McKinsey: Get Ready For More Foreign M&As

The latest McKinsey Quarterly is out with a story that asks, are mergers and acquisitions over? The obvious answer is no, of course. But McKinsey's article makes a very important observation: the wave of private equity and hedge fund deals in the United States may be flaming out, but there is going to be a major new source of buyers: international companies.

Cross-border M&As are notoriously difficult because of cultural differences, but they now represents 40 percent of global M&A, up from 20 percent in 2000 and 30 percent in 2005, says McKinsey.

Companies in emerging markets are coming on strong, it notes. Overall, Asia and the Middle East now represent about 15 percent of global volumes; India, China, and the Middle East are up by 110 percent, 47 percent, and 38 percent, respectively, over 2006.

My analysis is that the Americans have been playing such funny money games with insanely leveraged transactions so many of deals are going to crash in 2008. The most aggressive buyers are going to be non-Americans, i.e. the people who have been actually building their wealth while the Americans have been squandering much of theirs.

Another part of this emerging trend is that so-called Sovereign Wealth Funds, run by governments as opposed to private sector companies, are going to be major buyers. Some $3 trillion is estimated to be sitting in these funds. Policy elites in Washington have been clamoring for the SWF's to open up and offer more "transparency."

But if McKinsey is right, and my level of interepretation is right, political leaders are going to confront the spectacle of bankruptcy after bankruptcy in 2008. The new signal to SWF's and other foreign buyers is going to be, "Please buy our overleveraged assets and help save our economy."