May 31, 2017
You’d think the rising tide of nationalism around the world would put a damper on business confidence. And that America’s volte-face on globalization, in particular, would give pause to global investors. Think again. In this third blog of our series on cross-border M&A, The New Deal Frontier, we discuss why America continues to be so attractive to global investors. More than half of CEOs in PwC’s 20th Annual Global CEO Survey told us they were very confident about revenue growth prospects over the next three years. And 43% of CEOs based outside the US said they are targeting America for realizing their growth expectations in 2017. Our survey findings are consistent with other analyses, such as a UNCTAD forecast that the US will be the favorite investment destination of global business through 2018, followed by China and India.
At $1.8 trillion, US deals accounted for almost half of the announced worldwide M&A activity in 2016 (based on Thomson Reuters data with PwC analysis). Why, despite the very real threat of protectionism, do so many business leaders expect this momentum to sustain? As our previous blog, M&A is the new trade, argued, when trade protectionism increases, companies often seek opportunities via cross-border M&A. To these companies, the US offers enduring advantages that can withstand geopolitical uncertainties. Some are obvious; for example, the US is the world’s biggest consumer market and accounts for more than half of world’s market capitalization. Moreover, the dollar’s role as the global reserve currency means it’s a haven for investors in uncertain times.
Beyond these fundamentals, the US holds some key attractions. In our previous blog, we explored the drivers behind the current wave of cross-border M&A. Here, we discuss why all roads lead to America.
1. There are more digital assets in the US than anywhere else: Non-tech companies’ massive appetite for digital assets is a key factor fueling this current wave of M&A. Globally, digital deals accounted for about a third of all transactions in 2015, up from one-fifth in 2011. Companies in non-digital industries drove this increase by completing 48% more digital deals in 2015 than they did in 2011. In just the first quarter of 2017, non-digital buyers have announced digital deals worth $10.0 billion in the US. For companies in search of new technologies, the US arguably offers more targets than anywhere else. The US has the highest number of high-tech public companies as (1) a percentage of all domestic publicly-listed companies and (2) a share of all public high-tech companies in the world. The Bloomberg Innovation Index ranks the US as the undisputed leader in high-tech density among all innovative economies.
2. American cities are open for business: Previously, we discussed how cities have the cultural and economic clout to rival nation-states. American cities, with their long history of openness to not only foreign investment but also immigrant talent, will continue to attract global deal makers. The city of Chicago, for example, has signed an agreement with eight Chinese cities, including Shanghai, Beijing and Tianjin, to be a gateway to America for Chinese businesses. Becoming a gateway city in a global economy can mean many things. Developer Moishe Mana, in collaboration with the city of Miami, is building an ambitious financial and trade center to position Miami as a bridge between Asia and South America. Not coincidently, Miami-Dade County has the highest concentration of South American immigrants in the US.
City dwellers are key facilitators of commerce between their new and ancestral homes. According to the latest US Census data, Asians are the fastest-growing racial group in America, and 64% of international students in America are from Asia. It’s hardly surprising that South Korea, China, India and Singapore are four of the top 10 fastest-growing sources of foreign investment into the US.
3. Emerging-market businesses have the wherewithal to adjust to the US business environment: We discussed in our previous blog how we believe that protectionism can lead to increased cross-border M&A as companies begin to substitute exporting capital for goods. Those who have been around long enough will recall how controversial Japan’s buying spree in America raised the specter of a Japanese takeover of America. Japanese investors adapted, establishing automotive factories in the US and investing directly into industries as diverse as entertainment and energy.
This adaptation is happening again today. When China’s Haier acquired GE’s consumer appliance division for $5.4 billion last year, it stressed the importance of the GE brand in the US and global markets. Months before President Trump signed the Buy American, Hire American executive order, Infosys co-founder Narayana Murthy urged the Indian IT industry to hire “American residents in the US” instead of sending Indian talent on visa to the US market. And just last week, Infosys said it would hire 10,000 Americans as a part of a new recruitment drive.
4. For investors, the US is reliable if not always predictable: The US is hardly the only country to generate political surprises. From UK’s Brexit to China’s financial market turmoil, and from nationalist movements in France and Holland to nationalist governments in Turkey and India, political uncertainty is the new normal. As a result, investors are examining their portfolios and looking at the US as a relatively reliable market. The US is among the top 10 economies in the World Bank’s ease of doing business rankings. Its resilience is noteworthy. While the Brexit vote affected UK’s credit rating, the US continues to enjoy AAA and AA ratings with stable outlook. That said, credit rating is hardly the only tool used by investors today. M&A analytics, such as social media metrics, provide rich information about a target’s reputation or relationship with customers. Data analytics will continue to transform the US deals landscape, not least because America is good at harnessing its digital capabilities to boost competitiveness.
Today’s investors are not simply businesses based in mature economies that are pursuing traditional market- or efficiency-seeking acquisitions. They hold a variety of passports and have a range of motivations, from acquiring the latest technologies to buying up old manufacturing assets. One common trait is their interest in the US market. But how will the shifting US policy environment affect them? And how can they navigate the uncertainties? That’s our topic for next time. In the meantime, connect with Curt on LinkedIn or Twitter and with Fentress on LinkedIn for similar Deals-related thinking.