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Great Conditions for Cross-Border M&A?

By The Prince ⋅ April 24, 2008 ⋅  Email This Post ⋅  Print This Post ⋅ Post a comment

Since the credit crisis began everyone has been wondering what kinds of buyers would step in to replace the enormous hole left by private equity firms.  First, we heard that strategic buyers would become more important now that they lacked competition from private equity firms.  The only problem with this, is that it takes for sellers expectations to adjust, and that period of readjustment is not over yet.  Furthermore, many strategic buyers are choosing to wait on the sidelines and horde cash given the slowing of the U.S. economy. 

Foreign sovereign wealth funds have put large amounts of money to work in the U.S. but mainly in the financial sector.  Yet, foreign strategic buyers have been larger overlooked in the speculation about who the new acquisitors would be in the M&A market.  Adam Reinebach, a recent article blog post at Mergers Unleashed, gives some reasons why the environment for cross-border M&A led by foreign strategics is strong:

"At least on paper, the conditions for foreign buyers interested in U.S. targets couldn’t be more auspicious. The dollar is weak, M&A financing is harder to come by for financial sponsors, and many strategic buyers in the States are hard-pressed to make acquisitions at a time when earnings targets are being missed."

He also, lays out some of the negatives that may prevent foreign strategics from getting deals done in the United States:

"I would guess that most companies would ultimately be willing to sell to a foreign buyer if the price is right and they feel the asset is being left in good hands. But for smaller companies, in particular, the concept of selling to a buyer in Europe or Asia can still be unnerving…These fears, however unfounded they may be, are only reinforced by all the talk about sovereign wealth funds invading American soil. That’s a topic for another column, but I’m guessing most readers of this column would agree that much of the mainstream commentary and press (i.e., the recent 60 Minutes interview with China’s SWF chief) has been negative and perhaps short-sided."

While The Prince mainly agrees with Reinebach about the environment that should encourage a cross-border M&A boom, It is worth noting that there is strong argument that European strategics may also fall victim to the same paralyzing effects that U.S. strategics have been hit with.  Given how connected the U.S. and foreign economies are, many foreign strategics have begun or will begin to see slowing earnings as consumer demand in the U.S. falls and U.S. consumers continue to default on consumer credit products.  Furthermore, foreign strategic buyers may see the turmoil in the U.S. credit markets and the slowing U.S. economy as reasons why a purchase in the U.S. at levels that satisfy U.S. sellers with unadjusted expectations may be imprudent.  In fact, the more we consider this topic, to more we see that by-and-large the considerations that are keeping U.S. strategics on the sidelines of M&A and the same considerations that will probably keep foreign strategics out of the U.S. M&A market.