M&A Outlook 2008: Cross-border bonanza

E-Mail

Discussion

Print Story

Published November 7, 2007 at 1:02 PM

« Previous Story Home Next Story »

A panel at The Deal's M&A Outlook 2008 conference at the Ritz-Carlton, Battery Park in New York City Wednesday weighed in on cross-border M&A deals, which have become increasingly more commonplace, as The Deal's senior writer and moderator Matt Miller said, but not predictable or easy to navigate. Dealmakers, including Christina Mohr, a managing director of M&A with Citigroup Inc.; Dechert LLP partner Ian A. Hartman; John Noone, an IBM Corp. managing consultant; and Peter Gottsegen, the founding partner of Canada-focused private equity firm CAI; dished on the expansion of cross-border M&A deals, the role of emerging markets, the effect of the credit crunch and the emergence of sovereign wealth funds.

Continue reading below

Also on Dealscape

Mohr offered some color on trends. This year, she said, really represents the high-water mark of where M&A is globally. Overseas is where the growth lies. In 2007 to date, she said 45% of global M&A has been cross-border. It should be somewhere in the high 40% range by the end of the year. While Europe and U.S. have historically driven this, growth in the rest of the world has almost doubled over recent years. In the second quarter of 2007, there was $800 billion in global M&A volume. In the third quarter, it dropped to $400 million. The fallout largely came from the U.S. and Europe, she said, while volume from the rest of the world was essentially flat. The role of emerging markets and their companion sovereign wealth funds are driving a lot of this. Sectors where activity is hot include: financial services, energy and power, and industrials.

For buyers looking to the U.S., the current climate may make M&A prospects more attractive. Because of the credit crunch and the depressed U.S. dollar, cross-border strategics may see this as a good time to invest in the U.S., Hartman said.

Video highlights from The Deal's M&A Outlook: 2008

Click To Play

For Canada, specifically, from a private equity point of view, it's more expensive to buy in Canada, while for Canadian portfolio companies, there are attractive opportunities in U.S. companies, Gottsegen said.

However, the credit crunch and the depressed dollar hasn't stopped American companies from looking overseas. Instead, IBM's Noone said that "the credit crunch has created a risk in areas you're not strong in," so companies instead are sticking to their knitting.

Where deals are

In Canada, Gottsegen said, the first half of this year saw $270 billion worth of deals done within the Canadian market, like Thomson-Reuters or BCE, while 70% of the deals Canadian companies do are in the U.S. For example, Canadian financial institutions are particularly active in cross-border expansion.

In emerging markets, or BRICs countries, Dechert's Hartman said money's not just going in, it's coming out from what they've built up through oil markets. Mohr said some of the largest deals in the third quarter were on behalf of emerging-market acquirers. This year marks the first time out-bound volumes are equal to the in-bound volumes.

The hurdles

But regulatory hurdles are very much an issue. Regarding battles like CNOOC or Dubai Ports, the flow of capital into the U.S. raises concern, panelists agree.

On CFIUS, the body that regulates foreign investment in U.S. companies, recent amendments confirm it's not just national security, but focus on critical infrastructure, Hartman said. If you have the Chinese looking to make major investments in oil and gas or sensitive technologies, there will be scrutiny, and it's not just interest from emerging markets. Even Lucent-Alcatel was scrutinized over how the technologies would be handled.

The role of sovereign wealth funds

Money in Middle Eastern countries is being built up and will need to find a home, Gottsegen said.

Chiming in with more figures, Mohr said sovereign wealth funds represent a pool of nearly $3 trillion investable today, which will be practically $8 trillion within the next five years, created by excess foreign reserves — that's even before oil hits $100 a barrel. There are about 35 SWFs out there right now, and growing as trading balances tend to flow into countries with spectacular natural resources. Relative to private equity, which is probably only around $3.5 trillion, it's growing much more rapidly.

The strategy of SWFs is constantly evolving, Mohr said. Norway's, which is the second largest, acts like a mutual fund. Those around the Middle Eastern nations can adopt multiple investment strategies and invest directly or co-invest with PE. The separation of funds and the evolution of the strategy is almost continual, she said. These funds have driven emerging market M&A flow this year. But questions like: "Who do they really represent?" drive debate over whether this is a good thing.

In terms of industries that are attractive targets, the lion's share has been made in asset-intensive industries such as hotels, leisure and shipping, Mohr said. They have hard asset underpinnings. Hartman added funds go after things like stock exchanges, as that want to be strong financial players. Noone added consumer companies might become less desirable.

But there's a concern coming from the U.S. government, Hartman said, over lack of transparency. Will they make financial decisions, or will they start implementing foreign policy? —Carolyn Murphy

See more M&A Outlook posts