Robust Cross-Border M&A Market
M&A activity was exceptionally active in 2021, including a surge in deals between $1 and $10 billion. Large deals in 2021 increased by 81% increase relative to 2020. This was double the 2019 activity, the last full year prior to the onset of the Covid-19 pandemic.
M&A transactions have slowed in 2022 due to a myriad of economic hurdles and geopolitical uncertainties, rising interest rates, inflation, market volatility, supply chain issues, and an impending recession. These factors have complicated valuations and impacted deal volume. Nonetheless, cross-border M&A continues at a steady outpace, especially in the middle market.
Domestic dealmaking in a down market often tends to focus on a search for undervalued or distressed assets that can be acquired at attractive prices. Cross-border transactions tend to be more strategic. In fact, even with the cultural, political, regulatory and technical complexity inherent in cross-border deals, these transactions continue to offer attractive opportunities for strategic investors. In this context, strategic investors include both trade buyers as well as private equity firms looking to build scale and scope in their platforms through add-on acquisitions. Strategic cross-border acquisitions provide diversification of a company's sources of revenues and profits as well as other potential competitive advantages.
Clearly, cross-border transactions face a distinct set of challenges as compared to domestic middle-market deals. Strategic investors must be prepared for the relatively higher transaction costs and longer time frames for developing actionable acquisition opportunities and for closing them.
For example, governments may scrutinize deals with foreign entities closely and due diligence for environmental and quality of earnings assessments require more time than would be typical for most domestic transactions. Reaching agreement on valuations and structuring deal terms may also be complicated and challenging to negotiate for targets in countries with significant currency volatility.
Commitment To Growth And Diversification
Given the much-publicized slowdown in M&A activity as compared to the last two years, both buyers and sellers have reasons to be skittish about dealmaking, at least until there is greater certainty about the extent of the economic recession next year. But for companies with strong cash reserves and strategic commitment to growth and diversification, cross-border dealmaking provides an exceptional opportunity to pursue transactions when their inertial competitors are sitting on the sidelines.
Still, successful cross-border dealmaking requires knowledge about the best opportunities in targeted geographic markets, the capabilities to promote transactions even with companies that are not currently for sale, and a willingness to act decisively on these opportunities.
Stated another way, success with cross-border dealmaking in the middle market depends on a company’s long-term commitment in organic growth through business combinations along with confidence in their long-term strategy for corporate development.
Perhaps the best way to differentiate “leaders” and “laggards” in any industry sector is to observe which companies have the wisdom and virtue to complete strategic cross-border deals during periods of economic uncertainty such as we are experiencing today.
CDI Global provides middle-market advisory with global reaching success. Our commitment is to deliver worldclass service built on long-term client relationships. The pillars on which we have built our organization are integrity, excellence, client focus, and partnerships. These core values are at the forefront of every CDI Global engagement, driving our dedication to finding the best opportunities in virtually any industry or location. Our goal is to create a lasting and positive impact through our history of successful cross-border transactions.
By Jeff Schmidt, CDI Global Executive Managing Director and Chief Executive Officer