January 25, 2019

Cross-Border M&A in a Protectionist Environment

The Trump Administration’s emphasis on an “America First” policy when it comes to trade and foreign affairs generally has had significant implications for how companies conduct business – and this PwC blog says that their M&A activities are no exception.

The blog points out that cross-border deals have typically represented about 25% of US deal volume in recent years, and that ongoing trade tensions could prompt some companies to focus more on in-country transactions.  And there’s some evidence that this is already happening – after a year of steady growth, the number of outbound US deals dipped by about 20% in the third quarter of 2018.

Despite the challenges, many companies remain interested in expanding their global footprint. This excerpt has some tips for companies pursuing cross-border deals in the current environment:

– Reconsider deal size. Many deals blocked recently by the US and Chinese governments have been at least $1 billion in value, and in some cases much more. That magnitude may have been a factor in government scrutiny. More moderate acquisitions may raise fewer concerns and still allow a company to move forward with its growth strategy.

– Smaller countries out of the tariff spotlight may yield possibilities. Some emerging markets have emerged, and economic power is dispersed. With information barriers largely gone, cities are more connected than ever. An urban hub in a less developed nation could offer similar quality investments to traditionally targeted countries.

– Some sectors don’t rise to a high level of regulatory scrutiny by the US and other countries, or they don’t involve as many atypical risks, even with expanded government reviews.

On this last point, while tech has been the hottest sector when it comes to cross-border transactions, deals in that highly-scrutinized sector still accounted for only 30% of cross-border M&A volume in 2018. As the blog notes, “that leaves 70% across a wide range of industries, including some – such as consumer products, real estate and certain manufacturing – in which the security and intellectual property concerns likely aren’t as great.”

Check out this Baker McKenzie memo for a region-by-region breakdown of expectations for global M&A and IPOs during the upcoming year.

John Jenkins