Global trade wars, pandemics, and geopolitical tensions have profoundly altered M&A activities. As companies navigate this volatile and unpredictable environment, understanding how to adapt their M&A strategies to handle these disruptions has become more critical.
This blog explores the global impact on M&A and highlights how companies can effectively adapt to and prepare for the next disruption.
How Trade Wars Redefine Market Access and M&A Opportunities
Trade wars significantly reshape market access and present new challenges and opportunities for M&A activities. They often result in uncertainties and delays in M&A transactions due to changing tariffs, regulatory policies, and market access concerns, especially when two or more countries engage in escalating trade disputes.
Impact of Regulatory Scrutiny and National Security Concerns
- In the United States, the Committee on Foreign Investment in the United States (CFIUS) has intensified its scrutiny of transactions involving foreign investors, particularly from countries like China, Russia, Iran, and North Korea. Due to concerns over national security and intellectual property, this increased vigilance has led to delays and complications in cross-border M&A deals.
- Companies must conduct a thorough risk assessment of inbound transactions early in the process. This helps determine whether the investment requires mandatory CFIUS filings or might attract the committee’s attention.
Antitrust Enforcement and Compliance Issues
- Trade wars also significantly impact antitrust enforcement. The U.S. antitrust agencies have adopted a more aggressive stance, expanded their enforcement agenda, and increased their budget.
- For instance, in 2022, cross-border deals saw increased antitrust concerns, which led to stricter scrutiny of non-U.S. acquirers involved in upstream or downstream markets.
Key Statistics
- A remarkable 40% of global goods trade was affected by trade distortions from 2017 to 2019 due to targeted tariffs and other protective measures enacted during trade wars. This demonstrates the far-reaching consequences of trade policies on M&A opportunities.
- Additionally, 64% of cross-border M&A deals in the U.S. in 2022 were conducted using cash transactions, which surpassed the 55% average over the previous five years.
The Pandemic Effect: What Toilet Paper Shortages Reveal About Due Diligence
The COVID-19 pandemic exposed deep vulnerabilities in global supply chains, and these weaknesses have significantly impacted M&A valuations and strategies. The rapid shift in consumer behavior, supply chain disruptions, and shortages caused by the pandemic revealed the critical importance of assessing supply chain resilience in M&A activities.
Understanding the Impact of Panic Buying and Supply Chain Disruptions
- During the pandemic, panic buying led to empty shelves and shortages of essential items such as toilet paper and canned goods, temporarily disrupting supply chains.
- According to research from the Johns Hopkins Carey Business School, disruptions were most significant for goods that required complex, labor-intensive processes or where global transportation routes were involved.
The Importance of Supply Chain Due Diligence in M&A
- M&A activities must now consider the implications of supply chain vulnerabilities. A lack of raw materials, labor shortages, or transportation disruptions can significantly affect the target company’s valuation.
- The pandemic emphasized the need for robust supply chain risk assessments in M&A transactions, ensuring companies account for potential disruptions and challenges before closing a deal.
Key Statistics
- Supply chain disruptions accounted for 75% of total emissions within companies, indicating their extensive impact on operational efficiency and sustainability.
- The inflation rate in the U.S. surged to 8% in 2022 due to COVID-19-induced supply chain disruptions, the highest rate since the early 1980s. This massive inflation shock was primarily supply-driven, reinforcing the pandemic’s long-term impact on M&A evaluations and financial forecasts.
Practical Takeaways
- Companies engaging in M&A should prioritize supply chain due diligence, identifying potential bottlenecks and vulnerabilities. Assessing how a target company manages supply chain disruptions can significantly influence valuation and deal terms.
- To adapt to future disruptions, companies should diversify their supply chain sources, enhance communication with suppliers, and invest in technologies that improve supply chain visibility.
Lessons Learned: Preparing for the Next Global Disruption in M&A
Global disruptions, whether caused by pandemics, trade wars, or political instability, have forced companies to reconsider and adapt their M&A strategies. As businesses navigate the volatile, uncertain, complex, and ambiguous (VUCA) world, preparing for future disruptions is essential to ensuring successful M&A outcomes.
- Importance of Diversification
- Diversifying supply chains, markets, and investments is crucial for mitigating risks associated with global disruptions. For example, businesses that rely heavily on one region or supplier are more vulnerable when unexpected disruptions occur.
- According to Rutgers Business Review, companies that diversify across various markets and supply chains increase their resilience and adaptability to uncertainty.
- Embracing Digital Transformation and Technology
- Companies should leverage technology to monitor supply chains, improve transparency, and manage risks more effectively. Digital tools enable better data analysis, allowing businesses to identify potential disruptions early and adapt their strategies.
- Firms that have adopted technology-driven approaches for supply chain management experienced fewer disruptions during the COVID-19 pandemic, showing the value of integrating technology into M&A processes.
- Strategies for Risk Mitigation in M&A
Businesses must adopt multiple strategies to prepare for and cope with global disruptions:- Disengage: Temporarily withdraw from markets or activities that are too risky due to political or economic instability.
- Transform: Adapt your business model to the changing environment by finding alternative suppliers, partners, or customers.
- Bypass: Find innovative solutions to navigate disruptions, such as creating new distribution channels or sourcing strategies.
In an increasingly uncertain world, global events will continue to challenge M&A activities, affecting valuations, negotiations, and deal structures. By staying agile, conducting thorough due diligence, and embracing strategies like diversification and digital transformation, companies can confidently navigate the complex terrain of M&A.
To ensure your organization is well-prepared for these disruptions, contact us today for expert guidance and support in managing your M&A strategies. Contact us to learn how we can help you navigate the global impact on M&A.