The Reality of Cross-Border Mergers and Acquisitions

In the globalisation period, the cross-border mergers and acquisitions have massively increased in the last two decades. Policies of free trade and financial liberalisation have been essential contributors to the global expansion of markets.(Civilserviceindia.com, 2017)

Previously, we highlighted and discussed a series of political events and global currents that have been influencing global M&A trends. As observed by head of German conglomerate Bayer, Werner Baumann, cross-border transactions and deal-making remain a significant feature of global markets despite the volatility and uncertainty in the economic and political world scenarios. (Financial Times)

In the present world scenario, there have been major highlights that make this sector an attractive feature of global markets. Some of them are:

  • The need for massive consolidation.
  • An opportunity to expand and exploit potential growth in new scale markets.
  • Low rates of debt financing stimulate purchase of corporate debt.

The year 2016 witnessed $900bn-worth of cross-border deals , accounting for about 40 percent of the $2.37tn of the overall M&A transactions.

The shortage of growth prospects in developed nations make them a bright marketplace, especially for the developing nations such as China and Japan. Hence, growth opportunities in the US will attract a lot of investment in  the US companies by Asian as well as European companies. As highlighted in my previous post, the longer term trends observed in the UK will also drive cross-border M&A.

On the contrary, a controversy has been observed in China conflicting with the strong deal volume that had been maintained throughout 2016. Due to increased scrutiny of outbound M&A by the regulators in China, acquisitions done with purposes of prestige or political gain have been discouraged and hence, in the last quarters of 2016 saw a decline in acquisitions. (Financial Times, 2017)

Cross-border transactions include numerous uncertain variables, in terms of carrying legal proceedings in the host country as well as following requirements and activities that are bound to become complex in a foreign jurisdiction. (Cross – Border M&A Trends in 2016, 2017). Hence, compliance guidelines play a discouraging role for companies to make cross-border deals and encourage domestic deals instead. In a panel discussion on challenges and threats caused by Brexit for the mergers and acquisitions market, CEO of Domtar Corp, John Williams said that a merger or an acquisition is simply an international expansion of a business irrespective of the fact whether it is a global or a domestic deal. The uncertainty involved in the legal compliance could be resolved by having a flexible and well-versed process agent as a trusted point of contact who maintains the swiftness that is a requisite for M&A deal-making. (Wcsr.com, 2017)

With one of the most volatile times, cross-border deal-making has witnessed decelerating growth in 2016, but factors such as cheap finance, strong corporate balance sheets and decent growth across markets and key sectors will definitely improve the run-rate of M&A cross-border deal making in 2017 with an upward graph in 2018. (Baker & Mckenzie). I believe a soft-ish Brexit and friendly trade policies in the post-Trump world will play a major role in expansion of the global M&A market.

Hence, I feel the speculative trends in the present world will definitely have an impact on the M&A cross-border deal making and the global market, especially in the wake of radical changes in some of the strongest economies in the global M&A market.

BREXIT: the start of a depressed M&A market?

After having talked about the impact of political and economic changes in the global M&A activity, we saw Brexit, the shocking exit of UK from the European Union as the key concern and an essential factor in the expansion of M&A activity within the UK as well as globally.

It is one of the headwinds we come across in the face of global M&A deals, that froze the dealmaking activity involving British companies, hence, deaccelerating the M&A activity.

Tim Gee, M&A partner of the law firm Baker & McKenzie discuss how the volatility in the market will definitely lead to a decline in the M&A activity, but this decline might vary with the size of companies and the impact of deals.

Brexit, the result of EU referendum might slow down the UK to UK M&A activity but will not precisely affect investment into the UK. As said by the chief executive of the listed investment firm Zegona, Eamonn O’Hare, the decline in British currency will open doors for foreign investment in the UK and lead to depreciation of UK assets,  making them vulnerable to international takeovers.

Hence, the decline in sterling and cheap borrowing rates in UK have been reasons for a positive future of the British M&A market and hence, are the prime reasons for robustness in this sector despite the so-called aftermath of the EU Referendum. (Mathew Smith, Barclays).

This continuous uncertainty that has been discussed and brought into light in the post Brexit world could have various elements. Some of these elements could be:

  • Separation of a UK merger clearance process and an EU merger clearance process
  • Duplication of costs
  • Different timelines

As argued by the CEO of Domtar Corp, John Williams, buying a UK company is simply buying an international business and hence, Brexit would not be a barrier for large M&A deals considering they are global expansions. But the effect of Brexit might have an adverse impact on the middle ground companies of FTSE 250 because of their size and the uncertainty mentioned above, might affect such mid-size M&A deals.Such companies might become a part of the “wait and see mode” around this market volatility, leading to longer transaction processes in order to create high-value investments.

In my opinion, the nature of activity of M&A deals will definitely affect the large cross-border deals involving UK companies. I believe, takeover of UK companies might be stabilized because of the positive influence of downfall of the UK currency in the long run, but will definitely impact the relevance of UK, especially in European M&A. The lack of free trade with the exit of UK from the EU and  increase in regulation-related provisions will be factors slowing down the M&A market for UK companies.

The M&A ecosystem might shrink since, London, the capital city, might not be an appealing entry point for corporate and financial investors around the world.

The post Brexit Britain still involves a lot of uncertain and pending decisions around the trade and investment policies leading to volatile market conditions and a dynamic political environment. Therefore, 2017 is likely to bring in a lot of new surprises and shocks in the global M&A world.