Marc Cooper Discusses How Rising Protectionism Poses M&A Challenges
Rising Protectionism Poses M&A Challenges
by CEO Marc S. Cooper
When it comes to the financial fundamentals underpinning the global mergers and acquisitions market, there’s reason for optimism. Inflation is moderating, and following 10 rounds of interest rate hikes in a little over a year, the Federal Reserve paused rate hikes in June (though may need to raise them again per Chairman Jerome Powell’s recent comments). With a deep reservoir of private capital available for deals, corporate leaders are feeling more comfortable exploring creative solutions to revitalize and reposition their business portfolios.
If you want something to be wary of, keep an eye on the rising business protectionism around the world. It’s worth considering what the current geopolitical trends and shifting antitrust agendas mean for deal selection and transaction risk in the years ahead.
Geopolitical Trends Impacting M&A
It doesn’t take great powers of observation to realize that diplomatic ties between the U.S. and China, not to mention Russia and Iran, are on a downward slope. Predictions of a new Cold War may be premature, yet there’s no question that regulators in the U.S., and across much of Europe, increasingly view cross-border mergers through a national security prism.
When it comes to Chinese buyers and sellers, there is certainly still demand for [“land” sounds like we are selling used cars] transactions in purely consumer-facing sectors such as retail. However, M&A in sensitive arenas such as semiconductors, artificial intelligence, fintech or transportation infrastructure, will likely receive an extraordinary level of regulatory scrutiny, even possible legal challenges.
The Committee on Foreign Investment in the United States (CFIUS) has the power to block overseas investments in American companies. In recent years, CFIUS has derailed China-backed Canyon Bridge Capital Partners’ planned $1.3 billion acquisition of Lattice Semiconductor Corp., as well as Singapore-based Broadcom’s $117 billion hostile bid for Qualcomm Inc., on national security grounds.
Washington is also taking new steps toward reviewing sensitive outbound U.S. investments, while other countries, including Australia, France and the United Kingdom, have enhanced their scrutiny of Chinese investment. While governments have every right to look out for their national security interests, I suspect the tightening of foreign direct investment regimes in recent years is linked, at least to some degree, to rising protectionism that actually has little to do with China.
Across much of the developed world, securing antitrust approval for proposed mergers, particularly in the tech world, has become far more difficult. Consider Microsoft’s proposed $69 billion acquisition of gaming company Activision Blizzard, which has been heavily scrutinized by antitrust authorities in the United States, the United Kingdom and the European Union.
Antitrust reviews are important in evaluating the impact of a deal on market concentration and competitive dynamics within an industry. Yet, in some cases, it seems there may be an unfounded bias against corporate scale: a general impression in some political and media circles that the merger of two large corporations automatically results in a deepening of social inequality. In my experience, successful mergers – that generate jobs and wealth – do just the opposite, and often enhance competition to benefit consumers.
In addition, antitrust enforcers often misread how quickly the competitive dynamics within an industry can shift. A seemingly dominant company today may face new rivals and disruptive technology shifts tomorrow.
I’ve been around long enough to see the pendulum swing a few times when it comes to antitrust policy. The U.S. government spent more than a decade pursuing an antitrust case against IBM for monopolizing the computer market, only to drop it in the early ’80s—just as Apple started to revolutionize the personal computer industry.
In the 1990s, antitrust lawyers went after Microsoft for its alleged stranglehold over the computer software market. In 2000, a U.S. district court even ordered the breakup of the company, a decision soon reversed in a circuit court after an appeal filed by Microsoft.
This decade, it is Google parent Alphabet and Meta Platforms (formerly Facebook) that face antitrust challenges around the world, even as they face new competition from Chinese rivals such as TikTok and the disruptive impact of AI on their business models.
What The Future May Hold
So where are we heading next? To my mind, American politics is always changing, and I suspect that strict antitrust enforcement on big mergers will lighten up at some point. If Big Tech firms face serious competitive threats from emerging Chinese rivals, perhaps American corporate scale will be viewed differently later in the decade.
Geopolitical tensions between Washington and Beijing are unfortunately likely to continue. A rising China, aligned with Russia and Iran, will probably preoccupy Western national security policymakers for decades. That, in turn, will have significant implications for cross-border transactions involving any sensitive technology or manufacturing know-how. It’s potentially a trend with a very long tail indeed.
This article originally appeared on Forbes.com.