Since the financial crash in 2008, the fear of overdependency and heavily/overly integrated economies have encouraged the implementation of measures promoting ‘deglobalisation’. The focus of modern markets has shifted towards innovation with new methods of production bringing producers closer to the consumers. Mergers and acquisitions by multinational firms were previously vital in promoting globalisation and innovation as it assisted the transfer of capital, knowledge and skilled labour across borders. With the rise of Trump and his protectionist policies and the decision of the UK to leave the EU, what role does cross border M&A have in an ever-dividing global market? With the growing need for innovation and efficiency, how has the focus of M&A changed in the evolving markets?
Trump
When we look at the global economy, it is hard to ignore the impact that Donald Trump is having over the Atlantic on the largest economy in the world. Since being elected in November 2016, Donald Trump has focussed on protectionism and also made significant adjustments to the US tax system to pursue his goal of “Making America Great Again’. These have had important ramifications on internal and cross border M&A in the US as Trump aims to develop the domestic economy.
The implementation of the Tax Cuts and Jobs Act (TCJA) in December 2017 led to the reduction in corporation tax from 35% (the highest in the industrialised world) to 21%. This tax cut, which was the largest in US history, was accompanied by a modernisation of the American tax system to allow US firms greater ability to bring home foreign earnings to reinvest in domestic markets. Previously, it was often the case that, US firms wanted to avoid the high US tax and therefore held earnings offshore, however, the more attractive tax system in the US prompted restructuring of multinational firms and potential M&A deals to ensure they benefit from these tax amendments.
Trump’s push for greater protectionism, seen through his tariffs on steel and aluminium, his scrapping of the Trans-Pacific Partnership (TPP), withdrawing from the Transatlantic Trade and Investment Partnership (TTIP), and renegotiating the North American Free Trade Agreement (NAFTA), all signal a rise in M&A as firms look to acquire firms within trade barriers to avoid higher costs of cross border trade.
The first quarter of 2017 saw outward M&A deals from the US rise to $114.1 billion which was almost double the level in quarter one of 2016. However, in 2017, North America saw an overall decline in M&A deals by almost a third compared to the same period in 2016 according to Bloomberg statistics. Similarly, the number of global M&A deals in 2017 fell by 12.2% compared to 2016. This demonstrates the positive impact Trumps has had on US deal makers however the unpredictable and controversial personality of Trump has unnerved potential foreign deal makers.
Brexit
Following the EU referendum on 23rd June 2016, it would be expected that M&A transactions with British firms would have dropped significantly with the rise of uncertainty. However, data recorded shows that immediately following the Brexit vote, inbound M&A in fact reached a record £190bn following the sharp decline in the value of the pound with British exports becoming more competitive.
2017 in fact saw a slump to just £35.3bn in inward M&A transactions however the explanation for this slump is revealed when considering there were 4 high value deals completed in 2016 which accounted for 80% of the total value. 2017 saw 254 transactions completed compared to 226 in 2016. This demonstrates that demand for UK firms even after Brexit did not decline as expected. Similar trends continued into 2018 which saw the UK hold the world’s second largest M&A market during the first 6 months of 2018 and the value of transactions involving British firms boomed to £218.2 billion in the first half of 2018 compared to approximately £70bn the previous year according to data from Thomson Reuters.
Between the 18-month period from the referendum and January 2018, 31 inward deals occurred valued above £1 billion according to Mergermarket. The largest deals in this period included Japanese company SoftBank’s £24.3bn acquisition of UK chipmaker Arm Holdings and China Investment Corporation’s £10.7bn takeover of logistics firm Logicor Europe.
Outbound UK M&A in 2017 reached a 17-year high totalling £77billion demonstrating that British firms were not deterred from acquiring foreign firms. Whilst Brexit was predicted to isolate Britain from its European neighbours, instead, little effect occurred in the form of preventing M&A and instead firms were encouraged to exploit the cheap British pound and cheap debt.
Innovation and Fintech
In 1958, Chairman Mao launched his major economic campaign in China, the Great Leap Forward, with the slogan “More, better, faster, cheaper”. In the modern economic climate, there is a constant desire for these characteristics and M&A has provided firms with opportunities to acquire new and innovative services and production methods. Whilst issues regarding the protection of personal information and the continuing need for security against risk all present hurdles to innovation in 2018, the rise of Fintech has been one such phenomena which has targeted efficiency by which both firms and individuals conduct their business.
Fintech, as the name might suggest, is the use of technology in the financial sector through improving and/or automating financial processes. Modern day Fintech places focus on consumer orientated innovation mainly streamlining the process of money transfers, lending and borrowing and managing funds. The development of online banking through smartphones, for example, has greatly revolutionised the efficiency of money transfers. According to EY’s 2017 Fintech Adoption Index, one-third of consumers use at least two or more Fintech services in their daily lives.
Within very recent years, the influence of cryptocurrencies has further influenced Fintech and the development of Bitcoin, for example, has attempted to provide an alternative method of payment.
The growth of Fintech has prompted many large firms in the financial sector, specifically banks, to merge with large Fintech-based companies in order to improve the efficiency of their financial services. In 2018, Santander acquired transaction processor Elavon and BNP Paribas invested in robo-adviser Gambit Financial.
However, there are some arguments that the rise of Fintech has disrupted the status of financial services. The innovative new methods have indeed encouraged M&A but at the cost of branches and employees as more and more services can be provided online and simply through smartphones. Innovation based start-ups have boomed in recent years with an estimated $17.4 billion being invested in these new Fintech-based firms and thus has led to a greater need for a competitive edge.
The need for human interference in financial services is diminishing at an alarming rate as we place more and more of our faith on the online alternative. With further investment into Fintech, M&A has the potential to lead to an even more digitalised market- is this really what consumers want? Recent scandals regarding the hacking of Facebook and personal information show even the largest, and seemingly well protected, firms aren’t safe. Given how vital financial services are in allocating resources from those with excess to those who require it, do we really want to have to deal with the risks which online services present? Fintech has greatly encouraged M&A but at what cost to the whole economy.
Whilst some nations attempt to isolate themselves against competing trading partners, the rising innovation has brought nations closer and closer. Trump’s positive impact on domestic M&A contrasts to the international trepidation he has caused. Initial fears of Brexit in fact benefitted M&A due to exchange rates and the influence of Fintech has caused evermore financial services to acquire innovative new companies. The focus of M&A is constantly changing, and global events continue to define the actions of firms, banks and individuals.
Rory Hazelton
Commercial Law Section Feature Writer
13 December 2018
Aaron Kirchfeld, ‘Dealmakers fear president Trump’s ‘negative impact on M&A’ (Bloomberg, 5 December 2017) <https://www.bloomberg.com/news/articles/2017-12-04/dealmakers-fear-president-trump-s-negative-impact-on-m-a > accessed 11 November 2018
Alexandra Rogers, ‘Fintech M&A deals swell to $40bn in first half of 2018’ (City A.M., 8 October 2018) <http://www.cityam.com/264850/fintech-ma-deals-swell-40bn-first-half-2018> accessed 10 November 2018
Ben Martin, ‘Britain sends mixed messages post- Brexit with greater scrutiny of foreign deals’ (Reuters UK, 16th August 2018) <https://uk.reuters.com/article/uk-britain-m-a-analysis/britain-sends-mixed-messages-post-brexit-with-greater-scrutiny-of-foreign-deals-idUKKBN1L11KB> accessed 10 November 2018
Daniel Domberger, ‘Brexit may mean Brexit, but what does it mean for M&A’, (Financier Worldwide, December 2017 )<https://www.financierworldwide.com/brexit-may-mean-brexit-but-what-does-it-mean-for-ma/#.W-LAQaecZN0> accessed 10 November 2018
Ey’s 2017 Fintech Adoption Index
Fraser Tennat, ‘Trump’s tax cuts and the impact on US M&A’ (Financier Worldwide, April 2018) <https://www.financierworldwide.com/trumps-tax-cuts-and-the-impact-on-us-ma/#.W-L0DaecYdU> accessed 10 November 2018
Guy Potel, ‘Financial institutions M&A trends: Fintech’ (White & Case LLP, Lexology Newsfeed, 11 December 2017) <https://www.lexology.com/library/detail.aspx?g=14094194-d2fe-47a9-9620-32ffacb8a5a4> accessed 11 November 2018
James Hester, ‘3 focus areas as global M&A accelerates’ (Financial Management, 3 May 2018) <https://www.fm-magazine.com/news/2018/may/global-mergers-and-acquisitions-201818846.html> accessed 10 November 2018
Kate Beioley, ‘Private investors benefit from rising M&A, Post-Brexit boom in inbound M&A’ (Financial Times, 9 March 2018)
Matthew Toole, ‘The impact of protectionism on global M&A’ (Thomson Reuters blogs, 17 July 2017) <https://blogs.thomsonreuters.com/answerson/impact-protectionism-global-ma/> accessed 10 November 2018
Nicholas Azis, Jacob Kuipers, Paul Boles and Christian von Sydow, ‘Cross Border M&A- the impact of Brexit, the trump administration, and china’s crackdown on capital flight’ (McDermott Will & Emery, October 2017) <https://www.mwe.com/~/media/files/press-room/2017/08/cross-border-manda-the-impact-of-brexit.pdf> accessed 11 November
The Deal and Toppan Vite, ‘Impact of Global Economies on M&A’ (The Deal in partnership with Toppan Vite, 2016) <http://www.thedeal.com/pdf/Impact%20of%20Global%20Economics%20on%20M&A.pdf> accessed 11 November 2018
Disclaimer: The views expressed are that of the individual author. All rights are reserved to the original authors of the materials consulted, which are identified in the footnotes above.
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