In spite of a general environment of political and economic uncertainty across the globe and a daily sprinkling of stock markets’ volatility, trade wars, sanctions, natural disasters and various other crises, 2018 has so far been a great year for cross-border M&A. New records have been attained, eclipsing the previous highs set pre-2008 financial crash. The following 10 key trends have underpinned hyper activity in global M&A markets for the first nine months in 2018 and are set to continue to shape deals well into 2019.
1. National security – politics, protectionism and intervention
Foreign investment being viewed as a risk to national security is at the forefront of regulatory agendas globally.
- There is an increasing range of industries and businesses with national security touch points that historically would not have raised any eyebrows, including in semiconductors, AI, virtual reality technology, robotics and large-scale data storage. Technological superiority is now commonly equated with national security.
- In October 2018, CFIUS (the Committee on Foreign Investment in the United States) launched a pilot program to require mandatory notification of certain non-controlling investments by foreign persons in U.S. businesses touching “critical technologies.” The pilot program is a material move away from what used to be a principally voluntary regime.
- In July, the U.K. government published a white paper on its proposal to allow the scrutiny of foreign investments in any sector of the economy upon a “reasonable suspicion” of a national security threat. Examples include review of investments that may potentially lower R&D or that involve access to personal records. The U.K. government estimates that if this proposal, which looks very similar to the CFIUS construct, is adopted, it will lead to a material increase in notifiable transactions.
2. Politicization of antitrust and merger review largely in check
While the political climate has led to a tightening of controls on foreign ownership on both sides of the Atlantic, so far there are few signs that populism is spilling over into merger control review or wider antitrust enforcement. In the U.S., the number of ‘second requests’ issued to scrutinize transactions closely and the number of challenges are in fact down modestly over the last year, rather than up. There is no indication that U.S. antitrust reviews are being used to target foreign investment – in contrast to the CFIUS process which is unquestionably raising hurdles to foreign acquisitions. As we saw with the AT&T/Time Warner case, any merger challenge by the U.S. agencies needs to survive judicial scrutiny, based on the application of antitrust principles. In the EU, political concerns about the market power of (generally American) technology companies appear to have contributed to heightened scrutiny of some transactions, without changing their ultimate outcome. Overall, intervention rates in EU merger reviews are running at levels that are broadly consistent with the last decade.
3. Trade relations taking center stage
Closely linked to national security deal scrutiny, the quick moving sways in the political climate, changing trade dynamics and public opinion are impacting individual transactions in 2018. The current U.S./China trade relationship has shifted Chinese investment focus to acquisitions in Europe, Africa and Central and Southeast Asia. News stories such as the murder of Saudi Arabian journalist Jamal Khashoggi transcend international relations, leading multiple global businesses to review their collaboration with Saudi Arabia in raising funds and making joint investments.
4. Rise in failed deals
The growing politicization of the M&A environment has also led to a rise in failed deals in 2018. Increasing protectionism and political intervention has had a negative impact on high-profile cross-border deals. More than ever the success of a transaction requires careful advance preparation, well thought out strategies and good timing, not all of which is within the control of deal makers.
5. Mega-deals rule
The value paid for desirable targets has typically been higher in 2018. It is a sellers’ market, and corporate giants are reaching for M&A to head off competitive threats and expand their businesses. Certain sectors, in particular energy, healthcare and technology, have seen growing consolidation. Financial sponsors have helped drive the mega-deals trends by vying with strategic acquirers for the most attractive assets, driving multiples and higher prices.
6. Money is no object, but good deals are hard to come by
In what has been largely a low organic growth environment, deals are being funded by the record levels of dry powder held by private equity and cash piles repatriated by U.S. corporations following the U.S. tax reforms adopted at the end of 2017. Sponsors have adapted strategies to find returns and compete with corporate purchasers for quality assets, including forming consortiums to pool capital and acquiring large, public companies as the competition for privately held assets intensifies.
7. Data tech is king
Data M&A has been fueling deals in both typical tech and non-tech transactions. Data has been firmly established as one of the biggest assets of a company, often valued at a premium, and vital for a business to stay relevant in the current market. As data regulations are becoming increasingly complex and cybersecurity remains paramount, companies need to be able to understand, extract and use data. Buyers want to capitalize on data-tech clients to bolster their digital strategy and realize value. No industry is immune to tech’s encroachment. Without question, all companies need to be technologically, data driven in the future.
8. “Acqui-hires” – when talent matters more than assets
Buyers are recognizing the importance of acquiring the talent within the business, rather than the business or assets themselves – otherwise known as an acqui-hire. A popular strategy with technology companies, acqui-hiring secures and retains the knowledge and experience of the individuals who created and understand the data set and technology systems. At least for the initial period post-acquisition, the role of the key founding managers and employees is being more highly valued than ever before.
9. Good management highly rated
Attention in transactions more generally has shifted from typical buyer protections and target financial performance to the reward and retention of current, highly knowledgeable and talented management teams. Buyers are negotiating business objective based earn-out provisions, increasing revesting restrictions and complex bonus structures to ensure successful management remains on board with the new business owner.
10. Shareholder activism here to stay
Finally, shareholder activism has continued to proliferate in 2018. Activism has grown not just in the U.S. but also in European and Asian markets. Activist shareholders are demanding higher offers and divestment of subsidiaries and are putting increased pressure on companies to revise existing strategic business plans. Once viewed as nothing but bullish strategy and negative aggression, some of the newer “activism” models provide a platform for companies to access valuable sources of information, analysis and strategy building, along with productive dialogue among principals.