October 2, 2019
By Fentress Seagroves, US Inbound Deals Leader
Trade tension, economic and political uncertainty, and regulatory scrutiny may all be on the rise, but foreign investors are still seizing opportunities in the US. That’s the big inbound takeaway from PwC’s Q2 2019 Deals Industry Insights.
Inbound US deal volume was up 10% in the second quarter compared to the first, but it was down compared to the same period in 2017 and 2018. Inbound deal value, on the other hand, was comparable to 2017 and 2018, though it too was down compared to the banner year of 2016.
So inbound deals are both up and down, depending on the time frame and how you measure them — and the US as a whole is taking a bigger piece of the global pie: 60% of worldwide dealmaking took place in the US in the first half of 2019, compared to less than 50% in the same period of 2018, according to a PwC analysis of Refinitiv data.
If that big picture sounds confusing, it shouldn’t. There are some trends that explain it and that I expect to persist in the coming years.
Trend #1: Foreign investors like the US …
Long term, what’s clear is that year in and year out, foreign companies want to invest in the US. Most ups and downs are merely bumps along the way. It’s a gigantic market, backed by a strong rule of law, and many companies that can tap that market. Any company that has inorganic growth as part of its strategy (and nearly every larger company does) wants a piece of the US.
Our latest CEO survey offered further confirmation for this trend: Global CEOs called the US their most important overseas market for growth, by a big margin.
Trend #2: … and they love US tech
It’s not just the consumer market that attracts global CEOs to the US. It’s all the US companies that offer new tools for other companies to transform themselves digitally. And many foreign companies are in need of such a transformation. To call out just one of many such statistics from our global CEO survey, 93% of US inbound CEOs say they need good data on customers’ and clients’ preferences and needs — but only 14% say they are getting it.
It’s therefore no surprise that, despite high prices, inbound CEOs are eager to make tech deals. Three of the four biggest inbound deals announced in the second quarter were to acquire tech companies: Zayo Group, Cypress Semiconductor and Metadata.
Trend #3: Tougher regulatory scrutiny is having an impact
Despite this interest, inbound tech deals have been taking a hit. The Committee on Foreign Investment in the US (CFIUS) has been tightening its scrutiny, and they’re not the only authority taking a closer look. The Department of Justice and the Federal Trade Commission are also acting as tougher watchdogs than before.
But what I’m seeing is that, with the exception of certain critical technologies, cross-border deals can still get done. Potential acquirers just need to up their due diligence so they can either avoid problematic deals from the get-go, or remediate deals that might land in a “grey zone” for regulatory authorities. Chinese companies may still in the coming years prove to be aggressive, opportunistic acquirers in the US, so long as they avoid sensitive areas.
Heightened scrutiny is also, I believe, a big reason (along with, of course, the high prices due to tight competition) why the second quarter saw more smaller deals. Regulatory authorities tend to pay more attention to megadeals. Middle market and smaller companies are seeing fewer hurdles.
What to do now
If you’re a current or potential inbound investor, what should you do in the face of global uncertainty, whether over trade policy, US politics, regulators or the stock market?
For me, the answer has two parts. The first is to make sure you have the right long-term deals strategy, based on identifying your strategic capabilities, the gaps in those capabilities and the best way deals can fill them. Also aim to identify markets with positive growth and favorable competitive dynamics, as well as markets in which a potential target can offer synergies with your existing capabilities.
If, for example, your company’s strength is consumer product innovation and brand management, it will probably do best to acquire a company whose facilities, processes, technology, talent or suppliers can make those strengths even stronger — or expand them to new markets. Or if instead, back-end supply chain management is your strength, a smart deal may complete a few missing supply chain links.
Once you have your strategy in place, be agile, ready to swoop in when opportunities arise, yet also fully prepared for regulatory scrutiny, and with the fortitude to stay the course in the face of volatility.
The fact is the US marketplace is going to remain gigantic, and US companies will continue to be a rich source of both market access and innovation. So if a deal is made to acquire the right capabilities at the right price, it will benefit the acquirer in the long run, no matter what ups and downs financial markets may have along the way.