New Deal Frontier: Succeeding in a fractious and flatter world

James Marshall Deals Research and Insights Leader, PwC US 09 March, 2017

The world seems to have fallen out of love with globalization, reversing a trend that endured through most of the post-World War II years. Particularly after the end of the Cold War, one by one most world economies embarked on trade liberalization and integrated with the relatively open, US-led free-markets-oriented economic system. Cross-border M&A thrived in that environment. Although dips in activity occur that coincide with the robustness of the economy, cross-border M&A has clearly been an element of globalization.

Today, protectionism is on the rise, and trade is stagnating. America’s withdrawal from the multilateral Trans-Pacific Partnership (TPP) is only the latest chapter in a trend toward trade protectionism. Last year, global trade saw its slowest growth since the financial crisis. The critical question for global dealmakers is this: Will the factors that are fueling nationalism and slowing down trade also deal a blow to cross-border M&A? The answer, we strongly believe, is no. We’re confident that cross-border M&A will not only continue to soar but become more important as the means to deepen global economic integration.

At the same time that the landscape is shifting, so are the strategies underpinning cross-border investments. For years, both greenfield investments and cross-border M&A were driven by a need to scale, deriving cost advantages in both the supply chain and back office. Many companies have now reached the limit of this endeavor and are focusing on the fundamental question of growth. With growth in home country markets stagnant in many cases, companies are looking across borders to fuel their strategies.

But to succeed, dealmakers will need to be far more astute and nimble than before.

Business leaders are keenly aware of the challenge they face in executing their global growth strategies. Fifty-eight percent of CEOs in our 20th Annual Global CEO Survey agreed that it’s becoming harder to balance two competing trends: a more open global marketplace and more closed national policies. They are, however, charging ahead. Forty-one percent of global CEOs are planning M&A, and 48 percent are looking at alliances or joint ventures to further growth and profitability this year. Interestingly, business leaders are looking at a broad mix of countries, led by the US and China, to realize their growth strategies. These include Germany, UK, Japan, India, Brazil and Mexico.

This is an unfamiliar world for US dealmakers, who are accustomed to globalization defined by US institutions, political philosophy and even popular culture. Today, many powerful forces are working together — and at cross-purposes — to shape the global economy. Consider, for example, how nationalistic populism now thrives in capitalist economies while free enterprise gets encouragement in state-directed ones.

Technology, new regional blocs and institutions, and diaspora networks are all influencing the global economy in new ways. The key to succeeding in an environment where growth is the key objective but the business environment is shaped by two conflicting trends – greater connectedness and increased nationalist sentiment – is localization.

When scale was the primary objective, localization wasn’t the answer. Today, global dealmakers are being helped along by forces that facilitate connectedness, but they have to structure their deals to succeed in local environments. This must be reflected in all aspects of a transaction, from how to raise capital to structuring to integration.

In a series of blogs, we will first explore the powerful forces driving cross-border M&A in the face of protectionist national policies. We will then examine the implications of this for global dealmakers. Next we take a close look at America, a sought-after investment destination for global buyers. What are the driving forces for US investment, where is this investment happening, and what do buyers and sellers need to consider? This isn’t simply a story of large-scale capital flows between Shanghai and San Francisco. Even as countries turn protectionist, global investors are reaching into their hinterlands, often through middle-market acquisitions or directly via greenfield projects.