Impact of U.S. tariffs on cross-border M&A in the healthcare industry
The effects will vary depending on the nature of the tariffs, the countries involved, and the structure of the deals. Here's a breakdown of how tariffs might impact the healthcare sector:
1. Increased Costs for Healthcare Companies
- Import Tariffs on Medical Devices and Supplies: If the U.S. imposes tariffs on medical equipment, devices, or pharmaceutical products, the cost of goods for healthcare companies (especially those involved in manufacturing or distributing these items) could increase. This rise in costs may prompt companies to reevaluate cross-border M&A deals as the potential for higher operational costs may reduce the profitability of the deal.
- Raw Materials and Inputs: The healthcare industry is highly reliant on raw materials such as chemicals, lab equipment, and other inputs. If tariffs impact these raw materials, companies may reconsider cross-border acquisitions of firms that heavily rely on such inputs, particularly if those inputs are sourced from countries facing tariffs.
2. Uncertainty and Delay in Deal Closure
- Market Volatility: Tariffs can lead to market uncertainty, which may delay or deter M&A deals. Healthcare companies may postpone cross-border acquisitions as they assess the potential impact of tariffs on long-term profitability and business strategy.
- Regulatory Scrutiny and Negotiation Delays: Increased tariffs may also lead to heightened regulatory scrutiny. Healthcare M&A deals, particularly those that involve cross-border transactions, are often already subject to complex regulatory approval processes. If tariffs alter the economic landscape or supply chain dynamics, these deals may face more prolonged negotiations and regulatory reviews.
3. Changes in Deal Structure
- Price Adjustments: Tariffs can change the valuation of a target company. If a company’s operations are significantly impacted by tariffs (e.g., due to higher costs for importing or exporting), its value may decrease, leading to adjustments in deal terms or renegotiation of prices.
- Shift in Geographic Focus: Healthcare companies may rethink the strategic rationale behind their M&A targets. For example, firms in the U.S. might avoid acquisitions in countries heavily impacted by tariffs or reconsider entering markets where tariff-related trade barriers could hinder future growth.
4. Impact on Cross-Border Investment
- Reduced Foreign Investment: The imposition of tariffs could make the U.S. market less attractive to foreign healthcare investors, as tariffs would increase the cost of doing business in the U.S. This could discourage foreign companies from acquiring U.S. healthcare companies or investing in U.S.-based healthcare ventures, particularly if the tariffs increase operating costs or limit market access.
- Shift in Cross-Border M&A Activity: On the flip side, U.S. companies may look to acquire firms in countries with lower tariff barriers, or those that have trade agreements that mitigate tariff impacts. This could lead to a shift in the direction of cross-border M&A, with companies focusing on markets that remain more accessible due to trade agreements or lower tariff rates.
5. Strategic Responses to Tariffs
- Diversification and Risk Mitigation: In response to tariffs, healthcare companies might seek to diversify their operations across multiple markets to mitigate the risks of being overly reliant on a specific country or region. This could lead to more cross-border M&A activity, albeit with a focus on securing more balanced or diversified supply chains.
- Re-shoring or Near-shoring Strategies: Healthcare companies might also be encouraged to move operations back to the U.S. or closer to home markets to reduce reliance on foreign manufacturing, especially if foreign tariffs increase the cost of imported goods. This could lead to an increase in domestic healthcare M&A activity or acquisitions of companies with operations in countries with favorable trade conditions.
6. Changes in Strategic Alliances and Partnerships
- Joint Ventures: In addition to full M&A deals, tariffs might also prompt healthcare companies to enter into joint ventures or strategic partnerships rather than complete acquisitions. Such arrangements can help companies share risks and costs, especially when dealing with complex tariff regulations.
7. Long-Term Strategic Shifts
- Innovation and R&D: The healthcare industry is highly innovation-driven. Companies may focus on acquisitions that provide access to new technologies or products to offset the financial strain caused by tariffs on imports. For example, U.S. healthcare firms may look to acquire international biotech or pharmaceutical companies that can help expand their product portfolio and reduce reliance on tariff-heavy supply chains.
In conclusion, while U.S. tariffs may have an immediate dampening effect on cross-border M&A in the healthcare industry. The exact nature of the impact will depend on the specific tariffs involved, the countries impacted, and the characteristics of the M&A transactions. The recent 90-day pause will hopefully allow for productive trade talks between major trading partners around the world.
CDI Global is a leading M&A and corporate advisor for middle market transactions, especially cross-border business combinations. We have partners in selected industry groups and maintain offices in more than 35 countries covering the major economic centers of the world.”
For more information go to: https://www.cdiglobal.com/
By: Brent Peterson, Partner-CDI Global Healthcare Group
