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BUSINESS DAY
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Monday 01 April 2019
ANALYSIS
FT
Megadeals keep M&A market bubbling despite slowdown fears The $927bn of deals in quarter marks second strongest start to year since millennium JAMES FONTANELLA-KHAN, ARASH MASSOUDI AND DON WEINLAND
A Wirecard’s problem partners Half of the German company’s revenues come from partners but at some there is a mismatch with the reality on the ground DAN MCCRUM AND STEFANIA PALMA
A
gostin Antonio was mystified. A retired seaman living quietly with his extended family of 12 in a suburb of the northern Philippine city of Cabanatuan, he had no idea why a company called ConePay International had used his address. But the name did ring a bell. Avoiding the laundry drying in the front porch and stepping over his grandchildren playing at the kitchen door, Mr Antonio disappeared back into his typical single-storey home, emerging a few moments later with a large white envelope. Addressed to ConePay, the letter had arrived in the mail about a year ago, a single missive from an entity called Wirecard Bank. It was a 10-page set of statements for empty German bank accounts held in a string of currencies — Australian, Canadian and Singaporean dollars and British pounds. Mr Antonio didn’t know anything about Wirecard Bank either. “This house was my mother’s. It’s been with the family for 50 years.” It was an unlikely location for an international electronic payments business. ConePay is one of more than a dozen curious companies identified during an Financial Times investigation which, on paper at least, appear to have done substantial business with Wirecard, a digital payments group that ranks as an elite German blue-chip institution and one of the most successful fintech businesses in Europe. Wirecard often encounters online businesses for which it does not wish to process payments due to network payment rules, because it lacks the appropriate licences or other potential risks. The clients are referred instead to so-called “third-party acquirers”, which share processing fees with the German group as commission. Known internally as “referring”, it is by some distance Wirecard’s largest business line. The FT has been told by whistleblowers that at the start of 2018 it was expected to contribute half of the €2bn in worldwide sales Wirecard forecast for that year. The company confirmed the magnitude of such business, which it said was declining. It said nearly half its transaction volumes originate from countries where it does not hold the necessary payments licences, so it partners with “more than 100 processors, acquirers, issuers and local service providers” which do. Wirecard said every multinational payments processor relies on such networks, and its accounting treatment of the resultant revenues and costs is consistent with international standards. Processing payments for the murkier parts of online commerce
is highly lucrative. However, Wirecard said less than 10 per cent of its volumes “relate to lottery, gambling, dating, adult entertainment and associated business models”, and strict compliance and governance rules apply. The outsize revenue contribution of referring partnerships has not been a highlight of management commentary in recent years, as the company has explained its breakneck growth in terms of technological advances and Asia Pacific expansion. Longstanding and large commercial debts owed to Wirecard by these secret partners, revealed today by the FT, raise questions about the robustness of the sales and profits attributed to them. ConePay, incorporated at the house in Cabanatuan three hours’ drive north from the capital Manila, was the source of millions of euros in commission income accrued by Wirecard’s Singapore business in recent years — revenues that the FT has discovered often lacked the paperwork to justify them and that Wirecard’s accounts staff in the region failed to collect for more than three years. Police from Singapore’s commercial affairs department are investigating whether senior Wirecard staff have been using fake companies and doctored contracts to boost revenues artificially over several years. The probe follows a preliminary investigation last year by Singaporean law firm Rajah & Tann, which found evidence of suspected fraud, forgery and money laundering. At the end of January, the FT published details of that R&T report. Following a fall in Wirecard’s share price, it claimed manipulation by short sellers. In response, prosecutors in Munich opened an investigation into market activity and BaFin, Germany’s financial regulator, slapped a unique ban on short sales of Wirecard stock, citing risks to the economy and market stability. On Tuesday, Wirecard published its own summary of R&T’s summarised findings submitted to the company. It said a few Singapore employees may face “criminal liability”. It also said R&T “could not correlate certain payments made between business partners and Wirecard entities with agreements between them”. The company said it since had improved internal processes. Wirecard also announced that an accounting review of transactions was undertaken by an independent consulting firm. It said “the independent review made no findings of round tripping or corruption”, and that no finding had a material impact on the company’s financial results. Round tripping is the process of making money transfers in and out of a company look like revenue
derived from legitimate business. Further investigations by the FT have identified a vivid mismatch between the supposed scale of the partner businesses to which Wirecard entities have ascribed substantial revenue, and the modest reality on the ground in countries such as the Philippines. For instance, a predecessor of ConePay, Maxcone, gave as its address in 2015 what is currently an empty warehouse and office on a scruffy street in the southern Metro Manila city of Las Piñas, formerly occupied by a garage called Sam’s Autoworx and a bar called Hrai. When visited by FT reporters earlier this year, the local government office responsible for business permits knew of no payment company ever operating in its district. The registered office of two other Wirecard partners, Centurion Online Payment International and PayEasy Solutions, is found in an office building by Manila Bay, in Metro Manila’s city of Pasay. While PayEasy logos are plastered over the office, the space doubles up as the headquarters of Froehlich Tours, a bus and coach rental business that operates across the country. PayEasy and Froehlich Tours are owned by Christopher Bauer, a German former Wirecard Asia Pacific executive, and his wife Belinda Bauer, according to public filings. Centurion has made no filings since 2013. Both Bauers have represented Centurion in interactions with Wirecard. Pinned to a wall of the office was a memo to staff signed by Mr Bauer, whose Facebook profile in 2016 described him as chief executive of Froehlich Tours. He told the FT he was just an investor, and that as a board member he “does not have much to do with the day-to-day operations” of the bus company. He also denied having a managerial role in PayEasy, which he said provides payments solutions for commuter services offered by the bus firm. Wirecard describes itself as an integrated payments group which provides services such as pre-paid cards and a digital payments app. It also offers back-office support and refers business to scores of affiliated smaller companies offering payment services. What links these specific Wirecard partners in and around Manila is that their names are on stacks of unpaid bills, some lingering for years, sitting in the books of Wirecard’s accounts processing department in Singapore. Staff at Wirecard’s cash-strapped business in Singapore struggled to collect money they believed was due from ConePay and Centurion — or even produce paperwork required to justify the debts, according to whistleblowers.
flurry of US megadeals has turned the first three months of 2019 into the second strongest start to a year for dealmaking since the turn of the century. Deals worth $927bn have been agreed so far, according to data provider Refinitiv, in a clear sign that animal spirits among large companies are alive despite the looming spectre of a recession. The total is down 17 per cent from the rapid-fire start to last year, which was fuelled by the Trump administration’s corporate tax reforms. But it is up 22 per cent from the final quarter of last year, when a credit crunch and market turbulence spooked corporate bosses. The data shows the M&A bull run that commenced more than five years ago still has some room ahead of it but there are also some alarming signs, advisers said in a series of interviews. “The start of the year has been mixed,” said Anu Aiyengar, head of M&A in North America for JPMorgan Chase. “We’ve been very happy in terms of big deals but we need more deals overall.” Most of the activity has been driven by a small number of deals above $10bn. These include BristolMyers Squibb’s $90bn takeover of rival drugmaker Celgene; Saudi Aramco’s $69bn majority stake acquisition of petrochemicals group Sabic; and Fidelity National Information Services’ $43bn purchase of payments group Worldpay. In contrast the number of transactions dropped by a third from a year ago to 8,765 deals, the lowest in more than a decade. Some dealmakers believe this indicates CEOs’ fears that an economic slowdown is on the horizon. Jennifer Perkins, corporate partner at law firm Kirkland & Ellis, agreed that “everyone is talking about a recession” but she said even this would not necessarily mean the end of dealmaking altogether. “Everyone thinks there is something coming, it’s just a question of how severe, but dealmaking will continue through that although it might look a little different, with some companies making more countercyclical acquisitions,” said Ms Perkins. One alarm bell over the general state of M&A is the sharp slowdown in cross-border transactions, which fell by nearly 50 per cent as buyers tended to seek transactions in their domestic markets. Overall, the US market led the activity, with a total of $489bn worth of deals announced, 9 per cent higher than a year ago and the strongest first quarter since 2000. That pick-up stood in contrast to Europe, where activity dropped 67 per cent to $115bn as dealmakers said Brexit and questions over growth sapped enthusiasm from the C-suite. Chinese companies have done about $10.6bn in outbound deals so far this year, down from $25.2bn at the same time last year with Chinese regulators seeking to stop capital flight and countries such as the US blocking Chinese technology investments. But bankers and lawyers in Asia are homing in on another type of China deal: multinationals selling parts or all of their China units as the business environment deteriorates. Vanessa Koo, head of banking in Asia-Pacific at Barclays, said multina-
tional companies “are adjusting their strategies in China through partial of full exits. Some are partnering with national champions. Some are focusing more on their home markets.” The megadeals roll on Size and scale increasingly matters. In a world where companies are at risk of being disrupted by massive tech companies such as Amazon, Google and Netflix, striking transformative large deals has become an obvious defence mechanism. The fear of being driven out of business has been one of the key drivers for the 11 companies that agreed to spend more than a combined $400bn on acquisitions with a valuation higher than $10bn in the first quarter, according Refinitiv. “Companies are doing big deals for a number of reasons. The key drivers are growth, cheap debt and strategic motivations,” said Ms Aiyengar. She added: “Another important catalyst is that CEOs and boards are getting rewarded by shareholders for smart deals. The stock price of the acquirers has risen in most deals, which is not a given.” Danaher’s stock jumped 8.5 per cent after it agreed to buy General Electric’s life sciences unit for $21bn. Shares in BB&T jumped 4.5 per cent after announcing its $28bn merger with SunTrust. Such positive reactions were not the case for all deals. Bristol-Myers Squibb’s shares plummeted 15 per cent after revealing its $90bn Celgene deal and it is gearing up for a fight with investors who want to stop the deal from closing. The same was true for two large financial data and technology deals, FIS’s takeover of Worldpay for $43bn, and Fiserv’s acquisition of First Data for $39bn, which both suffered sharp drops in their stock after their plans were announced. James Fontanella-Khan Still waiting on the mega LBO Private equity groups remained a major feature of dealmaking in the first three months of 2019, even as a widely anticipated rush of leveraged buyouts greater than $10bn in size failed to materialise. Only one buyout registered above the megadeal hurdle, with Hellman & Friedman agreeing to buy human resources firm Ultimate Software Group in a $11.2bn tie-up. Just over $90bn has been put to work globally by private funds, representing about 10 per cent of all dealmaking in the quarter. Overall buyouts were down 8 per cent from the same period a year ago, but up slightly on the previous quarter. Other notable deals included the $6.5bn buyout of online listings company Scout24 in Germany by Blackstone and Hellman & Friedman as well as Brookfield’s $4.7bn acquisition of distressed investor Oaktree Capital. Alison Mass, who runs the financial and strategic investors group at Goldman Sachs, said that while there have been fewer big deals, the backlog of potential activity was strong. “Dry powder is at historically high levels, capital markets are wide open and we are anticipating another strong M&A year for PE firms in 2019.” Jitters in public markets last year with financing becoming less readily available for buyout deals slowed activity in the first quarter but industry insiders expect things to pick up, especially after the US Federal Reserve calmed financial markets by pausing plans to raise interest rates.