As just about anyone with even a passing interest in economic news is aware, most of the growth across the world's economies is occurring in emerging markets. While the World Bank expects the U.S. to grow at between two and three percent over the next few years, and Europe at less than two percent, it is forecasting growth of just under nine percent in China, five-plus percent in Turkey and about four percent in Mexico.
Companies that want to take advantage of the growth opportunities in these markets often turn to mergers or acquisitions, given that this usually is faster than trying to build operations from the ground up when working across national borders. In fact, a recent survey of M&A professionals by mergermarket and IntraLinks found that most expect cross-border M&A deals involving companies in emerging markets to outpace activity in the developed markets over the next 12 months. Nearly three-quarters of respondents expect cross-border M&A activity to increase in emerging markets, while just 50 percent predict an increase in developed countries.
Even when the rationale for these deals is sound, success is far from assured. Indeed, a recent study by PwC of 200-some deals in emerging markets found that more than half that had made it to the due diligence stage ultimately weren't consummated. About 40 percent of the deal failures were due to valuation mismatches and uncertainty. “The magnitude of future growth is uncertain, there are few comparables, and competition for assets in growth markets is stiff,” according to the study. Other problems that sink potential deals: the teams fail to get needed government approvals; financial information is lacking; or evidence comes to light of questionable or illegal business practices.
Moreover, even of those deals that are completed, post-deal problems eat up, on average, about half the buyer's initial investment. That's not all: In about half the deals, the buyer ends up either losing control of the target business, or divesting it at a loss.
Disputes between the partners account for nearly one-third of post-deal issues, the study found. Government interference, as well as questions about the company's financial reporting that surface only after the deal is inked, also pose challenges.
Still, several steps can help acquiring and merging companies boost the chances of success when working in emerging markets, PwC says:
- Early on, develop a sound strategic rationale for the deal. “Due diligence will be imperfect and valuations high, so a strong strategic rationale is critical to completing a deal,” the study says.
- Prioritize different markets. Focusing limited resources on a smaller number of markets increases the chances of developing positions in those markets that can support longer-term growth.
- Have feet on the ground. A personal presence is key. Not only does it boost the company's understanding of the market, but it enhances the quality of the due diligence, and increases financial information transparency.
- Put key people in place. This includes local advisors, such as experts in law and corporate finance, as well as the deal team. Deal team members should be drawn from both nationals on the ground, as well as the individuals who will manage the enterprise once the deal is complete.