Despite concerns expressed during our presidential campaign season over the loss of US jobs to international trade, investment in the US by foreign commercial enterprises remains strong, especially given the weak or weakened economies in such key overseas markets as Europe and China. To some degree, these market conditions have fueled an interest in investing in the US's growing and stable economy. The activity level of foreign direct investment (FDI) in the US is best examined via merger and acquisition (M&A) transactions. Our overview of analysts' data on inbound M&A from the first three quarters reveals a surging US FDI environment in spite of depressed global markets, worrisome geopolitical trends and transactional regulatory hurdles.
Year-to-date inbound M&A trends are historically strong overall1, which is consistent with experts', as well as our own, predictions from earlier this year. These current trends are viewed as favorable despite the fact that both the volume and the value of inbound M&A have decreased year-on-year compared to 20152. The drop-off in 2016's data is due in part to the historic number of mega-deals that were closed in 20153, which, while relatively few in number, made 2015's M&A value reach levels that surpassed those of the dotcom era and the mid-2000s M&A surge4. Considering both the relative uncertainty in financial markets this year as well as the unprecedented volume and value of inbound transactions in 2014 and 2015, M&A activity in 2016 is quite favorable. The strength of the M&A market in the face of global uncertainty is largely due to a high number of cash-rich companies, favorably low interest rates, and a growing alternative lending marketplace5, as well as the woefully substandard number of offerings in the IPO marketplace6.
Nevertheless, it cannot be denied that the aforementioned worldwide marketplace volatility has plagued 2016's cross-border investing climate. The most distressing developments of 2016 so far include Brexit, which has served to compound Europe's recent financial woes and sent both the pound and the euro dipping in value relative to the dollar7. For the first three quarters of the year, investors also feared the negative impact that the election of a populist candidate for the US presidency, either Bernie Sanders or Donald Trump, would have on financial markets, given that both candidates' positions on the regulation of Wall Street are viewed as being on the far ends of the political spectrum8. Falling oil prices, the slowdown of the Chinese economy and unrest in the Middle East have also served to make this a precarious year in which to engage in cross-border activity8.
Any slowing in M&A activity can be attributed in part to these factors; however, the fact that M&A is still at historically high levels in 2016 indicates that investors have taken a relatively measured approach to global trends. Analysts have described this trend as a "wait and see" approach by investors, in which companies rely on numerous, lower-value M&A deals rather than IPOs and large transactions5. This strategy allows for companies to shield themselves from any major fallouts, and allows capital to be transferred to the steadiest markets5.
This latter fact is evident in the US's success in inbound M&A, as it continues to be foreign investors' top destination for these transactions9. With its moderate economic growth over the past two years, countries view the US marketplace as a reliable place to spend capital, and the strength of the dollar in comparison to the weak euro and volatile pound reinforces this view10. These facts are especially appealing in emerging economies such as China, in which companies have chosen to invest abroad to avoid losing capital in their current sluggish domestic climate5. China is currently the most frequent inbound investor in terms of both volume and value this year, with Canada close behind11. The UK is also an enthusiastic investor in the US market; however, M&A from the UK has trended towards being much higher in volume than value11.
In terms of sectors, the three that serve as bellwethers for future FDI trends and obstacles include technology, media and telecommunications (TMT); financial services; and life sciences. For TMT, companies have been particularly attracted to investing in software technology12. The appeal of the technology industry to investors further explains the US's success in enticing foreign investments, given the storied reputation of Silicon Valley13. China and the UK have been the most prominent foreign investors in the US technology space so far13, 5, but deals have been slowed or halted due to increased review by CFIUS, a federal committee dedicated to ensuring that cross-border transactions pose no threat to US security14, 15. Companies' deals have been blocked by CFIUS even when the only US entities involved are subsidiaries of foreign parent companies15. CFIUS's increased watchdog tendencies could be a hindrance to the TMT sector going forward, given that software technology frequently involves the sharing of sensitive information.
The financial services' industry's rise in M&A popularity for the first two quarters can largely be explained by the former's facilitation of cross-sector deals. The industry has seen a particularly large crossover with the technology industry, as companies attempt to capitalize on technology's low operational costs to expedite the various aspects of banking and lending16. That being said, Brexit could chill some of this activity from industry-leading British-based banks. London is considered the world capital of so-called "fintech", but this status will certainly be challenged now that the UK's access to the EU's vast single market is in doubt17. The data from the first half of the year shows that investment from London into the US (California in particular) remains consistent in this industry13, but with rumors swirling that Dublin, Frankfurt or Paris could position themselves as a viable alternative to post-Brexit London17, US financial or fintech companies that are eager for deals with London banks could find themselves disappointed.
In examining the life sciences industry, cross-sector investing with the technology industry also explains this sector's popularity among foreign companies in 20161, 18. Financing for life sciences also tends to be cheaper, and valuations of companies tend to be lower, which is why we have seen higher deal volume but lower deal value compared to other industries5. Life sciences could be the leading sector for high-value M&A transactions this year, were it not for the Treasury Department's blocking of the Pfizer-Allergan mega-merger back in April via closing what it referred to as a "corporate inversions loophole"19. This once again reinforces a growing trend seen in the past year and a half, in which regulatory scrutiny from the Treasury Department, the Department of Justice and CFIUS have either halted deals or dissuaded investors from engaging in transactions altogether15.
In terms of further explaining cross-border M&A's popularity among companies compared to other types of corporate growth strategies, companies view M&A as an opportunity to enhance their lines of business, solidify their geographic presence and avoid the weakened aspects of our post-recession global economy. Companies and their investors appear to favor inorganic growth as a means to strengthen one aspect of their business while gaining a competitive foothold in a certain region or industry; this enthusiasm for obtaining inorganic growth now has only grown as protectionist sentiments continue to rise worldwide8. Companies want to buy up market shares in their chosen industry and lines of business now, when the question of market instability is still pending5.
As noted earlier, investors also favor cross-border M&A as a means to expand their geographic presence in select locations. This explains the developed world's, and the US's in particular, dominant success in attracting FDI over the past few years8. Companies want to expand their brand and increase their capital in areas that are prosperous and stable, and cross-border M&A allows them to choose markets as they see fit.
Finally, recent negative aspects of the marketplace have also proved highly influential in companies' preference for M&A-related investing. The IPO marketplace, in particular, has seen a steep decline in activity over the past year. The number of IPOs currently sits at a record low; the lack of enthusiasm for public offerings is the worst analysts have seen since the recession began in earnest in 20096. In January of this year alone, there was not a single IPO in major US marketplaces6. Given the aforementioned disconcerting worldwide economic and political trends, it follows that companies want to achieve growth via methods that are viewed as more conservative. Companies are cash-rich, with more than US $6 trillion in cumulative reserves for Q1 this year20, and they are more confident in achieving inorganic growth via combinations than risking the volatility of public markets.
Regardless of all its turbulent geopolitical and economic activity, 2016 still appears to be headed in the direction of being another in a string of robust years for FDI in the US.