As 2022 draws to a close, we look at some recent developments affecting cross-border transactions.
New determinants in cross-border M&A
Contrary to popular belief, COVID-19 does not always hamper deal-making. Whilst cross-border M&A saw a dry spell in the early days of the pandemic, now, more than two years after the World Health Organisation first declared the outbreak a pandemic, investors and businesses have clearer perspectives and a growing confidence as to their investment strategies, future plans and how to navigate deal waters in the new normal.
As part of this, new factors driving transactional and investment decisions, for instance, the determination of mergers and acquisition (M&A) targets, are emerging.
One example is in how locational decisions are made, where it is the management of the virus, and not the outbreak itself, that is becoming a key factor determining the end point of an M&A. The resilience of a healthcare system, vaccination rate and governmental response to the pandemic, whether actual or perceived, are increasingly key factors playing a role in investment and acquisition decisions.
A case in point is China, where its government’s “zero-Covid” policy has emerged as one of the country’s biggest challenges to foreign investors. While the containment strategy may have saved many lives, the uncertainties over China’s policy direction and its efficacy mean that many multinational companies are now reviewing plans for their China business and investors are looking elsewhere.
Other considerations driving cross-border deals include (i) the level of regulatory risks and regulatory intervention, as the legal and regulatory landscape becomes increasingly complex and some jurisdictions adopt a more protectionist approach amid the current rising geopolitical tensions, (ii) workforce matters, as human capital issues affect post-deal integration and workforce strategy is a growing priority, and (iii) the state of digital and technological infrastructure and its readiness to meet the demands of the continued digital transformation of many businesses.
Sanctions – Effect on M&A, due diligence, and financing
The effect of sanctions consequent to Russia’s invasion of Ukraine and resulting supply chain issues has focused companies’ attention on the need to ensure supply chain resilience. This is becoming a key consideration, if not the driver, behind M&A activity concerning Russia. Companies that previously relied on Russian suppliers and service providers are now not only sourcing for alternative supply chain partners, but also looking to vertically integrate them, with a priority on reliability over cost.
For entities wishing to acquire Russian targets or deal with Russian counterparties, detailed analysis of the transaction will be required to ensure compliance with applicable sanctions. Given the constant changes to sanctions, many of which are driven by developments in the Russia-Ukraine war, it is important that acquirors monitor such compliance on an ongoing basis. Acquirors should note also that many entities engage in over-compliance. For example, a bank or company may choose to comply with US, EU, or UK sanctions even if such sanctions do not apply to it. Acquirors will therefore want to clear transactions beforehand with other intermediaries or service providers working on the deal to ensure no delay is caused by such intermediary’s or service provider’s refusal to execute their role in the deal.
Entities providing finance based on Russian-origin collateral will want to ensure that such collateral is not the subject of sanctions that would impede realisation of the security. For example, if Russian-origin metal were pledged as security and default were to occur, the lender might be unable to realise the security if it were the subject of sanctions prohibiting the sale, import, or export of such metal.
Pushing digital goals and payments integration across borders
While we have long been adapting to the rise of digital technology and a cashless payment landscape, the continued developments in these areas are shaping the way businesses transact in an evolving business landscape. While there is a whole spectrum of developments across governments and industries, we look closer to home with a focus on initiatives taken by our central bank.
The Monetary Authority of Singapore (MAS) has been pushing digital goals by taking steps to strengthen Singapore’s capabilities to use digital currency-based infrastructure for cross-border transactions and enhance payments connectivity across borders to support Asia’s development and connect global markets.
On 3 November 2022, the MAS launched Ubin+, an expanded collaboration with international partners on cross-border foreign exchange settlement using wholesale central bank digital currency (CBDCs). Under Ubin+, MAS will develop standards, infrastructure, and policy guidelines to support atomic settlement of foreign exchange transactions using CBDCs and strengthen Singapore’s capabilities to use digital currency-based infrastructure for cross-border transactions.
On 29 September 2022, the MAS launched the Financial Services Industry Transformation Map 2025. Its key strategies include further digitalisation of financial infrastructure such as by developing digital platforms to connect small and medium-sized enterprises across growth regions, and enhancement of payments connectivity such as by expanding cross-border payment linkages with regional economies.
A month preceding that, the MAS and Bank Indonesia announced the cross-border quick response payment linkage that the two countries are pursuing to allow instant, secure and efficient payment transactions. The central banks said the move would empower small and medium-sized businesses to conduct cross-border trade more efficiently.
Innovations in digital solutions and payment connectivity remain at the forefront of government and business agendas in 2022 and can be expected to shape cross-border activity moving forward.
Focus on ESG
Environment, Social and Governance (ESG) is in the spotlight, with a growing recognition of ESG as being inextricably intertwined with business and investment decisions, directly impacting returns and long-term value. A strong ESG proposition can build resilience into a business model and a business with ESG-centered practices would be viewed as better positioned for the long term. Investors are increasingly applying these non-financial considerations as part of their investment analysis and companies are now looking at sustainability beyond compliance.
From a cross-border M&A perspective, there is increasing need for ESG issues to be identified and addressed, for instance, where a company is acquiring an overseas target that may be subject to a different set of ESG rules and practices from it. ESG is increasingly an integral part of M&A and integration processes, from the due diligence, risk assessment and valuation stages to the post transaction long-term plans of the integrated group.
In Singapore, recent initiatives include (i) ESGenome, a digital disclosure portal launched by the MAS and Singapore Exchange on 12 September 2022 for companies to report ESG in a structured and efficient manner, which could facilitate our listed companies to be in a better position to raise capital and attract international investors, and (ii) ESG Impact Hub, launched by the MAS on 5 October 2022, to encourage co-operation and collaboration between ESG FinTech players, financial institutions and real economy stakeholders as part of plans to grow the region’s ESG community and address the ESG needs of companies and financial institutions.
Moving forth, we expect increasing discourse and focus on issues surrounding ESG, as it evolves from a trend to a sustainable approach to business and investment.
Outlook
The pandemic is by no means over and Ukraine battles a war in a punishing winter. There are geopolitical tensions, rising interest rates, inflation and talks of a looming recession. It is no surprise that the challenges facing the economy in recent times have affected deal-making sentiment, in particular for larger cross-border deals.
As Bloomberg Law reports, the heightened uncertainty continues to hinder M&A activity, as the third quarter of 2022 (Q3) saw a notable dip in global M&A volume compared to recent quarters, with no market segment immune to the fall. The differences between the average quarterly volumes and Q3’s deal volumes for large and mega deals are more dramatic than the differences for small and middle market deals.
But the outlook is not entirely dismal. There are expectations of a continued rise of acquisitions in South-East Asia and of private equity money pivoting from China towards other markets in Asia. The reopening of international borders and recovery of sectors that were subdued in the earlier days of the pandemic are also bright spots. Looking beyond transactions into trade, the International Monetary Fund predicts global trade growth in 2023 to slow by more than previously expected but observed that global trade has been more resilient than expected since the start of the pandemic. A similar outlook is seen at the World Economic Forum, with predictions that the Russia-Ukraine war will have a much smaller impact globally on trade than the pandemic – slowing, but not reversing, growth.
It remains to be seen if 2022’s fourth quarter results will boost the year’s performance and the outlook moving forward, as transactions round the globe work towards the usual year-end closing rush.
While major uncertainties face the market today, the outlook is not all doom and gloom, as transactions and trade show resilience and opportunities persist in the region. It is the hope that open trade and the seizing of opportunities across borders, will continue to be drivers of growth. The constantly evolving business climate and unprecedented array of opportunities it brings, coupled with new knowledge from the pandemic, continued digital transformation and enhanced cross-border connectivity mean only exciting days ahead, for businesses looking to grow beyond borders.
Send your insights and queries to Ms Jacinda Wong.