Cross-Border M&A Activity on the Rise
26 Apr, 2013
Cross-border M&A activity is heating up as companies continue to expand beyond the BRICS countries (Brazil, Russia, India, China and South Africa) to include other high-growth markets. According to a report released by Baker & McKenzie, nearly half of all senior executives surveyed expect their company’s appetite for cross-border M&A to increase over the next two years. Companies based in high-growth market countries also reported targeting a wider range of jurisdictions to advance their growth strategies.
The report, based on a survey conducted by the Economist Intelligence Unit (EIU) on behalf of Baker & McKenzie, asked more than 350 senior executives across high-growth and developed markets for their views on the most important factors influencing the success of cross-border M&A transactions and the potential risks that could hurt their investments as they expand into new markets. A copy of Opportunities Across High-Growth Markets: Trends in Cross-Border M&A is available at:http://www.bakermckenzie.com/highgrowthmarkets/.
“Outbound M&A activity is shifting and we are seeing a greater number of deals involving high-growth market countries,” said Tim Gee, Head of Baker & McKenzie’s Global M&A Practice. “It’s not just Western companies on the buy side anymore. Both developed and emerging market companies are chasing acquisition opportunities in new markets such as Indonesia, Turkey, and Vietnam, and the frontier markets that lie beyond. Findings from our survey are similar to the activity and interest we see from our clients, including the need to rethink strategy to maximize investment in unfamiliar markets.”
According to the survey, companies in emerging regions are willing to consider a much wider range of potential markets and to pursue targets in a larger number of countries than their developed-market peers (103 vs. 82). Many of these target markets, such as Cambodia, Chile, Latvia, Malaysia, Ukraine and several African countries have, until now, attracted little interest from most developed-market acquirers.
Companies in emerging markets also seem more likely to perceive positive benefits, with 47% stating cross-border M&A activity was very helpful to strengthening their market position and/or profitability, compared with 31% in developed markets.
“Emerging market buyers are often willing to take greater risks in expanding into other emerging markets than developed-market companies because they are used to navigating challenges in such markets, similar to their own,” said Morné van der Merwe, an M&A partner in the Firm’s new Johannesburg office. “Sometimes they are more pragmatic in their approach and have a better sense for the potential growth prospects in developing economies.”
Despite the differences in M&A strategies of companies located in emerging and developed markets, all survey respondents agree on certain success and risk factors associated with expansion into new markets, including:
- Corporate compliance is the primary concern for dealmakers moving forward. Respondents point to corporate compliance issues (46%) as the top legal/regulatory challenge to overcome in conducting successful cross-border M&A deals over the next two years. Notably, corruption is specifically identified by far fewer respondents (29%), reflecting companies’ increasing comfort that taking a tough line on bribery will not compromise their ability to compete in the market for acquisitions. Concerns over the wider aspects of corporate compliance outweigh country-specific and target-specific factors. Protectionist measures (41%) and an uncertain tax environment (35%) were also identified as growing threats.
- Concern over cultural barriers is diminishing as cross-border M&A increases. Over the past five years, cultural barriers were the number one non-legal concern of companies entering new markets. As globalization continues to make the world smaller, those concerns are diminishing. Survey respondents ranked economic stability (33%) and decline in profits (32%) as their top concerns in conducting cross-border M&A over the next two years.
- A successful acquisition requires comprehensive integration planning. Almost 50% of survey respondents point to pre-transaction integration planning as the most significant factor in mitigating deal-execution risk. Buyers must build relationships with stakeholders on the ground before moving ahead in their acquisitions if they are to retain customers and expand margins, the two greatest indicators of effective integration, according to survey respondents.
Other interesting insights are uncovered in Opportunities Across High-Growth Markets: Trends in Cross-Border M&A, such as:
- Strategic buyers have the advantage in high-growth markets. Executives responding to the survey expressed a strong preference for strategic buyers, with more than twice as many (44%) preferring to deal with corporations compared with 21% who favored financial buyers.
- Debt to finance cross-border M&A. Debt will be the most important overall form of financing cross-border M&A transactions over the next two years, with 63% of companies using debt, followed by 51% that will use existing cash resources and 38% that will use equity.
- Customer retention and margin expansion key to integration. Survey respondents say that customer retention is the most important factor to consider when determining the effectiveness of post-transaction integration following cross-border deals.
“Taking the pulse of the global M&A market through this survey is an extension of our intense focus on high-growth markets and helping our clients capitalize on strategic growth opportunities,” said Mr. Gee. “Executives responding to this survey confirm the continued steady growth of cross-border M&A, and there’s no question high-growth markets are driving the upward trend.”