Cross-Border M&A Opportunities Favor the Prepared

Cross-border mergers and acquisitions (“M&A”) unlock growth, diversification, and a stronger global stance for businesses. These strategic moves enable firms from different nations to blend resources, making way into new markets, tapping into unique technologies, enhancing products, and realizing economies of scale and scope. Despite uncertainties from economic, regulatory, and geopolitical developments, the outlook for 2024 is positive, and certain industries are clearly leading the charge. This optimism is fueled by the digital revolution and the continued global shift towards sustainability, driving companies to rethink their strategic objectives and seek opportunities beyond their borders.

Dynamics and Strategies of Cross-Border M&A

Election Years and Regulatory Changes: Presidential elections do more than dictate who to argue about in the preceding months and four years thereafter — they are pivotal in cross-border M&A strategies, especially when significant domestic regulatory changes may be brewing. Instead of retreating, historically, firms are more inclined to pursue acquisitions abroad to bypass domestic uncertainties.[1] The most adaptable understand the importance of strategic alliances with policy analysts and legal experts. These professionals can provide insights into potential legislative shifts, enabling companies to recalibrate their M&A strategies effectively and reduce risks associated with regulatory volatility.

Market Sentiment and Strategies: The ripple effect of election cycles often redefines investor confidence, impacts market valuations, and affects financing options. In response, companies must adopt flexible financing strategies, allowing them to maneuver through uncertain market conditions. This agility is increasingly key as firms, including prominent ones such as MiddleGround Capital and The Riverside Company,[2],[3] expand their international presence. These expansions are not simply reactions to domestic challenges — they are strategic moves to capitalize on global opportunities. Such an approach further emphasizes the significance of cross-border transactions for sustained growth and diversification in an uncertain economic environment.

Geopolitical Considerations: Elections can also reshape international relations and trade agreements, influencing the tactical rationale behind cross-border M&A. As a way to hedge against sudden policy shifts, firms often conduct a comprehensive geopolitical risk assessment.[4] This strategy becomes even more relevant with regulatory developments such as the EU’s Foreign Subsidies Regulation (the “FSR”), which introduces additional layers of complexity.[5] Navigating these changes requires a deep understanding of the regulatory landscape, emphasizing the need for thorough due diligence and intentional and international diversification.

Planning for Uncertainty: “By failing to prepare, you are preparing to fail.” The unpredictable nature of election years demands meticulous scenario planning. By preparing for various potential outcomes, businesses can swiftly adapt to changing circumstances, seizing emerging opportunities while minimizing exposure to risks. This forward-looking approach ensures that companies are not caught off guard by sudden shifts in the political or economic landscape, enabling them to maintain a competitive edge.

Cross-Border M&A By Sector

The resilience of cross-border M&A is evident as the first quarter of 2024 witnessed a resurgence in deal activity, especially in sectors driven by digital transformation and sustainability efforts. Healthcare, pharmaceuticals, and industrial services are among a few sectors showing strong consolidation trends, not-so-subtly hinting at their strategic importance in the current global economy.[6] In particular, the healthcare and technology sectors stand out, as demonstrated by Pure Health — a United Arab Emirates-based healthcare platform, investing in Ardent Health Services, a U.S. based health system, for $500 million. Meanwhile, U.S.-based Concentrix purchased Paris-based Webhelp for €4.5 billion.[7] These sectors continue to attract significant interest due to their critical role in driving innovation and addressing global challenges, despite facing regulatory hurdles.

Industries in Focus: Beyond healthcare and technology, the manufacturing, distribution, pharmaceutical, and energy sectors are also drawing attention for cross-border deals. This interest is driven by a shared strategic necessity: navigate market uncertainty and complex regulatory landscapes effectively. By using calculated growth strategies, companies across these sectors aim to shorten lead times, ensuring stability and certainty for stakeholders.[8]

Target Regions for U.S. Firms: In their quest for growth and diversification, one of the primary questions companies seem to be asking is “Where should I be targeting?” U.S. firms are increasingly looking towards Canada, the U.K., and Europe.[9] This geographical shift is partly a tactical response to the challenges of higher financing costs and domestic market saturation. In particular, Europe and Canada have emerged as preferred destinations for investment, offering stability and growth potential, with Mexico coming in third. Noteworthy transactions, such as Law Business Research’s acquisition of MBL Seminars and BBB Industries’ expansion into Europe, illustrate this trend.[10]^,[11] This positioning towards established economies is not a new strategy — it merely continues to highlight the tried-and-true approach of firms implementing strategies to minimize risks while exploring new growth avenues.

European Foreign Subsidies Regulation

The introduction of the FSR marks a significant shift in the regulatory landscape for cross-border M&A. This framework aims to ensure fair competition by scrutinizing non-EU government financial contributions in deals exceeding certain financial thresholds. With its implementation in October 2023, the FSR emphasizes the importance of transparency and compliance, requiring firms to carefully evaluate and disclose foreign financial supports. Navigating this new regime is crucial for companies looking to remain competitive and compliant in the European market.[12]^,[13]

Conclusion

Navigating cross-border M&A in the context of an election year demands a nuanced understanding of the complex interplay between political events and the global business landscape. Adopting a proactive, informed, and flexible strategy is essential. By doing so, firms are then able to better navigate regulatory shifts, adapt to market volatility, and engage in comprehensive scenario planning. Such a multi-faceted approach enables businesses to manage uncertainties effectively, protecting against potential pitfalls while exploiting opportunities for international expansion.

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[1] https://corpgov.law.harvard.edu/2018/01/11/political-uncertainty-and-cross-border-acquisitions/

[2]  MiddleGround Capital launched its European office in Jan. 2023. Six months later, their European office completed its first platform acquisition with the purchase of Xtrac, based in the UK. In March 2024, MiddleGround acquired Spain-based global engineering service provider, IT8.

[3]  The Riverside Company is a global private investor, based out of NY and Ohio.

[4] https://corpgov.law.harvard.edu/2018/01/11/political-uncertainty-and-cross-border-acquisitions/

[5] https://www.nortonrosefulbright.com/en/knowledge/publications/bcb8011d/the-eu-foreign-subsidy-regulation-a-new-set-of-wide-reaching-powers-for-the-european-commission

[6] https://middlemarketgrowth.org/multiples-cross-border-m-a-takeoff-2024/

[7] https://www.pwc.com/gx/en/services/deals/trends.html

[8] https://middlemarketgrowth.org/multiples-cross-border-m-a-takeoff-2024/

[9] https://middlemarketgrowth.org/multiples-cross-border-m-a-takeoff-2024/

[10]https://finance.yahoo.com/news/levine-leichtman-capital-partners-portfolio-110000952.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAIxUnXNO4FW0PqRlFaAvDHh7YIAQEL1-7gmxYTs54t3zPu48VbB7bRTtLH0rivow-2b4sF48ZVFY_XBykUuTww1iogmwq_eGQ91WEducatMrL2QMRfGlKVUSmW8X6nHN2-9c4yuuYEXGFbHz4DHYzwf8WgZZqOr-W9qZh99iSyNV

[11] https://bbbind.com/Acquisition-Inter-Turbo-Poland

[12] https://competition-policy.ec.europa.eu/foreign-subsidies-regulation_en

[13] https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2024/01/global-m-and-a-trends-2024.pdf