The Hindu Business Line : Global M&As: ‘The hunted are fast becoming the hunters’

Chennai, Sept. 12 Companies from BRIC nations (Brazil, Russia, India and China) are fast closing the gap on their counterparts in developed nations in terms of cross-border acquisitions, according to KPMG’s ‘Emerging Markets International Acquisitions Tracker’.

Though the number of deals involving a developed economy buying into an emerging economy is still much larger than that of emerging-into-developed, the divide is narrowing fast.

“Four years ago, the emerging-into-developed deals were outnumbered by four to one,” observes Mr Ian Gomes, Chairman of KPMG’s New and Emerging Markets practice for KPMG in the UK. “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.”

So, when will one overtake the other? Looking at current trends, it’s feasible that this crossover could happen within the next two to three years, predicts Mr Gomes.

Will sub-prime impact?

Will the sub-prime crisis affect the pace of emerging market deals? “There is no question that we will see a short-term impact on cross border M&A (merger and acquisition) by emerging multinationals despite the resilience of the emerging markets, including India, to the sub-prime crisis in the US,” says Mr Gomes.

“Most of these would be highly leveraged and bankers would have difficulty selling down the debt in current market conditions. Asset values in the emerging markets are holding up well and private equity (PE) funds may not find the bargains they are hoping for,” he adds, in an email interaction with Business Line.

KPMG’s research, which analysed deal flows between 10 selected emerging economies and 11 key developed markets, found that during the first six months of 2007, there were 67 emerging-into-developed deals taking place, against 126 developed-into-emerging transactions, or nearly two to one.

The study took into account only deals classed as ‘completed’, and which saw a trade buyer taking a controlling majority shareholding in an overseas company.

“Deals which involved backing by a PE firm or other financial institution were not included.”

In 2006, a total of 119 emerging-into-developed deals took place, whereas there were 322 completions of the reverse kind. More than double that was compared to the situation in 2003, a year during which there were 49 emerging-into-developed deals, and 215, in the opposite direction.

The findings dispel the common 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.

“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,” reads a quote of Mr Gomes cited in the study.

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.

Mr Gomes argues that while 14 deals in six months might not seem like a huge number, 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,” he adds.

Impressive India

China, however, still has some way to go to catch up with India, 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 that happened during 2006.

The large volume of outbound deals in India, according to Mr Gomes, is indicative of the current mindset of many Indian companies: “Grow, acquire and utilise debt facilities to the full.”

Rather than grow organically, the favoured option for many Indian organisations appears to be getting a foot in the door quickly via the acquisition route.

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