“Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, so are light and air. No one will emerge as a winner in a trade war.” President Xi Jinping, PRC
The quote above would be unremarkable were it not from the President of the People’s Republic of China. Are things really so bad that the West must be tutored in free markets by the leader of the world’s largest communist country?
On June 12 the Reuters Global M&A Summit in London brought together investment bankers, M&A lawyers, international investors and corporate executives to discuss this question, exploring the trends that will shape the deal-making climate for the rest of the year, into 2018.
There are few parts of global finance as politically conspicuous as large-scale M&A. And with political climates so volatile across much of EMEA, it is a small surprise that politics was top of the M&A agenda.
The panel largely agreed that protectionism is increasing in the US and the UK, with mooted changes to the tax code and takeover rules, designed to protect jobs and ‘national champions,’ respectively. This sentiment inevitably feeds through to the M&A market, increasing caution and slowing the pace.
In terms of tactics, this takes hostile bids off the table. At the best of times, the track record for hostile bids in EMEA is poor. In the current environment, a target board can cry political foul before a deal gets off the blocks. It is therefore considered essential to constructively engage and consensually progress takeover plans for any hope of success.
On the other hand, while the UK is ratcheting up the protectionism rhetoric, it remains very open market, particularly in contrast to several European neighbors that are perennially guarded towards foreign takeovers. And while such protectionism is historically more a feature of Southern Europe markets, the phenomenon is spreading north. Take for instance, the French reaction to GE’s bid for Alstom; the Dutch political class’ hostility towards US-based PPG’s offer for Akzo Nobel in April, or the anxious reactions in Berlin to the flood of Chinese companies acquiring leading-edge tech out of the Mittelstand.
Even so, with the so-called BRIC countries having a hard time of late, and China and India still difficult territories in which to operate, the consensus is that US companies still favor Europe.
But there is a catch. European companies are writing a new defense manual to kill deals, and only acquirers that understand the new conditions will succeed.
So for instance, the deal must be politically-sellable; the target must be ‘on board’ in principle; favor cash over paper. Get your timing right – too early and you will get a leak, too late and you’re opaque. FX can help but this is a tail-wind, not a strategic imperative.
Trump’s tax plans
In addition, tax inversion is no longer a US kicker, given US President Donald Trump’s plans to reform corporate tax legislation. This could mean the period of effectively zero opportunity cost of making European acquisitions will recede, probably boosting intra-US deals at the expense of transatlantic action.
Back in Brexit-focused Britain, the relative openness of the UK is by no means unambiguous. While the Conservative Party’s almost non-existent working majority means Prime Minister Theresa May could conceivably row back from some of her more ambitious protectionist schemes such the Industrial Strategy, the general flow of political discourse is likely to be more, not less, protectionism.
Talk of hampering foreign bids ‘through the backdoor’ by stretching out the Takeover Code’s famous 28 day put-up or shut-up rule seems both poor in principle and poor in practice. Such changes should be achieved through legislation and, in any case, the 28-day rule was adopted in 2011 precisely to reduce prolonged uncertainty, expense and risk for the target business.
But let’s put all this in perspective: such a policy would be a bow and arrow compared to the US regulatory bazooka that is the Committee on Foreign Investments in the US (CFIUS).
What to expect for the second half of 2017?
Big, transforming deals look difficult. Expect more, smaller deals to pump up volumes. Transatlantic acquisitions are currently at a ten-year high but Trump’s protectionist tendencies can’t be ignored. Smart acquirers may seek to road-test their ideas in private or informally, before going full tilt. Asian buyers will continue to be a big part of the mix, notwithstanding political nervousness around China’s aggressive M&A spree. No sector is off the table, in principle – but that needs to be tested. As ever, strategic imperative will trump all.
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