International
Emerging Markets closing the gap on Developed Countries in the race for international acquisitions
By Finfacts Team
Sep 6, 2007, 05:37

H1 2007 – Emerging Market Acquisitions of Developed Market Targets:

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Deal flow between emerging and developed economies is beginning to converge as companies from the BRIC nations (Brazil, Russia, India and China) start to ramp up their mergers and acquisitions activity, according to KPMG’s Emerging Markets International Acquisitions Tracker.

The research, which analyzed deal flows between nine selected emerging economies and eleven key developed markets, shows that companies from countries such as the BRIC nations are fast closing the gap on their counterparts in developed nations in terms of cross-border acquisitions.

While the number of deals involving a developed economy buying into an emerging economy is still much larger than that of emerging-into-developed, the gap is narrowing – and narrowing fast. Key findings of the research included:

• During the first six months of 2007, there were 67 emerging-into-developed deals taking place, against 126 developed-into-emerging transactions.
• A total of 119 emerging-into-developed deals took place in 2006, whereas there were 322 completions of the reverse kind.
• This compares to a mere 49 emerging-into-developed deals in 2003, in contrast to 215 deals going in the opposite direction.

Ian Gomes, Chairman of KPMG’s New and Emerging Markets practice for KPMG in the U.K., commented, “Four years ago, the emerging-into-developed deals were outnumbered by four to one. By the end of 2006, that ratio was down to just under three to one, and already in the first half of 2007, that gap has narrowed even further, with the ratio now being less than two to one. This begs the question as to when one will overtake the other? Certainly looking at current trends, it’s feasible that this crossover could happen within the next two to three years.”

He continues, “There is perhaps an assumption that deal flow involving companies from emerging economies would by and large be one-way traffic, as companies in developed markets seek to gain a foothold in those fast-developing territories. However, the Tracker helps to dispel this theory, indicating that the hunted are fast becoming the hunters, with increasing numbers of companies in developing nations casting their eyes far beyond their own borders, putting their stamp on the international acquisition trail.”

Nowhere is this rapid convergence between inbound and outbound deal flows more apparent than in China. A total of 52 Chinese acquisitions were made by companies in the developed markets in the first half of 2007; well down on the 66 in the second half of 2006. At the same time, the number of deals going the opposite way showed its first significant increase in recent times, up from 8 to 14.

Ian Gomes commented, “While 14 deals in six months might not seem like a huge amount, the steady increase reported is surely a sign of things to come. The Chinese government has long strived to see its biggest and best companies establish a presence overseas, actively prompting them to investigate opportunities for acquisition and investment. You only have to look at the recent UK£2.4 billion of investment pumped into Barclays by The China Development Bank (CDB) to see that this approach is really starting to have an impact.”

China, however, still has some way to go to catch up with India – which was easily the most acquisitive of the emerging nations. A total of 32 outbound deals were recorded in the first half of 2007 – an impressive figure which puts the country well on target to beat the 50 deals which took place during the whole of 2006.

Ian Gomes commented, “The large volume of outbound deals is indicative of the current mindset of many Indian companies; grow, acquire and utilize debt facilities to the full. Growing organically does not appear to be a favored option for many Indian organizations – instead, getting a foot in the door quickly via the acquisition route is vital. They would argue that they have the money and are prepared to pay premium prices, so why wait? However, I recommend a degree of caution as there is a danger that in their haste to hit the acquisition trail, they could end up over-paying for assets.”

While China and India have been some of the most prolific of the emerging economies in terms of overseas acquisitions for some time now, other nations appear increasingly determined to play catch-up.

M&A activity in Russia in particular has accelerated over the course of the past two years. Russian firms undertook 23 overseas transactions in 2006, with another 11 completing so far this year. As well as the obvious market share gains, these deals can help geographical diversification and lessen Russian companies’ dependence on their own domestic market – something which could be interpreted as indications of more long-term strategic thinking on behalf of Russian companies.

Ian Gomes concludes, “Over the coming year, I expect to see a plethora of new players begin to make their mark on the international stage – not only from the likes of Russia and Brazil, but also from fast-developing nations such as Vietnam, South Korea and the Gulf States.”

“The Middle East is expected to become an increasingly major player, although much of its investment will come from quasi-governmental investment funds as opposed to companies based in the region. Current examples of this PE-style portfolio approach include Dubai’s acquisition of shipping operator P&O or the bid for Sainsbury by Qatar-based investment vehicle Delta Two. These typify the region’s new found risk approach to deal-making.”