The mergers and acquisitions in Malta is experiencing a temporary slump, attributed to several factors including high interest rates, stringent regulatory environments, and increased foreign direct investment scrutiny.
Dr Simon Schembri, an experienced lawyer in mergers and acquisitions explained that the surge in activity observed between 2021 and early 2022 has given way to a slowdown that he attributes to two primary factors: difficulty in sourcing financing for acquisitions due to high interest rates and a lack of confidence in M&A activity stemming from stricter local and international regulation.
Dr Schembri noted that foreign competition authorities are investigating deals below regulatory thresholds, and European Union Member States have increased their oversight of foreign direct investment.
Despite the current challenges, experts predict a resurgence in M&A activity in 2024. Economic stabilisation, financial sponsors deploying record levels of capital, and a potential rise in cross-border M&A are expected to drive this rebound. However, establishing a stable and uniform legal environment will be crucial to counter the uncertainties posed by international regulations.
High interest rates, a more stringent regulatory environment and increased foreign direct investment supervision especially by European states could be the main factors behind the current lull being experienced in the mergers and acquisitions market in Malta.
“Between 2021 and early 2022 we saw an exceptional increase in mergers and acquisitions with Maltese interest, with some very significant and interesting transactions happening in the local corporate market across all industries,”says Simon Schembri, Partner within Ganado Advocates’ corporate team.
An experienced M&A lawyer with over 20 years of experience in the field, Dr Schembri however also noted how compared to 2021, when the number of M&A deals completed were copious, Malta is currently experiencing a slowdown in M&A deals.
“This decrease in activity may be attributed to two main reasons, namely the tight financial conditions exacerbated by high interest rates where sourcing financing for eventual acquisitions has become increasingly burdensome and the lack of confidence in M&A activity mainly caused by the current international regulatory environment which has become more stringent,” explained Dr Schembri.
“With regards to the latter factor, this notably involves the foreign competition authorities who are investigating deals which are below regulatory thresholds as well as increased foreign direct investment supervision especially by European Union Member States,” he added.
As with any other economy, Malta’s M&A market is susceptible to global economic trends and factors such as trade tensions, shifts in global supply chains, and changes in demand patterns as well as to market sentiment dictated by geopolitical tensions, economic slowdowns, or political instability which can all have a significant impact on M&A activity. The same can be said for the war in Ukraine which has proved to be a major contributor to the current inflation being experienced.
“Higher interest rates, more often than not, deter companies from pursuing M&A deals, especially if they anticipate that the cost of servicing the debt will outweigh the potential benefits of the acquisition,” explained Dr Schembri who noted how higher interest rates also affect valuations and predictions on future cash flow increases which can lead to lower valuations and less attractive deals for both buyers and sellers.
“The regulatory environment has also become more stringent and as a result, not only is this slowing down the pace of deal-making but is also leading to an increase in the costs associated with completing such deals.”
“Some European countries have implemented stricter concentration rules, particularly in sectors such as technology and infrastructure – delays that could potentially block certain foreign acquisitions, which can affect the overall M&A landscape. A case in point is the Microsoft proposed acquisition of Activision, which has evidenced a difference in approach by the different regulators across various jurisdictions. The Competition and Markets Authority in the UK first blocked the acquisition, the European Union shortly after, gave the green light and the US Courts just last month gave the go ahead for the proposed USD 69 billion deal, with the consequence that now the UK authorities are reconsidering approving the proposed acquisition.”
“This notwithstanding, the situation in the near future looks promising. Various international forecasts predict that M&A activity should pick up in 2024 and should be in full swing, hopefully comparable to 2021 and early 2022 levels, in 2025,” notes Dr Schembri.
“The main reasons for this positive outlook are attributable to the expected economic stabilisation over the coming months as businesses seek to expand and capitalise on positive economic trends; financial sponsors, which are holding record amount of capital, deploying it in acquisitions; as well as cross border M&A which could be on the rise following a period of international tensions.”
“That said, to counter the challenges posed by the international regulatory uncertainty created, establishing and maintaining a stable and uniform legal environment will be crucial,” added Dr Schembri.
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