We looked at some of the trends that are shaping M&A in 2019, a year where successful boards and investors have identified opportunity amid the challenges of trade tensions, political uncertainty, and increasing regulatory scrutiny. We explore a number of specific themes we see as highly relevant in the current environment.
As data creates greater economic value, governments are regulating and often restricting its flow through data localization laws, data privacy regulations and technical controls. Businesses reliant on data are structuring international transactions to account for this new landscape of digital borders. Intellectual property is creating and influencing transactions and is viewed as a key target asset to be exploited. IP assets have been behind the success – and indeed challenges – of a number of recent, large M&A deals.
Against this backdrop of volatility, the predictable returns from infrastructure, energy and real estate assets have renewed appeal, with record levels of capital available. That traditional markets have themselves become less predictable, is encouraging investors to ramp up risk appetite and broaden their horizons.
In a fluid economic environment, companies are taking advantage of the flexibility of strategic partnerships as a less capital-intensive complement to traditional M&A, pooling expertise and sharing costs to defend market position or to expand into new markets and technologies.
1) Digital Borders – why data flows matter to M&A
Global data flows now generate more economic value than the global trade in goods. How data is used, stored, transferred, processed and protected is central to how businesses across sectors generate value and stay competitive in 2019. But governments are regulating and restricting the flow of data through data localization laws, data privacy rules and censorship. Data has become a matter of national security, of individual rights, of technological dominance, of how countries are governed and elections fought, and in some cases, of sovereignty.
China is foremost in these efforts, creating and enforcing a properly Chinese sphere of cyber-sovereignty, by technological and regulatory means. In the US, we are seeing increased governmental scrutiny of, and intervention in, inbound tech deals under the guise of national security. Elsewhere, rules designed to protect individual privacy rights, such as the EU’s GDPR, impose territorial restrictions.
Just as traditional barriers to trade have shaped the M&A strategies of multinational businesses, these newer digital borders are critical to how businesses – ever more reliant on data – structure their operations and enter new markets.
2) Intellectual Property – smart use of intellectual property in M&A
The increased use of data and technology allows companies to rapidly scale their business, diversify and create new income streams through smart use of IP in M&A.
IP is one of the most flexible and portable assets. With creative thinking, the same IP asset can be ‘sold and resold’ repeatedly through innovative sales and licensing structures. Smart exploitation of IP enables scalable growth with little to no capital cost and is driving today’s new business models.
The licensing of IP assets can also engineer a means of control over a business that a licensor elects to sell. IP rights are being used as deal catalysts, to create and influence transactions, as part of asset or product ‘swaps’, to drive bidder or partner preference and to adjust pricing and valuations.
3) Real Assets – the widening search for stable returns
Data-driven M&A grabs headlines, but unprecedented levels of fundraising in 2018 demonstrate the continued attractiveness of real assets such as infrastructure, energy, and real estate. In an uncertain world, the predictability of real asset returns has renewed appeal for a broadening range of investors. With developed infrastructure markets perceived as less certain, institutional investors are looking further afield for opportunities. Competition is increasing, with record capital raised and new players entering the market.
Investments in strategic real assets – including transport, social infrastructure, and networks – also bring influence at a time when it is important to have ‘a seat at the table’. Increasing competition for assets requires international investors to have well-defined localized strategies and an ability to maximize the attractiveness of their deal terms while balancing the protection of their investment.
4) Doing deals differently – Strategic partnerships are the spirit of the age
In a shifting commercial climate, agility is no longer a tactic but a necessity, and the resurgence of strategic partnerships is challenging the traditional pre-eminence of M&A. Businesses are gaining exposure to new opportunities by taking advantage of the flexibility and speed of alternative combinations to respond to industry disrupters, work in new ways and capitalize on complementary strengths. Upfront decision-making on how strategic partnerships are run, who runs them and potential exit routes is essential.
Click here to download Clifford Chance’s full M&A Trends Report 2019.
