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The impact of protectionism on global M&A

Matthew Toole

25 Jul 2017

Chinese President Xi Jinping attends the World Economic Forum (WEF) annual meeting in Davos, Switzerland January 17, 2017. Photographer: Ruben Sprich
Chinese President Xi Jinping attends the World Economic Forum (WEF) annual meeting in Davos, Switzerland January 17, 2017. Photographer: Ruben Sprich

The dichotomy between politics and M&A is stronger than ever. Matthew Toole, Director, Deals Intelligence at Thomson Reuters, explores this changing landscape and highlights some of the key discussions from the Reuters Global M&A Summit. 

Speaking at Davos in January, the President of the People’s Republic of China, Xi Jinping, said: “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.”

This quote would be unremarkable, were it not from the President of the People’s Republic of China.

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Is the landscape changing so much that the West is being tutored in free markets by the leader of the world’s largest communist party?

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 so politically conspicuous as large-scale M&A.

And with political climates so volatile across much of EMEA, it is small surprise that politics remains top of the M&A agenda.

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The panel at the Reuters Global M&A Summit largely agreed that protectionism is increasing in the U.S. and the UK, with mooted changes to the tax code and takeover rules respectively, designed to protect jobs and ‘national champions’.

This sentiment inevitably feeds through to the M&A market, increasing caution and slowing the pace.

Hostile deals

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.

Speaking at the summit, Karen Cook, Chairman of Investment Banking at Goldman Sachs, stressed that it is therefore considered essential to constructively engage and consensually progress takeover plans for any hope of success.

Watch video — Karen Cook, Chairman of Investment Banking, Goldman Sachs on the impact of protectionism on M&A

On the other hand, while the UK is ratcheting up the protectionism rhetoric, it remains a very open market, particularly in contrast to several European neighbors that are perennially guarded towards foreign takeovers.

Download report — Deals Insight – The UK M&A Scene H1 2017

Statistics from Deals Insight - The UK M&A Scene H1 2017 report
Statistics from Deals Insight – The UK M&A Scene H1 2017 report

And while such protectionism is historically more a feature of southern Europe markets, the phenomenon is spreading north, as Hernan Cristerna, co-Head of Global M&A at JP Morgan pointed out.

Watch video — Hernan Cristerna, co-Head of Global M&A at JP Morgan, on the UK market and the spreading of protectionism in Europe

Take for instance, the French reaction to GE’s bid for Alstom; Dutch hostility towards U.S-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 to operate in, the consensus is that U.S. companies still favor Europe.

But there is a catch.

European defences

European companies are writing a new defence 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.

In addition, tax inversion is no longer a U.S. kicker, given President 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.

Watch video — How is the unpredictability around tax reform in the US impacting the M&A space? Hear from Steve Baronoff, Chairman of Global M&A at Bank of America Merrill Lynch

‘Backdoor’ opposition

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 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 United States’ regulatory bazooka that is the Committee on Foreign Investments in the US (CFIUS).

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Looking ahead

So, what to expect for the second half of 2017?

Chart to demonstrate the last several years fluctuation in Global Announced M & A Volumes
Chart to demonstrate the last several years fluctuation in Global Announced M & A Volumes

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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