Friday, March 09, 2012

Outlook and strategies of global investment banks towards Emerging Markets M&A – an opportunity that always was


The dip in mergers and acquisitions (M&A) activity in Developed Markets (DM) since the onset of the 2007 financial crisis has led to a shift in the focus of investment banks towards the Emerging Markets (EM).

Emerging markets, as defined by M&A analytics firm Dealogic, are all countries except Western Europe, Japan, Australia, New Zealand and North America (which are classified as Developed Markets)

Bankers speaking at a Dun & Bradstreet seminar last week have been quoted as saying that EM countries including the BRIC nations (Brazil, Russia, India and China) will account for 20% of global M&A activity going forward. Typical favourite sectors of EM M&A activity like pharmaceutical, healthcare, metals & mining and manufacturing will be accompanied by retail and aviation.

Considering the pace at which EM are growing, the above percentage would only increase.

Recently DM M&A activity (both acquirer/target in DM) has been focused on two broad themes: horizontal and niche. Market saturation and plateaued organic growth has compelled larger deals to happen horizontally either between equals (proposed AT&T/T-Mobile merger) or between market leaders in different markets (SABMiller in UK/Fosters in Australia). Typical examples of niche acquisitions are in the Technology space where large companies are keen to acquire technologies that augment current offerings (Apple/Siri). Non-core asset disposals are also happening as companies tend to concentrate on core businesses like the way P&G sold Pringles to Diamond Foods.

DM acquirers are currently in a “wait and watch” mode till uncertainty reduces in the global macroeconomic scenario. This temporary dip in M&A is expected to rectify once concerns regarding DM economic growth and the Eurozone debt crisis diminish.

An alternative strategy that investment bankers are currently pursuing is advising a DM acquirer expand geographically to enter an emerging market through acquiring a local incumbent like the way Wal-Mart entered South Africa by acquiring 51% in Maasmart in 2010.

Emerging Markets M&A – its nature and the unique challenges

Before delving deeper we need to understand that unlike developed markets, EM has its own set of quirks that potential advisors and investors need to be mindful of. High organic growth is a standard characteristic of all EM sectors even in traditional stable businesses like utilities due to rapid infrastructure development and electrification projects. However, the main requirement to sustain the high growth levels is continuous inflow of capital. Hence, capital raising is a more common transaction type than an acquisition and Bankers need to adjust their mindset accordingly while pitching ideas to EM clients.

The major characteristic feature of EM M&A deals can be described as stake sales and asset purchases (e.g. GTL Infrastructure/Aircel towers)

Due diligence and sound strategic rationale are however critical for purchasing an EM asset because of several factors as explained below:

  • Large promoter holdings make it difficult to acquire companies which are in a growth phase since, promoters would rather participate in the growth story than sell out – a good example is the Cremica Group which continues to remain private instead of raising capital through an IPO
  • Information on local companies is either difficult to get or needs careful scrutiny
  • Growth premium leads to unheard of valuations. E.g. recently Reckitt-Benckiser acquired Paras at 8x sales multiple
  • Political climate in some EM countries may be unfavourable for business transactions. E.g. the recent loss of 2G telecom licenses has lead to the exit of Etisalat and Batelco from the Indian market as a fallout of the 2G scam
  • Regulatory scenario might hinder entry of foreign players. E.g. Only 26% FDI in multi-brand retail sector is hampering Wal-Mart, Carrefour and peers to open up branded stores and leverage their brand value in India. The same problem is faced in the insurance sector in India

Strategies for winning EM mandates

The strategies for global investment banks to derive business from EM M&A market can be summed up as follows:

  1. Hire a strong local team with sound knowledge of local regulations, tax, market and extend coverage to as many companies as possible from the large caps down to mid-caps. This enhances the quality of the due diligence performed as well. This strategy is being followed by most of the Big Banks across the EM geographies, where local knowledge is combined with global experience and practices
  2. Tie up with local banks through alliances like M&A International if it is not possible to develop strong presence in the EM location to ensure local expertise. This strategy can be explored by smaller investment banks, where setting up a large EM office may not be feasible or cost-effective. Additionally tie up with a local EM research provider to provide local research, valuation and company and sector intelligence on a need basis
  3. Build strong relationships with promoters say in the large private companies which are good IPO candidates just waiting for an upturn in the equity markets. This is crucial even with large public companies for acquisition mandates and secondary offerings.
  4. Build strong relationships with Financial Sponsors: If IPO is not preferred/possible and given that capital raising is a key focus, relations with PEs, FIIs could help get and deliver on advisory mandates for investments in promising EM assets (e.g. KKR/Amalgamated Bean Coffee)
  5. Target EM sovereign wealth funds which have large cash reserves due to rising commodity prices. These are typically passive investors with a long term investment horizon. (e.g. Khazanah/Apollo Hospitals) and can be regularly approached to show investment targets or shown exit strategies for existing stakes
  6. EM companies are ripe candidates for investment by global investors through DM exchange listing ( or through depository receipts (Infosys, Gitanjali, Gazprom, Baidu etc)
  7. Expand market coverage: Many sectors in EM are highly fragmented and offer consolidation opportunities. In such a scenario, without continuous tracking of the market, quick deal opportunities can be missed (e.g. Flipkart/
  8. Advise EM corporates to expand internationally: EM companies with global ambitions are quick to snap up technologies and lucrative assets abroad at cheap valuations (Tata/Corus, Gitanjali/Rogers USA). Global banks with strong DM coverage and relationships have the necessary knowledge to suggest the right kind of targets
  9. High economic growth and increasing disposable incomes lead to a strong appetite for luxury products in EM countries. Bankers can advise DM companies to list in EM exchanges where their biggest markets are. However, valuation and timing of the IPO is critical given the lukewarm reception to the recent Hong Kong IPOs of Prada and Samsonite
  10. Advise DM companies to enter EM: Bankers can advise their DM clients to enter EM countries either through a Joint Venture (Prudential/ICICI) or direct acquisition by stake sale (Abbott/Piramal)
  11. Disinvestment: Bankers need to develop strong relationships with the Government for capital market offerings of prized Government assets. Although not a revenue generator, banks can do this for getting tombstones of big deals for credential purposes. E.g. recent offer for sale of ONGC Corp in India

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Outlook and strategies of global investment banks towards Emerging Markets M&A – an opportunity that always was by Sayan Sircar is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

Sunday, November 19, 2006

Add GMail search to Internet Explorer 7 without using Google Toolbar

Do you love GMail?
Do you hate toolbars?
Do you want to search GMail from the new IE7 search bar?

If you answered "Yes" to any two of the above then here's your solution:

Step 1:

Open Internet Explorer 7 and goto to the search box on the top right. Click the small down arrow right beside the magifying glass.

Step 2:

Click the "Find more providers" option.

Step 3:

This takes you to this page:

Step 4:

Now go to this box on the bottom right of the page:

In the "Paste the URL..." box paste this URL:

All of that should be in one line.

In the "Specify name..." box type GMail.

Click the Install button and are done

Again click the down arrow in the search box and you will see GMail listed as a search provider. Search you favourite mailbox right from the comfort of you browser search bar and without any toolbar.

Note: This works only for Internet Explorer 7. I am a Firefox fan myself but IE7 is not too bad. Get it here.

Have fun!

Sunday, November 05, 2006

GMail bookmarks

If you ever wanted to bookmark the 'Compose Mail' link in Gmail but failed then heres how you do it:
Compose in Gmail
Right-click on the link and set it as a Favourite (in IE) or Bookmark (in Firefox).

Here's another tip:
Open Gmail so that it shows only unread mails - here's the link:
Unread Gmail

Of course for both of these tricks to work you need to have cookies enabled on your browser and previously logged in to Gmail (just don't log out once you are done working in Gmail - mind you that you MUST log out if you are using a shared computer)

Those who want to tinker a bit by saving custom Gmail searches as favourites / bookmarks can use this special URL:

Just replace %S in the URL to what you are searching for say 'is:unread' or 'from:John' - you get the idea;-)