Insights

A Closer Look at the Ongoing Decline of Cross-Border M&A Deals
POSTED 3.13.19 M&A

Domestically, the trend for M&A is robust, with nowhere to go but up in the next year in terms of the number and size of deals. There were $2.2 trillion in M&A transactions in 2018, with six deals above $50 billion. That’s the fourth year in a row above $2 trillion. Median deal sizes are also going up, doubling in the last four years to hit $60 million in 2018.

It’s a rosy picture on the domestic front.

But when it comes to cross-border deals, in which a foreign company acquires a U.S. company, we have a seen a slowdown.

According to a recent report from PitchBook, cross-border activity decreased in 2018, hitting the lowest level in four years, continuing a trend that started in 2017. There were only 2,192 cross-border transactions worth $655.6 billion in 2018, compared to 2,983 in 2015.

There are a few factors at play here:

  • Global trade tension
  • Tariffs
  • Anti-Trump rhetoric
  • A push for anti-globalization by the U.S. government, as well as other countries, i.e. protectionism
  • Brexit, which has caused European companies to be cautious to spend on acquisitions
  • Potential recession in Germany and France (based on economic indicators)

It’s important to note that European companies conduct the majority of M&A deals with U.S. companies. Mexico is also a major player, and continues to be, despite recent tension.

But China is the one to watch as until recently it was rapidly gaining ground, growing from just 1% of U.S. cross-border deals in 2010 to a high of 9.4% in 2016. But there is a slowdown there too, with only 5.6% of deals coming from China in 2018, no doubt the result of recent tariff disputes.

Let’s look closely at China.

Chinese companies are especially interested in anything related to technology: telecoms, aerospace, etc. And they had money to drive prices up to the point that domestic Buyers couldn’t keep up. That was the main factor in the meteoric rise up until 2016.

But now, they’re facing regulatory roadblocks, on top of trade tensions and tariff issues.

The Committee on Foreign Investment in the United States (CFIUS) is the agency tasked with examining cross-border deals closely to ensure the transaction does not threaten national security and is in the best interest of the country.

I was actually involved in a deal where CFIUS got involved – luckily it was much smoother. Startup car rental company Silvercar, a U.S. company, was being bought by Audi through its U.S. subsidiary. But because Audi itself is a German company, CFIUS had to approve the deal.

Taken more seriously are instances where a U.S. tech company designs and manufactures communications equipment for the U.S. military. Being acquired by a Chinese company, which would then have access to classified data, would be a no-go, according to CFIUS.

If this seems familiar, you might have seen Chinese telecommunications giant Huawei, which makes smartphones and other devices, in the news recently. The U.S. has accused the company of espionage and being a threat to the country’s national security because of its alleged business deals in Iran that violated sanctions against that country. This culminated in the arrest of the CEO in Canada back in December, with anticipated extradition to the U.S.

The company and the Chinese government contend they are being unfairly targeted and have filed suit in the U.S. Whatever the case may be, or how this plays out, it’s clear this tension isn’t going anywhere any time soon.

Concerns over Chinese purchases of U.S. companies isn’t limited to technology or aerospace. Technology is getting embedded into traditional industries such as transportation, industrial, manufacturing and agriculture, so involvement by CFIUS will only increase.

Whatever the causes of the general slowdown in cross-border deals (exacerbated by the U.S. government shutdown, during which there were no CFIUS reviews done), I believe that this could mean opportunity.

When deep-pocketed foreign companies are taken out of the equation, at least to some extent, that puts U.S. Buyers in a better position to land deals at better prices. I expect to see a continued growth in domestic M&A activity in the coming year.

For more analysis on why domestic M&A will continue its upward trend, be sure to download my free report: The 13 Factors Contributing to the M&A Boom