OECD: Ominous Signs for International Investment

By Michael Gestrin, OECD

After two years of steady gains, international M&A activity plunged by $107 billion, or 45%, in the first quarter of 2012. This is the second lowest level of international M&A since the start of the global economic crisis. (figure 1)

The magnitude of this sharp reversal is due to its global reach, with countries from all regions simultaneously pulling back. The biggest industrialised outward investors accounted for most of the declines. The United States, the United Kingdom, and Japan reduced the most — $76 billion in Q1.

This time the emerging economies also joined the trend. As a group they accounted for $12 billion of the total global decline, a share of 11%. This contrasts with the counter-cyclical role they played at the start of the crisis in Q1 of 2008. At that time, international M&A from the emerging economies increased by $6 billion, or 7%, while overall international M&A declined by $235 billion, or 37%.

This is the second lowest level of international M&A since the start of the global economic crisis.

The biggest change between these two periods is China (including Hong Kong, China). In Q1 of 2008, as the crisis started and global M&A fell by 37%, China (including Hong Kong, China) grew its international M&A by 70% to $33 billion. This year it contributed to the downward trend, reducing its international M&A by 36% to $19 billion.

The sharp decline in international M&A investment in Q1 of this year didn’t come completely unannounced since it was preceded by softer declines in Q3 and Q4 of 2011. This trend is also evident in data on foreign direct investment (FDI) flows, a broader measure of international investment that includes international M&A. Given that FDI flows and international M&A tend to move in lock-step, it is likely that global FDI flows have also declined sharply in 2012.

Just as the declines in outward M&A have been global in nature, inward M&A has also declined across all regions, with only one exception (table 3). Inflows of M&A into Europe, North America, Latin America, and Asia all declined by around 50%. The Middle East has been hardest hit, seeing M&A fall by 82% due to the combined effect of the downward cyclical trend and heightened political and economic instability in the region. The best performer was Africa, which enjoyed a 133% increase in inward M&A.

A feature of the crisis has been the growing importance of international M&A by state-owned enterprises (SOEs), a trend first reported in IN13 (June 2010). When international M&A reached its lowest point in 2009, international M&A by SOEs reached 30% of the global total, an historical record. This government-driven investment would seem to be motivated in part by bargain-seeking strategies. As the crisis reached its peak in 2009, SOEs mobilised their cash to acquire distressed international assets.  The latest sharp downturn in international M&A has been accompanied by another sharp increase in international M&A by governments. These accounted for 15% of total international M&A in Q1, the highest share since the record levels reached in 2009. (figure 2)

Although it is too early to predict whether to the steep decline in Q1 marks the start of a new downward trend, the magnitude of the decline in Q1 and continued sluggishness half-way through Q2 do not bode well for international investment in 2012. On current trend, international M&A would fall to levels not seen since 2004 (figure 3).

(Click for Figures and Tables)