US inbound acquisitions post COVID-19

September 2020 | FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

September 2020 Issue

With abundant cheap financing available and record low interest rates, M&A activity was robust for most of the last decade. As world trade became increasingly globalised, cross-border dealmaking increased as a key source of growth for many companies. Over this time, the US has been a prime hunting ground for foreign acquirers seeking access to the world’s largest economy.

The US has attracted significant inbound activity. In 2019, year-on-year value increased from $286.5bn in 2018 to $325.8bn (though volume fell by 13 percent to 972 deals), according to White & Case. 2020, however, has seen US inbound activity greatly curtailed by the COVID-19 crisis.

Many deals have been put on hold or cancelled since the outbreak. For those that do proceed, acquirers and sellers are facing logistical challenges. Practical issues, such as the ability to conduct on-site due diligence, and delays in obtaining regulatory and other third-party approvals for transactions, are complicating the M&A process.

Despite these issues, however, some inbound deals were announced in H1 2020, notably by Chinese acquirers. According to GlobalData, between January and April 2020, a total of 57 Chinese outbound M&A deals worth $9.9bn, and 145 Chinese outbound investments worth $4.5bn, were announced. The US – an important market for Chinese companies for decades – was a key target destination.

Though the crisis has seriously impacted deal flows in 2020, as we move into the latter part of the year and economies begin to reopen, there will be opportunities for companies to acquire assets and distressed companies across many jurisdictions, including the US. A wave of US businesses have already filed for bankruptcy protection and many more are set to follow, despite steps taken by the US government to prevent them collapsing. The US Coronavirus Aid, Relief, and Economic Security (CARES) Act has provided $1.8 trillion in direct aid to individuals and businesses, making it the largest stimulus package in US history. This funding includes $659bn in loans through the ‘Paycheck Protection Program’ (PPP) and another $600bn in loans through the ‘Main Street’ programme.

“Many deals have been put on hold or cancelled since the outbreak. For those that do proceed, acquirers and sellers are facing logistical challenges.”

However, distressed M&A often carries additional risks, where the importance of due diligence, risk management and acquisition structure is heightened. In the COVID-19 environment, these aspects are also more challenging to address.

Protectionist policies

With a protectionist, anti-globalisation stance being adopted by a number of governments, including the Trump administration, the screening of potential foreign investments will be a key part of the M&A process going forward. It is likely that that US regulators will actively block certain deals or impose conditions on their completion.

Though the US has long maintained an open investment policy, it recently enacted the Foreign Investment Risk Review Modernisation Act (FIRRMA) to address its evolving national security concerns. Crucially, however, the US has not yet announced additional restrictions on the acquisition of US businesses, perhaps because of the COVID-19 crisis.

For the time being, the Committee on Foreign Investment in the United States (CFIUS) remains focused on national security, particularly as it applies to critical infrastructure or sensitive assets. During the pandemic, CFIUS has been classifying more assets as critical to national resilience, and this could continue for some time. Undoubtedly, the COVID-19 crisis has increased awareness around vulnerabilities in the US medical supply chain, for example, and foreign investments in this sector could easily attract additional scrutiny.

In May, Republican congressman Jim Banks introduced a bill designed to mitigate the perceived threat of Chinese firms acquiring US companies. The bill, known as the Restricting Predatory Acquisition During COVID-19 Act, would expand the number of potential acquisitions that are reviewed by CFIUS and approved by the president. Additionally, the legislation would prevent companies with ties to the Chinese government from owning more than 51 percent of shares in certain firms.

Choppy waters

Though there is a great deal of conjecture surrounding the future of inbound US dealmaking activity, the COVID-19 pandemic could have a detrimental impact on the economy for years to come. The barriers to inbound investment, which were already being erected prior to the outbreak, are unlikely to be dismantled anytime soon.

There will also be a significant shift in the balance of power, away from sellers and toward buyers. For deals agreed before the outbreak took hold, but which have yet to close, acquirers may seek to terminate deals, or to renegotiate terms due to the effect of the pandemic on the target’s performance or ability to satisfy pre-closing covenants or conditions.

Though US inbound dealmaking will continue, volume is set to decline for the foreseeable future as the economy adapts to the post-COVID-19 landscape, against a backdrop of heightened national security and protectionist policies.

Richard Summerfield