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‘Significant test of nerves’ facing global M&A players
Three areas of risk are being credited for creating a wide, fast-changing and increasingly-complex risk landscape for M&A transactions, according to a report.
Grace Ormsby
M&A Insights, a M&A report from Allen & Overy with a focus on quarter four of 2018, said that political risk, ‘change of law risk’ and greater protectionism are the three factors that have “particularly come to the fore” recently.
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Political risk “has been elevated at a time when disparate forces are at play”, the report stated.
It emphasised “the unpredictable politics of the Trump White House through to the rise of populist movements across Europe”, as evidentiary examples of political risk.
“It seems that the political and policy landscape in many countries is becoming less stable and much harder to predict,” the report said.
‘Change of law’ risk was credited as the second area, with Brexit cited as “a prime example” in the report, as it represents the “biggest change of law to hit the UK and the rest of Europe in many decades”.
Despite the fact that most M&A investors have “rarely” had to grapple with this issue in the recent past, M&A Insights said that “the allocation of risk arising from a change in law has been a common feature in many long-term project financing deals for some time”.
The third notable risk factor, a “march towards greater protectionism” is credited by the report as being “seen most acutely in the increasingly hostile trade wars between the US and China as the recalibration of economic power from West to East is fought out through tariffs”.
It comes as the UK contemplates tougher restrictions on foreign direct investment, while Germany is already imposing strict controls.
With France considering following suit, the report also noted that Chinese investors “are increasingly worried about the controls being exerted by the Committee on Foreign Investment in the US”.
“Throw in sanctions as well, and it is clear that protectionist risks and the impact of assertive economic foreign policies are rising rapidly,” it continued.
Global co-head of corporate at Allen & Overy, Dirk Meeus, said this will result in “further tests ahead in 2019 as the global risk landscape broadens”, as a result of the above three factors.
He noted that “while one of these alone may not be enough to topple the M&A market, it will be a significant test of nerves for all players.”.
“We are seeing a growing number of transactions where these dynamics are affecting the structuring and execution of deals and it is clear that plotting M&A strategies and deciding which markets to prioritise are becoming more complex tasks,” the report concluded.
Lawyers Weekly recently reported that the value of M&A transactions is up by more than 30 per cent despite increasing geopolitical turbulence.
