To mark the forty-year anniversary of the American Bar Association Business Law Section’s Mergers & Acquisitions Committee, Jorge Yanez, Gary McSharry, and Luciana Griebel, co-chairs and vice chair, respectively, of the International M&A Subcommittee, reflect on developments in cross-border M&A in the last forty years.
Over the last forty years, cross-border M&A has gone through the best and worst of times. The effects of many global economic events have affected the activity of international M&A, for better or worse. Take, for instance, the good years of the eighties, then the recession of the early nineties, the recovery during the Clinton years, the internet explosion, the dot-com implosion, the wars in the Gulf and Iraq, the subprime bubble burst and global financial collapse, the renaissance of the tech companies, the COVID-19 pandemic. All of these events affected cross-border M&A activity during the lifetime of the Mergers & Acquisitions Committee.
The Foundation of Global M&A
The mid-eighties are the clean starting point for the modern global M&A era. This is when collection of reliable statistics on global M&A began. This period was driven by deregulation, corporate restructuring, and hostile takeovers, especially in the United States and Europe. Then came the recession in the late eighties and early nineties. With this, leveraged activity stalled. However, and even though cross-border M&A was still relatively limited compared to what it is today, the foundations were being laid for the globalization wave that would follow in the mid-nineties.
In the nineties, after the world came out of recession, cross-border M&A began to explode. Liberalization of world markets after the 1994 General Agreement on Tariffs and Trade Uruguay Round, privatization trends in Asia and Latin America, the expansion of the European Union single market, and more openness in emerging markets all helped drive cross-border deals. This is the period that saw multinationals expand internationally through acquisitions, rather than start-ups. Around the world there was a sense and need to shape local laws to be more friendly towards cross-border transactions. On the other hand, emerging markets saw the need to adopt new regulations in areas like energy, antitrust, and telecoms to protect internal markets from the wave of new investment and acquisitions. In this period, and contrary to what would be expected, the EU had a more active role in global M&A than the United States or Asia. International M&A became so relevant that the M&A Committee formed a subcommittee dedicated to cross-border transactions.
From Dot-Com Reset to Record Activity
The late nineties, in anticipation of Y2K, came with a flurry of deals focused on telecoms and media. The dot-com era detonated. Transactions focused on these industries were overvalued. This period established the idea that M&A was no longer about buying competitors at home. It had become a tool for global expansion, capability acquisition, and market access. After the tech bubble burst, M&A activity weakened, especially in sectors that had relied on inflated equity valuations. This was a reset period. International M&A suffered a decline. Public companies and sophisticated investors turned to international markets that were not affected by the tech disaster and focused on acquisitions in industries that had more tangible value, like food & beverage, consumer products, steel, and diversified industrials.
With the correction of the markets in the post-bubble years came tranquility, however. This is when the International M&A Subcommittee (“IMAS”) took shape and was formed. With a heavy dose of Canadian lawyers and U.S. members with cross-border practices, the IMAS came to life. Soon members of the M&A Committee from the United Kingdom, the EU, Asia, and Latin America joined to expand the membership.
The five-year period preceding the 2008 subprime crisis witnessed a huge increase in international M&A activity. Low interest rates, lots of liquidity, a renewed interest in globalization that surpassed the one that took place in the mid- and late nineties, and the increase of private equity investment helped this new surge in cross-border activity. 2007 was a record year for cross-border activity, with the highest deal value in history up to that year; it was the pre-subprime-crisis high water mark. The IMAS increased membership not annually but with each meeting. The IMAS also began to engage in publication projects for the ABA; the very first project was the International Due Diligence Manual.
The 2008 Financial Crisis Changes Cross-Border M&A Practice
The “fat cow” period of cross-border activity after the correction of the dot-com burst ended with the subprime crisis in 2008. The financial crisis sharply interrupted the growth cycle. The start of 2008 had been very promising; cross-border acquisitions numbers were strong in the first three quarters of the year. Then, in the last quarter of 2008, all came falling apart like a house of cards, with lingering effects in 2009. The world stopped. Deals in the making stopped due to the financial markets. Huge consortiums and groups that based their activity on leveraged acquisitions had to adjust. However, these troubled times also brought opportunities for investors and large companies to acquire businesses in distress. The value of deals fell sharply, but cross-border activity continued as opportunities were evident for distressed M&A deals.
The subprime crisis brought other positive effects to cross-border M&A. Activity recovered, but with more discipline: Acquirers were focused on due diligence and looked at every detail. This had a huge effect on cross-border M&A legal practice. Transaction documents evolved, and new clauses were inserted in cross-border deal documentation. Representations and warranties in purchase agreements of businesses with operations in different jurisdictions took on more relevance than before. With discipline, mega deals came back. There was a high number of divestitures, as global companies understood that they had to focus on core business growth. In the 2010s, the IMAS engaged in two more publication projects for the ABA: (i) the International Joint Venture Review; and (ii) the updated version of the International Due Diligence Manual.
Pandemic Shock and Technology-Assisted Rebound
Times were good again for international M&A until 2020 and the COVID-19 pandemic, a global event, which influenced the way deals were made. The pandemic caused a deep immediate shock to the markets and a normal and understandable decline in cross-border deals, but once technology and tools to manage long-distance negotiations were available, activity rebounded and came back to normal quickly.
The rebound came so fast that 2021 became the new record year for international M&A activity. The tools available to M&A practitioners made things significantly easier, and growth in data centers and crypto helped fuel the surge in deal activity. This is the period in which artificial intelligence started to play a role in the creation of legal documents. Private equity also became a huge player, making the contrast between conventional M&A and PE M&A wider. International M&A also became selective, focusing on regions that showed progress and respect to the rule of law.
Looking Forward
Predicting the future of international M&A is a complex endeavor. The trends in M&A, especially those involving cross-border transactions, are heavily influenced by global events. These external factors can rapidly shift the landscape, making long-term forecasting particularly difficult. Still, there are some long-term trends to point to. Over the last forty years, globalization has largely prevailed over nationalism. This shift has had a decidedly positive impact on international M&A activity, facilitating deals and partnerships across borders. The dominance of globalization has enabled companies to expand their reach and has encouraged the growth of cross-border transactions. Looking forward, artificial intelligence is poised to have a significant influence on the M&A legal practice. In the coming decades, the advancements brought by AI will shape how legal professionals approach and manage M&A transactions. The evolution in the past forty years in international M&A will be modest compared to the dramatic changes that could take place in just half that time in the future driven by technological innovation.
