Resetting the compass: How high growth market buyers are moving M&A in a new direction

Coolin Desai and Nick Page discuss the M&A shift from mature to high-growth markets

John Dwyer and Matthew Hammond talk about how high growth market companies are investing into mature markets

A new direction for global M&A
We’ve been tracking a new trend in global M&A: buyers from emerging markets looking for deals in developed ones – and there are more than a few. In 2012, companies from high growth, emerging markets invested over US$32.6 billion in mature market targets, more than deal flow in the other direction, and almost three times their 2005 investments. So what does this trend mean for deal-makers? Buyers and sellers unfamiliar with one another’s processes, corporate and cultural context may need to go the extra mile to make deals happen but we believe that the growth and investment opportunities to be had make it very worthwhile.

HGM companies invest more in mature market ones than vice versa

Considerations on critical aspects of the deal process

We've identified how the emerging to mature market dynamic can affect deal-making. So how can you improve your chances of making a good deal happen?

Addressing valuation mismatches

  • Greater transparency by both buyers and sellers around deal drivers can increase trust and dispel unfounded expectations.
  • Sellers should not assume that an HGM company may have easier access to capital, including state funds.
  • Sellers need to understand the buyer’s investment timeframe and shareholder environment before setting premia – Sellers may demand a higher premium from buyers they think are likely to be slow to complete.
  • Clarify valuation techniques to ensure both parties are working with the same parameters.
  • While multiples can be a guide, past deals are not always a reliable yardstick.

Agreeing a timeframe for completion

  • Both parties need to understand what constitutes a ‘normal’ timespan for negotiations and completion for the other party to set expectations from the outset.
  • In cases where special approval processes need to be followed, e.g. the deal needs to be vetted and/or finance approved by a regulator, buyers should educate sellers early around their approval processes and timelines so that they do not become an obstacle.
  • Foster relationships with key decision-makers from an early stage so that dialogue is possible if the deal timetable begins to slip.

Connecting with decision-makers

  • Take time early in the process to understand decision-making hierarchies – and who has the final say. This is particularly true for deals involving State Owned Enterprises.
  • Buyers bidding for targets with Private Equity involvement should have direct contact with the PE side as well the target company’s management.
  • The time needed to develop relationships varies greatly from culture to culture; consider this when approaching decision-makers. Seek advice from people who understand these finer points and stay attuned to signals.

Reconciling deal process differences

  • Plotting the deal process and due diligence approaches of both the buyer and seller will highlight where they diverge and provide a basis for discussion.
  • Communicating the reasoning behind due diligence practices can make the other party more comfortable/willing to cooperate with the process.
  • High growth markets can have very different reporting, tax and legal demands and systems that can slow the due diligence process and necessitate more requests for information: both the buyer and the seller need to be explicit about this.
 

Emerging markets buyers: why they invest
For this report, PwC carried out an assessment of deals between high growth market buyers and developed market sellers over the last seven years. We interviewed senior deal-makers in high growth market companies who have bought businesses in developed markets to understand their rationale, concerns and their views of developed market investment opportunities ahead. From the emergence of privately owned Chinese companies as international investors and Indian companies going global, to the shifting patterns of outbound M&A by Russian and Brazilian firms and from the Gulf Region, no developed market seller can afford not to know what these buyers want.

Getting to grips with a new deal dynamic
The report also draws on the experience of our own global network of PwC Deals teams for considerations on what both buyers and sellers need to factor in to make these deals happen. Differences in valuations, processes, decision-making, and completion timeframes come to the fore, with considerable variations across markets. A clear message from our M&A experts was that there really is no “one size fits all” approach to deals with emerging market buyers. Understanding the rationale, mind set and the commercial, as well as cultural, context of the buyer requires a team with a mixture of local knowledge and international deal-making experience.

Ready to reset your compass?
As figures in this report highlight, the direction of deal flow between emerging and developed markets is shifting – and the competition for investment is heating up. For those of you who want to get a head start, this report will be a guide to how to make the most of the opportunities emerging market investors can offer. If you are ready to reset your deal compass, you may have a lot to gain.

M&A activity by region from our CEO survey

Explore the data from our CEO Survey

Continue the conversation

If you have any questions, please contact

John Dwyer

Global Deals leader

Tel: +44 (0) 20 7213 1133

Nick Page

Transaction services

Tel: +44 (0) 20 7213 1442