What Does The Future Hold For Cross-Border M&A?
Cross-border M&A has been a crucial mainstay of strategic growth and development for Multinational companies. Allowing emerging economies to gain a foothold in established markets and giving firms access to new markets and customers, it is easy to see why cross-border transactions have rapidly become a fundamental characteristic of the modern global business landscape. In an increasingly interdependent global economy, it would appear that cross-border M&A would, in theory, be the future driver of all deal activity. Yet despite this in recent years, we have seen numerous underlying trends that do not reflect these glowing prospects.Even prior to COVID-19, the rise of populist political tendencies, regulatory and geopolitical uncertainty, a pickup in domestic consolidation and a decrease in Chinese outbound M&A activity had resulted in cross-border M&A falling 25% in 2019 [1]. The pandemic has only accelerated these trends.
The Rise of Protectionism
Following the global financial crisis, we have seen countries lose faith in the social benefits of free trade and the rise of populist and nativist political tendencies on a global level. Populist governments tend to look at acquisition of domestic firms by foreigners with a greater level of scrutiny. These deals are often met with resistance from both governments and non-government groups when it is viewed as hurting economic and political interests. This has led to the emergence of protectionism and arbitrary impingement of globalisation. These protectionist policies thwart global trade, setting off a chain reaction across government levels to protect assets in the name of national security and technological exclusivity. Domestic M&A made up 70% of global M&A in 2019, a decade high for the share of domestic M&A activity, as dealmakers have looked to facilitate deals within national boundaries to avoid increasing scrutiny, political risks and delays [2].
Following the outbreak of the pandemic, this trend towards protectionism has only increased. On June 21st 2020, the UK Government announced that it is introducing emergency legislation that will bolster its powers to scrutinise, and potentially block, foreign takeovers on new public interest grounds [3]. Spain, Italy and France have all implemented similar policies.Here governments have sought to move quickly to protect struggling businesses from opportunistic foreign buyers looking for distressed targets. Indeed, while there is still a degree of uncertainty in the global markets, there is nonetheless scope for such opportunistic acquisitions, perhaps especially by Chinese and Japanese buyers, who have emerged from lockdown restrictions much quicker than the rest of the world [4].
Chinese Issues
The global financial crisis of 2008 was a catalyst for Chinese outbound investment. With a more closed off economic system, China was in a relatively good position to ramp up overseas investment and took advantages of falling overseas asset prices. Over the next decade China gradually increased its outbound M&A, peaking in 2016 with over $200 million worth of outbound deals. However, in 2019 US – China trade tensions, combined with greater regulatory and political scrutiny abroad have dampened Chinese acquirers’ appetite for cross border deals, with only $41 billion in outbound deals this year, nearly halving from 2018 and less than a fifth of the 2016 peak [5].
Do TikTok and Grindr Pose a Threat to National Security?
Motivated to reduce the trade deficit, Donald Trump imposed severe tariffs on Chinese goods, what ensued was a chain effect, with China retaliating and imposing equally severe tariffs. This is what political commentators have labelled as the “Weaponization of Global M&A” – the use by national governments of the tools of regulation of M&A to advance, explicitly or implicitly, domestic political and trade agendas. The US uses the Committee on Foreign Investment in the United States (“CFIUS” or the “Committee”) to scrutinise cross border M&A that they deem to be a “threat to national security.” In May 2019 CFIUS required Beijing Kunlun Tech Co. Ltd to divest from Grindr LLC, a dating app, due to concerns about foreign access to US citizens’ personal information. More recently, the CFUIS have launched an investigation into ByteDance, TikTok’s parent company, a Chinese technology firm headquartered in Beijing. The CFUIS have concerns over data security and the spread of Chinese propaganda on Tiktok. According to TikTok’s privacy policy, the app “automatically collects” users’ IP address, geolocation-related data, unique device identifiers, browsing and search history, and cookies. This data includes information users share from “third-party social network providers.” Though most social media apps have similar policies, TikTok’s identity as a company based in the People’s Republic of China makes its data access potentially troubling [6]. The most likely CFUIS response is forcing TikTok to restructure in a way that further separates its US presence from its Chinese one. Though a “Tiktok Ban” is a still a possibility. The Trump administration could order the Commerce department to place TikTok on an “entity list”, as they did to Huawei, in which limits its commercial ties to US companies and would force Apple and Google to remove TikTok from their App Stores.
This protectionist environment between the world’s two largest economies has caused outbound deals from China into the United States to plummet 80% in a year to $2 billion [7].Despite this, Popeyes is expecting to open 1500 stores in China, Costco opened its firsts store in Shanghai and is expecting to open more, Tesla has opened a factory in Shanghai, Universal is planning to open a Theme park in Beijing and Exxon is in talks to build a new plant in China [8].Fundamentally we are seeing US multinationals back the long-term growth of China over the geopolitical and supply chain risks that come from operating there.No matter the circumstance, it is inevitable that the world’s two largest economies will continue to deal with each other.
COVID Hit Supply Chains
COVID-19 has been wreaking havoc on supply chains. Many products and services in the UK depend on fast, efficient supply chains, which are highly integrated and often operate cross-border. Modern day suppliers have various third parties involved in their supply chain, such as storage solutions and logistics providers, without even realising. Supply Chains are becoming more intertwined and complicated, as well as becoming increasingly dependent on technology which can be just as complex. Firms have realised their supply chains are not as diversified as once thought. Though they do have alternative first line suppliers, they may be reliant on the same tier 3 or tier 4 suppliers. If the suppliers are brought to a halt this could threaten a firm’s entire operation. To mitigate this risk in the future multinational companies are looking to diversify their supply chains. Apple, for instance, had bet heavily on China as a manufacturing hub, but is now looking at options outside China in reaction to both the trade war and the wreaking supply chains caused by the coronavirus. Apple are looking at options in South East Asia, not America [9] [10].
The Future of Cross-Border M&A
Fostered by an increase in protectionism and the effects of COVID-19, we are now seeing a phenomenon where domestic M&A is significantly more attractive than cross-border M&A. However, we are by no means seeing the end of cross border commerce. Two decades of global integration has ensured global supply chains have become deep and complicated. These relationships are durable and will be difficult to sever. Low interest rates, high levels of QE and the heaps of dry powder (capital available to invest) in the private equity industry have created the perfect climate for leveraged buyouts and distressed M&A acquisitions to thrive in. These acquisitions will drive M&A in the second half of 2020, both domestically and internationally. Ultimately COVID-19 has changed cross-border commerce and globalisation forever, the next chapter will be defined by our ability to reignite trade, by removing unnecessary regulation and reshaping our supply chains.