Countries around the world are erecting barriers to fend off expected efforts by foreign corporate acquirers, particularly China, to scoop up strategically important assets that have lost value during the coronavirus pandemic.
From the United States to India to Australia, governments, warning about the need to keep key industries from falling into the hands of adversaries, have taken action against potential fire sales of prized companies whose share prices have been hard hit.
The pandemic has unleashed an international economic collapse not seen since the Great Depression. The International Monetary Fund is predicting a global recession, and the United Nations estimates income losses of US$2 trillion worldwide.
Trillions of dollars of company valuations have already been wiped out. In the US alone, the benchmark Dow Jones Industrial Average, despite a recent recovery, is down 18 per cent since late February.
Boeing and Airbus, the US and European aircraft giants, have each lost nearly 60 per cent in market value since mid-February; shares in the Italian oil titan ENI and Australia’s largest mining company, BHP Group, are down 40 per cent or more since January.
As asset value drops in aerospace and energy companies, governments worry that buying opportunities are being created for adversaries like China. In just the past weeks countries have put new protective measures in place – with governments strengthening foreign-investment reviews and even weighing whether to take stakes in some companies considered strategic.
Margrethe Vestager, the European Union’s competition commissioner, said last month that European countries should consider buying stakes in companies to stave off the threat of Chinese takeovers, the Financial Times reported. “We don’t have any issues of states acting as market participants if need be – if they provide shares in a company, if they want to prevent a takeover of this kind,” she said.
Rod Hunter, a Washington-based lawyer at Baker McKenzie who advises on foreign investments, said, “Governments are saying we don’t want other people to take advantage of the market upheaval.
“A lasting effect from the pandemic will be that it has exposed areas of vulnerabilities across the economy – whether it be dependence on China for active pharmaceutical ingredients or Europe for medical devices,” Hunter, who previously worked at the National Security Council, added. “Awareness of these vulnerabilities will influence how governments look at foreign investment from all regions, but especially China.”
As Beijing becomes more vocal about its global ambitions in technology and military development under President Xi Jinping, Chinese investments in strategic sectors have grown as a sensitive issue in the West.
The pandemic has reminded government leaders worldwide how heavily their nations rely on China for simple but fundamentally important products, from masks to medicines, and how entwined their economies are with China’s for supply chains in a vast range of categories.
And governments instituting new restrictions are walking a tightrope: protecting national security without jeopardising the lifeline provided by foreign investment at a time when businesses need cash to survive.
China is not specifically named in any new measures, but in discussing the need for them, officials have spoken of fears about overreliance on Chinese manufacturing. Senior European policymakers have recently argued that the supply chain breakdowns during the crisis have underscored the importance of having domestic manufacturing capacity to produce key materials.
On March 25, the European Commission issued new foreign-investment guidelines for its member nations to safeguard assets, notably in health, medical research, biotechnology and infrastructures.
The new rules required member states like Greece and Belgium that lack investment reviews to set up screening mechanisms.
“The risks to the EU’s broader strategic capacities may be exacerbated by the volatility or undervaluation of European stock markets,” the commission said in its new guidelines. “Strategic assets are crucial to Europe’s security, and are part of the backbone of its economy and, as a result, of its capability for a fast recovery.”
Additionally, member states were asked to consider the impact on the European Union as a whole.
“Remember, the acquisition of a company in your country may have a security effect in other member states or it may negatively affect a project of union interest. Today more than ever, the EU’s openness to foreign investment needs to be balanced by appropriate screening tools,” said European Commissioner Phil Hogan.
Government officials elsewhere are wrestling with the same concerns.
For example, Australia – though its economy is heavily reliant on trade with China – followed suit a few days later by requiring all proposed foreign acquisitions to undergo review, eliminating a dollar-value threshold. It also extended the review process – previously 30 days – to up to six months.
Australian Treasurer Josh Frydenberg expressed concern about distressed assets ending up in the hands of opportunistic foreign interests.
“There is likely to be a rise in debt-restructuring transactions for Australian businesses, along with opportunities to invest in distressed assets. Without these changes, it is possible many normally viable Australian businesses would be sold to foreign interests without any government oversight, presenting risks to the national interest,” the government said in a statement.
Also, India on April 17 revised its foreign investment rules to include any country that shares a land border with it – “a move clearly directed against China,” the Brookings Institution research group reported.
“Beijing’s approach has fuelled Delhi’s existing strategic and economic concerns,” according to the report. “These include overdependence on China for industrial inputs. Because of this crisis, the desire to boost domestic production or diversify India’s options is likely to intensify.”
A spokesperson for China’s embassy in New Delhi pushed back on the rules two days later, saying that the move was against free and fair trade and violated World Trade Organisation principles of non-discrimination.
“The impact of the policy on Chinese investors is clear,” the spokesperson said in a statement.
First hit by coronavirus in December in Wuhan, China was forced to close factories and businesses en masse. And the nation’s GDP shrank 6.8 per cent in the first quarter, the first contraction since 1976 in an economy known for its consistent growth.
Even so, some analysts argue that Beijing’s severe measures to tackle the Covid-19 outbreak may have put the country on a faster track to financial recovery than Western nations – giving it an upper hand in pursuing strategic acquisitions.
“We could argue China is the first to recover. Arguably, they are on the back end of the crisis. Their financial situation is stabilising,” John Lash, a business consultant on foreign acquisitions at the Control Risks consulting firm in Washington, said.
“On the other hand, if you are an investor in the US right now, it’s less likely you would deploy the capital when there is so much uncertainty.”
Though China’s outbound direct investment decreased to US$117 billion from its 2016 peak of US$196 billion, tech and media telecommunications continued to dominate its investors’ overseas acquisitions, with 22 per cent of deals completed in these sectors last year, according to an Ernst & Young report.
China’s ambitions for tech-sector dominance, for example, haven’t changed: just this week, Reuters reported that Beijing is preparing a new plan this year called China Standards 2035, intending to set global standards for the production distribution and use of next-generation technologies like telecoms and artificial intelligence.
In March, Ellen Lord, the US Undersecretary of Defence in charge of monitoring foreign investments, warned that it was “critically important that we understand that during this crisis, the [defence-industrial base] is vulnerable to adversarial capital”.
Lord said that US small businesses “may be more likely to enter problematic arrangements with foreign investors owing to uncertainty surrounding the renewal of their defence contracts”.
Lash said he had started to see an uptick in foreign interest in distressed US assets.
The tech sector is particularly active with overseas investors, many from China, offering financing – from convertible loans to straight-up takeovers, he said. Lash didn’t disclose specific deals due to the confidential nature of the transactions.
Such transactions, he noted, would eventually come to the attention of the Committee of Foreign Investment in the US (CFIUS). The inter-agency federal body that reviews most foreign deals for national security implications, it has been given more power in recent years by the Trump administration.
“You could run the risk of CFIUS coming back to look at them later,” said Lash. “But if you are a company that needs capital to keep the lights on, you’d say ‘we are going to take the money because we need it now’.”
“It’s very difficult to balance. But we ought to understand there will be adversaries that take advantage of the situation.”