Globalization of the world economy slowing down

вестник 07.02.2019

Under instability of the world economy and trade wars, pace of globalization has slowed down. It is for this reason that the number and volume of M&A transactions has reduced.

Mergers and Acquisitions (hereinafter “M&A”) market crossed national borders and became an indicator of globalization process. Common outcome of the development of any large company is its intention to internationalize activities. The company must have clear competitive advantages and choose the most effective ways of business development to increase revenue and profitability. Commonly speaking, M&A transactions aim at the following:

  • scale and synergy effect - comprehensive financial result of merged companies is significantly higher than if these operate independently;
  • diversification of activity allows to break away from niche specialization and cover other areas of the economy;
  • acquisition of effective enterprises to obtain profit or unique developments;
  • simplification of production chain and internal standards enable the quality of products and services to be improved at lower or comparable price level;
  • public interest, which on the one hand seeks to control of strategic properties, and on the other to allow privatization.

M&A costs are due primarily to possible monopolization of the market occurring under no government regulation. In that case, positive effects are reversed by the lack of competition. Hostile takeover and raiding are also common. It should be considered that national production characteristics disappear in a globalized economy, and it is increasingly difficult to acquire the unique product.

Major trends on the international M&A market

The international M&A market is tightly relates to condition and dynamics of the global economy, particularly of the USA and EU countries. China is proactive, purchasing assets not only in Africa and Asia, but also in Western Europe.

Peak of volume and number of cross-border M&A transactions was recorded in 2007, when over 15 thousand mergers and acquisitions at the amount exceeding 2 trillion USD were made. Since then, this result is not surpassed. According to the results of 2018, about 14 thousand M&A transactions at the amount of 1.5 trillion USD were conducted. This indicates the slowing of world economy globalization.

The biggest transaction in 2018 was the acquisition by the American telecommunications holding AT&T of one of the largest media and entertainment conglomerates WarnerMedia (СNN, Time Inc., Warner Bros, etc.). The price of transaction amounted to 130 billion USD. According to the leading electronic databases publisher Bureau van Dijk (Belgium), Credinform strategic partner, AT&T assets at the date of acquisition amounted to 444 billion USD, and 69 billion USD of WarnerMedia.

The largest cross-border transaction was acquisition by Japanese pharmaceutical corporation Takeda Pharmaceutical of Irish biochemical company Shire plc. The volume is estimated at 62 billion USD.

The Russian M&A market

The Russian M&A market stagnating under the instable situation on foreign markets. The low growth rates of the economy and consumer demand continue to have negative impact, as well as sanctions and barriers affecting business of the Russian enterprises abroad and entry of new foreign investors.

The largest volume of M&A market in Russia was recorded in 2013, when 533 transactions at the amount of 121 billion USD (or 3.8 trillion RUB) were made (see Picture 1).

Latest available figures show that 230 transactions at the amount of 31 billion USD (1.9 trillion RUB) were made in Q1-Q3 of 2018. According to tentative forecast for 2018 (taking into account the results of Q4), total amount of transactions will be 42 billion USD (2.6 trillion RUB) that is 20% less than in 2017.

Picture 1. Volume and number of M&A transactions on the Russian market, including domestic Picture 1. Volume and number of M&A transactions on the Russian market, including domestic

Table 1 contains the largest M&A transactions in Russia for Q1-Q3 of 2018. It is noteworthy that takeover JSC Promsvyazbank by the State Corporation Deposit insurance agency was a necessary measure aimed at avoiding the collapse of one of the leading commercial banks in Russia. The situation is similar with JSC Binbank , restored by the Central Bank of Russia. On January 1, 2019, Binbank was joined to FC Otkritie .

Major trends on the Russian M&A market are as follows:

  • the state policy on localization of production within the country and relatively low prices for assets and operating expenses make domestic companies attractive for cross-border M&A transactions in the future;
  • further consolidation of domestic assets by large corporations and the state;
  • domestic business will continue to search for opportunities for international development, especially in the resource-rich regions of North Africa, Middle East and Latin America;
  • low economic growth and consumer demand will continue to have a negative impact on the dynamics of M&A transactions.
Table 1. The largest M&A transactions on the Russian market in Q1-Q3 of 2018
Sector Objest Sellers Acquirers Package Amount, million USD Format
1 Financial institutions JSC Promsvyazbank Alexey Ananyev and Dmitriy Ananyev, other minor shareholders Deposit insurance agency 24,99% 4 250 Domestic
2 Construction and real estate Stroigazkonsalting group of companies United Capital Partners (USP) Gazprombank group 50% 2 882 Cross-border
3 Communications Wind Tre (Italy) Veon (parent company of JSC Vimpelcom) CK Hutchison (Hong Kong) 50% 2 867 Cross-border
4 Trade JSC Magnit Sergey Galitskiy JSC VTB Bank 29,1% 2 410 Domestic
5 Transport LLC MODUM-TRANS (former LLC UVZ-Logistik) JSC NPK Uralvagonzavod Invest-Logistika 100% 2 120 Domestic
6 Food industry and retail trade Agrokor Government of Croatia JSC Sberbank JSC VTB 39,2%
7,5%
1 633 Cross-border
7 Food industry JSC Donskoy tabak Agrokom group, Ivan Savvidi Japan Tobacco (Japan) 100% 1 600 Cross-border
8 Financial institutions JSC Binbank Mikhail Shishkhanov (67,97%), Mikhail Gutseriev (28,49%), other minor shareholders Central Bank of the Russian Federation 99,99% 994 Domestic
9 Mining operations LLC GDK Baimskaya Millhouse Capital (owned by Roman Abramovich) Kaz Minerals (Kazakhstan) 100% 900 Cross-border
10 Construction and development JSC SEZ Production and industrial type Alabuga and JSC SEZ Innopolis JSC Special economic zones Ministry of Land and Property of the Republic of Tatarstan 100% 569 Domestic
  Top-10 20 225  

M&A market is dynamic, and reacts quickly to global economic processes. Under the conditions of instability of the world economy and various restricted measures outside the WTO framework, mistrust between participants of economic processes is growing. That results in decrease in the number of mergers and acquisitions. Whether the idea of globalization becomes an illusion or is transformed into something new, the near future will show.