Strong outlook for cross-border deals amid emerging potential hurdles | Deloitte US has been saved
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In our most recent survey (last fall’s Deloitte’s 2018 M&A trends report), more than 90 percent of US corporate executives said they planned to look abroad and engage in deals. Since then, deal flow has matched those sky-high expectations with a strong showing—and the outlook remains promising, despite some potential hurdles.
What’s driving cross-border deals? From the vantage of many international companies, particularly in sectors like consumer packaged goods, the US market appears fairly stable and profitable. Domestic companies, especially mid- to large-cap companies, struggle to find double-digit growth domestically, unless it’s with a new product. For these companies, niche products are likely not going to move the needle (in terms of revenue or profit), thus prompting the desire to look abroad for opportunities to grow at faster rates with scale.
And then there’s the quest to add capabilities. Sticking with consumer product companies, we see multinational buyers searching for ways to add capabilities that provide intelligence or insight into what consumers want. These companies also are investing in businesses that specialize in subscription and loyalty models—running the gamut from home-delivered meals to clothing services. Another trend is for companies, underwhelmed by traditional companies that do media buys or brand building, to upgrade online capabilities through acquisitions.
Other sectors—such as automotive and energy—are scouring the globe for deals, with technology being the underlying driver. Companies in these sectors are either buying a technology company or technology embedded in a competitor. In the automotive sector, to illustrate, we see fewer acquisitions of manufacturers of tires or steering wheels; rather, the quest to add logistics software and autonomous driving technology, among other capabilities, has gained prominence.
We believe the chase for technology should remain a driving force for several years to come. Technology centers have emerged in recent years in Israel, the Nordic region, and Singapore, among other markets. While transactions in these markets may not be the biggest deals, they are driving overall volume higher.
Though this trend appears sustainable, especially with private equity buyers armed with huge cash hoards, interest from private equity firms might actually be thwarting corporate buyers from engaging in deals. In auctions, we see corporate buyers more frequently either shy away or leave the bidding early, with the sense they would be outbid by private equity firms.
Meanwhile, two issues loom as potential spoilers to the heated deal market. Trade tariffs could spark global uncertainty or disruption.1 The sustainability of recent deal activity is more in doubt than it was earlier this year because of recently announced tariffs. That said, it’s far from certain this will lead to a marked decrease in global deals. And, it’s important to note that should tariffs remain effective and onerous, companies can always make foreign direct investment into markets to produce goods there.
Another emerging hurdle is the Committee on Foreign Investment in the United States (CFIUS), which has become a potential gatekeeper on cross-border deals. There have been notable cases where buyers have faced resistance from the agency in striking deals. Companies from some markets might take a more measured approach and invest somewhere besides the United States, rather than face the risk of a deal being annulled.
That said, companies often look to M&A as a growth driver, because it can be quicker and easier to grow inorganically than organically if a deal is done right. With many attractive buyers overseas, strong stock prices, ample cash, and relatively low borrowing costs in place, the environment appears strong enough to withstand the potential hurdles.
1 Jeff Cox, “Fed’s Mester says tariffs add ‘uncertainty’ to an otherwise strong economic growth picture, "CNBC, March 26, 2018, https://www.cnbc.com/2018/03/26/feds-mester-says-tariffs-add-uncertainty-to-strong-economy.html
Larry is a principal with the Merger & Acquisition Consultative Services practice with Deloitte Consulting LLP. He has more than 29 years of professional experience, including nearly 25 in the consulting profession serving clients in the consumer and industrial products industry. Larry has worked in a number of areas within M&A including large-scale restructuring, due diligence, merger planning, divestitures, and integration.
Andy, a partner with Deloitte & Touche LLP, leads Deloitte’s US M&A Seller Services practice. He specializes in providing accounting and financial due diligence and structuring services, focusing on divestitures and business dispositions, and has worked with corporate and private equity clients leading carve-out financial statement and sell-side due diligence engagements. Andy has worked on major global transactions across many industries.