The latest Iran war is having an economic impact on the world economy. If less fuel is available to the world through the Strait of Hormuz, it means less travel and fewer petroleum products.
What are petroleum products, and what is petroleum used for? Quite a lot, according to the US Energy Information Commission.
Petroleum products include transportation fuels, fuel oils for heating and electricity generation, asphalt and road oil, and feedstocks for making the chemicals, plastics, and synthetic materials that are in nearly everything we use.
So, we expect a ripple effect into many economic sectors.
Looking ahead
The only certain thing is uncertainty. What is business going to do? Here are a few possibilities for consideration:
In the short term, shortages of petroleum products are driving up prices. Multinational corporations (MNCs) may be expected to look for alternative sources of raw materials to supply onward or incorporate in products for onward sale.
But can higher prices be passed on to customers? If not, will other cost savings be needed to maintain profitability? In particular, will employees be laid off? How can demand be maintained if there are more unemployed?
The US and Israel have their own energy resources, but their customers don’t always.
Mergers and acquisitions (M&A)
M&A deals may soon be used to increase MNCs’ capacity fast by buying other useful companies, rather than spend years building up their own capacity.
To help meet demand and avoid laying off management and other personnel, we anticipate an uptick in M&A deals.
The aims may be: (1) buy new sources of supply unconnected to countries on the Strait of Hormuz; (2) buy up competitors to raise prices; (3) achieve vertical integration in the supply chain, i.e., raw materials, production, storage, distribution, and retail sale.
The M&A process requires reasonable valuation of a target company and due diligence to check out what the target is worth before buying it.
There are many ways of structuring an M&A deal and the consideration to pay for it. For example, the buyer may buy shares in the seller company or its assets. The buyer may pay with cash or shares. The price may be fixed or variable (earnout). Each possibility has pros and cons.
This is discussed further in the book M&A This Way! by this author.
New capabilities caused by adversity
Over the years and centuries, adversity has resulted in many technological advances in equipment, communications, pharmaceuticals, and more. The global-warming climate crisis, for example, has led to the development of sustainability solutions. These include electric and hybrid vehicles. The Tesla Semi is a truck that is said to have a range of 500 miles (800 km.). It is battery powered, and little or no Gulf state oil is needed.
M&A to acquire new sources or new capabilities?
Many innovative solutions are developed by start-ups founded by technical geeks who lack all-important marketing abilities. The result has been a wave of M&A deals in which US-based MNCs with marketing muscle acquire innovative start-ups for their intellectual property.
What motivates an MNC in an M&A deal? Often it is a fear of falling behind their competitors. Shortages of raw materials at reasonable prices due to the Iran war may spur a wave of M&A deals as MNCs seek to fix that shortage and catch up with competitors, i.e., from crisis to strategic moves.
Israeli perspective
In the case of Israel, the hi-tech sector began in the late 1960s. Israel won the Six Day War, but it then faced an arms embargo from its chief supplier, France. So, Israel sought self-reliance for military technology. This spilled over into civilian technology. Many successful Israeli tech companies are run by ex-IDF elite engineers.
War is never good, but every war cloud in Israel has a silver lining, such as new developments that Israeli companies sell throughout the world. Some then get acquired by a multinational group. Recent examples include the $32 billion Google-Wiz M&A deal and the $25b. Palo Alto Networks-CyberArk M&A deal.
Because of the war, earn-outs (consideration contingent on results) are often used.
Israeli taxes
Much depends on how an Israeli M&A deal (“exit”) is structured. Israeli capital-gains tax rates vary from 25%-35%. Foreign investors are usually exempt from Israeli tax on a share sale (not in the gas or real-estate sectors) but are taxable in their home country.
Conclusion: Peace may emerge, but it may be fragile. Business needs alternative supply sources and/or new capabilities.
Wishing our readers a happy and safe Passover.
As always, consult experienced professional advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Consulting & Tax and MergeAcq.Com.