Transactions
The value of everything
15 Jan 2025
Insight
Global
3m read
As the global landscape shifts from a unipolar world dominated by the US to a multipolar system in which the influence of economies like China and India continues to grow stronger, there are several implications for M&A activity.
US-China tensions, which are foremost in exemplifying the shift, are expected to heighten with the re-election of Donald Trump, who has indicated an intensification of US protectionist policies, particularly targeting China. These measures include higher tariffs on Chinese imports, stricter application of foreign investment regulations under the Committee on Foreign Investment in the United States (CFIUS) and increased scrutiny of proposed investments by Chinese technology companies into the US.
With effect from January this year, US persons and their controlled foreign entities will also be subject to restrictions when engaging in transactions with foreign persons in “countries of concern” (currently limited to China alongside the Hong Kong and Macau special administrative regions) which operate in sensitive sectors including semiconductors and microelectronics, quantum information technologies or artificial intelligence. This regime, commonly referred to as 'Reverse CFIUS', is expected to be emulated more widely, with the European Commission also expressing interest in implementing a parallel regime.
The Middle East, seen as a neutral player, is benefitting from a strengthening of ties with both the US and China. However, it remains to be seen if this can continue for long, as Middle Eastern investors are increasingly courted by China to fill the vacuum created by the withdrawal of Western capital."
Chris Walters
Dubai
It is not just use of FDI regulations where the US is setting the precedent.
Adoption of protectionist policies more generally is also on the rise. In Europe, the European Union's Carbon Border Adjustment Mechanism, which will take effect in 2026, will protect European industries from unfair competition by imposing tariffs on carbon-intensive imports.
Economically, Japan may benefit from the geopolitical instability, with investors looking for alternative opportunities in the region. A weak yen and relaxed corporate governance rules have boosted inbound M&A activity and targets with strong ESG credentials and technological capabilities are proving particularly attractive.
India could also capitalise on the US-China dynamic: the US is encouraging strategic investment into India to counterbalance China's growing influence in the Indo-Pacific region. While a number of Southeast Asian economies are benefitting from the 'China plus one' strategy (a hedging strategy for foreign companies that have previously concentrated investments in China) the domestic growth drivers in India (including strong fundamentals), coupled with the desire from the West to realign the global supply chain, are driving M&A and investments in India.
The opportunities offered by China in green energy, technology and advanced manufacturing are particularly attractive at a time when key economies in the Middle East continue to transition from reliance on hydrocarbons to more diversified and sustainable sources of income. While there continues to be some caution around committing to full acquisitions, the trend of collaborative arrangements, as well as joint venture and minority investment activity, continues.
Companies, particularly those in relevant sectors and geographies, are becoming accustomed to navigating geopolitical risk, and getting comfortable with country-specific risk, for example, through diligence and using specialist advisory firms. They are also more used to the increased scrutiny from regulatory authorities that comes with investment in, or association with, certain jurisdictions."
Nanda Lau
Shanghai
Innovative deal structures
It is not just the geographies in which deals are done which is being affected by the shifting world order: deal terms and structures are also evolving.
Increasing geopolitical tensions and domestic regulatory scrutiny have required companies to be innovative in terms of how deals are structured.
We are seeing increased numbers of M&A deals being structured, and businesses being carved out, to ensure that the parties are able to navigate the regulatory landscape and bring deal certainty. There is also a greater level of acceptance, and planning done, among buyers around commitments under FDI regimes which go to valuation and business, eg, inability to move workforces to cheaper jurisdictions and restrictions around transfer of IP and technology.
Geopolitical conflicts and uncertainty
Global conflicts, both ongoing and threatened, continue to influence the M&A landscape. The war in Ukraine has disrupted European security and strained global supply chains, leading to increased costs and operational uncertainties for businesses. Similarly, conflicts in the Middle East have heightened geopolitical risk, leading to volatility in energy markets and uncertainty more generally.
Given this combination of geopolitical considerations, institutional memory of the sudden impact of the Covid pandemic, and the growing threat of climate breakdown, companies are choosing to re-evaluate their long-term M&A strategies. Boards and investment committees are actively, and rightly, raising questions around geopolitical risks on acquisitions, investments, joint ventures and supply chain security and, in market surveys, geopolitical risks consistently rank as the top concern for clients when considering their investment strategies.
Notwithstanding the challenges that geopolitics add to the mix, businesses continue to show resilience in pursuing M&A, adapting to the new normal and finding creative ways to navigate issues. And M&A may provide a solution to some of the challenges they face.
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The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2025
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