Keeping score in cross-border M&A
February 2014 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
The share of mergers and acquisitions that are cross-border in nature has grown dramatically over the last decade. As a result, corporate control is shifting from one country to another much more dynamically. This development reflects the internationalisation of industry consolidation, spurred by the global battle for resources and broader efforts to achieve global scope and scale. The growing integration of regional economies meshes with the increased importance of multinational corporations (MNCs) that are capable of coordinating global value chains. As a consequence, cross-border M&A has a pronounced impact on the process of international economic integration. And corporate control has become a key element of economic influence.
To understand the global shifts in corporate control more fully, we conducted a comprehensive study of cross-border M&A deals that took place in the largest 30 economies worldwide over the five years since 2008 – the year of the bankruptcy of Lehman Brothers and the subsequent collapse of the M&A market (Kübel et al.(2013): Global Controlling Interest). Cross-border M&A were defined as deals in which the ultimate controlling parents of acquirer and target – irrespective of the locations of the involved entities and assets – were from different countries and as transactions that result in a change of corporate control (i.e., the acquirer gains at least half of the target’s shares).
Which economies have boosted their international influence in the corporate world?
According to our analysis, Japan, China, France, India and Switzerland gained the largest corporate control ‘surpluses’ over the past five years in absolute value terms (measured as the value of acquisitions that resulted in cross-border changes of corporate control, less the value of corresponding divestitures). In contrast, the US, the UK, Australia, Sweden and Norway suffered the largest corporate control deficits. The corporate control balance expressed in terms of value typically parallels the number of companies involved. For instance, Japan’s value surplus reflects a net increase of 580 controlled companies, while the UK’s deficit corresponds with a decrease of 579 controlled firms. Nevertheless, the US and a few other countries including Sweden and the Netherlands saw net increases in the number of companies they control while experiencing a value deficit. There were also a number of countries – China, Germany, Belgium and Mexico – at the other end of the scale, gaining value surpluses only to end up controlling fewer companies.
Our research reveals that large acquiring countries are often also popular targets for foreign investors. In fact, a closer look at the cross-border M&A data puts the large corporate control deficits of the US and the UK into perspective. It becomes clear that their inbound and outbound deal flows were not totally unbalanced and that the large deficits resulted primarily from the massive scale of their cross-border activities. In contrast, the top corporate control surpluses of Japan, China or India – three countries which are restrictive to foreign direct investments according to the OECD – resulted from the value of their cross-border acquisitions more than tripling that of M&A investments into these countries.
The net flows of corporate control take on a different significance when measured relative to the size of an economy. This is most apparent for Switzerland and the United Arab Emirates (net totals as percentage of GDP of 1.06 and 0.94), followed at some distance by Japan, France and India. Conversely, Australia, the UK, Norway and Sweden suffered a loss of corporate control equal to 0.8 percent or more of their respective GDPs.
Policy makers can influence a country’s overall performance on the global market for corporate control. On the buy side, high productivity levels, the existence of more large companies and the availability of relatively low cost capital can help foster the emergence of global consolidators. On the sell side, concentrated shareholder structures, comprehensive shareholder rights (including ‘golden shares’) and anti-takeover regulations targeted at foreign investors can shelter local industries. Governments can also employ numerous informal instruments such as delaying takeover procedures, providing financial support for domestic companies, promoting domestic mergers or simply applying political pressure. Although most governments are keen to attract and facilitate foreign investments, these and other instruments have been more frequently applied in recent years, raising some observers’ concerns about greater protectionism.
Why does corporate control matter for an economy?
In our experience, even multinational corporations tend to exhibit a strong home-country bias, which is evident in where they site headquarter functions, how they target investment decisions and whom they appoint to executive positions. A home country-bias is more likely to generate direct employment effects, especially regarding high-paid jobs, and adjacent sectors and local communities can feel an impact from the flow of corporate control. There are indirect benefits too: a nation’s net total corporate control can directly affect the scale and liquidity of local capital markets, for example.
The location of headquarter functions triggers local demand for professional and auxiliary services involving lawyers, auditors, consultants and the like, although the benefits of having local industry clusters will depend on the strength of the involved corporations. A nation’s universities often benefit from external funding by domestic corporations and the draw of top talent who prefer to work at corporate centres. Finally, corporate philanthropy is often more focused on local communities. These are all self-reinforcing factors that can strongly influence the general attractiveness of a location in future business placement decisions.
At a macroeconomic level, corporate control can also help determine the strategic agility of an economy in adapting to a changing environment or simply facilitate its pursuit of national interests in the global environment.Having strong networks of top executives and top talent are among the critical incubators of entrepreneurial skills and capabilities. Furthermore, corporate decision-makers are often far more influenced by the politics as well as cultural and ethical values of their home countries.
We expect growth of cross-border M&A to continue. And with that, the debate about international corporate control will at times be controversial and political. Whatever the pros and cons of losing and gaining corporate control at the macro level, this analysis highlights the need for almost all sectors to be attuned not just to the opening up of markets, but the increasing competition for the assets that can help win in them.
Dr Moritz Kübel is a senior manager, and Oliver Warnken and Dr Sarah Ali are managers, at Accenture Strategy. Mr Kübel can be contacted by email: firstname.lastname@example.org.Mr Warnken can be contacted by email: email@example.com.Ms Ali can be contacted by email: firstname.lastname@example.org.
© Financier Worldwide
Dr Moritz Kübel, Oliver Warnken and Dr Sarah Ali