Don’t Believe Everything You Read
Conventional wisdom suggests that if the economy is sputtering and businesses are struggling, then merger and acquisition (M&A) activity must be declining as well. Scarce capital is to be conserved or reinvested, not necessarily spent on acquisitive growth in an already risky environment.
Conventional wisdom in this market is partially wrong. Without a doubt, domestic M&A is slowing in the face of unfavorable economic conditions. Companies are intensely focused on their own bottom lines, and those that are evaluating deals are running into drastically tightening capital markets for trans-action financing. From large, syndicated M&A deals all the way down to single-bank transactions, those attempting to raise debt are experiencing diminished availability, higher pricing (spreads over historically low rates continue to increase), and rigid covenant structures. Private equity firms are adversely impacted, too, as there’s only so much equity they’re willing to invest in a transaction to make up for a shortfall of debt capital.
But Deals Are Still Being Consummated…
That’s right. They are. One reason is that M&A activity by non-U.S. acquirers is on the rise. Nearly 40 percent of the cross-border activity in 2007 involving the United States was driven by foreign buyers. Last year buyers from industrialized nations accounted for approximately 77 percent of foreign acquisitions of U.S. companies, while emerging market acquirers accounted for a very significant 23 percent. This trend continued through the first quarter of 2008. The graph below demonstrates growth in the number of cross-border deals.
What’s Driving This Increase?
The increase in acquisitions of U.S. companies by non-U.S. acquirers continues to be driven by both strategic and market dynamics. Among the most important strategic factors is accessing the North American markets to (1) obtain new customers, (2) develop new distribution channels, and (3) enter new industries. Many foreign acquirers realize that it’s better to “buy” their way into the North American market rather than “build” their way in via greenfield expansion. Acquisitions are also driven by current customers that expect global sourcing capabilities and, in many cases, require a local market presence. An example of this is smaller, foreign automotive suppliers acquiring U.S. companies to support large, global customers in a country other than the suppliers’ home markets.
Other key factors driving cross-border M&A into the U.S. include accessing advanced business processes, new technology, engineering expertise and management talent, as well as the optimization of the global cost structure. In some cases, acquisitions will provide foreign companies the opportunity to pursue facility consolidations, leverage purchasing synergies, and realize the benefits of relocating certain operations or processes. In other examples, foreign companies are executing acquisitions in the United States to match dollar costs with dollar revenues by manufacturing in the same geography where products are sold. Finally, foreign companies are pursuing U.S. acquisitions to minimize economic cycle volatility in an effort to minimize overall risk.
While strategic factors have been, and continue to be, the key driver of U.S. transactions by non-U.S. acquirers, market factors are accelerating overall activity. The weak dollar currently is creating bargain-buying opportunities for foreign acquirers, and the domestic credit crisis is reducing competition for these assets. In time, as the dollar strengthens, North American operations will contribute a greater percentage share to the overall earnings of foreign buyers.
How Can PMCF Help You Capitalize on These Opportunities?
PMCF is also experiencing increased cross-border deal flow composed of inbound and outbound M&A transactions. The industries represented are diverse, from capital equipment, automotive, and plastics, to medical products, pharmaceuticals, and business services. Examples of PMCF transactions in 2007 included:
- Sale of a capital equipment manufacturer to a publicly traded Italian multinational company to secure one of the best brands in the industry.
- Sale of an automotive supplier to a private UK multinational company to extend reach from Europe to Asia to the United States.
- Sale of a plastics company to a publicly traded Japanese multinational to add complementary manufacturing technology and customers.
- Sale of a health care diagnostics company to a publicly traded Swiss multinational to access technology and strengthen its position in the pharmaceutical industry.
In order to deliver enhanced value to our clients and strengthen international capabilities, PMCF led the formation of Corporate Finance International (CFI), a select network of boutique investment banks throughout the world. PMCF has grown the network to nine member firms, providing our clients access to leading M&A advisors in the most important geographies around the world. Each CFI firm brings specific industry expertise, local market knowledge, language skills, and a broad contact base to transactions, enhancing our ability to execute cross-border deals seamlessly.
Close collaboration with our network partners allows PMCF to leverage global industry knowledge and contacts and deliver unparalleled service to our clients. We encourage you to learn more about Corporate Finance International at http://www.cfi-network.com/ and, when it comes time to consider a transaction, don’t believe all the news you read. Global M&A remains robust, and PMCF is well-positioned to identify a value-maximizing solution to your investment banking needs.
