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JUNE 2012

Appleby

21

Commenting on the report, Peter remarked: “The challenges ahead are manifold, but there are ongoing signs of real buoyancy in Asian and other emerging markets.” When asked what these challenges would be, he continued: “I believe that the key challenges that lie ahead for the offshore M&A market are in the context of the global economy, and the uncertainties about its continuing direction.

“There is uncertainty in Europe, a combination not only of the crisis relating to Spanish, Portuguese and Italian economies, but also those other economies of the European Union that have slipped back into recession. In the U.S., there are some sign of a weaker patch, for example in terms of the recovery of jobs in the U.S. economy, and concerns that stronger growth may not return for the balance of this year.

“These things taken together, with concerns about the strength of growth in the Chinese economy, mean that although there are different sectors of the global economy and in particular some regional economies, which may fare well, the future still has great uncertainty in it.

“That lack of certainty affects the valuation of businesses that may be considered for acquisition, the pricing of initial public offerings, the comfort of businesses as to their ability to sustain the cost of acquisition and the availability of funding.

“While it is perfectly clear that the global economy is considerably better off than it was 3 years ago, there is, it would appear, no widespread belief that it has returned to strong or consistent growth. That inconsistency and periodic weakness undermine the willingness to commit to transactions.”

According to the report, M&A levels have decreased compared to the same period last year. When asked to what Peter attributes this decline, he explained: “Our markets are not immune to the global economic pressures, of course, and in the period under review the United States economy faltered amid fears that the recovery would continue to be lacklustre at best. That inevitably impacted business in the offshore jurisdictions of Bermuda and the Cayman Islands, which derive the bulk of their business from the United States. Continuing uncertainty about the Eurozone, and the potential contagion from Greece of the sovereign debt crisis into the Spanish and Italian markets hit deal drivers elsewhere. The threat of a slowdown to the seemingly unstoppable Chinese growth story further dented confidence. There are no specific issues, relating to any of the offshore jurisdictions that we cover in our report, nor any

particular local factors that affect the viability of M&A activity in those jurisdictions - if anything, the continuing pace of law reform, in order to provide more effective mechanisms for corporate transactions, will likely make it easier for such transactions to be undertaken as a technical legal matter, while business confidence rebuilds.”

The future for the offshore M&A market will be one of continuing development and greater sophistication.

Commenting on whether this trend will continue, or if there is real reason for optimism, Peter continued: “All jurisdictions are continuing to witness the conservatism that has become a mainstay of M&A today, driven by uncertainty about future growth prospects, liquidity challenges and pricing concerns. That said, experience tells us that deal activity is usually more robust in Q2 than Q1, and we have no reason to think this year will be any different. There are ongoing signs of real buoyancy in Asian and other emerging markets, and robust activity in the financial services and natural resources sectors, which should fuel some optimism. Despite the continuing uncertainty, the signs still seem to be that growth exists in the U.S. economy and that the recession being experienced in certain European economies are relatively mild. Additionally, the review of certain of the European banks by way of "stress tests" seem to suggest that all is not as bad as had been feared. Accordingly, while we are not expecting any early return to strong growth, we are optimistic that deal activity will continue and indeed will probably increase in the next quarter, as fears of a second significant global decline continue to recede. Again, there is nothing particular to developments in any of our offshore centres which relate to this trend.”

According to the report, the ‘most popular destinations for investors doing deals involving offshore targets are Hong Kong and the Cayman Islands’. Peter went on to explain the reasons for this. “The strength in Hong Kong deals is entirely understandable in the context of the current macroeconomic situation, with Asia providing the source of a significant amount of deal activity,” he said. “These markets are not shielded from the events occurring in the US and European

economies, but have strong domestic growth stories that continue to fuel demand. Many of the deals going through Cayman in Q1 are likely to have had some Asian involvement as well, given that Cayman has emerged as a preferred jurisdiction for companies entering into transactions across the Asia Pacific marketplace. As an example, Indonesia is undergoing a period of sustained growth, which a number of our clients have benefited from. That growth and the ability to structure effectively for efficient investment through offshore vehicles will continue to drive interest in Asia and the use of the traditional offshore structures such as Bermuda, Cayman and BVI for such investments, but also the creative use of Seychelles and Mauritius with their double taxation treaty networks for more sophisticated structures.”

When asked to comment on the current mood amongst practitioners within the Offshore M&A market, Peter said:

“Generally speaking the mood is cautiously optimistic. We believe that there is a gradual return to M&A activity, but the frequency of transactions is still not at high levels compared to the historic levels and as has been noted in the re- port, we expect the offshore field to develop only after a more sustained flow of transactions onshore. We expect that the interest in investment in developing markets, whether Africa, Asia or Latin America, will fuel growth in the M&A market in the offshore world in particular.”

Looking to the future, Peter concluded: “The future for the offshore M&A market will be one of continuing development and greater sophistication. Offshore jurisdictions are seeking to put in place more efficient structures for the undertaking of corporate merger activity, e.g. providing for the alternatives of mergers (two entities which combine and one survives ) or amalgamations ( two entities combine and each of them survives in the remaining surviving entity). The development of these more sophisticated arrangements and structures are intended to provide opportunities for the continued efficient use of offshore vehicles, which provide speed, low cost and efficient vehicles for undertaking transactions and for access to capital markets. We expect that this process of change will continue and grow in its sophistication and use.” LM

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