In the Zoom calls and Teams meetings that poorly imitate City wine bars these days, the chat among investment bankers is about how 2021 could be a bumper year for M&A.
Pent-up demand for deals and the prospect of some form of normality resuming is expected to bring a wave of transactions, with companies resuming pre-COVID plans after a year of mitigation rather than growth.
But next year could bring a new dynamic for companies and advisers to tackle. The National Security & Investments Bill, which received Royal Assent on April 29, is a material change to the deal process.
The law, which is expected to come into effect towards the end of the year, gives new powers to the Government to block or introduce conditions on transactions that are perceived to threaten national security in high-risk sectors. And the reach of its powers is much broader than many would expect – with 17 specified sectors in its scope.
The UK is behind the curve in terms of protectionist legislation. Most major Western economies already have similar laws on foreign investment – the most notable of which is Washington’s Committee on Foreign Investment in the United States (CFIUS).
Will the UK’s laws be tougher than CFIUS? Can we afford to be protectionist in a post-Brexit world, while trying to strike trade deals? Is the legislation just window-dressing to appease concerns about “selling the family silver”, such as those expressed after some high-profile M&A deals of recent years?
In truth, the answer to those questions will only be known once we start to see the laws applied.
Since 2000, CFIUS has been used more actively, as a broader range of bidders have taken interest in US companies. The powers of CFIUS are wide-reaching and largely at the discretion of the executive, as shown most recently in the ByteDance/TikTok case. This potent mix has fundamentally altered the way in which companies interact with M&A processes, bringing political considerations to the fore of many transactions.
There are a number of lessons we can draw from the US approach to foreign investment in sectors and companies considered to be more protected.
The first is the potential for M&A to become subject to the changing moods of governments. This has become a more prominent topic of the CFIUS-related debate throughout the investigation into Bytedance’s US operations. Some view the more recent CFIUS interventions as an attempt to maintain economic pre-eminence as opposed to reviewing transactions strictly in relation to national security.
The NSI Bill has been heavily caveated to avoid such perceptions in the UK. The announcement of the legislation was accompanied with direct statements that the process would be clear and predictable, while only affecting a defined set of sectors and strictly on national security grounds. But it should also be noted that the Statement of Policy which governs this process will be updated regularly, potentially introducing further changes for companies to manage in the M&A process. More recently, the concessions over the notification threshold provided by Kwasi Kwarteng will also go some way to allay the concerns of foreign buyers.
In any case, the deals which fall within the identified sectors will undoubtedly need to clearly and pre-emptively state why they satisfy any potential concerns which an investigation may raise. Those sectors include industries that are heavily invested with foreign money such as nuclear, energy, telecoms and computing hardware.
A second factor is the resourcing and expertise assigned to manage the process. The current set-up of CFIUS with limited resources means that it has to be incredibly selective in the transactions it prosecutes. Often, transactions which become subject to a CFIUS investigation are those which receive significant national attention, forcing an intervention from the committee.
The impact assessment of the UK’s legislation estimates that between 1,000 and 1,830 transactions will require notification, 70-95 will be called in and about 10 subject to remedies. The Department of Business, Energy and Industrial Strategy which is assigned to manage the process in the UK, will have a huge job on its hands reviewing more deals annually than the Competitions and Markets Authority (CMA).
The NSI Bill is more prescriptive when it comes to the sectors, triggers and the basis for investigation. But, without proper resourcing and expertise, the UK could face a similar situation to the US where often only high-profile deals are the ones investigated.
In addition, this legislation will require a huge amount of expertise to be drawn from across government departments, national security professionals, as well as those with a strong understanding of M&A. Both the Takeover Panel and CMA have this expertise but the UK will have to find a similarly high-quality team to staff this new body.
The law will inevitably have an impact on how companies assess deal timelines, likelihood of completion, as well as associated costs. Despite commitments from the Government, those operating in M&A will be closely watching how it is implemented.
The first port of call should be learning the lessons of similar regulatory regimes elsewhere to avoid any perception that investigations will be seen through a political lens, potentially reducing the attractiveness of the UK for foreign investors.