Foreign Buyers in the U.S. Middle Market
The appetite for cross-border deals remains strong as foreign buyers continue to invest in U.S. businesses, despite new headwinds.
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The U.S. M&A market remains attractive for foreign acquirers because of the predictability of the country’s legal system and the purchasing power of American consumers. Deal activity is expected to remain strong due to low costs of entry, potential for fast-paced growth, and the ability to transform companies easily.
Foreign buyers steadily increased their M&A activity in the U.S. middle market from 2013 to 2017. It remains to be seen how tariffs, reform legislation involving the Committee on Foreign Investment in the United States (CFIUS), higher interest rates and a strong dollar will impact middle-market M&A activity, but foreign buyers have continued their acquisition activity in the first three quarters of 2018 at a rate comparable to that of 2017. Based on trends and forecasts, foreign buyers likely will continue to find the U.S. middle market attractive.
For M&A deals valued at $10 million to $1 billion in 2013, foreign entities made up 13.7 percent of all buyers of U.S.-based targets, according to data from S&P Capital IQ. In 2017, that number grew to 21.4 percent. In the first three quarters of 2018, foreign buyers constituted nearly 21 percent of buyers.
“Based on trends and forecasts, foreign buyers likely will continue to find the U.S. middle market attractive.”
Like U.S.-based buyers, most foreign acquirers prefer transactions in the $10 million to $100 million range, followed by increasingly larger middle-market deal sizes. In terms of overall value, deals involving foreign buyers contributed to 15.8 percent of total deal value in 2013. That grew to 20.4 percent in 2017. At press time, foreign-buyer deals have contributed to 19.6 percent of total deal value in 2018.
S&P Capital IQ’s data show that during the period from 2013 to 2017, foreign buyers were most active in real estate, followed by the consumer discretionary, information technology, health care, industrials and materials industries.
This is generally consistent with broader trends for U.S. buyers, except that U.S. buyers showed more interest in the financial industry. The first three quarters of 2018 showed similar trends.
CFIUS reform legislation enacted last August may negatively impact M&A activity in certain industries. The new law increases scrutiny of deals involving a buyer based in a country of special concern that has the strategic goal of acquiring critical technology or critical infrastructure, such as those in the information technology, biotechnology, defense or infrastructure industries. China is widely understood to be a country of special concern. Indeed, CFIUS has blocked several transactions, even before the enactment of more rigorous legislation—including in instances where the target was a foreign company with a U.S.-based business.
Any slowdown in deals with Chinese or other foreign buyers may not affect the broader U.S. middle market because most foreign buyers are from countries that have not been deemed threats to U.S. national security. From 2013 to 2017, the top countries represented by foreign acquirers in the U.S. middle market, in order of deal share, were Canada, the United Kingdom, China, Germany and Ireland. In the first three quarters of 2018, they were Canada, the United Kingdom, China, South Korea and Switzerland.
Overall, we expect the pipeline for middle-market transactions to remain robust for the foreseeable future.
This article originally appeared in the January/February 2019 issue of Middle Market Growth.
Alpaslan “Alp” Basaran is a corporate associate in the New York office of Pepper Hamilton LLP. He focuses primarily on M&A and general corporate matters, and he has represented public and private companies, as well as private equity firms, in a variety of U.S. and international transactions.
