In the realm of deal activity it remains unclear what the impact of increasing protectionist measures has been exactly. Through the first nine months of 2018, global M&A value climbed 22% compared to the same period last year to reach US$2.7 trillion. The increase suggests confidence among buyers. At the same time, cross-border deal value grew 10%, while domestic deal value went up 27%—implying that acquirers may be looking more inward.
To find out how deal practitioners are responding to the changes in global trade, Mergermarket on behalf of Toppan Vintage spoke with six experts for their insights.
Toppan Vintage question: What effect, if any, do you think the current wave of protectionist measures is having on overall cross-border deal activity? Leading industry experts weigh in...
Ama A. Adams, Partner, Ropes & Graysays: The increasing regulatory review of foreign investment in the U.S.; the Trump administration’s efforts to enhance U.S. export control restrictions on emerging technologies; and the expanding trade war between the U.S. and key trading partners around the world have definitely had an impact on cross-border transactions. Since these events are evolving at or around the same time, rather than in isolation, investors must now assess an expanding range of complex issues in conjunction with pure commercial and valuation ones.
Investors are also facing difficulties in securing CFIUS approval for transactions involving certain sensitive U.S. businesses, the impacts of outbound restrictions on certain supply chains, and tariff-related costs on the value of a potential target. Together, these events are leading investors to pass up certain opportunities or take a more cautious approach, as they have no choice but to deal with legal requirements that are more extensive and formulated to address U.S. national security concerns.
Jack Bell, Managing Director, Pantek Partners adds: In terms of what we’ve been seeing from an M&A, capital-raising, or joint venture perspective with targets specifically in Asia, the tariffs are definitely slowing down the buy side. We represent American companies on the sell side that are typically going into Asia either to raise capital or form joint ventures with Asian partners, and are looking to enter the local markets. But over the past two or three months, there’s been an increased level of hesitance or deliberation, especially with regards to China.
The big cloud has been the updated CFIUS language, which has been getting a lot of play all over Asia, but in China in particular. We’re still seeing deals get done when there's a strong rationale for U.S. and Chinese companies to work together, but there is an additional layer of diligence and care being taken.
Daniel Wang, Managing Director, Harris Williams weighs in: We've also seen push-back from Chinese companies in terms of trying to do business in the U.S. Our current administration's view on protectionism— i.e., increasing CFIUS oversight on foreign buyer activity—is having somewhat of a ripple effect.
A related trend is that a lot more Chinese capital is being funneled to Europe, whereas about a year ago there was a split between Europe and the U.S. For example, one of the largest sporting equipment businesses in China, ANTA Sports, recently put in a US$5.3 billion dollar bid for a Finland-based ski business called Amer Sports. It is one of the biggest Chinese cross-border deals I've seen in sporting equipment.
Interestingly, the sentiment in other parts of Asia has not changed all that much. South Korea and Japan are trying to interpret whether what's going on between China and the U.S. will trickle over to them, but they don't have negative sentiments about the tariffs, as they aren’t really targeted at them. However, they have asked us whether CFIUS could change to become even stricter.
Drew Bernstein, Co-Managing Partner, Marcum BP says: I agree that Chinese inbound investment into U.S. companies and assets is dropping. An increasing proportion of Chinese outbound investment is getting diverted to Europe, Central Asia, Southeast Asia, and other places in order to support China’s “One Belt, One Road” initiative. China wants to establish Europe as a counterweight to the global trading and investment on which its export economy depends. This would also remove an aggressive cashed-up bidder for U.S. assets, which may depress values at the high end. As far as global deal activity is concerned overall, I think companies are just waiting for a bit more clarity before making big, multi-year capital commitments.
Euan Rellie, Senior Managing Director, BDA Partners adds: Speaking for private equity, the tariffs and the threat of increasing them tit-for-tat have combined for a chilling effect. As a cross-border advisor, there are specific problems for us, since Asian investors have been very beneficial—both PE sources and corporates from Asia have effectively been propping up prices in the market. Remember that we're not only talking about new PE investment, but the 3,000 or so mid-market PE firms in the U.S. They typically have 10 or 15 portfolio companies each, and keep those assets for an average of five years. The average firm might be trying to sell three companies every year, and after the very robust market of the last three or four years, I'm certainly seeing a bit more caution on the prices that people will pay in the marketplace.
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The New Wave of Protectionism
What effect is protectionism having on sentiment among dealmakers? Are the measures actually bolstering domestic M&A? And how is private equity responding to the new conditions? We explore how deal practitioners are responding to the changes in global trade in our full report.