Insights

The Future of Cross-Border Acquisitions
POSTED 4.14.20 M&A

Since last year, trade tension between the U.S. and China, as well as other countries, has been at a high-level. After the signing of the so-called Phase 1 trade deal with China earlier this year, that feeling has slackened somewhat, although the full, final deal is still being negotiated.

As part of this deal, China has agreed to buy more American agricultural goods, as well as oil and gas, pharmaceuticals, and other manufactured goods. Yet U.S. companies are still looking for alternate supply chains and manufacturing hubs. For example, Apple has been seriously looking at moving at least some operations to South Korea.

This is not the only impact.

Many companies are signaling that ongoing global trade disputes like this one – and the uncertainty they bring – will continue to influence their M&A strategy going forward. (The impact of the coronavirus pandemic remains to be seen.)

In a survey conducted by Deloitte and highlighted in their The State of the Deal: M&A Trends 2020 report, 40% of respondents (which include Strategic Buyers, as well as PE firms) said trade disputes would not change their M&A strategy. But it’s important to note that 30% of those surveyed said they would focus more on domestic deals instead of going overseas for acquisitions.

PE investors in particular are worried that tariffs will have a significant and harmful effect. 70% of those surveyed in the Deloitte report said that “tariff negotiations are having a negative impact on their portfolio companies’ cash flow.” The same percentage felt tariff troubles were harming portfolio companies’ operations, too. That’s compared to 55% and 58%, respectively, in 2018.

This decline in M&A deals abroad is not new and not tied to the coronavirus impact on the economy. As I wrote in March 2019:

“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)

All of these factors are still at play.

As we reported earlier this year, M&A activity is expected to hold strong in 2020. But U.S. companies and PE firms will be looking at domestic acquisitions more than cross-border deals. This was true before the coronavirus and now is even more so as the pandemic spreads across the globe. You can’t ignore the impact from interruptions to manufacturing, trade, and economic activity from interruptions like this.

This negative impact also creates even more uncertainty surrounding emerging markets, where U.S. companies are increasingly hesitant to invest.

The other problem is that already emerging markets were already more risky investments than they had been in the past, with companies earning less and less returns.

There is a caveat here.

Look for increased M&A activity where U.S. companies invest in European Union acquisitions, excluding Germany and France. It will be Italy and Spain instead, because they have smaller companies, i.e. small targets. European companies are being adversely affected by Brexit and that will make them ideal value opportunities for U.S. acquirers.

With smaller deals happening domestically and internationally, insurers have responded by offering Representations and Warranty insurance for those under $15M to $20M in transaction value.

For more information on this specialized type of insurance with a host benefits for Buyers and Sellers, you can contact me, Patrick Stroth, at pstroth@rubiconins.com.