Future of cross-border M&A


Financier Worldwide Magazine

October 2016 Issue

October 2016 Issue

Mergers and acquisitions activity has been riding the crest of a wave for the last two years or so; a number of factors combined to help lift M&A numbers out of the post financial crisis doldrums. Shareholder activism has been on the increase, driving organisations to divest units or sell themselves entirely. Mega-mergers have re-emerged, repositioning themselves near the top of the corporate agenda. Companies are again keen to spend billions of dollars consolidating their business or entering new industries and locations. Distressed M&A has also re-emerged as a viable opportunity as companies, particularly in the energy space, have endured a turbulent period.

Cross-border M&A, too, has remained robust. 2014 enjoyed a substantial boom, with cross-border deals worth more than $1 trillion announced. This activity held strong throughout 2015, although it began to falter somewhat in the first quarter of 2016 owing to difficulties permeating the global economy.

While the strong run of robust M&A activity was always likely to come to an end, in the second quarter of 2016 that cross-border M&A finally flagged. Brexit and a number of other economic and geopolitical uncertainties dampened activity, according to a new report from Baker & McKenzie. With global and economic issues looming large, the question of how cross-border M&A will fare going forward is a pertinent one.


In 2016, cross-border activity has been something of a mixed bag. Although value rose by 14 percent in Q1 2016 versus Q1 2015, deal volume fell 10 percent. Both value and volume globally were down significantly on Q4 2015; however, this was to be expected given that the final quarter of 2015 was the busiest quarter of a record year for M&A. Yet Q2 2016 did not see a recovery in terms of value or volume. Headwinds held back dealmaking in many locations.

The slowdown affecting the Chinese economy has been a big issue facing the cross-border deal market. Another is that fact that oil prices, although recovering somewhat from their nadir of 2015, are still down considerably from where they have been. Political headwinds have also remained strong – particularly the UK’s EU referendum, which loomed large on the horizon for months. The decision taken in June to the leave the union has only served to increase confusion and consternation. The decision of when to even trigger Article 50 of the Lisbon Treaty is still a source of debate, with suggestions that the process may not even begin for a number of years. Such uncertainty does nothing to alleviate tension surrounding the UK economy.

Other geopolitical issues around the world have had a similar effect on deal flow. The controversial nature of the US presidential campaign, in the run-up to national elections, has played a role in dampening M&A activity. How the election result will affect dealmaking after November remains to be seen. Elsewhere, the failed coup attempt in Turkey and upheaval across the country gave investors reasons to pause before entering the market via M&A.

Megadeals failed to materialise in the first two quarters of 2016. Deals worth $5bn and above, compared with the same period in 2015, were down markedly. H1 2015 saw 21 megadeals struck, with a total value of $296bn. The 18 deals agreed in the first half of 2016 were worth 23 percent less, at a value of $228bn. Q2 in particular saw a remarkable drop in megadeal activity, with just three deals completed at a value of $29bn.

According to Baker & McKenzie’s report, stalled dealmaking was largely caused by volatility permeating the global markets. The firm’s index, which tracks quarterly deal activity using a baseline score of 100, dropped to 176. This represents a decline of 33 percent from the same period last year and a 17 percent drop from Q1 2016. Furthermore, the figure recorded in the second quarter 2016 was the lowest since Q3 2013. The data suggests that 1320 cross-border deals were announced in Q2 worth $214bn – a 4 percent drop in volume and a 45 percent drop in deal value compared to the second quarter of 2015.

Headwinds held back dealmaking in many locations.

“After a record year in 2015, there’s no question that Brexit, political uncertainty in the US and elsewhere, a subdued macroeconomic environment globally and other factors have weighed on deal makers’ confidence,” said Michael DeFranco, chair of Baker & McKenzie’s global M&A practice. “Even with this though, we continue to see high volumes of deals – just fewer of the mega transactions – and many multinationals are continuing to make acquisitions in support of their long-term strategies.”


The Chinese economy is in a state of flux. The days of breakneck GDP growth are over, and efforts to re-tool the national economy continue at pace. Accordingly, Chinese firms are launching more cross-border deals than ever before. The second quarter of 2016 saw 97 outbound Chinese deals worth a total of $40.7bn. Compared with 2015, the number of deals seen in Q2 2016 climbed 23 percent and the total value of deals was 132 percent higher during the same period, according to Baker & McKenzie’s report. Activity involving China has escalated quickly, rising to prominence in a global context. In the second quarter of 2011, Chinese M&A accounted for only 1.1 percent of the global total, compared to 6 percent for the most recent quarter.

In light of the country’s slowing economy, with local opportunities scarce, Chinese companies have been mandated by the government to pursue deals overseas. According to data from Bloomberg, since Chinese premier Li Keqiang first advocated the new ‘going out’ policy, China’s dealmaking ambition has helped to swell the volume of outbound deals to $157bn by mid August 2016, a figure far outstripping 2015’s full-year record of $109bn.

Chinese banks are also in on the act. Limited domestic lending has encouraged them to focus on cross-border opportunities. The government has tasked China’s banks with financing the burgeoning spending spree; state banks have arranged $19.9bn worth of global syndicated loans for M&A this year. As a result, the banks’ share of that market has jumped to 4.4 percent from 0.9 percent in 2015. Top tier and latterly second tier Chinese banks have become active in the financing of outbound M&A transactions, with many secondary banks using the experience and willingness of Chinese companies to acquire foreign assets as a means of developing and expanding their own investment banking divisions. Given this support, we may continue to see Chinese companies aggressively pursue overseas assets.

Well recognised Western brands and advanced technologies are likely to remain key deal drivers. Baker & McKenzie’s report notes Chinese companies focused heavily on investing in technology. In Q2, 15 deals worth $17bn were announced in the tech space, alongside 17 deals worth $4.8bn in the industrial sector.

Q2 also saw Chinese interest in mining return to the fore in the Americas. Chinese acquirers completed four deals in the region worth $4.4bn. Though Canadian acquirers have been the most prolific in the mining industry for some time, Chinese dealmakers have now become the biggest spenders, completing 22 deals worth $8.7bn in the first half of 2016. Among the high profile transactions in this space was China Molybdenum’s acquisition of the niobium and phosphates businesses of Anglo American in Brazil, in a deal worth $1.5bn, announced in April. The company followed this transaction by acquiring, in May, a 56 percent stake in Tenke Fungurume Mining for $2.65bn.

Chinese buyers have also been particularly active in Europe. In the second quarter of the year, Chinese industrial products and services company Midea Group’s offered to acquire German-listed industrial automation company KUKA for $4.3bn. Also making headlines was the purchase of Dutch-based NXP Semiconductors’ Standard Products unit for US$2.8bn by private equity firms Beijing Jianguang Asset Management Co. (JAC Capital) and Wise Road Capital Management.

For some, the emergence of China as a buyer of overseas assets may be the catalyst for renewed dealmaking activity. According to data from Credit Suisse, Chinese companies bought up non-Chinese assets at a startling rate in the first half of 2016, spending a new annual record of around $144bn. Whereas US acquirers were the previous drivers of M&A activity in Europe and much of the world beyond, Chinese acquirers are set to be even more influential in the second half of the year. For European deals in H1 this year, 18.5 percent of acquirers were Chinese, more than any other country. Indeed, Mr DeFranco, believes that Chinese buying activity will continue to develop despite the turbulence evident in the global economy. “I suspect that Chinese outbound M&A will be a driving factor for M&A in the year ahead and be a key part of global transactional activity,” he suggests.

European misgivings over the expansion of Chinese interests, particularly in the tech sector, are evident. As developing technology passes to Chinese hands, a number of European policymakers have expressed concerns. One deal that raised eyebrows was the acquisition of a 94.55 percent stake in Germany’s Kuka AG, which is a major force in the country’s industrial sector, by Chinese appliance giant Midea.


China’s push into Europe has been part of notable shift of global dealmaking activity toward the continent. Deal value in Europe totalled around $400bn by the end of July and could, by some estimates, reach around $800bn by year-end – an impressive figure no doubt. However, 2016’s dealmaking activity, should it live up to this estimate, will still be down, year on year, by around $200bn. One of the key contributing factors to this drop off is Brexit. Though the timing of Britain’s exit from the European Union is currently unknown, as is the nature of its future relationship with the bloc, one thing is clear – Brexit will have a significant impact on global M&A. Indeed, estimates from Baker & McKenzie’s Global Transactions Forecast suggest as much as $1.6 trillion could be erased from global M&A activity over the next five years.

Conversely, although there has been much doom and gloom around dealmaking activity in a post-Brexit world, the UK itself has attracted a rather surprising amount of inward investment since 23 June. Following the referendum result, the UK saw 54 inbound deals worth around $38bn, which flies in the face of claims that it would become an unattractive destination for deals. The decline in the value of the pound has opened doors to overseas acquirers. Opportunistic deals such as SoftBank’s acquisition of Britain’s ARM Holdings Plc and AMC Theatres’ acquisition of the Odeon & UCI Cinemas Group, could be a sign of things to come, as dipping valuations of British companies, and even distress in certain sectors, create attractive propositions for overseas acquirers.

Looking ahead

To be sure, the global economy has endured a troubled couple of years. Economic and political uncertainty has permeated key global markets yet, until very recently, deal activity remained resolute. In 2016, a combination of factors, some of which were considered unthinkable such as Brexit, has slowed not only cross-border M&A activity in the first half of the year, but all dealmaking.

Regardless, we should expect to see cross-border transactions continue throughout the second half of 2016 and beyond. There is a good chance China will likely lead the next great wave. Though some of the players may have changed, cross-border M&A is here to stay.

© Financier Worldwide


Richard Summerfield

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