Global M&A Decline In Q3 of 2017 Likely Due to Geopolitical Uncertainty

Third quarter of 2017 experienced a decline in global M&A closings. Data released from PitchBook in the beginning of October 2017, showed that globally 3,756 deals (worth $474.3 billion) were closed in Q3 2017, compared to the 4,701 deals (worth $698.8 billion) recorded in Q2 2017 and the 5,971 deals (worth $579.9 billion) closed in Q1 2017. 

While each region is unique and features varying M&A issues, the decline in global deal-making has been largely attributed to uncertainty resulting from recent geopolitical developments.

In the United States, for example, the Trump administration’s plans to overhaul the corporate tax code have added more uncertainty as companies contemplate its potential effects on valuations. The new proposed tax plan calls for lowering the corporate tax rate to 20% and setting the top pass-through income tax rate at 25%. Furthermore, recent presidential decisions to block certain inbound transactions under the recommendation of the Committee on Foreign Investment in the United States (“CFIUS”) is also impacting cross-border deal-making, especially from China.

In addition to foreign regulatory challenges, Chinese buyers are also facing increased domestic regulation. In November 2016, State Administration of Foreign Exchange (“SAFE”) issued new restrictions on outbound investments in an effort to curb the outflow of capital, and further depreciation of Chinese currency. Following the implementation of these rules, China’s State Council issued new guidelines specifically restricting investments in “real estate, hotels, entertainment, sport clubs, outdated industries and projects in countries with no diplomatic relations with China, chaotic regions and nations that should be limited by bilateral and multilateral treaties concluded by China.”

Despite such new regulations restricting cross-border deal-making, the Chinese government continues to encourage Chinese companies to pursue deals that would promote China’s 2013 Belt and Road Initiative, which is a national initiative with the objective of becoming a global economic leader in areas like manufacturing, and deals that would otherwise benefit China’s domestic products and technology.

In Europe, Germany has recently amended its German Foreign Trade Regulation

introducing stricter rules on foreign acquisitions, strengthening its review rights, broadening the notification requirements and extending the time limits for review. According to a joint letter obtained by Reuters, Germany, France and Italy also proposed to the European Commission that foreign investments should only be permitted if reciprocity exists and that a protection mechanism should be established for investments by state-owned investors.

Moreover, Spain and the U.K. are experiencing volatility as Catalonia attempts to secede from the country and the British government attempts to implement its planned departure from the European Union.

Despite uncertainty and resulting decrease in deal-making in Q3, a number of sizable deals were made during the period, such as General Electric’s buyout of Baker Hughes, and industry experts further expect M&A activity to press forward through the end of the year in light of availability of inexpensive capital.