The Challenge of Doing Deals in Emerging Markets

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Directors need to perform enhanced due diligence

The number of transactions completed by Canadian companies in emerging markets has increased by nearly 400% since 2003. While there are likely many more excellent opportunities to do deals in the years to come, there are also risks that may present additional challenges for directors.

Those challenges were discussed at a recent PwC Directors’ Briefing seminar, Achieving growth beyond borders: An interactive session for directors about doing deals in emerging markets. At the briefing, PwC’s John Nyholt, former national leader of the Canadian Transaction Services practice, and Brenda Eprile, former national Risk leader, were joined by DJ Peterson, director of Corporate Advisory Services at Eurasia Group, the world’s leading geopolitical risk research and consulting firm, and David Beatty, the Chairman of the Board of both Inmet Mining and Western Coal, and a director on the boards of Bank of Montreal and FirstService Corporation. The briefing was moderated by Dave Forster, PwC’s managing partner for the Greater Toronto Area.


Since the economies of many emerging markets are rising at a faster pace than those of Canada and the rest of the G7, companies want to take advantage of that growth by making acquisitions and/or doing business there. The combined gross domestic product (GDP) of the BRIC nations — Brazil, Russia, India, and China — is expected to overtake the G7’s GDP before the end of the next decade. In 2010, China became the second-largest economy in the world, behind the United States, after surpassing Japan.

“In South America, it’s also a similar story in terms of opportunity related to fast-paced growth,” says Nyholt. “We’re seeing a lot of Canadian mining companies expanding their reserves by doing acquisitions there.”


Companies know that when they are considering expanding their business, they should examine risk and determine strategies to mitigate. For those looking to do business in emerging markets, it’s important to look at the broader political ecosystem around that country and whether it’s positive or negative.

“A second issue to look at is the trajectory of a country,” explains Peterson. “Is the country moving on a political path that suggests more openness to business and foreign investors or is it on a trajectory of imposing regulations and restrictions on foreign investment?”

Elections are also a key indicator to project the political stability or trajectory of a jurisdiction. Peru is scheduled to have an election in June 2011 and one candidate may be warmer than the other towards foreign investment, especially in the mining sector.

“Similarly, you can look at individual ministries that might be important to your business,” Peterson adds. “Does that person have ideas or philosophies or policies that are favourable or unfavourable to your environment? Understanding the political actors, both in government as well as various industries, can be a very important indicator.”


In the past, companies may not have considered moving into some emerging markets for ethical, moral economic reasons. But some of those countries may have turned things around as new leaders have been elected and cleaned up political and/or governmental corruption.

“The due diligence component not only becomes more necessary for boards to come to a decision,” says Beatty, “but it also becomes deeper in terms of understanding the kinds of challenges you may be facing.”

Doing deals in unfamiliar and different cultures can also open companies up to an increased risk of corruption and bribery in some cases.

“One of the aspects directors need to focus on is the way business operates in foreign markets,” Eprile explains. “If the business relies extensively on third-party agents – sales agents or distributors – then the risk is going to go up in terms of corruption.”

Thorough due diligence on everyone involved is required because corruption legislation in North America will apply to companies operating in these jurisdictions. One of the issues is successor liability. If the company being acquired has made improper payments, the company, the officers and the directors will be liable.

If Canadian companies are looking at doing business in emerging markets, they need to be aware of legislation in the United States, the United Kingdom and any other jurisdiction where they’re doing business. Domestic firms could be prosecuted under the Foreign Corrupt Practices Act (FCPA) if they have a U.S. bank account, have an American-based officer or director, or are listed on U.S. stock exchanges — there are currently more than 200 inter-listed companies. And Canadian companies with an office in the U.K. could be subject to its Bribery Act.

The FCPA’s definition of a bribe is quite wide-ranging. It could include not only cash, but also discounts, gifts, entertainment, drinks, meals, transportation, lodging, and promise of future employment. Foreign officials cannot be bribed, which includes not only government officials, but those employed by the state or state-owned enterprises.

The standards are now higher and there is much more active enforcement of these laws. “There’s much greater international cooperation, particularly between those two major jurisdictions,” says Eprile. The U.K.’s Serious Fraud Office (SFO) has worked together with the Department of Justice (DoJ) as well as the Securities and Exchange Commission (SEC) in the United States on numerous occasions.

In one such case of cross-Atlantic cooperation, a pharmaceutical company paid a US$70 million settlement to the DoJ and SEC over allegations that it made improper payments to doctors in Europe. It also resolved kickbacks paid to the former Iraqi government under the United Nations Oil for Food Program. The same company also paid £4.83 million to the SFO in a related investigation.

Even if there aren’t any issues, you must ensure that the employees and any of the other parties you are working with understand your compliance policies and procedures. Then monitoring must be done so if there are any issues, they can be taken care of right away.

A technology company recently reached a US$10 million settlement with the SEC over alleged bribes to government officials in South Korea and China. The SEC claimed that the company’s subsidiaries lacked sufficient internal controls designed to prevent or detect violations despite having FCPA-compliant corporate policies prohibiting bribery.

Enforcement can also take a number of different shapes. For instance, companies could enter into a deferred prosecution action (DPA). They may pay a smaller penalty in exchange for enhancing their anti-corruption policies and controls and avoid prosecution.

Accountability is also growing outside of regulatory regimes. The rise of social media (Twitter, Facebook and YouTube) is increasing the speed at which information on company actions is moving. Companies must be mindful of what their actions are and what the public might see them as.

Any company wanting to do business in an emerging market should have access to qualified advisors to gain appreciation of the cultural variables. While what may not be appropriate in our society may be normal in theirs, it doesn’t mean what they do is wrong or immoral or wouldn’t pass the scrutiny of a third-party observer.

“Boards need to do their due diligence,” Beatty recommends. “But I think they’d be well advised to have somebody close to the decision who actually had experience in one or more of these countries.”

For more information

Following the briefing, the panel of speakers participated in a Strategy Talks podcast called Beyond the Boardroom: Emerging Markets — What Directors Need to Know. For more information, please listen to the recording or read the transcript.

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