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U.K. public markets remain an attractive hunting ground for U.S. bidders

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Part of our report

Global M&A Insights Q4 2024
Published Date
Dec 17 2024

U.S. acquisitions of U.K. listed companies have traditionally been a staple of global deal flow. This year is no exception, although the volume of attempted bids far outweighs the number of completed deals. Buyers need to understand the unique features of the U.K. takeover regime to ensure their transactions succeed.

Transatlantic public M&A involving U.S. bidders and U.K. targets has long underpinned global deal flow, with U.S. corporations and private equity sponsors originating more inbound takeovers of U.K. listed businesses than investors from other countries. Indeed the size and volume of these deals is often seen as a key indicator of the strength of the global M&A market, and of the confidence levels of corporations and their boards to seek international growth and scale. 

So far in 2024 we have seen a return of significant transatlantic public M&A activity, with acquisitions of U.K. listed companies by U.S. acquirors worth USD15.2 billion in the period to mid-October, almost double 2023’s annual total of USD7.7bn. A number of these deals have been competitive, and some have seen all or part of the consideration made up of shares issued in a listed U.S. acquiror.  

 

Several factors are driving this uptick in activity. Corporates have been far more active in what has at times been a private equity-dominated market in recent years, driven by greater confidence in their businesses and the broader economic outlook, the desire for scale and synergies to address higher costs, and a more favorable financing market. This has been coupled with slight improvement in private equity deal activity after an extended lull in 2022 and 2023.

Relative strength of U.S. equity markets makes many inbound bids attractive

Where deals involve an offer of U.S. listed shares as consideration, clearly the synergy value is an important component of the value opportunity presented to the target company's shareholders. However, key to the narrative has also been the chance to realize a re-rating of shareholders’ equity to reflect the typically higher multiples that the acquiror’s stock trades at the U.S. market.

This is part of a recent and much broader market theme involving the relative strength and competitiveness of the U.S. compared to other jurisdictions, which in some cases has seen companies move their place of listing to the U.S. outside of an M&A context.

U.K. takeover rules create a competitive market for bidders

Bidders have found it hard to execute in 2024, with the number of approaches made to U.K. targets far exceeding the volume of announced and completed deals. In many of these cases the target’s board has been robust in its assessment of value, with a 30%-40% bid premium (historically considered the benchmark) not enough to obtain a recommendation. At the same time, several deals have not proceeded on the basis of issues arising in due diligence.

We have also seen greater competition for U.K. public companies, with U.S. corporations prepared to engage in the level playing field the U.K. regime creates for contested takeovers. U.K. boards are permitted to switch their recommendation to another bidder during a transaction, so the initial bidder needs to make its package as attractive as possible, not just in terms of price but also in relation to certainty and speed of execution.

The price of a target board recommendation is not necessarily as high as the price required to discourage other bidders from entering the race. We have seen examples of bidders being pushed to terms higher than those which may have caused a potential interloper to think twice about intervening had they been offered from the outset.

Aspects of U.K. public M&A regime are unique in global markets

Many aspects of the U.K. regime for public M&A are unique among the major global financial centers, and certainly compared to the regulation of U.S. public company transactions.

  • Deals are overseen by the Takeover Panel, an organization which is independent of government and the financial regulator, the Financial Conduct Authority.
  • The Panel has a high degree of discretion to apply the rules of the Takeover Code in a manner that it considers achieves their underlying purpose, which at a high level are to "ensure fair treatment for all shareholders and an orderly framework for takeover bids".
  • The rules themselves are principles-based and not written in the technical language of legislation.
  • The Panel comprises a combination of permanent staff and M&A practitioners on secondment (mainly from investment banks and law firms), and is heavily involved in the day-to-day running of deals.
  • Its rules require advisors to consult with the Panel on any matter of interpretation of the Takeover Code rather than to form their own view. As a result, many key issues on a deal involve a real-time discussion with the Panel. The U.S. approach is very different in this regard, with the SEC’s role more focused on compliance with detailed rules and regulations primarily dealing with appropriate disclosure.
  • The Panel also has authority over certain aspects of a transaction, such as the circumstances in which a regulatory condition can be invoked, which in the U.S. are largely a matter of contract between the parties, and ultimately the courts in the event of a dispute. 

The Panel system of M&A regulation in the U.K. takes some getting used to for those unfamiliar with the process. However, parties often recognize the benefits of being able to speak to an experienced M&A practitioner at the regulator who can provide certainty and quick decision-making (often 24/7) on a live issue.

U.K. vs U.S. M&A regimes – key differences compared

Clearly every transaction is different and expert advice should be sought in each case. However, we set out below some of the key differences between the U.K. and U.S. public M&A regimes which are important to understand before embarking on a takeover of a U.K. listed company.

M&A issueU.K. regimeU.S. regime
Leaks
  • The Panel may require a leak announcement at an early stage if there is press speculation or an untoward price rise after the point at which a bid is “actively considered” by the potential bidder.
  • The risk of a leak announcement is heightened on approaching the target.
  • The financial advisor leads engagement with the Panel on whether a leak announcement is required.
  • If it is, the Code imposes a 28-day deadline for the bidder to announce a firm offer (fully financed, due diligence complete) or walk away.  This can be extended by the target.
  • A maximum of six external parties (excluding advisors) may be brought inside before announcement.
  • As a general matter, no requirement to disclose approaches and negotiations in response to inquiries, and therefore most companies adopt a “no comment” policy in the event of a leak. 
  • A party may not remain silent about negotiations, however, if silence would result in a temporally relevant disclosure becoming inaccurate or misleading. 
  • Also, “no comment” typically does not work in response to an official inquiry (e.g. resulting from unusual trading or market rumors).
  • However, stock exchanges will be reluctant to accept “no comment” in response to an official inquiry. 

 

Due diligence
  • Typically more limited than in private and U.S. M&A deals.
  • Any due diligence information provided by the target must also be given to other potential bidders that may emerge, even if less welcome, which naturally constrains what information may be forthcoming.
  • Similar to the U.K. position, however no rule requiring that all bidders be given the same due diligence information, even though the result in practice may be the same. 
Deal protection
  • The target is prohibited from agreeing most deal protection measures with a bidder (e.g. break fees, no-shop, matching rights, etc).
  • The target can commit to assist with regulatory clearances, but the board is otherwise free to withdraw and switch its recommendation.
  • Reverse break fees are seen where there are substantive regulatory risks and/or bidder shareholder approval is required.
  • Bidders focus on director and shareholder irrevocable undertakings, price, speed and execution certainty to impose hurdles for potential interlopers.
  • Deal protection measures are ubiquitous in U.S. transactions, which typically have a no-shop covenant, with a “fiduciary out” – an ability for the board to change its recommendation and terminate the agreement upon payment of a break fee (which typically is between 2% and 4% of equity value based on constraints imposed by fiduciary principles under Delaware law) and matching rights. 
  • Some U.S. transactions include a “go shop”, which permits the target company to shop itself to others for an agreed number of days after signing, typically with a lower break fee payable if an alternative deal is struck during this period. 
  • Reverse break fees are common to address substantive regulatory approval risks. No upper limit on reverse break fees imposed by applicable law, so on average, amounts tend to be higher than typical break fees.
  • Tender/support/voting agreements with directors and significant shareholders are common. 

 

Regulatory conditions
  • Panel requires all reasonable steps to be taken to satisfy conditions.
  • Panel will not permit a condition to be invoked unless circumstances are of material significance in context of offer. Panel will apply this test to a remedy required by a regulator to the extent known before the long-stop date.
  • Target companies typically negotiate contractual commitments to obtain regulatory clearances, which exist alongside Panel regime, although litigation is rare.
  • Long-stop date is a key focus, in particular whether it should accommodate a second request/in-depth review notwithstanding financing cost of longer period.
  • Unlike in the U.K., the parties are free to agree on conditions to the transaction by contract and the SEC and courts will not intervene in what those conditions are. 
  • Similarly, invocation of a condition is a matter between the parties (and ultimately the courts if there is a dispute as to whether it was properly invoked) and not something the SEC is involved in. 
  • Similar approach to U.K. around negotiation of contractual commitments to obtain regulatory clearances and long-stop date. 
  • Litigation more common in the U.S. 
MAC and other general conditions
  • Very difficult to invoke. Bidder can improve ability to invoke by including specific negotiated conditions and clearly disclosing to shareholders the circumstances in which bidder would seek to invoke. 
  • Again, parties are free to agree contractually on the conditions to the transaction, and the SEC will not get involved. MAC provisions in the U.S. rarely include specific triggers, leaving this to the parties' (and courts') interpretation However, similar to the U.K., the no MAC condition is very difficult to successfully invoke – a landmark Delaware case in 2018 marked the first ever successful invocation of a MAC in Delaware. 
Deal structure
  • Scheme of arrangement most common structure on recommended transactions – requires two-limbed shareholder approval: (i) majority in number; and (ii) 75% by value, in each case of shareholders voting.
  • Statutory merger most common structure in friendly transactions, which requires (in Delaware) the affirmative vote of a simple majority of the target’s outstanding shares to approve. 
  • Tender offers are also fairly commonly used in situations where speed is paramount and the regulatory approval process can be completed very quickly, as well as in hostile situations. 
Financing
  • Certain funds required at time of firm offer announcement (full financing documentation). Financial advisor must provide cash confirmation statement and will appoint own counsel to verify source(s) of funds.
  • No certain funds type rules or cash confirmation as in the U.K., but rather a matter of contract between the parties. 
  • Typically acquiror will provide target company with signed debt commitment letters that, subject to limited customary conditions, require the lender party thereto to provide the required debt financing at closing. 
Intention statements
  • Bidder must disclose intentions for the business, locations, management, employees and R&D (pre-vetted by Panel before deal is announced). Panel review after 12 months to ensure compliance. 
  • No similar requirements in U.S. transactions, though often, as an IR, PR and retention matter, buyers will explain their plans at a high level to market the transaction.
Management incentives
  • Any post-completion incentives package requires full disclosure and fairness opinion. Equity arrangements (outside ordinary course awards) or unusual incentive arrangements can require separate shareholder vote. Incentive arrangements often deferred until post-completion.
  • Disclosure will also be required, but no requirement to obtain a fairness opinion. 
  • Certain arrangements may require a shareholder vote, but these are not that common in the typical U.S. public company transaction as they are usually handled post-closing once the target company is no longer public. 
  • Arrangements with target company management will generally not be negotiated until key deal terms, including price, have been agreed.

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