Targeting M&A for Foreign Direct Investment
Earlier this month, I was on an international consultants’ panel discussion on all things Foreign Direct Investment (FDI). We talked about a wide range of interesting and challenging topics over the hour long session in San Diego, but for me the point that stuck out was around mergers and acquisitions (M&A). For too long, FDI consultants and Economic Development Organizations (EDOs) have been guilty (myself included), of not paying the level of attention to M&A that it surely deserves.
Why should we be interested in M&A?
Simply, because cross-border M&A represented US$400bn of investment in 2014 (see UNCTAD World Investment Report 2015), a 28% increase in the previous year. At the same time, greenfield investment of US$696bn decreased by 2%. This trend towards M&A is likely to persist, as more investors choose to use cautious, less risky forms of investment, at least as a starting point for going international.
There is particularly a desire to limit risk for investing in developing countries, given the imperfect information and sometimes weaker governance in these markets. Hence, as developing country inward FDI flows have started to edge ahead of developed in the last two years, the role of M&A can only strengthen. Continued global economic unsteadiness also reinforces a risk averse approach, such that even where greenfield investment does take place, it may often equate to relatively low levels of job creation.
So why are we paying M&A limited attention?
There are two sets of reasons for this. The first revolves around the question of whether M&A necessarily brings economic benefit. Certainly it may not always bring job creation, and indeed there are high profile examples of the opposite (e.g. Kraft’s acquisition of Cadbury). Moreover, even where a project does create jobs, a project announcement from an EDO of such activity has none of the public enthusiasm that a brand new investment announcement will have. Despite this, in many cases, M&A will have a positive net effect on the host country, but there is a persistent challenge of perception.
The second is one practical. What set of services should the EDO provide and how do they prioritize which firms to provide them to? This is at heart of the issue – ultimately as EDOs and consultants we have yet to truly identify (although I’m sure there are exceptions!) what a suite of services should look like, beyond providing a generic list of companies who may be receptive to an M&A deal.
So what can and should we do to address M&A?
Inevitably, not all M&A deals have a positive effect. So an EDO’s best course of action must surely be to lobby government in developing a transparent mechanism which identifies whether a deal is in the interests of the economy or not. Such a mechanism is of course far from straightforward, as it assumes access to the relevant data and freeing the economic case from the political agenda. Of course, governments can and do regularly block deals in the interests of competition (e.g. BHP Billiton acquiring Potash Corp in Canada), or national security (Huawei’s access to the US). But it is fine a line for EDOs to be closely involved in the actual decision making – and probably not one that it should cross. The EDO exists to facilitate and promote investment, not play the role of investment adjudicator.
If we do accept though that EDOs should play a promotion role in M&A deals, what services should they provide? The answer is probably much the same as those for attracting greenfield - matchmaking services, market opportunity information, sources of funding etc. Therefore, it should not be so difficult to provide a clear, defined set of M&A services, even if only for reactive support.
Sustained success for EDOs in the long term, may well come to those that make themselves M&A-ready in the short term.