The Fall in Cross-Border Deals

By Francesca Bandini


During the last decade, the need for companies to internationalise their supply chains in a search of competitive (cost) advantage, has led to an unprecedented surge of cross-border transactions. Emerging as a way of entering new markets, they allowed companies to get access to new technologies and capabilities, creating new opportunities for both ailing firms and local economies.

Despite their previous tremendous growth, 2019 saw a decrease in the number of these transactions: amounting to $1.2 trillion, cross-border M&A fell by 25% compared to the previous year, reaching its lowest level since 2013. This downturn was caused largely by a series of geopolitical tensions such as the trade war between the US and China and the uncertainty surrounding Brexit, along with its impact on the European market.

Furthermore, this decline has been further exacerbated by the current coronavirus emergency. Ever since the outbreak, Covid-19 has led to a massive disruption of supply chains, bringing the cross-border M&A activity to a halt. According to the Financial Times, cross-border activity fell 17% to $204bn, with respect to 2019.

What is a Cross-Border Deal?

A cross-border merger and acquisition is defined as a transaction involving two firms whose headquarters are located in different home countries. Allowing companies to circumvent tariffs barriers and accessing new markets, this type of M&A is an important tool in a company’s armoury. Indeed, it provides significant cost advantages.

Depending on whether the movement of capital is an inflow or an outflow, a cross-border deal can be classified as:

  • Inbound → takes place when a foreign company acquires or merges with a domestic company. This is an inward movement of capital.

  • Outbound → takes place when a domestic company acquires or merges with one in another country. This is an outward movement of capital.

Fostered by the dramatic rise in international trade and the greater exchanges of goods, capital, resources and ideas across national borders, more and more companies have started investing overseas. For this reason, during the last decade, cross-border transactions have become fundamental characteristics of the global business landscape.

However, in 2019 cross-border deals lost their momentum. Political uncertainty and sluggish economic growth resulted in a decline of this type of transaction, as they accounted for only 40% of the total M&A activity. On the other hand, since companies were wary of expanding beyond their markets, there was a dominance of domestic transactions, as the top 10 deals of 2019 were all conducted within one country, the US. This negative trend has continued in 2020, aggravated by the coronavirus emergency.

Image: Global M&A Market Share in 2019 (MergerMarket)

The Trade War Between the US and China

During the past two years, trade tensions between the US and China have been a frequent cause of concern for global markets. The conflict, started by President Donald J. Trump to reduce the US trade deficit and increase domestic manufacturing, has weighed on business confidence, forcing firms to reconsider their long-term investments. The severe tariffs imposed by both countries created a protectionist atmosphere, under which several deals have been blocked or even overturned. The Committee on Foreign Investment in the United States (CFIUS) blocking Broadcom’s acquisition of Qualcomm, and overturning the already completed Beijing Kunlun Technology Company’s acquisition of Grindr are just some examples.

Moreover, the high degree of uncertainty surrounding this conflict has played a significant role in the downturn of cross-border transactions, particularly in China’s outbound M&A in the US. As a result of the severe tariffs imposed by the US and the tightened regulatory scrutiny of Chinese companies carried out by the Committee on Foreign Investment, Chinese investments in the US have dropped to $2 billion, a plunge of 80% with respect to 2018, according to Refinitiv. Because of China’s economic slowdown and tight capital controls, Chinese companies, which used to rely heavily on debt to finance overseas transactions, were under pressure to cut debt. This further explains the downturn of outbound Chinese M&As.

The prolonged conflict between the US and China has undoubtedly changed the global economic landscape. Companies are now finding themselves at a very important crossroad: reshoring production or keeping it overseas?

To avoid the severe tariffs imposed by the US, more and more companies are modifying their supply chain by moving production outside China. However, while some companies are considering reshoring, others are planning on rebuilding their supply chains in those Asian countries where production costs are low, namely Vietnam, India, Taiwan, and Malaysia. According to the Nikkei Asian Review, Silicon Valley giants such as Apple, Microsoft and Amazon are assessing the cost implications of this maneuver.

Image: Apple's Supply Chain (