March 26, 2020

Breakingviews: M&A will be lasting casualty of post-viral world

by Breakingviews.

Even before Covid-19 sent the world into a financial tailspin, merger watchdogs were ramping up their scrutiny of cross-border deals. China and the United States were two countries that had already decided economic wellbeing is a form of national security. With countries staring down unemployment that could go as high as 30%, expect that kind of thinking to take hold globally, with dismal implications for cross-border mergers.

National security is a common grounds for blocking deals even in hands-off countries like the United Kingdom. But definitions have gotten vaguer. France’s former Prime Minister Dominique de Villepin wedged his way into a PepsiCo bid for Danone in 2005, calling the yogurt company a “crown jewel.” U.S. President Donald Trump blocked a deal between chip makers Broadcom and Qualcomm in 2018 for fear the country might lose its competitive edge on 5G. Last month the Committee on Foreign Investment in the United States gained the power to vet non-controlling investments.

The virus has raised defenses still further. Politicians in Germany and Spain say they may protect domestic firms from foreign deals. Last week Reuters reported that the U.S. administration was considering how to acquire CureVac, the German maker of a potential coronavirus vaccine, in order to sell the drug exclusively in the United States. That plays to fears that foreign takeovers are Trojan horses for advancing the buyer’s national priorities at the expense of the seller’s.

Companies’ relationship with the government is changing too. The Trump Administration has talked about invoking the Defense Production Act, which gives it powers to procure coronavirus test kits and other healthcare products that are in a shortage, which suggests that politicians are focused on business leaders doing their bit to help. Trump can strongarm General Motors and Ford Motor into helping the coronavirus war effort. Would that be so easy if their parent companies were in Japan, or China?

Finally there’s the specter of opportunism. China is ending its lockdown in April, for example, having started sooner than Europe or the United States. Companies in regions that recover earlier will find themselves at a valuation advantage to those in places that recover later – creating political anxiety over takeovers at unreasonably low levels. Cross-border deals depend on trust and openness. Coronavirus will do lasting damage to both.

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