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The Fall in Cross-Border Deals

By Francesca Bandini

During the last decade, the need for companies to internationalise their supply chains in a search of competitive (cost) advantage, has led to an unprecedented surge of cross-border transactions. Emerging as a way of entering new markets, they allowed companies to get access to new technologies and capabilities, creating new opportunities for both ailing firms and local economies.

Despite their previous tremendous growth, 2019 saw a decrease in the number of these transactions: amounting to $1.2 trillion, cross-border M&A fell by 25% compared to the previous year, reaching its lowest level since 2013. This downturn was caused largely by a series of geopolitical tensions such as the trade war between the US and China and the uncertainty surrounding Brexit, along with its impact on the European market.

Furthermore, this decline has been further exacerbated by the current coronavirus emergency. Ever since the outbreak, Covid-19 has led to a massive disruption of supply chains, bringing the cross-border M&A activity to a halt. According to the Financial Times, cross-border activity fell 17% to $204bn, with respect to 2019.

What is a Cross-Border Deal?

A cross-border merger and acquisition is defined as a transaction involving two firms whose headquarters are located in different home countries. Allowing companies to circumvent tariffs barriers and accessing new markets, this type of M&A is an important tool in a company’s armoury. Indeed, it provides significant cost advantages.

Depending on whether the movement of capital is an inflow or an outflow, a cross-border deal can be classified as:

  • Inbound → takes place when a foreign company acquires or merges with a domestic company. This is an inward movement of capital.

  • Outbound → takes place when a domestic company acquires or merges with one in another country. This is an outward movement of capital.

Fostered by the dramatic rise in international trade and the greater exchanges of goods, capital, resources and ideas across national borders, more and more companies have started investing overseas. For this reason, during the last decade, cross-border transactions have become fundamental characteristics of the global business landscape.

However, in 2019 cross-border deals lost their momentum. Political uncertainty and sluggish economic growth resulted in a decline of this type of transaction, as they accounted for only 40% of the total M&A activity. On the other hand, since companies were wary of expanding beyond their markets, there was a dominance of domestic transactions, as the top 10 deals of 2019 were all conducted within one country, the US. This negative trend has continued in 2020, aggravated by the coronavirus emergency.

Image: Global M&A Market Share in 2019 (MergerMarket)

The Trade War Between the US and China

During the past two years, trade tensions between the US and China have been a frequent cause of concern for global markets. The conflict, started by President Donald J. Trump to reduce the US trade deficit and increase domestic manufacturing, has weighed on business confidence, forcing firms to reconsider their long-term investments. The severe tariffs imposed by both countries created a protectionist atmosphere, under which several deals have been blocked or even overturned. The Committee on Foreign Investment in the United States (CFIUS) blocking Broadcom’s acquisition of Qualcomm, and overturning the already completed Beijing Kunlun Technology Company’s acquisition of Grindr are just some examples.

Moreover, the high degree of uncertainty surrounding this conflict has played a significant role in the downturn of cross-border transactions, particularly in China’s outbound M&A in the US. As a result of the severe tariffs imposed by the US and the tightened regulatory scrutiny of Chinese companies carried out by the Committee on Foreign Investment, Chinese investments in the US have dropped to $2 billion, a plunge of 80% with respect to 2018, according to Refinitiv. Because of China’s economic slowdown and tight capital controls, Chinese companies, which used to rely heavily on debt to finance overseas transactions, were under pressure to cut debt. This further explains the downturn of outbound Chinese M&As.

The prolonged conflict between the US and China has undoubtedly changed the global economic landscape. Companies are now finding themselves at a very important crossroad: reshoring production or keeping it overseas?

To avoid the severe tariffs imposed by the US, more and more companies are modifying their supply chain by moving production outside China. However, while some companies are considering reshoring, others are planning on rebuilding their supply chains in those Asian countries where production costs are low, namely Vietnam, India, Taiwan, and Malaysia. According to the Nikkei Asian Review, Silicon Valley giants such as Apple, Microsoft and Amazon are assessing the cost implications of this maneuver.

Image: Apple's Supply Chain (

Apple's Supply Chain

Famous for innovation and design, Apple is a leader in supply chain management. First of all, Apple purchases materials from various suppliers and gets them shipped to its manufacturing plant in China. Then, once assembled, the products are shipped directly to customers or sold through other distribution channels.

To avoid the punitive tariffs imposed by the US, Apple has asked its major suppliers - Foxconn, Pegatron and Wistron - to assess the cost implications of moving between 15% and 30% of its production capacity outside China, mainly to India and Vietnam. There is also the possibility of exploring other options like Mexico, Indonesia and Malaysia.

The Impact of Brexit

Another issue that continued to spread uncertainty through European markets was Brexit, which refers to the UK leaving the European Union. Ever since June 2016, when the referendum was held and the majority of citizens voted for “Leave”, the legal implications of Brexit along with its impact on the European market have been unclear.

During the past years, to face the great uncertainty that was surrounding Brexit -particularly the structure of the future relationship between the UK and the EU member states and its economic implications - most companies opted for a wait-and-see approach, putting the majority of their transactions involving the UK on hold. This approach has in turn led to a downturn in European deals, which saw a 54% decrease in cross-border M&A activity in Europe.

The Impact of COVID-19

The COVID-19 outbreak has been responsible both for a demand and supply-side shock. In particular, firms have deferred investment and there has been a general decline in business confidence and international trade, caused by the closure of borders to stymie the spread of the infection. Supply chains have been massively disrupted and cross-border M&A activity has plummeted.

Ever since the virus was first reported in the city of Wuhan, its fast-pacing spread has forced the Chinese government to impose substantial restrictions on production, and even to shut down entire factories. Since a great number of companies - particularly those in the automotive, tech and fashion industries - strongly rely on China as their main supplier, the government measures have been greatly detrimental for their production capacity. Indeed, according to a survey published by the Institute for Supply Management, more than 75% of companies are reporting supply-chain disruptions. This is clearly signalling that the coronavirus outbreak is weighing down the global economy.

Therefore, the Fed and its global counterparts have taken action. Their coordinated response was focused on providing liquidity to the troubled financial markets, which were in the middle of a meltdown. In particular, emergency rate cuts and offers of cheap dollars were enacted, with the aim of restoring market confidence. This has been the first move towards a possible recovery that will be pursued once the lockdown is over. However, restarting is not going to be easy, and companies will be forced to rethink their concept of value chain: perhaps less driven by the systematic pursuit of low-cost labor and components in the Asian continent, and more robust with respect to possible crises'? The pandemic has exposed the excessive reliance of companies on overseas suppliers. Could this be the beginning of a new era of onshore production?

The answer is not so easy. Companies that outsourced production years or even decades ago could have a hard time reshoring, as they would face significant costs. At the same time, hedging against supply chain fragility might represent a necessity. For these reasons, we may see some reshoring, but it is yet to be seen if this trend will continue over the next half-decade.

Deals to Know About

Announcement Date: 25 June, 2019

Acquirer: AbbVie (NYSE: ABBV)

Target: Allergan (NYSE: AGN)

Acquirer Geography: USA

Target Geography: Ireland

Deal Value: $63bn

Industry: Healthcare

Announcement Date: 31 October, 2019

Acquirer: Groupe PSA (Peugeot SA, EPA: UG)

Target: Fiat Chrysler Automobile (MTA: FCA, NYSE: FCAU)

Acquirer Geography: France

Target Geography: USA

Deal Value: $44bn

Industry: Automotive

Announcement Date: 25 November, 2019

Acquirer: LVMH (EPA: MC)

Target: Tiffany and Co. (NYSE: TIF)

Acquirer Geography: France

Target Geography: USA

Deal Value: $16.6bn

Cash or Stock: Cash

Industry: Luxury

Announcement Date: January 14, 2019

Acquirer: Newmont Mining Corp (NYSE:NEM)

Target: Goldcorp Inc. (NYSE:GG)

Acquirer Geography: USA

Target Geography: Canada

Deal Value: $9.96bn

Industry: Energy, Mining & Utilities


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