Will the recent seismic shift in popular political attitudes about globalisation affect the way that corporates tackle international expansion? The past six months have certainly forced a re-examination of how cross-border transactions are presented and pursued.
In the short term, cross-border M&A exposes a company to a wider range of suppliers, operational processes, financing and tax structures, and requires the alignment of the company’s management group. Over the longer term, major deals ultimately involve the rationalisation or realignment of whole areas of business. In recent years, the expansion of oversight by regulators in both the industrialised and emerging markets has become more aggressive and directly affected the ways in which deals get done.
More than 120 countries now have antitrust regimes in place. Roughly a third are aggressively targeting cartel activity, with nearly a dozen state actors pursuing price-fixing and other anti-competitive behaviour beyond their own borders. This has added enormous complexity to the planning and execution of cross-border M&A and has the potential to reshape the types of deals done in the future.
The potential limitations on a company’s freedom of manoeuvre mean that other forms of corporate combination may come back into favour as companies try to sidestep antitrust regulations or address concerns about jobs. These include joint ventures and partnerships, licensing and distribution agreements, greenfield investments, franchising, incorporating a local company and partnership with a financial investor. The other option is for a company to move laterally along the industry vertical into something which is adjacent to, but does not overlap with, its current product lines. This means taking actions which in effect recreate a conglomerate model – something which is perhaps less attractive to today’s shareholders but more acceptable to national stakeholders.
The level of strategic importance of the target company or sector to both the host country and the country of the investor is probably a major determinant of antitrust action. For example, US sensitivities around foreign investment in technology and energy are well known, as are similar Chinese concerns in telecoms and computer services.
Given the realities of the antitrust environment, the options for alternative corporate combinations may need to be considered. For example, parties to transactions involving companies that have assets or sales in non-US jurisdictions should pay close attention to non-US competition law requirements. Some leading emerging economies have adopted expansive transaction notification requirements in the past few years. In some cases, non-US filing requirements have long notice periods that can have a meaningful impact on the overall timing of a transaction. Delays in deals due to competition law processes increase the risk of the transaction not closing – by increasing the possibility for intervening events, changes in market conditions, interlopers or other disruptive factors to arise.
Today’s business environment demands flexibility of approach, including an understanding of the options available when considering outbound expansion. While regulatory drivers are an important consideration, there are other factors – including a very dynamic political environment – which parties also must weigh when determining the best form of corporate combination for business success.