Minnesota Lawyer
By Pete Pichaske
U.S. companies are expected to continue to pursue their appetite for overseas mergers and acquisitions this year, but some experts say the trend faces an uncertain future.
A new political climate in this country, talk of reduced corporate taxes, a possible retreat from globalization – all of these and more, observers say, have the future of cross-border deals in doubt.
“Almost everybody we have who’s looking (overseas) is in a waiting stage right now,” said Joseph M. Harenza, CEO of the King of Prussia-based Griffin Financial Group, Pennsylvania’s largest investment banking firm. “They want to see what’s going to happen with tax reform, tariffs – all of that.”
Uncertainties aside, experts also agree that interest in overseas deals is far from dead.
A survey of 1,000 American business executives by Deloitte, the largest professional services network in the world, predicted that 2017 “is likely to be a year of globe-hopping.”
The survey (taken in the fall of last year, before the presidential election) found that 90 percent of the executives said at least some of their M&A deals will involve foreign targets – up from 77 percent in Deloitte’s mid-2016 survey.
“More respondents are looking for M&A deals abroad than in prior years, and they are focusing on a select cluster of countries and regions,” the report found.
The survey identified the top five foreign markets for acquisitions, in order, as Canada, the United Kingdom, China, Japan and Eastern Europe.
Similarly, a January report from the M&A Team at the giant financial services firm J.P. Morgan predicted that after a “solid” 2016, the global merger and acquisition outlook remains robust.
“We anticipate 2017 volumes will be consistent with 2016’s solid performance, as we expect companies to continue to seek both innovative and transformative transactions to complement organic growth,” J.P. Morgan found.
“A number of factors point toward an active deal environment,” the report stated. “As markets adjust to ongoing political and regulatory changes, the M&A market should be buoyed by strong fundamentals and the potential for pro-business policy changes. In particular, opportunities may emerge from potential new U.S. policies, such as cash repatriation … and more modest regulation.”
The report included words of caution. It noted that elections in this country and in Europe, as well as Britain’s exit from the European Union and increased regulatory and political scrutiny in China “are likely to contribute to regulatory uncertainty that will continue to affect the M&A market throughout the year.”
What’s driving these deals
Griffin Financial’s Harenza, who has advised numerous companies on mergers and acquisitions over the past quarter-century, said the move toward more overseas ventures has lasted for several years and been fueled by several factors.
Among those factors: recession-related decreased domestic demand for some goods and services, which lowered revenues in the U.S.; the high transportation costs and tariffs of exporting into a foreign market; and the strong value of the dollar, which made buying companies overseas more attractive.
But the biggest factor, Harenza said, was the corporate tax rate in this country, which drove companies to look elsewhere.
“We have the highest effective tax rate in the world and it’s punitive,” Harenza said. “When businesses look overseas, the reason might be (decreased) revenue and taxes, it might be (lower) costs and taxes – but the tax piece is always there.”
As the president and Republican-controlled Congress talk of lowering that tax rate – slashing it by 50 percent or more – businesses could pull back on their overseas ventures, Harenza said.
The business sectors U.S. companies are most interested in, he said, are manufacturing, technology and telecommunications, professional services and financial services.
Laurent Fresard, an associate professor of finance at the University of Maryland’s Robert H. Smith School of Business, downplayed the importance of taxes in overseas mergers and acquisitions.
Fresard, who recently wrote a research paper, “Extending Industry Specialization through Cross-Border Acquisitions,” said lower tax rates elsewhere represent “a small fraction of all deals.”
He said many factors have driven the increase in overseas mergers and acquisitions, and academics, at least, don’t agree on the main one.
“In the recent years, the main driver has been the willingness to expand abroad, especially in booming places,” he wrote in an email response to questions. “U.S. firms have some unique capabilities (technology, logistics, etc.) that they can profitably deploy on foreign assets.”
Also fueling the trend, he said, is that some overseas companies are especially innovative – Israel and Switzerland, for example – which attracts U.S. buyers eager to use their technology.
Fresard was more confident than others that overseas deals will continue unabated.
Moreover, he said the trend is not specific to this country – that overseas companies are looking at buying companies here.
“The recent years have seen a surge in foreign acquisitions of U.S. firms,” Fresard wrote. “I predict the concept of national boundaries for firms will become very blurred in the future.”
