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Global economic balance, and resilience in M&A

The last four years have been marked by heightened geopolitical tensions, and these are shaping the transactional landscape and driving M&A activity in key sectors and geographies. These could be attributed to trade tensions, including between China and the US, the aftermath of Covid, events in Ukraine and more recently the Israel-Hamas conflict.

Businesses in the West are being encouraged to "risk-off China" with the US leading the initiative, supported by the UK and Europe. With that, we are seeing foreign direct investment (FDI) policies aligning with trade alliances, especially when they match security alliances between the same countries.

The Biden Administration in the US is threatening to subject a small number of outbound investments from the US into China in certain tech sectors to reverse FDI scrutiny (called "reverse CFIUS"). The European Commission is also looking at an initiative on outbound investments to address the risk of leakage of sensitive emerging technologies, as well as dual-use items, to destinations of concern.

The US has already enacted the CHIPS and Science Act and the Inflation Reduction Act, which favour domestic manufacturing and penalise countries of concern. In Europe, the EU Foreign Subsidies Regulation (which came into force last year) allows the EU to scrutinise, and block, acquisitions by entities which have benefitted in their local markets from subsidies.

In response to China's dominance in some critical mineral production and processing, and its lead in electric vehicle (EV) technology, the West has responded with numerous trade alliances and partnerships (such as the US-led Minerals Security Partnership) to develop and secure supply chains between its (non-China) members. FDI regulation and policies in a number of those countries are already mirroring these arrangements. Further initiatives are also under consideration, showing a clear direction of travel.

China has partially retaliated with curbs on exports, including graphite. Some, largely non-Western, countries are seeking to align with both the US and China (or in some cases seeking to play one off against the other), sometimes driven by their national priorities. How long this continues to be a viable option remains to be seen.

Where geopolitical risks are higher, this will need to be factored into deal terms including price, not only because of the risks of deal failure and regulatory conditions not being met, but also because of post-completion geopolitical risks. Buyers who can explain these risks to sellers and factor them properly into the deal will be well placed.

Greg Mulley
London

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Boards and investment committees are actively, and rightly, raising questions around geopolitical risks on acquisitions, investments, joint ventures and supply chain security, more than ever before. In an EY survey last year, 97% of CEOs said that they have changed their investment strategy in response to geopolitical challenges.

But despite the unpredictability that geopolitics brings, businesses continue to show more resilience in pursuing M&A than was the case pre-Covid, and have shown an increasing ability to navigate the issues, rather than see them as an insurmountable obstacle.

Alongside pure M&A, we have been seeing an increase in collaborative arrangements, as well as joint venture and minority investment activity, which do not always get captured in M&A league tables. In some cases, this is driven by a desire to participate in new markets, geographies or sectors but without wishing to commit to full acquisitions. We expect this will continue, for the same reasons, in 2024. We will see how these deals play out over time and whether they lead to consolidation plays (or sales) in the future.

The increase in, and a higher engagement of, geopolitical advisory firms and teams in banks and law firms is indicative of the demand and importance of geopolitical considerations in deal-making.

Beneficiaries

Geopolitical positioning has brought a number of themes to the fore, such as the need to rebalance global supply chains, energy transition, China's stronghold on clean energy technology and certain critical minerals, semi-conductor concentration in Asia, and access to tech (including AI and advanced manufacturing). These, combined with policy, legislative and regulatory intervention, are key in shaping M&A activity today.

Some regions and sectors are benefitting from such positioning which is providing impetus to M&A deals. For example, the various critical minerals trade alliance partnerships, and facilitative FDI regulation which follows, are already encouraging a refocus of critical minerals transactions and investment.

India, which is in the middle of an energy transition, tech revolution and infrastructure boom, is benefitting in particular from the Western world's desire to rebalance global supply chains and in some cases pivot away from China. This has resulted in corporates like Apple and Tesla focusing on manufacturing in India. Indian M&A has increased four-fold over the last 10 years, from US$30 billion worth of deals in 2014 to US$121 billion today. Part of this increase is driven by local demand, but there are significant tailwinds in India's favour that are helping to drive this activity. Similar to India, Southeast Asia (in particular, Indonesia) is also benefitting from such geopolitical positioning.

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Ambitious projects by the KSA like Neom, and a surge in joint ventures in the Middle East to bring advance manufacturing capability on-shore, are making the region a prominent player in the global M&A market.

Joza AlRasheed
Riyadh

The Middle East, which has consolidated its position with high oil prices and vertical integration in the oil and gas industry over the years, recognises the global energy transition ambitions and is taking steps to horizontally diversify to other sectors including healthcare, manufacturing and advanced technology. The Kingdom of Saudi Arabia (KSA) is successfully executing a broader global strategy. KSA's sovereign wealth fund, PIF, is looking to outpace GIC as the world's most active sovereign wealth fund, and we are seeing KSA-based companies looking at investments overseas, eg Manara's 10% investment in Canada-based Vale Base Metals. The KSA's liberalisation of its legal market to allow foreign law firms to set up their own office is another important indication of its desire to promote M&A. The region's desire to diversify is shaping up as a potential countervailing trend to Western investors seeking to risk-off China. For example, Middle Eastern sovereign wealth funds are investing in Chinese and other Asian EV/clean tech companies with a view to bringing the technologies back into their home markets.

In a more challenging geopolitical and economic climate, the obstacles that parties face when doing any deal loom much larger, whether that be navigating different and more vocal investor positions, the value expectations of the parties, shareholders and those set by third parties (which ignore the trading fundamentals of the markets, public and private), and the position of regulators and third-party regulatory objections.

Stephen Wilkinson
London

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Issues to navigate

While geopolitical considerations have always had an impact on M&A deals, the issues that have emanated in the post-Covid era are unprecedented and will only continue to evolve.

There is increased scrutiny by regulatory authorities which is resulting in prolonged deal timetables and execution risk. The UK's FDI agency recently used its powers under the National Security and Investment Act to order Nexperia (owned by WingTech, a Shanghai-listed company) to divest the majority of its stake in Newport Wafer Fab, a semi-conductor supplier. The US FDI agency is raising more questions during the course of approval applications on M&A deals. And there is a higher level commitments across a number of jurisdictions to address regulatory concerns than in the pre-Covid era.

Sanctions regimes are likely to continue impacting M&A deals. Parties are giving more emphasis to the analysis of sanctioned entities and ownership structures, associated supply chain risks and protecting employees in higher risk jurisdictions, and also sometimes reverse due diligence on the buyer.

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We are seeing a rise in carve-out deals and restructurings where companies are de-prioritising countries or reducing reliance on single supply chains in a manner which avoids a shock exit.

Graeme Preston
Tokyo


Key contacts

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Rebecca Maslen-Stannage

Chair and Senior Partner, Sydney

Rebecca Maslen-Stannage
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Siddhartha Shukla

Partner, London

Siddhartha Shukla
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Tommy Tong

Partner, Hong Kong

Tommy Tong
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Chris Walters

Partner, Head of Middle East Corporate, Dubai

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