INSIGHT: Global M&A Decline Creates Domestic Opportunities in U.S.

Global M&A volume is falling, in large part due to factors outside the U.S., but domestic U.S. deals are outperforming other global markets, including inbound U.S. deals and other cross-border transactions.

The first quarter of 2019 saw a 17% drop in global M&A volume, followed by a 13% drop in the second quarter. Compared to the second quarter of 2018, European deals are down 54% and Asian deals are down 49%, while U.S. volume is down only 3%, spurred by several mega-deals.

This downturn in global and cross-border M&A is exacerbated by a number of geopolitical factors, including U.S.–China tensions and a slowing Chinese economy, increased U.S. scrutiny of inbound transactions, and the uncertainty surrounding Brexit and its impact on the UK and Europe.

These geopolitical factors shaped global and cross-border transactions in the U.S. and abroad during the first half of 2019 and will continue to do so for the foreseeable future.

China and Cross-Border M&A

The trade tensions between the U.S. and China have been a frequent cause of concern for global markets in recent months. They continue to create uncertainty, which has led to fluctuations in global markets and contributed to a slowdown in outbound Chinese M&A, especially Chinese investment in the U.S.

Through the first half of 2019, Chinese acquisitions in the U.S. have dropped 17% compared to the first half of 2018. That decrease, in part, reflects an overall decrease in the volume of outbound Chinese deals. The total volume of outbound Chinese deals for the first half of 2019 was $35 billion, the lowest first-half total since 2013. The decrease in outbound deals is partially the result of tariffs imposed by both the U.S. and China.

While the ongoing tensions between the U.S. and China play a role in the decrease of cross-border deals, their impact may be overstated. It is true that increased tensions, uncertainty and tariffs have led some Chinese companies to avoid investing in the U.S. However, their impact has made China less appealing as a base of global operations. As a result, some Chinese companies are looking for investment opportunities outside China, including, in some instances, in the U.S.

Aside from the trade tensions, there is evidence that China’s economy is slowing. Through the first half of 2019, the Chinese economy slowed to 6.2% growth, the lowest rate in nearly 30 years, evidence that China’s economy is slowing sooner than countries like Taiwan, South Korea and Japan did at a similar stage in their growth.

The current Chinese economy helps explain the overall decrease in outbound Chinese deals, which will continue to slow along with the Chinese economy as Chinese investors see opportunity arise in the domestic Chinese market.

Indeed, the current environment has led to an increase in domestic Chinese transactions. Further, outbound Chinese deals are increasingly focused within the One Belt, One Road region rather than the U.S. and Europe. Notably, the first half of 2019 saw more than 40% of Chinese outbound deals taking place within the Asia-Pacific region.

Tensions between the U.S. and China are likely to endure for the foreseeable future, continuing the trend of Chinese companies hesitating to invest in the U.S. In addition to the trade tensions, other barriers to Chinese investment in the U.S. remain, including export controls, increased foreign investment scrutiny and potential actions against specific Chinese companies, as exemplified by the inclusion of Huawei on a government blacklist.

Increased CFIUS Scrutiny

Last year, the Foreign Investment Risk Review Modernization Act (FIRRMA) instituted significant changes to the Committee on Foreign Investment in the United States (CFIUS), resulting in increased federal scrutiny of inbound investment in the U.S.

FIRRMA, among other things, expands CFIUS authority over industries in which a foreign investor might gain access to critical infrastructure, critical technology or sensitive personal data. CFIUS now has the authority to review all foreign investments in those industries. FIRRMA is the most significant change to CFIUS in the past half-century, and the increased scrutiny of inbound U.S. deals has led to active enforcement actions in the first half of 2019.

Already this year, CFIUS required the divestiture of Chinese-backed investments in a dating app and a patient network and research platform. The public nature of these enforcement actions is likely the beginning of a larger trend toward preventing, mitigating or unwinding a greater number of inbound transactions, especially with Chinese investors.

However, oversight is not limited to Chinese investors—all inbound deals that fall within the now-expanded authority of CFIUS are subject to the requirements imposed by FIRRMA. Expect inbound U.S. M&A to face significant headwinds through the end of 2019 and beyond.

Brexit’s Effect on the European Market

Brexit continues to sow uncertainty throughout European markets. If Britain does not reach a deal with the EU by Oct. 31, the resulting no-deal Brexit—a hard exit from the EU without a transition period—would lead to a period of uncertainty for a myriad of issues.

The exact structure and effect of Brexit on the UK, EU and rest of the world will not be known until a deal, or lack thereof, is reached. However, many companies are putting M&A transactions that involve the UK or EU on hold, opting to wait for the structure of Brexit and its implications to become clear, which has led to a sharp downturn in M&A activity in the UK and the rest of Europe.

In fact, the first quarter of 2019 saw a 67% drop in cross-border M&A activity in Europe, including a 62% decrease in Britain’s M&A activity and a 76% decrease in Germany’s.

This trend continued through the second quarter of 2019, resulting in a 54% decrease in overall European deals. These decreases in European M&A activity exceed the global trends during the first half of 2019.

The uncertainty created by Brexit will continue, leading more companies to implement a wait-and-see approach to UK and EU M&A. As a result, the number and value of cross-border deals involving the UK and other European countries will continue to decline in the second half of 2019, at least until Brexit’s Oct. 31 deadline.

U.S. Domestic Implications

External geopolitical factors will continue to weaken cross-border M&A for the near future. However, these factors benefit domestic U.S. M&A by creating additional opportunities for U.S. companies at home.

Despite the overall decrease in global M&A, there are signs that domestic U.S. M&A is strong. Deal value in the U.S. for the second quarter of 2019 totaled $466 billion, compared to $152 billion in Europe and $139 billion in Asia. This higher value was aided largely by several mega-deals that took place in the first half of the year.

Additionally, some U.S. companies have directly benefited from the increased CFIUS scrutiny of foreign investment. Already this year, UnitedHealth purchased PatientsLikeMe following the divesture of iCarbonX’s stake in the company. As CFIUS continues to expand its scrutiny of inbound transactions and its enforcement actions, additional opportunities for U.S. companies will arise.

The trade tensions with China, a slowing Chinese economy, an increase in CFIUS scrutiny and Brexit will shape global cross-border M&A through the remainder of 2019. This is especially true when transactions involve China or Europe.

The decrease in inbound U.S. M&A that took shape over the first half of 2019 will continue. However, the decrease in cross-border and inbound M&A will leave open additional opportunities for U.S. companies at home, causing U.S. domestic M&A to hold strong with continued momentum through the second half of 2019 and looking ahead to 2020.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Tony Balloon is a partner with Alston & Bird and a member of the firm’s Financial Services & Products Group. Balloon focuses his practice on mergers, acquisitions, joint ventures, strategic alliances, and international business transactions, both outbound and inbound.

Erik Nielsen is an associate with Alston & Bird and a member of the firm’s Corporate Transactions & Securities Group. He focuses his practice on mergers, acquisitions, and capital raising for clients across a variety of industries.