Rising Barriers: Key Considerations For Deal-Making Post COVID-19
Political and policy barriers to deal-making continue to rise in the United States and across the world, with the COVID-19 pandemic accelerating protectionist trends. Policymakers are broadly redefining what it means to be a critical industry and tightening restrictions on foreign direct investment. At the same time, there is growing public distrust of foreign interests and corporate capitalism, and fear that industry consolidation is on the horizon.
COVID-19 has demonstrated there are weaknesses in relying on global supply chains for many industries, including healthcare, technology, and defense to name some of the most high-profile sectors. The pandemic has catalyzed questions that were already raised as to whether the definition of critical assets should be expanded, and whether barriers to foreign ownership and investment should be raised further, particularly ownership and investment by companies affiliated with a foreign government. COVID-19 has heightened already intense scrutiny and increased the momentum of policies that are intended to shield industries from foreign influence and to secure supply chains by near-shore or onshore domestic manufacturing.
Public sentiment in the U.S. is also shifting more in favor of investment restrictions for large companies and foreign entities. A recent FTI survey found a near 2:1 margin of Americans believe the federal government should intervene (rather than remain idle) to block larger companies from acquiring their competitors and prevent monopolies. The survey also showed 42% of Americans believe struggling U.S. companies should not be able to sell to foreign entities as compared to 35% of Americans say U.S. companies should sell as they see fit.
In this volatile environment, heightened regulatory, political, and media scrutiny should be expected around transactions. Additionally, in the context of hostile transactions, protectionist trends may also be used as a defense mechanism. Three areas of particular importance include the following:
- National Security
The Pentagon is calling for the Committee on Foreign Investment in the United States (CFIUS) to exercise “hypervigilance” to protect the defense industrial base from adversaries looking to leverage capital to gain ownership or access to sensitive technologies.
- Critical Infrastructure
Shortages of personal protective equipment, medical devices, basic medicines, and other vital products are driving bipartisan demands for government intervention to strengthen U.S. manufacturing and supply chains, and reshaping conversations about what constitutes critical infrastructure.
- Opportunistic Takeovers
Progressive legislators are seeking a freeze on mergers and acquisitions. While these proposals face a steep path forward in the Congress, it will serve as a rallying point as political attacks on “vulture capitalism” escalate.
Framing the Deal: Three Strategic Imperatives
To protect a deal and ensure continued freedom to invest, it is critical that buyers and sellers prepare for scrutiny. Here’s where to begin.
Know the new rules of the road.
New regulations that took effect on February 13, 2020 cast a much wider net of foreign investors that will be subject to review by the Committee on Foreign Investment in the United States (CFIUS). Two major changes include the expansion of CFIUS jurisdiction to non-controlling investments involving technology, infrastructure, and data (“TID”) businesses and the requirement of mandatory filings for transactions involving foreign investors with ties to certain governments and TID businesses. Given the heightened scrutiny of foreign takeovers and “mega mergers”, along with the Trump Administration’s recent moves to retroactively unwind deals, it is imperative that companies incorporate the changing landscape into their investment strategies. The bottom line is that the regulatory process remains very important.
Prepare for political scrutiny.
Companies must provide compelling evidence and/or a narrative that clearly demonstrates that foreign investors do not have close ties to adversarial countries and sanctioned parties to expedite the review process and support approval (particularly for TID transactions). They must make the case with key stakeholders, including local and national politicians, throughout the process.
Regulatory compliance is not enough.
Simply relying on a regulatory process that can be politicized or disrupted by headlines is not enough. Competitors are increasingly using political advocacy to influence outcomes. Employees fearful of potential job losses as a result of a transaction are doing the same. In hostile transactions, the regulatory process can also be leveraged as a defense. While the exact degree of influence that outside stakeholders bring to bear on final decisions will vary, today’s landscape leaves little room for error. External efforts to diminish investor confidence, sway employees, and harm reputation cannot go unanswered.