Cross-Regional M&A: Are You Prepared for the Resurgence?CROSS-REGIONAL M&A: ARE YOU PREPARED FOR THE RESURGENCE? | 5 The focus regions over time Compared to previous upswings, Europe

Cross-Regional M&A: Are You Prepared for the Resurgence?Knowing the drivers and navigating the opportunities

2 | CROSS-REGIONAL M&A: ARE YOU PREPARED FOR THE RESURGENCE?

Published by J.P. Morgan’s M&A team in June 2015.

Global

Hernan Cristerna Global Co-head of M&A E: [email protected] T: +44 20 7134 4631

Chris Ventresca Global Co-head of M&A E: [email protected] T: +1 212 622 2228

Asia Pacific

Brian Gu Regional Co-head of M&A E: [email protected] T: +852 2800 6811

John Hall Regional Co-head of M&A E: [email protected] T: +852 2800 6606

Europe, Middle East and Africa

Dirk Albersmeier Regional Co-head of M&A E: [email protected] T: +44 20 7742 4461

David Lomer Regional Co-head of M&A E: [email protected] T: +44 20 7134 9798

Latin America

Ignacio Benito Head of Latin America M&A E: [email protected] T: +1 212 622 2459

North America

Anu Aiyengar Regional Co-head of M&A E: [email protected] T: +1 212 622 2260

Henry Gosebruch Regional Co-head of M&A E: [email protected] T: +1 212 622 2299

CROSS-REGIONAL M&A: ARE YOU PREPARED FOR THE RESURGENCE? | 1

Contents

Executive summary 2

1. Then and now: A look at cross-regional M&A by cycle 4

The focus regions over time 5

The rise of transformational cross-regional activity 6

2. Knowing the drivers: The trends supporting the 2015 upswing 7

The eurozone recovery 7

Attractive EMEA valuation levels 8

Supportive FX conditions 8

Golden financing opportunities 9

Cash is king 10

Increased activity in defensive sectors 10

The rise of Asian cross-regional appetite: Chinese buyers are diversifying and Japanese companies are seeking external growth 11

3. Navigating cross-regional M&A 12

Appendix: Select cross-regional deals 14

About J.P. Morgan M&A advisory solutions 16

Please note: use of this material is subject to the important disclaimers set out on the inside back cover.

2 | CROSS-REGIONAL M&A: ARE YOU PREPARED FOR THE RESURGENCE? CROSS-REGIONAL M&A: ARE YOU PREPARED FOR THE RESURGENCE? | 3

Executive summary

Transformational deals and a range of macro factors are driving a new era in cross-regional M&A in 2015 – potentially boosting activity by 18% year-over-year to $733 billion if current momentum continues. The estimated dollar volume would represent 23% of all M&A activity in 2015 against a 10-year average of 17%. In particular, the first quarter of this year saw record levels of inbound activity into Europe.

There continues to be challenges to cross-regional M&A, but investor support for corporate growth remains strong and companies are increasingly optimistic about cross-regional M&A as a source of value creation.

With a 3.1% GDP growth rate, U.S.

corporates will seek both domestic and international growth.

Overseas cash accounts for 64% of the total cash held by

non-financial companies and will be a major factor in the growth

of foreign acquisitions this year.

Europe represents 58% of

target cross-regional M&A compared to a 10-year average

of 39%. Depressed valuations as a result of conservative European growth rates provides attractive pricing, boosted by supportive

FX movements and limited bidding competition from local players.

Asia Pacific represents 36% of acquirer

cross-regional M&A compared to a 10-year average of 26%.

Increasing appetite for foreign investments is underpinned by large amounts of capital

(China) or the need to diversify (Japan).

Large growing markets of Brazil and

Mexico and FX dislocations provide the inbound corporate with attractive opportunities.

Source: J.P. Morgan, Dealogic, Moody’s Investors Service Report as on May 7, 2015

Economic growth rates

Macro drivers

Considerations

Currency movements Financing conditionsCash reserves continue to grow

Foreign ownership restrictions

FlowbackListing and index inclusion

Currency hedgingTakeover laws and foreign corruption legislation


1. Then and now: A look at cross-regional M&A by cycle

History shows that cross-regional deal flow rises and falls with peaks and troughs in overall M&A activity, as demonstrated in Exhibit 1. With the emergence of globalization in the mid-1990s, subsequent upturns in M&A have been accompanied by an increase in cross-regional deal value. Cross-regional M&A accelerated in earnest in a number of key markets in 2000 as national interest protectionism eased.

During these cycles, speculators played a significant role in driving cross-regional M&A. They contributed to the over-valuation (based on optimistic earnings projections) of technology and telecommunications stocks in the dot-com era, and piled into commodities and real estate during the leverage bubble. In the latter case, high valuations were also driven by the rise in private equity buyouts commencing in 2005 and the cheap debt available to fund these transactions.

Cross-regional M&A value development since 1996 ($bn)

1,000 25%

20%

15%

10%

5%

0%

900

800

700

500

1996 19981997 20001999 20022001 20042003 20062005 20082007 20102009 20122011 2013 2014 2015

400

300

200

100

0

600

Dot-com bubble Leverage bubble Downturn Recovery?Downturn

733

622

462

536539544

606

829

347

249

173182

266

622

509

363

192

130

316

Deal value ($bn) Cross regional as % of global M&A

550

Source: J.P. Morgan, Dealogic as of April 1, 2015, “Cross-regional M&A” is defined as a deal where the target and acquirer are from different regions ¹ 2015 YTD data has been annualized

Exhibit 1


The focus regions over time

Compared to previous upswings, Europe Middle East and Africa (EMEA) is increasingly becoming the focus as a target region, with inbound flows at record highs, as displayed in Exhibit 2. Asian buyers’ growing appetite for foreign investments is also evident (see below), with outbound flows nearly double the level of 2007. We explore the current drivers of this shift in the next section.

Cross-regional M&A by target region (US$bn)

26%21%

32%38%

47% 36% 36%27%

36%29% 30% 40%35% 36%

58%

51% 58% 34%

38% 25% 29% 41% 49%

36%47%33%

30%40% 42%

30%

10% 13% 14% 10% 7%15%

9% 5% 8%7%19%

11% 13% 11%4%

13% 9%19%

14% 21%

20%

34%

40%

6%

20% 14% 19% 20%17%

19%

19% 11%

53%

23%

10%

15% 11%

8%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015YTD

2014

EMEA NA APAC LATAM

Exhibit 2

Cross-regional M&A by acquirer region (US$bn)

60% 67%

46% 44%28%

39% 40%48%

38%48% 40%

29% 30%40%

27%

34% 23%

37% 42%

56%43%

26%

31%

39%29%

30%

37% 32%

33%

35%

1% 1% 3% 2% 1%6% 7%

2% 2%2% 3% 2%4%

3% 0%5% 9%

13% 12% 15%13%

47%

36%

1%

16%

27%

19% 21%21%27% 33% 34%

24%

43%

5%

28% 23%38%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015YTD

2014

EMEA NA APAC LATAM

Source: J.P. Morgan, Dealogic as of April 30, 2015 YTD as of March 31, 2015 “Cross-regional M&A” is defined as a deal where the target and acquirer are from different regions


The rise of transformational cross-regional activity

While the pattern shows that cross-regional M&A is correlated to the overall M&A cycle, bigger dollar-volume deals, including transformational deals equal to or greater than 20% of the acquirer’s market cap, are underpinning this current uptick. This trend applies globally, but particularly in Europe and North America. Companies are not hesitating to make bolder plays on the back of a recovering economic environment and opportunities presented by a favorable foreign exchange (FX) environment. Recent examples reflecting these factors include the Nokia and Alcatel-Lucent merger and the Shell and BG Group deal.

In the search for external growth, during the past five years, companies have embarked on some of their biggest acquisitions. Some of the notable deals are NXP Semiconductor’s acquisition of Freescale, FedEx’s acquisition of TNT Express, XPO Logistics’ acquisition of Nobert Dentressangle and Cap Gemini’s acquisition of iGate.

Cross-regional: Average deal size ($bn) Bubbles represent deals with a value greater than US$10mm

444 601 835 1,005 1,197 820 617 567 777 962 1,066 1,343 1,321 770 1,000 1,065 967 862 894 248

603 813 1,065 1,300 1,533 1,065 820 793 1,093 1,326 1,565 2,099 2,028 1,237 1,687 1,699 1,493 1,300 1,338 334

Global

Europe

# of deals

# of deals

NA

# of deals 445 621 783 987 1,130 774 624 590 807 937 1,056 1,431 1,398 864 1,170 1,168 1,018 838 912 241

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD

215 236 341 391 405 249 222 218 228 262 352 395 299 256 323 317 359 355 465 577

234 243 398 438 456 265 248 223 240 305 389 476 376 322 363 348 376 387 530 627

234 258 390 435 445 245 231 239 221 280 353 466 328 274 292 305 381 362 509 517

24%

18%

2%

Average deal size Global ($mm) Average deal size EUR ($mm) Average deal size NA ($mm)

Source: J.P. Morgan, Dealogic as of April 30, 2015, YTD as of March 31, 2015 “Cross-regional M&A” is defined as a deal where the target and acquirer are from different regions

Exhibit 3


2. Knowing the drivers: The trends supporting the 2015 upswing

As CEOs of North American and Asian companies gain confidence in a recovering eurozone, they have increasingly made Europe their target region amid a global equity rally and continued compressed European valuations relative to their peers in other regions. Acquirers are taking advantage of these trends to embark on transformational deals using appreciated equity as an attractive alternative to straight cash – although the latter is usually the target shareholders’ preferred consideration of choice.

The eurozone recovery

As demonstrated in Exhibit 4, Europe is still slowly emerging from a recession that ended in 2012, and its economy is expected to grow 1.8% this year and 2% by 2016. Recovering at a quicker pace than Europe, the U.S. GDP is forecast to expand more than 3% in 2015 and 2016, providing further impetus to cross-regional M&A over the longer term.

GDP growth rates in major economies

8%

2.3%

1.5% 1.5%

7.7%

0.2%

2.2%

0.9%

1.4%

2.2%

0.8%

1.8%

3.1%

0.8%

2.0%

3.0%

0.9%

2.0%

3.0%

0.9%

2.0%

2.7%

1.0%

2.0%

2.6%

7.7%7.4%

7.1%6.8%

6.6%6.4% 6.3%

7%

6%

2012 2013 2014E 2015E 2016E 2017E 2018E 2019E

5%

4%

0%

-1%

3%

2%

1%

Europe US China Japan

(0.3%)

Source: IMF as of April 30, 2015

Exhibit 4


Attractive EMEA valuation levels

Enterprise value/EBITDA multiples for European targets purchased by U.S. acquirers in 2015 highlight why European companies are attractive. The average EV/EBITDA multiple of 12.4x is the lowest of any region. Forward-looking price/earnings (PE) multiples for European companies of 17.2x also show the valuation opportunity from a regional perspective, as weak earnings in a sluggish eurozone pressure valuations compared to other regions. By comparison, peer companies in North America and Asia are trading at median P/E multiples of 21.9x and 20.0x, respectively.

Exhibit 5

Cross-regional M&A transaction multiples by target region (EV/EBITDA)

20

13.0x 13.3x13.9x

13.9x

18.2x

13.5x13.5x

13.8x14.3x

11.5x 11.8x12.4x

17.3x16.6x

14.6x

12.4x

15.4x

13.1x

14.9x

17.0x16.1x

16.0x

12.6x

15.7x

11.1x10.4x

10.5x

8.1x

18

16

2009 2010 2011 2012 2013 2014 2015 YTD

14

12

2

4

0

10

8

6

EMEA NA APAC LATAM

Source: M&A transaction multiples are based on latest twelve months reported by Factset as of April 30, 2015, YTD as of March 31, 2015

Supportive FX conditions

For the first time since 2000, year-to-date data indicate foreign currency shifts are playing a significant role in the pace and flow of cross-regional M&A. Data shows that as the U.S. dollar rallied 27% over the last 12 months against the euro, major cross-regional deals by U.S. acquirers of European companies are fourfold higher year-to-date compared with the same period in 2014.

Other currencies are benefiting from a weak euro, such as the Japanese yen, which has appreciated 11% year-to-date. Concurrent with this appreciation, Japanese M&A has surged eightfold to $11 billion from the same period in 2014.


Transatlantic M&A by number of target deals

33% 27% 41% 62% 67% 63% 47% 33% 51%38% 52% 46% 59% 42%55%66% 79%

67% 73% 59% 38% 33% 37% 53% 67% 62% 48%49% 54%27.4x

11.4x

34% 41% 45% 58% 21%

20001999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

U.S. outbound into Europe Europe outbound into U.S.U.S. outbound into Europe (exit multiple) Europe outbound into U.S. (exit multiple)

EUR/USD

1.5

1.630x

20x

10x

0

(10x)

(20x)

(30x)

1.3

1.4

1.2

1.1

1

0.9

0.82015YTD

Source: J.P. Morgan, Dealogic as of April 30, 2015 vs. March 31, 2015

Exhibit 6

EUR benchmark rates remain near historic lows

6%

5%

4%

3%

2%

1999 2001 2003 2005 2007 2009 2011 2013 2015 YTD-1%

0%

1%

10 year German bunds5 year German bunds

Source: J.P. Morgan Markets, as of April 30, 2015

Exhibit 7

Golden financing opportunities

The combined low interest-rate environment and the search for enhanced profit growth is making M&A the preferred mode of capital deployment versus share buybacks and/or increased dividends. European Central Bank support via quantitative easing and the boost in demand for credit is central to this trend. With debt markets offering low-cost financing, acquirers are well positioned to raise capital for transformational deals. In addition, corporates have significantly de-levered since the financial crisis with the overall net debt percentage of total debt and market capitalization combined dropping to 13.4% in 2014 from 25.3% in 2008 for EMEA-based companies. Similarly, U.S-based companies experienced the same trend, paving the way for increased debt capacity for transformational deals.


Cash is king

Cash reserves available globally are equal to around $6 trillion, $1.4 trillion of which are held by European companies. In addition, U.S-based companies will continue to utilize their offshore cash to help facilitate foreign acquisitions. According to Moody’s, U.S. non-financial companies held $1.73 trillion of cash as of year-end 2014. Of this total, overseas cash is estimated at $1.1 trillion and has contributed to a 20% increase in acquisition expenditures to $322 billion in 2014, similar to levels seen in 2011 and 2012.

Increased activity in defensive sectors

Cyclical sectors generally drive upturns in M&A, since they rise and fall in concert with macroeconomic trends. Defensive sectors, such as utilities, have a low correlation to the economy. However in this current cycle, defensive sectors – particularly health care and telecommunications services – are supporting M&A growth. Healthcare has been in a period of consolidation as companies seek to replace expiring patents and make bets in the biotech sector, where advances in tailored therapies could yield significant profits downstream despite the lofty prices being paid. Telecom has also been another sector which has been going through a significant uptick in M&A. The U.S. market is less conducive for consolidation because the competitive landscape is already highly concentrated. In contrast, Europe has seen the lion’s share of activity, since it is more fragmented and its service providers are rapidly expanding into true quad-play (broadband internet, television, telephone and wireless).

The concentrated nature of current activity contrasts with deals during the leverage bubble, where there was unparalleled activity in all sectors and commodities featured significantly in global deals. In the current go-round, there has been a sharp global decline in mining and energy deals, as falling commodity prices exerted pressure on exploration and production projects. In Europe, for example, the number of natural resources and gas constituents with a market capitalization of more than $1 billion fell by 5% in 2015 compared to the same period in 2009.

Value of overseas cash held by non-financial U.S. companies (US$bn)

Source: Moody’s Investors Service Report as of May 7, 2015

2011 20132012 2014

Overseas Cash (US$bn)

700 840 950 1,100

Exhibit 8


The rise of Asian cross-regional appetite: Chinese buyers are diversifying and Japanese companies are seeking external growth

Today, the global consumer landscape is evolving. As living standards improve, consumers in developing countries are seeking to buy technology and luxury goods at a record rate. During the leverage bubble, commodities accounted for 11% of all Chinese outbound deal value, but, in 2015, commodities are accounting for just 4%. This is explained by the fact that disposable income in China is increasing at a five-year compound annual growth rate of around 11%, and private consumption in China, as a percentage of GDP, is expected to reach 43% in 2023 compared to 35% in 2013.

Japan, on the other hand, faces a different challenge. A declining population, which is expected to fall by 2% to 124 million by 2019, means that Japanese buyers will continue to invest in foreign companies to compensate for slowing domestic revenues.

Chinese investment into Europe and North America

1%1%

11%

87%

1%1%

91%

4%3% 2%

1%1%

1%1%

2% 1%

3%

2%

2%1%

1%1%

2%

87%

7%1%

2%

66%

19%

10% 1%

5%

66%

19%

4%

5%

72%

14%

11%

15% 26%6%8%4%

72%

9%

17%

15%

22%

5%

12%

38%

17%

26%

2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD

C&R Diversified FIG RE TMTHealthcare NRG

Source: J.P. Morgan, Dealogic as of April 30, 2015

Exhibit 9


3. Navigating cross-regional M&A Largest opportunities

Region-specific opportunities for clients

Inbound into Outbound from

Nor

th A

mer

ica

• Technical expertise, distribution, strong brands and diversification into a relatively stable and growing marketplace

• Exposure to North American markets

• Reduces single country exposure to home country

• Secure natural resources

• Continued search for growth and diversification

• Look to foreign markets for opportunities of high growth

• Re-domiciliation opportunity

• Opportunity to deploy cash trapped offshore

EMEA

• Current depressed valuations

• Local players refocusing and managing balance sheet may limit competing bidders

• Emerging markets as opportunity for growth and geographic expansion

• European companies seeking growth outside their challenged home market (due to issues surrounding the euro)

• Suffering from domestic economic weakness and limited capital inflows

• Middle Eastern sovereign wealth funds looking to deploy capital

Chin

a

• Large, high-growth end market

• Low cost base for multinationals

• Government ownership in Chinese companies continues to weigh on investment appetite

• Recent growth uncertainty

• Large amounts of available capital

• Increasing appetite for foreign investments

• Looking to acquire technologies, distribution, brands and know-how

Japa

n

• Lower growth than other Asian countries

• Government approval of M&A transactions can be challenging

• National pride/aversion to foreign investments

• “Abenomics” depressing yen and boosting the stock market

• Large amounts of excess savings with low return expectations in Japan

• Increased need to diversify, especially after the 2010 Earthquake

• Highly receptive to joint ventures

Oth

er A

PAC

• Higher expected growth with cheaper valuations relative to China

• Continued search for partnership and alliances with North America

Lati

n Am

eric

a • Provides access to large and growing markets (e.g., Brazil, Mexico)

• Regional proximity and existing relationships helpful

• Current FX dislocations offering attractive entry point into long-term growth markets

• Increasing interest of bids to go abroad to diversify in-country exposure

• Lowest level of M&A outflow relative to other regions

• Affected by recent volatility from spiking interest rates


Observations

• Most countries have sector-specific foreign ownership rules – Relaxations in foreign ownership thresholds create opportunities (e.g., Mexico, India)• Acquisition of targets by foreign acquirers is subject to regulatory review for national

security implications – No specific list of sectors, but common for aerospace & defense, energy, certain

technology companies• Political perception needs to be managed carefully

Ralls Corp

Foreign ownership restrictions

1

• In a cross-border transaction involving stock consideration, the target’s shareholders may be unable or unwilling to hold the acquirer's stock

– Results in temporary selling pressure on the acquirer's stock – Expected flowback is situation-specific and depends heavily on the target’s

shareholder base – Can be mitigated by proactive investor communication, dual listings/ADRs and

concurrent share repurchases

Flowback

2

• Risk that the home currency equivalent of the purchase price fluctuates between signing and closing if the purchase price is denominated in foreign currency

– Hedging strategies can be used between signing and closing• Risk from depreciation of the currency of the cash flows after closing vs. exchange

rate at the time of the deal• Emerging markets are subject to higher currency risk and hedges may be more

di�cult to put in place

Foreign exchange

4

• Local takeover laws/rules impact the structure and execution of foreign acquisitions – Shareholder vote requirements, mandatory o�ers – Financing requirements (e.g., “funds certain” requirement) – Deal protection

– Work council approvals – process to consult employees on any structural or transnational changes must be thoroughly completed through a centralized, representative group within the target organization

– Announcement obligations with respect to leaks

Takeover laws

5

• Need to consider Foreign Corruption Practises Act (FCPA) and local anti-corruption laws

• Di�culties to uncover issues relative to FCPA during due diligenceCorruption legislation

6

• Liquidity, exchange rules (including governance) and flowback are key considerations• Can maintain home country primary listing with no investor stigma associated with

foreign domicile• Alternatively, the combined company can elect another exchange as primary listing

and list ADRs in their home country – ADRs are liquid and well accepted by investors and have a long track record• S&P 500 inclusion for non-U.S. companies is generally di�cult but is a possibility for

certain jurisdictions

Listing and index inclusion

3

Six considerations for making the deal:


Transaction outcomes Acquirer Target Date Value ($bn) Premium¹ Strategic rationale

United States

France

Apr 30, 2014 24.1 23.7% • Alstom brings complementary technology, global capability, a large installed base and talent to GE

• Transaction enhances GE’s position as the most competitive infrastructure company with a specialty financial services business

“The combination of the very complementary Energy businesses of Alstom and GE would create a more competitive entity to better service customer needs.”

Patrick Kron, Chairman & CEO of Alstom, May 2014

Germany United States

Sept 22, 2014 17.0 35.2% • Increasing scale – expanding position in attractive life science industry

• Enhancing value for customers via strengthened offering, reach and operational excellence

• Closing the gap in U.S. – adequate presence in all geographies

• Leveraging existing platforms for global innovation rollout

“This transaction marks a milestone on our transformation journey aimed at turning our three businesses into sustainable growth platforms.”

Karl-Ludwig Key, Chairman of Merck, Sep. 2014

Spain Chile

Oct 11, 2014 7.3 67.2% • Entry into a key market in LATAM with immediate access to a leading market position

• Reinforces GNF’s leadership in gas distribution and strengthens electricity platform in LATAM

“It’s very material because it represents significant entry into Chile, one of Latin America’s largest and most stable markets. The acquisition of CGE enables Gas Natural to gain immediate scale in Chile.”

Rafael Villaseca, CEO of GNF, Oct. 2014

Spain Canada

Dec 16, 2014 13.5 45.6% • Geographic expansion into politically stable OECD countries

• Accelerate the development of Talisman assets in Canada

• Reinforce Repsol’s upstream unit by diversifying and improving the quality of assets

“This is a transformative and exciting deal which will make us one of the world’s most significant players and allow us to grow as a company and reinforce Repsol as a solid and competitive integrated player.”

Antonio Brufau, Chairman of Repsol, Dec. 2014

Appendix: Select cross-regional deals


Transaction outcomes Acquirer Target Date Value ($bn) Premium¹ Strategic rationale

Hong Kong United Kingdom

Jan 23, 2015 15.5 N/A • Enable the group to create the largest mobile telecommunications operator in UK in terms of subscriber numbers

• Enlarged scale of the Group’s mobile telecommunications business in the UK will enable the group to better meet and service customer requirements

“We are proud of the business built up by Three in the UK. It is a market leader in mobile data and customers benefit from a superior high speed data networks. The signature of definitive agreements with Telefonica today is a major milestone.”

Canning Fok, Group MD of HWL, March 2015

China Italy

Mar 23, 2015 8.8 11.2% • Reinforces coverage of strategic geographical areas

• Create long-term industrial value in the tire sector and strengthen Pirelli’s development plans enabling company to double its volumes in the industrial tire business

“We are delighted with the opportunity to team up with Marco Provera, Chairman and CEO of Pirelli, to continue to build together a world class organization and a market leader in the global tire industry.”

Jianxin Ren, Chairman of Chemchina, March 2015

United States

Netherlands

Apr 7, 2015 4.8 45.2% • Combination will transform FedEx’s European capabilities and accelerate growth

• High level of certainty

“We believe that this strategic acquisition will add significant value for FedEx shareowners, team members and customers around the globe. This transaction allows us to quickly broaden our portfolio of international transportation solutions to take advantage of market trends.”

Frederick W. Smith, Chairman of FedEx Corp, April 2015

Source: Company filings, Dealogic and FactSet; ¹ One-month premium ² Grid business, renewable energy, nuclear and steam business


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