Understanding and managing the risks

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By examining a number of deals we traced the root causes of these problems to a set of critical differences in practices and governance between growth markets and developed markets. This has led to the following set of recommendations.

Recommendations: Getting to the right side of the delta

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Boards should recognise growth markets as large opportunities that require some initial strategic thought

“Less successful companies tend to under-invest in doing deals in growth economies and smaller companies find it difficult to build a deal infrastructure. But due diligence will be imperfect and valuations are high, so a strong strategic rationale is critical to completing a deal".

"Developing a rationale is hard, and takes time: 1-2 years in our experience. You may need to do considerable primary research to build up data, and there is a need to educate shareholders, because Board members and shareholders often hold pre-conceived concerns about growth economies.

To achieve scale and increase the chances of success, companies should focus on a limited number of markets

“Although there are themes across markets, each market is different. This is one reason local capabilities are critical.”

“With a requirement for increased investment in individual markets, there is a case for prioritising markets. Focusing scare resources on fewer markets increases the chances of building scale positions that can support future growth. An effective way to do this is to use a ‘platform strategy’, making a large initial acquisition to enter a new market, and then bolting on smaller acquisitions.”

Being on the ground was consistently identified by interviewees as the best way to reduce risks

“Being on the ground gives stakeholders context to address their concerns. It makes it easier to identify a target short-list to improve the chances of choosing the right partnerand gives visibility of market potential to help with valuations. Engaging with multiple levels of government increases the chances of obtaining approval and can help understand potential future changes in the government’s position”

Ultimately, the people involved will most influence whether your deal is a success or not

Key people measures for success in growth market deals:

Short-list of local advisors:

  • Finance
  • Strategy
  • Corporate finance
  • Law
  • Forensics
  • Integration specialists

Build a deal team:

  • Dedicated deal leaders
  • Deal ‘moonlighters’, who can work part-time on a deal to provide specialist input
  • Include nationals on the ground
  • Include people that will manage and go into the business post-completion.

Many boards need to accept that a ‘normal’ deal approach is not appropriate for a growth market

“There is too much ground to cover; competition from rival bidders can be strong and appear irrational; sellers’ expectations are different; and there is too much uncertainty over future performance. Past deals show that there are a number of best practice measures and tips to manage individual risks in growth markets.”

Past deals show a number of measures and tips to manage risks acrossthe seven pitfalls
Measures and tips to manage risks
Pitfall                  Measures and tips

Financial information

  • Phase diligence: first thorough high-level initial screen, then in-depth
  • Build-up data bottom up in priority areas (exclusivity if possible)
  • Consider issues in local context
  • Conduct additional research to improve comfort with forecasts
  • Use earn-outs/ deferred consideration

Business practices

  • Conduct FCPA/ Anti-Bribery review
  • Conduct diligence on key individuals/ partners (within reason)
  • Include tax and labour in diligence

Negotiation & contracting

  • Adapt to local norms
  • Maintain alternatives
  • Avoid 50/50 JVs
  • Plan for exit

Government involvement

  • Run scenarios for changes in government positions

Post-completion operations issues

  • Address critical areas such as governance from day 1

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