foreign investment.

That leeriness has affected policy. On Sept. 13, President Donald Trump followed the recommendation of the Committee on Foreign Investment in the U.S. and blocked Canyon Bridge Capital Partners LLP's $1.3 billion agreement to acquire Lattice Semiconductor Corp. (LSCC) Canyon Bridge is a private equity fund backed by China Venture Capital Fund Corp. Ltd., a Chinese corporation owned by Chinese state-owned entities that manages industrial investments and venture capital.

The implications of the Lattice decision aren't clear, says Brian Curran, a partner at Hogan Lovells (US) LLP in Washington who specializes in CFIUS issues. He says that the result wasn't entirely surprising, since deal raised "a fairly typical set of national security concerns, including technology transfer, the role in funding from Chinese government, supply chain concerns, and the nexus with the U.S. government," which uses semiconductors from Lattice. Hogan Lovells ranked 13th among M&A legal advisers. 

"People are not interpreting Lattice too broadly, given that the deal raised these concerns," Curran says."I think what will be more telling will be how the Committee deals with transactions involving less sensitive sectors and non-Chinese buyers. If we start to see significant problems with getting those sorts of transactions through, that would be more telling than the decision in Lattice." He added that data privacy and security are becoming more important issues in a variety of CFIUS reviews, meaning that deals in industries such as healthcare and insurance that CFIUS has not traditionally examined closely may receive much more scrutiny.

This article was produced by the staff of The Deal, a financial intelligence service that provides actionable information on deals and dealmakers, offering over 100,000 users the unique opportunity to find potential deals and target dealmakers.