The Rise of Emerging Markets
in Mergers and Acquisitions
T
he rise in the number of mergers over the past five years has been
dramatic. Unlike previous merger waves, however, companies
in emerging markets are playing an increasingly important role.
Indeed, while the number of majority acquisitions increased globally
by 6 percent, acquisitions of established companies by emerging firms
grew at an annual rate of 26 percent. Although their motives differ from
traditional M&A activity, it is clear that, in the near term, emerging
com-petitors present a potential threat to companies in developed countries.
Mergers and acquisitions have become a staple of newspaper headlines. Although most M&A activity is initiated by companies in the developed world, a recent A.T. Kearney study of global M&A reveals that a paradigm shift is occurring: Beginning in 2002, deals between developing and developed countries grew at an annual rate of 19 percent— far in excess of the industry average and four times faster than deals conducted within either develop-ing or developed countries alone (see figure 1 on page 2). While not large in absolute terms, this rate of growth indicates how rapidly the developing world is catching up in the M&A business.
in fact, the study found that companies from developing countries such as china, india, Malaysia, Russia, the united Arab Emirates and south Africa are snapping up established firms at an astonishing rate. of the 2,168 majority acquisitions between developed and developing
countries in 2007, almost 20 percent—a total of 421—were driven by companies from developing countries. furthermore, this pattern is growing by 26 percent annually.
This paper highlights the key findings of the global M&A study, and lays out a strategy for established firms to gain a competitive edge from the changing dynamics they reveal. The rise of developing nations in M&A activity is creat-ing unprecedented pressure on companies in the developed world. companies need the appropri-ate levers if they are to maintain their positions in the market.
Asian Countries Lead the Developing World
companies from india, Malaysia and china are at the forefront of M&A activity in developing nations. Together, these three nations accounted for 56 percent of the deals that took place from2002 to 2007 (see figure 2). While india is spear-heading the acquisitions market, Malaysia is a sur-prising second—primarily due to the government providing substantial tax incentives to engage in high-tech business deals and promote exports. This is in sharp contrast to chinese companies, which sometimes encounter political problems clinching deals. consider the case of the china national offshore oil corporation (cnooc), which ran up against severe political obstacles in its bid to acquire u.s.-based unocal.
china is first among developing nations tar-geted by companies from developed countries. Almost one out of every four such transactions are conducted within its borders. india follows
at second place in this greatly dispersed market with 6 percent.
Among developed countries, companies in the united states lead the ranks of both the acquired and the acquirers by considerable margins. u.s.-based companies participated in one of every five mergers and acquisitions between developing and developed countries from 2002 to 2007, acting as the major acquirer in 19 percent and the main target in 23 percent of M&A activity.1
Governments Help Drive Acquisitions from
Emerging Markets
As companies from developing countries make equity investments in developed nations, their
An increase in deals between developing and developed countries
CAGR = compound annual growth rate
Global majority acquisitions Majority acquisitions between developing and
developed countries
Majority acquisitions within either developed or developing countries 25,377 23,576 22,496 19,413 17,096 2007 2006 2005 2004 2003 2002 2007 2,168 2006 1,901 2005 1,522 2004 1,113 2003 925 2002 2007 23,204 2006 21,677 2005 20,974 2004 18,300 2003 16,170 2002 17,803 902 18,705 CAGR = 6% CAGR = 19% CAGR = 5%
Sources: Dealogic; A.T. Kearney analysis
objectives dovetail neatly with the political goals of their governments. governments in china and Russia, for example, are eager to enter established markets and grab a share of economic power.
china recently invested $3 billion in the pri-vate equity firm The Blackstone group and now holds almost 10 percent of the firm’s outstanding shares. We believe this is just a beginning. china recently founded a state-owned company to make $300 billion in investments this year, with the expectation that the organization will earn higher returns than traditional government bonds.
Russia is nearly in line with china. its stabilization fund will cap reserves that exceed 10 percent of the gdP and divert them into the
newly organized national Welfare fund. This fund was established in february 2008 with an estimated $32 billion for riskier investments.
such sovereign wealth funds (sWfs)—state-owned investment funds that manage mainly for-eign currency assets—are growing in number worldwide, and have been accumulating assets rapidly. Both oil-exporting countries such as Russia, norway, Malaysia, and the gulf states and non-oil-exporting countries in Asia such as china and india have gained huge current account sur-pluses in the last decades. Traditionally, countries turned these surpluses into risk-averse financial assets to reduce currency volatility and stabi-lize their economies by investing in importing
Figure 2
China, India and Malaysia are at the forefront of M&A activity*
Sources: Dealogic; A.T. Kearney analysis *Percentages from 2002-2007 India Malaysia China South Africa Russia Mexico
United Arab Emirates Other China India Poland Brazil Mexico Russia Czech Republic Hungary Romania Malaysia Other
Acquirers from developing countries Countries targeted by companies from developed countries 24% 29% 14% 13% 8% 6% 3% 3% 6% 5% 5% 5% 4% 4% 3% 3% 3% 38% 24%
countries with a current account deficit. china, for example, supported the strong consumption economy of the united states by buying u.s. government bonds.
Lately, however, there has been a strate-gic shift in the way the money is being invested. instead of traditional investments, sovereign wealth funds are favoring equity-type investments either through state-owned investment funds or companies—thus gaining exposure to strategic companies with more capabilities and know-how in industries that are crucial to their own econo-mies. in this way, emerging countries are evolving from lenders to owners.
What are the implications of this shift for established firms? Although sWfs are still in a
fledgling state, developing countries are expected to make a giant leap forward in the acquisitions market once their funds reach the anticipated potential. sovereign wealth funds already repre-sent a larger class of investors than hedge funds, with assets totaling $2.5 trillion in 2007.2 By 2015, Morgan stanley projects that sWfs will reach $12 trillion collectively. The Abu dhabi investment Authority, established in 1976, is cur-rently the largest state-owned fund with $875 billion (see figure 3). By 2009, however, china’s state-owned investment company is expected to overtake it.
given that china alone can dispose of $1.2 trillion in currency reserves, it’s clear that a stra-tegic change in investment activity by sWfs will 1 Morgan Stanley, currencies: how Big could sovereign Wealth funds Be by 2015?, 3 May 2007. Merill Lynch estimates the current value of SWFs at
$5 trillion, reaching $8 trillion by 2011.
Oil-exporting countries represent the majority of sovereign wealth funds
*Asset values as of January 2008
**Includes the National Welfare Fund with an asset value of $32 billion
Sources: Sovereign Wealth Fund Institute; A.T. Kearney analysis
Country Fund Asset value in$ billions* Inception
UAE Norway Singapore Kuwait China
China (Hong Kong) Singapore Russia Australia Qatar Libya Algeria
Abu Dhabi Investment Authority (ADIA) Government Pension Fund of Norway (GPF)
Government of Singapore Investment Corporation (GIC) Kuwait Investment Authority
China Investment Corporation (CIC)
Hong Kong Monetary Authority Investment Portfolio Temasek Holdings
Stabilization Fund of the Russian Federation** Australian Future Fund
Qatar Investment Authority
Libyan Arab Foreign Investment Company Revenue Regulation Fund
875 380 330 250 200 163 159 157 61 50 50 43 1976 1990 1981 1953 2007 1998 1974 2004 2004 2000 1981 2000
have a dramatic effect on financial markets. Yet with the rapid increase of their assets, these funds are under growing pressure to invest, which may lead to overpaying for acquisition targets.
one roadblock to their continued success is that the investments and political agendas of some sWfs are secretive. Because of this, the government of singapore investment corpora-tion, Abu dhabi, norway and the international Monetary fund are working on
common standards for sWfs to sustain the growth trend and avert a tendency toward financial protec-tionism among recipient countries.
Different Motives for M&A
Private companies in emerging coun-tries also pose a challenge to mature M&A market competitors because of the rapid growth of their activi-ties. nonetheless, their motives differ from the way M&A is traditionally pursued, so we need to consider the possibility of a new type of competi-tor in the market.Acquirers in developed countries usually pursue a merger to cut costs and create growth opportunities.
The aim is to establish or broaden their pres- ence in high-growth markets, so they are con-stantly on the lookout for acquisitions with growth prospects. These companies also focus on low-cost environments for manufacturing and sourcing. Well aware of the growing threat from emerging rivals, they want to strengthen their competitive positions.
in contrast, acquirers from developing coun-tries focus on gaining access to production and new technology. These firms are also entering established markets to maximize the advantages
of their low-cost structure against traditional competitors. This strategy pushes expansion plans by broadening the customer base and increasing market share in developed countries. it relies on a new, more educated class of executives driven to expand the scope of their business activities. consider the motives behind Tata Motors’s pur-suit of the traditional but recently suffering British brands Jaguar and Land Rover. so far,
Tata has produced only simple, cheap compact cars, and it is now trying to expand into Western markets. Acquiring the Jaguar and Land Rover brands offers Tata access to production technol-ogy and distribution channels. it also changes the perceived quality of Tata products in the estab-lished world. While this brand-buying may well result in a positive spillover for the Tata brand, it could also harm the established brands as the spillover effect works both ways.
Their motives may differ, but acquirers from both developed and developing countries
developing
countries
are
expected to
make a giant leap
forward in the mergers and
acquisitions market
once their
sovereign wealth funds reach the
anticipated potential.
are targeting many of the same industries. The majority of deals (51 percent) are in mining, con-sumer and retail, financial institutions, real estate, communications and process industries (see figure 4). not surprisingly, these targeted industries exhibit strong rates of growth, with mining (41 percent) and real estate and construction (40 per-cent) at the forefront.
companies from developing countries typi-cally promise to make significant capital invest-ments to grow the business. Their goal is to best competitive bids from mature companies that focus on cost cutting as a route to profitability. This approach usually offers a more attractive value proposition for the management team of the targeted firm.
Spectacular Majority Acquisitions by
Developing Countries
Acquirers from developing countries are pursu-ing spectacular majority acquisitions. for exam-ple, petrochemical giant saudi Basic industries corporation (sABic) recently acquired gE Plastics for $12 billion. This transaction gave sABic, already in the top 10 of petrochemical companies globally, strategic access to markets in the united states and Europe and improved competitiveness.
dubai Ports World invested about $9 billion to acquire the companies csX and P&o in the past two years and is now one of the top three leaders in international marine terminal opera-tions. The strategic acquisition of csX in 2005 gave the company a strong presence in Asia and operations around the world. P&o, acquired in March 2006, expanded dubai Ports World’s port-folio of terminals and added P&o ferries, P&o
Firms from both developed and developing countries target the same industries*
*Percentages from 2002-2007 Financial institutions
Consuner and retail
Communications and media Mining
Process industry High tech and electronics
Real estate and construction Automotive
Other
Industries targeted by developed and developing countries
9% 12% 8% 14% 8% 4% 9% 3% 34%
Industries targeted by companies
in developing countries Industries targeted by companiesin developed countries
8% 13% 8% 7% 12% 5% 6% 5% 37% 9% 12% 8% 15% 7% 4% 9% 2% 34%
Estates and P&o Maritime services to the group. Both acquisitions established a strong basis for future development and expanded the company’s network across key markets.
india, the czech Republic, indonesia and Russia have all stepped up the pace and size of their acquisitions over the past five years, as evidenced by their above-average
M&A growth rates. Acquisitions in india, for example, grew by 49 per-cent annually, followed by the czech Republic and indonesia (both at 38 percent) and Russia (37 percent). This trend could be bolstered by the fact that stock markets in high-growth emerging countries have significantly higher price-to-earnings ratios than those in mature markets. Thus, all-stock transactions might enhance emerging companies’ opportunities for deal making.
Russian companies are also anxious to strengthen their foothold in established markets. for exam-ple, the steel company severstal ini-tially made an unsuccessful “white knight” bid to circumvent Arcelor’s takeover by indian-based Mittal, one
of the world’s biggest steel companies. instead, severstal was able to expand internationally by buying u.s.-based Rouge steel in 2004 and making a 62 percent investment in the italian firm Lucchini in 2005. (That investment rose to 80 percent in 2007.) severstal wanted to diver-sify its business further and focus on higher-value customers and products.
By signing the deal, severstal, the fourteenth-largest steelmaker in the world, gained access to the European market and acquired technol-ogy and know-how in higher value-added
prod-ucts while bypassing import quotas. Lucchini, the twelfth-largest, regained balance sheet strength and returned to profitability. The key success factors were improved investment decisions and shared technologies.
Acquisitions by companies from develop-ing countries have shifted the balance of power
between developing and developed nations. Fortune magazine’s prestigious list of top compa-nies, the fortune global 500, reveals that since 2003 emerging firms have been superseding com-panies from established countries at an annual rate of 27 percent (see figure 5 on page 8).
huge deals are nevertheless not one-way events. Transactions by developed countries into emerg-ing markets still represent the majority of deals, as evidenced by transactions such as Vodafone’s pur-chase of hutchinson Essar in india or Lafarge’s acquisition of orascom cement in Egypt. Lafarge,
As emerging
firms acquire
state-of-the-art products and
technology,
they are
dimin-ishing established companies’
advantages in innovation and
threatening their global
mar-ket superiority.
a french cement maker, paid $14.8 billion for orascom cement to enhance its presence in an emerging market and leverage economies of scale to cut costs and increase revenues.
Managing Competition: A Fight-Back
Strategy for Established Companies
The rapid consolidation between developed and developing worlds will put pressure on margins for companies on both sides of the divide. As com-panies from the developed world enter emerging markets, they are increasingly able to lower their factor costs—historically the key competitive advantage of emerging companies.
similarly, as emerging firms acquire state-of-the-art products and technology, they are diminishing established companies’ advantages in innovation. indeed, established firms need to make use of their global market superiority while they still have time. With this in mind, we identified the following levers that established companies can pull (concurrently) to remain competitive.
Maintain the innovation advantage. core strengths such as technological leadership and superior quality must be maintained despite the challenges posed by emerging competitors. companies can preserve these advantages by
451 460 470 474 481 480 49 40 30 26 19 20
Emerging firms are superseding companies from established countries
Sources: Fortune magazine; A.T. Kearney analysis *Figures rounded
Fortune Global 500 Top 15 companies from emerging countries in 2007
2007 2006
2005 2004
Percent of emerging firms in Fortune Global 500
2003 2002
CAGR = 27%
Emerging firms Established firms
11% 9% 6% 5% 4% 4% Profit ($ billions)* 4 13 2 4 20 13 7 13 2 6 6 0.4 0.2 3 5 Country of origin China China China Mexico Russia Brazil Russia Malaysia India China China Turkey China Thailand China Revenues ($ billions)* 132 111 107 97 81 72 55 51 45 37 36 34 34 32 31 Rank 17 24 29 34 52 65 110 121 135 170 180 190 192 207 215 Company name Sinopec China National Petroleum State Grid Pemex Gazprom Petrobras Lukoil Petronas Indian Oil Industrial and Commercial Bank of China China Mobile Communications Koç Holding China Life Insurance PTT
launching new innovations targeted to meet spe-cific market requirements within mature and emerging economies. for established firms, this means expanding the scope of their activities to assure that existing intellectual property rights (iPRs) include features such as proprietary solu-tions, pricing models and product upgrades.
for example, we recently helped a manufac-turer of specialty materials define the strategies needed to protect its business iPRs. This company was torn between ignoring the opportunities of the chinese market and risking an iPR nightmare by moving all of its global manufacturing to china. instead, we helped it create a strategy to discour-age imitations so that it could move select manu-facturing to china while still limiting its exposure to risk. By raising barriers across its entire supply chain—including tracking device technologies such as radio frequency identification (Rfid)— the company distinguished its products from
imi-tations in the market. it also alerted buyers to the potential downsides of counterfeit products by raising obstacles such as legal actions that could be taken against customers and end-users.
Move quickly into emerging markets. While most M&A still takes place within developing or developed countries, the rate of M&A activ-ity between developing and developed countries is growing by 19 percent per year. consequently, established leaders should move quickly and more broadly into emerging markets to curb up-and-coming competitors. This can be achieved either by acquiring emerging firms or teaming up with other incumbents to conquer developing markets jointly. for example, when Vodafone purchased hutchinson Essar in india last year, it secured its position as a global market leader and gained a foothold in the fastest-growing and second-big-gest mobile market in the world. The acquisition was worth $13 billion.
Integration Closing
Figure 6
Key success factors for M&A performance in China
Source: A.T. Kearney
Target selection and due diligence • Evaluate the level of information
realistically available and plan for extra effort to bridge inform-ation gaps
• Assess ownership of assets, scope and validity of licenses, supply contracts and previous compliance with tax regulations
• Manage authorities and utilize local resources leveraging relationships
• Don‘t overpay
• Hedge information asymmetry by signing earn-out agreements (for example, pay lower initial price with additional payments after two years if key assump-tions hold true)
• Understand and anticipate Chinese regulations
• Demonstrate sincerity and build relationships with target company and regulators
• Identify key employees and tailor an effective retention plan
• Inject expatriates sparingly; however, bring key functions (such as CFO) under control and up to Western standards rapidly
• Develop a strategy to protect intellectual property rights (even in case of a full merger)
Expand M&A skill sets. As companies from emerging countries become targets of developed companies in the M&A market, the latter should redesign and expand their existing M&A skills. Transactions involving companies from countries at different stages of economic development pose unique challenges for acquirers, and require spe-cific skills that are not necessarily available, at least not yet.
Again, we can use china to illustrate this point. china is the most attractive target for established companies in developing markets, representing 19 percent of all such acquisitions. Acquirers choose china to strengthen their pres-ence in this attractive market and benefit from its low-cost manufacturing environment. however, what Western-style companies soon learn is that conventional M&A wisdom is of limited use in china. There are specific success factors in terms of target selection, due diligence, closing and inte-gration (see figure 6 on page 9).
for example, performing due diligence in china, as in all emerging markets, is often ham-pered by a lack of available information. There is little transparency in these markets, which means the acquirer must invest more time and money in identifying and assessing potential targets. Acquirers should consider making use of various arrangements, including earn-out agreements, to reduce their risk if key assumptions don’t hold true after closing.
Turning Potential Threats into Opportunity
These success factors can reduce the risk and downside of making transactions in an envi-ronment that in many respects is different from the business setting established companies have traditionally enjoyed. To counter the threat of emerging competitors and benefit fully from the opportunities in these markets, leading compa-nies will internalize their capabilities and expand their existing M&A skills.Authors
Juergen Rothenbuecher is a vice president in the Munich office, and can be reached at [email protected].
Joachim von Hoyningen-Huene is a manager in the Munich office, and can be reached at [email protected].
A.T. Kearney is a global strategic management consulting firm known for helping clients gain lasting results through a unique combination of strategic insight and collaborative working style. The firm was established in 1926 to provide management advice concerning issues on the CEO’s agenda. Today, we serve the largest global clients in all major industries. A.T. Kearney’s offices are located in major business centers in 34 countries.
AMERICAS Atlanta | Boston | Chicago | Dallas | Detroit | Mexico City New York | San Francisco | São Paulo | Toronto | Washington, D.C.
EUROPE Amsterdam | Berlin | Brussels | Bucharest | Copenhagen Düsseldorf | Frankfurt | Helsinki | Lisbon | Ljubljana | London Madrid | Milan | Moscow | Munich | Oslo | Paris | Prague Rome | Stockholm | Stuttgart | Vienna | Warsaw | Zurich
ASIA Bangkok | Beijing | Hong Kong | Jakarta | Kuala Lumpur
PACIFIC Melbourne | Mumbai | New Delhi | Seoul | Shanghai Singapore | Sydney | Tokyo
MIDDLE Abu Dhabi | Dubai | Manama
EAST
For information on obtaining additional copies, permission to reprint or translate this work, and all other correspondence, please contact:
A.T. Kearney, Inc.
Marketing & Communications 222 West Adams Street Chicago, Illinois 60606 U.S.A. 1 312 648 0111
email: [email protected] www.atkearney.com
Copyright 2008, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form without written permission from the copyright holder. A.T. Kearney® is a registered mark of A.T. Kearney, Inc. A.T. Kearney, Inc. is an equal opportunity employer.