The clash of two opposing forces — globalization versus isolation — is remaking the landscape for mergers, acquisitions and other deals. A world that grew more connected through technology and culture is becoming more fractured by economics and geopolitics. Over the last few years, fragmentation has profoundly changed the global business environment. Yet extensive supply chains, increased communication, prolific social media and other factors make it unlikely that developed countries can become totally self-sufficient and isolated. The COVID-19 pandemic only confirms this — a desire to secure borders, both physically and psychologically, versus the reality that unwinding global ties is difficult.
It’s a far cry from the world in which deal activity has grown over the last three decades. The end of the Cold War in 1991 set into motion a golden period of globalization. Multilateral institutions such as the European Union and World Trade Organization formed. Democracies emerged in Latin America. China rose as the workshop for the world. As a result, supply chains spread, and trade and M&A flourished.
But globalization’s impact was uneven, spurring policy responses in some nations. In a more multinodal world — where globalization is giving way to more individual connections — corporate and private investors have to navigate geopolitical competition that influences how they pursue growth. And failing to adapt isn’t an option. Even in decline, globalization is required for too many companies in a range of industries, and those that ignore the international environment do so at their own peril.
True cross-border deals — in which the parties are based in different countries — typically account for about one-fourth of transactions involving US companies, and outbound deals by US companies are only about 15% of total volume. While the absolute number of acquisitions of foreign assets by US buyers has declined since 2017, the percentage of deals for non-US targets increased in 2018 and 2019, a PwC analysis found.
But the fragmentation of the global order has an impact beyond cross-border deals, as US companies in different industries increasingly have a value chain that isn’t entirely domestic. From operations to suppliers to customers, most businesses have a non-US element that could be vulnerable to disruption, which could affect a company’s value in a deal.
Consider what actually crosses borders: goods via trade, capital via M&A and investment, people via immigration. The forces of fragmentation ultimately affect each of these. Each also is a key consideration in doing a deal, whether the transaction explicitly involves companies in different countries or is a domestic deal with international elements.
We believe US companies need to understand and adapt their growth strategies for the forces of fragmentation, which have made the balance of geopolitical power and its influence on business investment more fluid than it has been since World War II.
Thirty years of globalization brought unprecedented growth, but it also led to inequalities. In its 2019 study of regional inequality in 20 advanced economies, the International Monetary Fund found that “regional disparities in income are large, persistent, and increasing over time.” Concerns over inequality have run in tandem with a decline in trust of traditional institutions, including the media and the judiciary. A primary outcome has been the rise of populism or “muscular nationalism,” in which an “us versus them” mentality is more dominant. As a result, national priorities — cultural and financial along with political — have turned inward.
In the US, the Trump administration has pushed US companies to invest and create jobs within the country, and Demcratic presidential candidate Joe Biden also wants to encourage more domestic investment. The president also has pledged to reduce US involvement in other countries’ affairs and in multilateral organizations in general. The result: significant shifts in trade agreements, immigration policy and regulations for foreign investment in the US.
As countries have turned inward, the geopolitical landscape has changed significantly. China is a particular pressure point, as its economic rise shifted the dynamic with Western nations. After serving mostly as a production partner, China now competes directly with the US in strategically important industries such as aerospace and telecommunications. Leaders of both major US political parties see more risks to US businesses and, by extension, employees and the economy. Sweeping efforts such as China’s Belt and Road Initiative could pull other nations — especially developing countries hungry for investment — closer to China’s orbit.
For all the business opportunities associated with data and emerging technologies such as artificial intelligence and the Internet of Things, risks to cybersecurity and privacy have mushroomed. Hackers and other bad actors not only have caused breaches at many US companies but are actively spreading misinformation designed to manipulate sentiment among large groups of people and put a competitor country at a disadvantage. Major elections, including the 2020 US presidential contest, attract even more disinformation activity.
These larger trends are playing out in specific ways around the world.
Many countries have seen significant shifts in their domestic political landscapes, making governing more difficult. In more mature Western democracies, political parties are fracturing, and trust in core domestic institutions, such as labor unions and religious organizations, is declining. Forming governing coalitions has become harder, resulting in a lack of cohesive, comprehensive legislation. In younger democracies, core governing institutions are under attack, and nations such as Brazil, India, the Philippines, Hungary and others have seen rises in cults of personality.
The US has been prominent, pulling out of the Trans-Pacific Partnership and the Paris Agreement on climate change in recent years. But the US isn’t the only nation placing less emphasis on intergovernmental organizations and alliances. Solving problems increasingly involves one-on-one dialogue between partners, and bilateral trade agreements have gained more weight amid the US withdrawal, Brexit and other fracturing relationships. Witness the United Kingdom’s recent trade deal with Japan, its first major deal since leaving the European Union.
Trade has declined as a percentage of GDP in recent years, due in part to the global economy’s pivot from goods to services. But trade remains a weapon in government attempts to translate a protectionist philosophy into a stronger domestic business environment. Even with the approval of the US-Mexico-Canada Agreement (USMCA) in 2020, the US still has had trade disputes and tariffs with multiple nations — from China to France to Brazil — that have strained political relationships and forced business adjustments, notably shifting production to other countries.
PwC's US Deals Leader Colin Wittmer discusses how geopolitical tensions and supply chain shifts are affecting M&A. Part of the PwC series Tomorrow's Deal Dynamics.
Time: 48 seconds
Even with globalization under strain, cross-border deals can still be a viable and even necessary move for many US companies. Some businesses may have difficulty achieving scale or reaching new customers domestically. Talent at a firm in another country could boost an acquirer’s workforce. And innovation is seldom bound by borders. For these reasons and others, we recommend that potential buyers and sellers take the following actions when considering capital investments across boundaries:
Deals Leader, PwC US
Deals Partner, PwC US