Watch: How Are Supply Chains Impacting M&A Dealmaking?

Debra Hatter, partner with Norton Rose Fulbright US LLP, discusses the findings of the law firm’s second annual Global M&A Trends and Risks Report.

According to the report, conducted with Mergermarket, there’s been an uptick of activity in mergers and acquisitions. One driver, Hatter says, is the passage of measures such the Inflation Reduction Act in the U.S., which generated around $500 billion worth of incentives and spending, $400 billion of which is directed at clean energy projects. The measure has resulted in a slew of new investments, loan guarantees, grants and tax incentives, creating “quite a large pot of money that is spurring dealmaking.”

All of the affected sectors have accompanying supply chains that must step up to support the wave of new investment. Hatter says much of the M&A activity is in the form of vertical dealmaking, by which discrete elements of a supply chain, such as manufacturing and component or raw materials supply, are brought together under common ownership. That’s a reversal from the trend of past decades, whereby companies came to rely on outsourcing for obtaining critical materials, parts and components for final assembly. With vertical dealmaking, “you’re able to realize synergies by owning it within the network, eliminating markups and the need to share that supplier with others,” Hatter says.

That’s great for manufacturers, but it raises red flags for regulators, who worry about large companies asserting monopoly power over markets. The potential is for fewer options for other manufacturers who lose access to the acquired suppliers, as well as higher prices for consumers.

Yet large companies are nevertheless pursuing such deals, as they strive to avoid a repeat of the supply shortages that they suffered during the COVID-19 pandemic, by asserting greater direct control over their supply chains, Hatter says.