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EY Capital Insights Q3 2012


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  • 1. Helping businesses raise, invest,preserve and optimize capital Q3 2012 Insights Calling the shots Lead strapline Deutsche Telekom CFO Lead strapline supporting Höttges on Timotheus copy line 1 Lead strapline supporting copy line 2 collaboration, innovation and communication Metals and Mining line Two M&A: heading What the future holds One line heading Cross-border financing Poland: RisingTwo line in the east heading
  • 2. ng Op vi ti er m es iz Pr in g Helping businesses raise, invest, preserve and optimize capital For Ernst & Young In st ve Marketing Director: Leor Franks in i ngsi Broadening g Ra ( Program Director: James Horsman ( Consultant Editor: Richard Hall Digital Manager: Laura Hodges Design Consultants: David Hale, Henri Yan horizons and Najet Zeggai For Remark Editor: Nick Cheek Assistant Editor: Sean Lightbown Head of Design: Jenisa Patel Production Manager: Felicity James The quest for growth has seen many firms venture into new markets Contributors EMEA Director: Simon Elliott — and changing patterns in the direction of activity are becoming Contributor: Matthew Albert Capital Insights is published on behalf of established. In Q2 2012, the value of global cross-border M&A rose Ernst & Young by Remark, the publishing to its highest level since Q4 2010 while the volume of outbound M&A and events division of mergermarket Ltd, Capital Insights would like to thank the following 80 Strand, London, WC2R 0RL UK. from emerging markets jumped by 64% year on year. business leaders for their contribution to this issue And we are seeing a growing trend for corporate collaboration as more companies seek to expand while minimizing risks. This issue of Ernst & Young Capital Insights examines these two complementary business trends. Assurance | Tax | Transactions | Advisory Cross-border: as firms look beyond their own markets for growth, About Ernst & Young we explore three countries in Eastern Europe that offer exciting Ernst & Young is a global leader in assurance, tax, opportunities (page 24). And we are very pleased to have an exclusive transaction and advisory services. Worldwide, our 152,000 people are united by our shared values interview with Poland’s former Prime Minister Jan Krzysztof Bielecki, who and an unwavering commitment to quality. We make a difference by helping our people, our clients examines the political and regulatory background for M&A in the country. and our wider communities achieve their potential. In addition, for those looking to raise capital, we investigate the Ernst & Young refers to the global organization of member firms of Ernst & Young Global alternatives for cross-border fund-raising as banks retrench (page 20). Steven Appelbaum Stephen Benzikie Brian Coulton Timotheus Höttges Limited, each of which is a separate legal entity. Collaboration: Deutsche Telekom CFO Timotheus Höttges tells us Ernst & Young Global Limited, a UK company Professor Director Global Emerging Chief Financial Officer limited by guarantee, does not provide services how partnerships with other corporates and entrepreneurs are driving to clients. For more information about our Department of Pelham Bell Pottinger Markets Strategist Deutsche Telekom organization, please visit innovation and growth (page 14). Meanwhile, on page 34, we explore Management Legal & General Concordia University Investment Management About Ernst & Young’s Transaction Advisory how businesses can work with shareholders to head off “activism” and to Services How organizations manage their capital agenda channel shareholders’ passions positively. Combining the two threads of today will define their competitive position this issue, on page 31, we show you why joint ventures can be vital tools tomorrow. We work with our clients to help them make better and more informed decisions in overcoming cultural differences in cross-border M&A deals. about how they strategically manage capital and transactions in a changing world. Whether When it comes to optimizing asset portfolios, we examine how companies are refocusing and divesting in the metals and mining sector All data in Capital Insights is correct at 1 September 2012 unless otherwise stated you’re preserving, optimizing, raising or investing capital, Ernst & Young’s Transaction Advisory Services bring together a unique combination of (page 10), and regular columnist Dave Murray discusses whether now is skills, insight and experience to deliver tailored advice attuned to your needs – helping you drive the right time to diversify or rationalize your business (page 7). competitive advantage and increased shareholder returns through improved decision making across In these tough times, corporates that strive for expansion can no Mark Hutchinson Richard Lewis Michal Mravinač Liz Murrall all aspects of your capital agenda. longer afford to be standalone or purely domestic in focus. For those Chairman Head of Alternative Richard Lewis Director for UK and Director, Corporate © 2012 EYGM Limited. All Rights Reserved. looking to raise, invest, preserve and optimize capital, I believe that Credit Ireland Governance and M&G Investments Communications CzechInvest Reporting, Investment EYG no. DE0356 crossing borders and collaborating are the way forward. I hope this issue Management Association This publication contains information in summary form and is therefore intended for general guidance of Capital Insights points you in the right direction. only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Joachim Spill The opinions of third parties set out in this publication are not necessarily the opinions of the Transaction Advisory Services Leader, EMEIA global Ernst & Young organization or its member (Europe, Middle East, India and Africa) at Ernst & Young firms. Moreover, they should be viewed in the context Jan Krzysztof Bielecki Wojciech Pytel Christoph van der Elst Peter Williamson of the time they were expressed. If you have any feedback or questions, please email Head of the Economic Member of the Professor of Professor of International Council to the Polish Management Board Business Law Management For more insights, visit where you can find our latest ED 0113 Prime Minister Polkomtel Tilburg University Judge Business School thought leadership including our market-leading Capital Confidence Barometer.Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 3
  • 3. Alamy/Gregory Wrona 24 For further insights, visit Insights or download our app Regulars 06 Headlines Global transactions news and how it affects you 34 07 Getty Images/Stone/Duane Rieder The real deal 31 Dave Murray discusses how optimizing portfolios by rationalizing or diversifying can aid businesses 08 Transaction insights 10 A look at the rising trend in hostile takeovers 30 The PE perspective Sachin Date explores the globalization of private Getty Images/Veta/Andrew Rich equity and its spread into developing markets 38 Getty Images/Flickr/jjguisado Moeller’s corner M&A Professor Scott Moeller explains how heeding Features shareholders’ advice can reap rich rewards 39 Further insights More insights on how to raise, invest, 10 Extracting value 24 Eastern promise 31 Dealing with difference preserve and optimize your capital Recent high-profile deals in the metals and As companies continually search for new Culture clashes have an infamous history of mining sector have hit the headlines. However, sources of growth, Poland, Ukraine and the disrupting M&A deals. How can your company a closer look at the sector reveals new trends Czech Republic could provide opportunities manage social, corporate and linguistic with big implications for others. for deal-makers. differences to ensure a successful transaction? 14 Cover story: Calling the shots 28 In pole position 34 Driving change Deutsche Telekom CFO Timotheus Höttges Former Polish Prime Minister Jan Krzysztof Shareholder activism is on the rise across explains how the company is negotiating Bielecki tells Capital Insights how his the globe. Capital Insights explores how a turbulent and heavily regulated markets, country’s growth has been driven, and what potential investor revolt can be turned into while also looking for new opportunities. it plans to do to stay ahead of the pack. constructive stakeholder collaboration.1 20 Withdrawal symptoms Ernst & Young – recognized by With banks reining in their cross-border# mergermarket as top of the European league tables for accountancy advice lending activity, what alternatives are out on transactions in calendar year 2011* there for corporates looking to raise capital *As run on 11 January 2012 for their businesses?Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 5
  • 4. Dave Murray Headlines The real deal Getting smart on start-ups East side story Deals for technology start-ups are very much to Corporates and private equity (PE) alike are Making or the fore at the moment. In May, computer firm waking up to the potential of the Central and Oracle bought social-media marketing business Eastern Europe (CEE) region. In August, NYSE- Vitrue for US$300m. Two months later, in July, listed WNS Holdings, a global business services it acquired social marketing company Involver provider, opened a new delivery centre in breaking and network vendor Xsigo for undisclosed Gdynia, Poland, to service clients across Europe amounts in separate deals. Meanwhile, in and Asia. Meanwhile, earlier this year, Chinese the same month, Google bought marketing Deputy Premier Li Keqiang signed deals worth start-up Wildfire for a reported US$250m. over US$16b in Russia and Hungary. Also from A July 2012 survey from print services com- China, shipping giant COSCO has shown interest pany RR Donnelley also highlighted the focus A comeback for IPOs? in the Croatian port of Rijeka (pictured below). on buying tech start-ups. Respondents noted While certain high-profile initial public offerings PE activity is also on the rise. Figures released that the “stratospheric valuations” of relatively (IPOs) have underperformed of late, it appears in August from the Emerging Markets Private young companies mean “both financial and that companies are still looking to go public as Equity Association show that PE fund-raising strategic buyers are looking to buy early in a key way to raise capital. IPO activity world- in CEE hit US$2.6b in H1 2012, nearly double hope of a big payday.” wide increased in Q2 2012, according to a new the total for 2011. Deal-makers should look When it comes to optimizing asset portfolios, corporates can choose a strategy Ernst & Young report. The latest Global IPO Update shows that 206 deals raised US$41.8b eastward, with Poland a stand-out destination. For more on Eastern Europe, see page 24. of rationalization or diversification, but knowing which way to turn can be tricky in the second quarter, a respective 5% and A 141% increase on Q1 2012. Japan is seeing a ny personal finance advisor will grows, businesses may want more control climate, finding a buyer, at the right price, rash of IPO activity — particularly from its air- tell you that the key to limiting over their supplier base. This could de-risk can be tough. Despite the fact that large lines. In July, All Nippon Airways (ANA) raised investment risk is diversification. operations, with companies buying suppliers companies are sitting on an estimated around US$2.1b while Japan Airlines (JAL) is Sadly, for corporates, it’s not and adding them to the core business. In US$7.8t, according to Standard & Poor’s, aiming to relist on the Tokyo Stock Exchange in that simple. With growth in many developed addition, companies may diversify to gain bidders are unwilling to acquire assets at a a bid to generate US$8.5b. However, compa- markets stagnating, companies need to entry to growing markets. This has been premium if they feel they can buy the targetcl Getty Images/Bloomberg/Jason Alden tc Getty Images/Stephen Brashear cr Shutterstock/Krkr nies need to be fully prepared before they float. ask themselves whether now is the time to the case with PepsiCo and the Campbell for a bargain price. And sellers do not want The next issue of Capital Insights will carry an rationalize or diversify their businesses. Soup Company, which have recently bought to be seen by key stakeholders as shedding in-depth investigation of IPO readiness. At present, the trend seems to be healthy options brands to expand their reach. assets in what can amount to a ‘fire sale’. very sector specific. In oil and gas, for As for those looking to refocus, the Those considering diversification need example, we’ve seen rationalization. Major emphasis should be on core competencies to find the right assets, get the best value PE assets hit new record Payback time for investors organizations such as Shell and ExxonMobil and divesting those areas that are giving and work on a solid integration plan. Yet, Assets managed by the private equity (PE) It’s a bumper time for shareholder dividends. are divesting downstream operations in lower-than-average returns, so they traditionally, a diversified business may suffer A call to action industry have hit new heights. They reached Firms worldwide are paying out record amounts order to reinvest in core services such as can reinvest in higher-returning assets. in the markets. Stock markets historically New research has identified the top 10 US$3t in value last year, according to Preqin. in dividends, according to new data. Analysis exploration and oil field services. Corporates are looking at the relative discount conglomerates while rewarding obstacles that those in the telecommunications The data firm also said that the number of by share registration services provider Capita However, we have seen a move toward profitability of the business, even if it means those with a tighter focus. However, data from industry need to overcome. A report from assets managed by the industry grew 9% from Registrars has revealed that UK companies re- diversification in the food and beverage selling off a key part of the company. Dutch the Leipzig Graduate School of Management Ernst & Young has revealed that the inability December 2010 to December 2011. warded shareholders with payouts worth £22.6b sectors as companies try to gain rapid firm CSM, the world’s largest supplier to has shown that this “conglomerate discount” to capitalize on new connectivity tools, uncer- Bronwyn Williams, Preqin’s Manager of Perfor- (US$36b) between April and June this year, growth outside of their core business and bakeries, announced in May that it would is shrinking. Between 2008 and 2009, the tainty on new-market regulation and unclear mance Data, said the figures indicate that PE beating the £22b (US$35b) record for the same markets. Kellogg is a prime example of this divest its larger bakeries businesses to discount significantly decreased across the security responsibility to customers are among “continues to be attractive,” and that period in 2000. In the US, Standard & Poor’s trend. In February, the breakfast cereal giant concentrate on its more profitable, yet US and UK. While in Asia, conglomerates now the 10 key challenges facing communications “faith remains that PE fund managers can still Dow Jones indices said that net dividend rises bought the Pringles chip brand from Procter smaller, bio-ingredients business. command a market premium. companies. Other sectors should also take deliver these returns.” Though the figures are totaled an all-time high of US$12b in Q2 2012. & Gamble for US$2.7b. Kellogg viewed this However, before companies embark on Firms should undergo a thorough health note as The top 10 risks in telecommunications positive, PE is continuing to search for new Meanwhile, in Russia, new legislation coming into acquisition as a way to drive global growth either strategy, they need to be aware of check before deciding which strategy to take. 2012 survey highlights a lack of organizational sources of growth in secondary markets. force at the end of the year will compel firms for its predominantly US snack business the challenges. When businesses start to With the competition for growth intensifying, flexibility and poor M&A and partnership strate- This is demonstrated by the tripling of PE to up their mandatory dividend distribution level rather than go through the pain of growing rationalize, they should get assets targeted when it comes to optimizing capital, gies as key pitfalls — risks which can cut across investments in Africa to US$3b in 2011, to 25% of earnings. It would seem that, at a time their own operations organically in the same for divestment into a saleable state. These businesses need to make the right move. all business areas. For a full copy of the report, according to Mthuli Ncube, Chief Economist when companies are sitting on US$7.8t, markets they sell cereals. assets are often intertwined, so management Dave Murray is EMEIA Markets Leader, visit And for an of the African Development Bank. For more according to Standard & Poor’s, keeping inves- A company may look at diversifying in needs to consider the costs of separation. Transaction Advisory Services, Ernst & Young. exclusive interview with Deutsche Telekom on PE manoeuvres in emerging markets, tors happy is all important. For more on share- order to de-risk the business or to increase Structurally, the company may need to For further insight, please email CFO Timotheus Höttges, see page 14. see page 30. holder engagement, see pages 34 and 38. growth. For example, as supply chain risk carve the business out. And in the current Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 7
  • 5. Failed vs. completed deals, 2007-12 (Figure 2) y2007 2007 41% 59% y2008 2008 42% 58% Completed Transaction y2009 Failed 2009 52% 48% y2010 2010 51% 49% y2011 2011 52% 48% y2012 2012 33% 67% 0 20 40 60 80 100 insights Percentage of deals Failed vs. completed deals in the top five countries for hostile takeovers, 2 5 2007-12 (Figure 3) 9 HTs can be affected by regional factors. Australia UK Norway 14 These include takeover codes and Key facts and figures from the world of M&A. This issue: Hostile takeovers regulations, which differ substantially 22 from country to country. In the UK, for Hostile takeover deals, 2007-12 (Figure 1) example, the Takeover Panel reformed its rules last year making HTs more difficult. 31 40 15 The figure, right, shows that, over the 35 12 last five years, the UK and Norway Number of deals have completion rates comfortably 9 30 above the halfway mark, with 61% 6 and 71% respectively. In Canada, 25 the completion rate for 39 HTs Canada USA Number of deals 3 12 since 2007 is just 35%. Corporates 16 20 0 Q1 Q2 contemplating HTs therefore need not 15 2012 2012 only to look at the prospective target 22 but also the regulatory framework of 10 the country involved. 5 Key 3 7 Completed Deals 0 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 Failed Deals 2007 2008 2009 2010 2011 2012 While the volume and value of overall global M&A may HTs may be on the rise, but the proportion of failed deals Percentage of hostile takeovers completed in top five hostile takeover-prone Across the top five HT-prone industries, have fallen in H1 2012, hostile takeovers (HT) are making is also increasing. From 2009-2011, the number of completed industries, 2007-2012 (Figure 4) 169 HTs have been attempted since 2007. a comeback. Hostile bid volumes, in which the bidder hostile deals outweighed failed ones; however, so far in 2012, 70 The difference in deal completion is not bypasses the target company’s board and appeals directly a bid of this nature is twice as likely to fail as it is to succeed as varied as with countries (see figure 3), to shareholders, have risen by 54% in H1 2012 year on (see figure 2 for more details). 65 although the consumer sector stands out. year, according to mergermarket (see figure 1). In Q2 2012, Therefore, while these bids may be an attractive This is the only sector in the top five that 60 bids also almost doubled quarter on quarter from 7 to proposition for corporate bidders and shareholders alike, both has witnessed more completed HTs than Percentage of completed deals 13 — the fastest rate of increase since 2008. Recent examples should take into account that being ready for a failure is just as 55 failed ones since 2007, with 65% proving include GlaxoSmithKline’s US$3.6b takeover of Human important as preparing for completion. Meanwhile, targets successful. Of all the sectors, the energy, Genome Sciences. that are unwilling to be bought out can also take some heart 50 mining and utilities industry has had the r all images iStock and Shutterstock Why is this happening? With the world’s top companies from this data. most HT bids, with 81 attempted takeovers, 45 sitting on some US$7.8t, according to Standard & Poor’s, The failure rate of HTs may also be affected by factors such yet it had a completion rate of only 44%. firms are certainly not short of capital, and with stock as geography and industry. Since 2007, less than a third (30%) The figures are good news for those in the 40 markets depressing some targets’ values, this could of the 54 HTs in the US have ended in completion. For more consumer sector attempting HTs. However,Source: mergermarket incentivize bidders to acquire targets at a bargain country and sector specific data, see figures 3 and 4. for those in the other top four sectors, the 35 price — a feature of many hostile bids. So, could this rise in HTs signal an upswing in M&A activity data shows that HTs are not easy to bring This action is often driven by the bidder’s shareholders in general? Only time will tell. But with so much money on 30 to a successful conclusion, so corporates who are now demanding that companies use surplus capital to companies’ balance sheets and shareholders agitating for Consumer Financial Services Industrials Energy, Mining TMT in these sectors need to think particularly drive growth (for more on shareholder activism, see page 34). greater value, the signs are certainly there. & Chemicals & Utilities carefully before going hostile. Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 9
  • 6. Optimizing Investing Extracting value Some recent high-profile metals and mining deals may have grabbed headlines, but closer scrutiny reveals new However, it would be wrong to suggest that raw materials suppliers are standing at a cliff edge. Peter Williamson, Professor of International Management at Cambridge University’s Judge Business School, has studied China’s investment in infrastructure. He has compared China’s current spending with that of countries such as Germany and Japan when their economies were at a similar stage, and he sees no sign of the bubble bursting. Top metals and mining M&A deals (2012) Completion JAN 2012 FEB 2012 Target Nord Gold European Goldfields Buyer Severstal Eldorado Gold Deal value US$2.7b US$2.3b trends that have big implications for other corporates Nevertheless, the prospect of even a moderate softening MAR in global prices looks set to have a tangible impact on the 2012 Quandra FNX KGHM Polska Miedz US$2.2b mining sector. For one thing, just the idea of lower demand, T he well-documented negotiations between strategic acquisitions at a time when valuations are low. even in the short term, could scare the markets and put Source: mergermarket commodities trader Glencore and diversified Meanwhile, the same conditions are also seen as driving pressure on share prices. “By its nature, the industry tends mining group Xstrata have overshadowed much divestment by businesses seeking to optimize portfolios. to work to very long-term horizons,” says Downham. “But of the M&A activity in the metals and mining But if the fiery economic backdrop has created an appetite in contrast, the markets have very short-term horizons.” industry during 2012. Any deal aimed at creating a business for deal-making, the level of activity is being tempered by Concern in the markets is borne out by a fall of around with a market value of around US$90b will dominate market uncertainty. 14.4% in the FTSE Mining Index between January and the headlines. August this year, as investors factored in falling metals But there has been volatile M&A activity and interest A changing landscape prices and rising costs. elsewhere in the metals and mining sector. Figures from The last few months have seen a marked change in the global Clearly, falling prices put pressure on margins. According Ernst & Young’s Mergers, acquisitions and capital raising in the economic landscape. Despite an unappealing patchwork of to Downham, such pressure is prompting companies to look mining and metals sector — 1H 2012 report show a slowing below-par growth, stagnation and contraction across Europe at their portfolios and consider ways and means to optimize in activity, with the number of deals in H1 2012 falling to and a subdued recovery in the US, raw materials providers assets, notably through divestment. “If you can realize value 470 from 580 last year, while the value of deals was just over could rely on growing demand from emerging markets to from the sale of non-core assets, then in the current climate US$55b — 38% down on H1 2011’s value. However, the first keep shareholders happy. So, when the second quarter that may be a sensible thing to do.” three months of 2012 saw mining companies completing no figures revealed that China’s growth had slowed to fewer than 10 deals with a value of US$1b or more, including 7.6% from 8.1% in the first three months of the year, Getting to the core Canada’s Pan American Silver Corp’s US$1.49b acquisition of worry increased. In July, Brazilian iron ore miner Vale sold its European exploration company Minefinders in March. The concern is rooted in hard numbers. For instance, in manganese business to Glencore for US$160m, while According to Lee Downham, Ernst & Young’s Global June of this year, Australia’s Bureau of Resources and Energy Australian-based BHP Billiton announced in May that it Mining and Metals Transaction Leader, there is a continuing Economics estimated that iron ore prices would average planned to optimize and simplify its portfolio further by appetite for deal-making, despite volatile markets and US$136 a metric ton in 2012 compared with US$153 in selling its Ekati diamond mine. ongoing economic uncertainty. “There is a strong pipeline,” 2011. Shipments from the country were also expected to fall Moves to focus on core businesses are nothing new, he says. “Miners are increasingly unwilling to sit out the to 479m tons, from March’s estimate of 493m. Slower growth according to Abby Ghobadian, Professor of Leadership volatility and are prepared to act opportunistically and in China was seen as the main contributor to the decline. Studies at Henley Business School. He cites the example strategically. Robust long-term demand fundamentals and According to a briefing published by Legal & General of Anglo American which, in 2009, created a new strong balance sheets will drive deal activity through 2012.” Investment Management (LGIM) earlier this year, growth group structure arched across seven key commodities As Downham observes, the logic underpinning the in these countries has been driven by capital investment, businesses — namely platinum, copper, nickel, proposed Glencore-Xstrata merger arguably says little about fuelled by a high level of savings at home. As these economies metallurgical coal, iron, thermal coal and diamonds. In the factors driving deals elsewhere in the sector. “It’s a mature and domestic consumption rises, investment will fall tandem with the group restructuring, Anglo set about unique transaction with characteristics that are unlikely to be back, slowing the rate of growth. This trend will have major a US$3.3b divestment program that saw the company replicated in other deals and also brings together a company implications for commodities suppliers. exiting its paper and packaging business and selling a with significant marketing activities with a major diversified As LGIM strategist Brian Coulton observed: “The big range of mining assets.Getty Images/Flickr/jjguisado producer,” he says. “I don’t think we’ll know for some time change over the next 10 years will be a sharp decline in So how are the diversified mining giants defining which whether the deal will have a wider impact on the thinking of investment growth. In the last decade, Chinese and Indian assets are core and non-core? “The big issue is scalability,” mining and metals companies.” consumers have foregone a rising share of income to fund says Downham. “If you look at recent announcements, Of more immediate concern is the state of the global growth. But, in the next decade, this pattern is likely to both BHP Billiton and Rio Tinto have put their diamond economy and the perennial issue of securing sources of be reversed. If the last decade was the story of BRICS as operations up for strategic review, neither of which are supply. On the buy side, volatile markets and depressed producers, the next decade will be the story of BRICS as considered to have the same scalability as, say, copper share prices are allowing mining companies to make consumers. The effects will be felt across the globe.” or iron ore.” Capital Insights from the Transaction Advisory Services practice at Ernst & Young 11
  • 7. Securing sources of supply in the current climate is imperative, especially in an industry where diminishing resources is a long-term issue. Establishing 206 deals US$8b 306 deals US$34b Viewpoint synergies with other companies can also help to cut costs. 388 deals US$64b 436 deals US$44b 183 deals LGIM’s Brian Coulton explores how 1,047 deals 1,008 deals US$12b 903 deals US$60b US$162b 555 deals investment trends in China could point 470 deals 2012* US$211b US$69b Scaling up and synergies 919 deals 1,123 US$55b Population growth is also having an impact on the market. to a slowing rate of long-term growth US$126b deals The big players in the mining industry have grown through “Increased population and urbanization means that there US$113b 2012 acquisition. In the current climate, it is imperative for an are greater demands on arable farmers to supply produce to 2009 industry that is faced with the long-term issue of diminishing growing markets,” says Downham. “That in turn increases C 2009 2007 resources to secure sources of supply. 2007 2011 demand for potash.” This is evident in Canada-based Potash hina’s leaders tightened the country’s monetary policy in 2011 2011 2008 It’s a complex market. On one hand, the “junior players” 2008 Corp’s Q2 results, in which it cites “accelerating demand” as in response to inflationary concerns, and this has since been 2010 2010 offer new sources of supply. On the other, much of the focus a key driver for a “gross margin of US$1.2b for the quarter, accompanied, to some degree, by a tightening of fiscal policy, is on projects that are already up and running. “Mining [Potash Corp’s] third-best quarterly total.” leading to lower investment in infrastructure. H1 companies want to grow,” says Williamson. “Good greenfield Meanwhile, despite concerns about lower demand from However, while spending on infrastructure is likely to rebound, this 1 g *H et * acquisitions aren’t always easy to come by so there is a emerging markets, copper, coal and iron ore assets remain could well be offset by what is happening in the real estate sector. At the n ark Metals and mining M&A deals You strong focus on Private that are already producing.” assets equity-funded metals and mining sought after. Indeed, in value terms, coal was the most moment, house-building numbers still look strong — but this is because erm M&A deals (volume and value) And if lack of scalability drives divestment, the potential targeted commodity in 2011, accounting for deals totaling of projects that are already under way. In the future, the likelihood is that t& (volume and value) 2007-2012* erg 2007-2012 rns to scale up is a key factor in acquisition strategy. “Scalability US$41.4b, according to figures compiled by Ernst & Young. we will see a fall in real estate growth. m E is top of the list for most companies,” says Downham. This has clear implications rce: rce: He cites the example of Rio Tinto’s acquisition of the The financial conundrum for providers of raw materials. Sou Sou Key Riversdale coal asset, which specializes in Africa, for Economic uncertainty in the mature markets and slower Lower growth in infrastructure Lower growth in around US$1.1b in June 2011. Rio Tinto’s Chief Executive growth elsewhere are already affecting the ability of mining and real estate will have Value infrastructure in Tom Albanese said of the deal that it reinforced a strategy companies to raise cash through debt or equity. It is, says an impact on demand for Peter Williamson sees geography as a factor. of buying long-life competitive businesses with growth Christian Schaffalitzky, CEO of mineral exploration company materials. As will the longer- China will have an “Businesses isolated in a particular geography may potential. “Rio Tinto saw it as a scalable investment Eurasia Mining, an issue that is particularly acute in the term rebalancing of China’s impact on demand be sales targets as they are hard to integrate with where it had a unique ability to grow a major coal operation,” “junior” segment of the industry, characterized by pre- economy, which will see a for materials the rest of the business.” says Downham. revenue stage projects, often financed by venture capital. greater emphasis on services Optimizing the portfolio offers more than an As industry costs rise and metal prices fall, the potential “I have never seen things quite so tough for companies and less on manufacturing. Indeed, although it’s a long way off, the opportunity to raise capital from the sale. For instance, for synergies is also hugely important for businesses that seeking to raise finance,” he says. “Nobody knows what is Chinese economy will ultimately come to resemble Britain’s. Anglo American’s restructuring was intended to create a are assessing acquisition targets. This ties in with a renewed going to happen, so everyone is sitting on their hands.” All this needs to be put into perspective. China’s economy is bigger more responsive organization where decisions could be focus on core business strategies that enable miners to strip As Downham sees it, mining company balance sheets than it was a few years ago. So even with a slowing growth rate, it will taken quickly and more effectively. Downham says efficient out costs by sharing systems and management teams. are indeed strong after a period of deleveraging, but there continue to be the major center of demand for mining companies. use of management time is a key theme. “There is a skills Any acquisition strategy aimed at establishing synergies is a reluctance to draw internal resources or risk their credit However, while the markets are pricing in the impact of decelerating shortage across the sector,” he says. “So, it makes sense with an existing business will be tailored to suit the market ratings by borrowing large amounts. Meanwhile, volatile growth, there may still be some way to go in that process. to focus your management talent on core businesses.” position of the companies in question. But, says Downham, share prices have made it more difficult for businesses to However, there is a potential problem. there is particular fund deals through equity. As Ernst & Young’s Mergers, Brian Coulton is Emerging Markets Strategist at Companies seeking to optimize portfolios in interest in a number of acquisitions and capital raising in mining and metals — 2011 Legal & General Investment Management (LGIM) the current climate face a volatile market. key mining sectors. trends, 2012 outlook report observes, IPOs were down 18% Valuations are relatively low and securing A focus on core assets “At the moment, with in 2011. This year, the outlook is similarly bleak. a good price may not be easy. Downham and a diversified lending valuations hit so hard And there is a certain amount of frustration as companies tired of buying from the spot markets or relying on overseas suppliers. recommends a measured approach to the market has put metals and post-Fukushima, there see opportunities, but are constrained by limited financing So China is acquiring resources,” says Williamson. sale process, starting with an assessment is a growing interest in options. Schaffalitzky cites the gold sector as an example. China’s burgeoning relationship with raw materials producers has of potential acquirers that could range mining back in the spotlight uranium assets,” he says. “Some valuations are ridiculously low and that creates M&A been well documented. Chinese firms have been taking minority stakes from trade buyers to governments or state- “A number of investors opportunities — but only if you can get the finance.” in listed companies in Africa, Asia and South America. These deals can owned companies and sovereign wealth funds. “Consider are waking up to the fact that nuclear will be a vital part of the Finance issues have affected the size of deals. Returning to often be complex. For instance, in September 2011, a number of Chinese all the options and, where possible, generate competition energy mix in years to come, and that is driving interest.” Rio Tinto’s Riversdale acquisition, Downham says: “It was a deal companies formed a joint venture to take a 15% stake in Brazil’s CBMM for the asset,” he says. And according to Energy Resources of Australia (ERA), that the company could finance without risking its credit rating, for US$1.9b. For sellers, the growing appetite of companies from From there, it’s a question of preparing the asset the world’s fourth-largest uranium producer, while the it added scale and was considered to be accretive — these are emerging markets is providing a new tier of buyers at a time whentl Shutterstock/Katerinar-spb properly. “That tends to be thought of in terms of due short-term has seen the market struggle post-Fukushima, the type of deals we expect from the major diversified miners.” juniors are struggling. diligence, but you should ensure that you fully understand the long-term health of the market is promising. “Despite There are alternatives to the bond and equity markets. Slower deal flow in the mining sector in the first part of 2012 shouldn’t the business and its value. This may mean delaying a sale some slower growth in the medium term, as China transitions Ernst & Young’s report outlines that mining companies undermine an appetite for M&A. While the current economic climate may until market conditions are right,” Downham adds. to an increased reliance on improved power generation will explore new sources of finance, notably sovereign be a cause for concern; a focus on core assets and a diversifying lending While IPO activity is subdued, one option is to float a technology, ERA expects that the country will be one of the wealth funds and private wealth. New buyers are market has put metals and mining back in the spotlight. percentage of the company — around 20% or 30% — and largest uranium consumers within the decade,” it said in its coming into the market, notably players from emerging work toward a full exit over time. half-yearly report. markets. “Companies in countries such as China are getting For further insight, please email Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 13
  • 8. Preserving Raising Investing Calling Optimizing Raising the shots Deutsche Telekom CFO Timotheus Höttges tells us how one of the biggest players in telecommunications is finding new growth financial strategy. Measured by total shareholder return, Deutsche Telekom has been one of the top performers in the telecommunications sector over the last three years. This is primarily due to the reliability of our three-year commitment to all stakeholders — shareholders, debt holders, employees and entrepreneurs within the company.” However, he is under no illusions about the challenges ahead. He says: “This industry is under a lot of pressure. opportunities while facing downturn, competition and regulation There are serious levels of competitiveness and over- capacity. And huge investment is needed for modernization in certain areas — especially in the fixed-line space. We T imes are tough for the telecommunications — servicing 130 million mobile and 33 million fixed-line have to defend our leading market positions while radically industry. The Eurozone crisis has hit most of the customers — is surprisingly upbeat. reducing our cost base. And we need to do all of this in a leading telecommunications firms hard, with many The results from H1 2012 showed that Deutsche regulatory environment that is cutting into our value.” announcing falling profits from their European Telekom stabilized in the first six months, with revenue down Yet, he also sees “huge opportunities for growth.” These operations. Timotheus Höttges is very aware of the threat only 0.9% compared with H1 2011 at €28.8b (US$36.1b). come from what he calls the “new industries” — information and has had to manage risk appropriately. EBITDA remained consistent at €9.2b (US$11.6b) compared and communications technology (ICT), cloud services and ”The Eurozone crisis, uncertainties in international capital with the same period in 2011. A reduction in the company’s mobile data. “We need to seed for the Gigabit society today, markets, greater regulation, intense competition, new market net debt from €43.3b (US$54.3b) in June 2011 to €41b if we want to reap a rich harvest tomorrow,” he says. “Our entrants and the immense speed of innovation within the (US$51.4b) after the first half of 2012 is also a cause for industry is schizophrenic. On the one hand, management industry require rigorous risk management,” says Höttges, understated celebration from the CFO. needs to strictly cut costs and reduce staff to compete in our seated in his office in Bonn, the old West German capital city. The company has also seen growth for its business in traditional telecommunication services. On the other hand, “We permanently monitor the potential impact of risks the US. T-Mobile USA, the subject of an unsuccessful merger we need to invest heavily into new business areas.” on our operations, ranging from foreign exchange, inflation, attempt with AT&T in 2011, raised adjusted EBITDA in H1 debt capital markets and legal issues to regulatory measures 2012 by 6.8% when compared with the same period in 2011. Strength at home and IT risks. We also simulate potential outcomes of the euro Höttges believes that a focus on core markets, continued Deutsche Telekom is, by far, the largest telecommunications crisis. A sober assessment of all relevant risks is a sound investment in innovation and maintaining financial stability company in Germany. And while it already operates in 13 basis for entrepreneurial action,” he says. have enabled the company to weather the storm. very diverse European economies, including Greece, Hungary However, despite this somewhat gloomy backdrop, the “We have improved competitiveness and reduced and Poland, as well as the US, the CFO will not be following CFO of one of Europe’s largest telecommunications firms costs,” he says. “On top of that, we have a balanced other big corporates in adventures into emerging markets.Capital Insights from the Transaction Advisory Services practice at Ernst & Young 15
  • 9. core markets, rather than emerging market adventures, A focus on investment in innovation, strong partnerships, and maintaining financial stability have all helped the company weather the current downturn. This modernization will involve an networks. “The internet is increasingly going mobile, so users embark on what could have been a risky JV with a rival investment of more than US$4b. The will need higher bandwidth wherever they go. High-speed in the first place? company hopes that in the next two years, data networks, in which we have to invest on a continuous “We were in a difficult spot in the UK with T-Mobile and the whole US footprint will be covered by 4G basis, are a prerequisite for this,” says Höttges. the same was true for France Telecom,” says Höttges. “We LTE. In order to improve its position in the The third part of Deutsche Telekom’s investment strategy both felt a JV would be a good solution. It was questioned US market, Deutsche Telekom also agreed is focusing on digital innovations such as the smart grid for whether a German–French partnership could work. But, to swap certain wireless spectrum (which energy supply. “In the past, energy supply was vertical — it since the beginning, there has not been a single dispute. We provides additional network coverage) from went from power plant to distribution network to retailer are honest partners in the UK. We are increasing our market Verizon Wireless. The company envisages this and then to end user. In the future, systems could be more share while realizing synergies at the same time. Consistent deal helping T-Mobile rise from its current place as the fourth- horizontal. There will be people who produce energy and execution requires all parties to pull in the same direction.” largest US wireless company. T-Mobile USA is also embarking then people who consume energy,” says Höttges. “So how So, does the progress made by Everything Everywhere on a large cost-cutting program called Reinvent. could you steer that? In every single household, you have mean that there will be more JVs in the future?tc Getty Images/Bloomberg/Michele Tantussi cla Getty Images/Bloomberg/Jason Alden ca Getty Images/AFP/Oliver Berg “It was wise to focus on our strengths. For us, it makes “This year, we have saved US$700m [in the US] but connection to telecoms — wireless or wired. This information “If you are in a situation where you jointly win, then no sense to try and grow in India or Africa,” Höttges says. we are taking money from the cost base to reinvest in the via our network could be steered at any time and you could this builds trust among the partners. Consequently, there “Our most important market is Germany. Here, we are marketplace and are gaining momentum,” says Höttges. know exactly how much consumption you have.” are other opportunities. We are, by far, the biggest buyer of leading in almost every category.” Höttges realizes that investing in an uncertain future is hardware and handset equipment in Europe. That is why last The company invested more than €3.6b (US$4.5b) in Evolve or die risky, but the firm cannot afford to stay static. year we started our procurement JV, named BUYIN, with a Germany in the last year — a good proportion going into 4G As well as concentrating on core territories for growth, “If you do not invest in innovative ideas today, you will not targeted annual run rate of €1.3b (US$1.6b) in combined LTE (long-term evolution, the fastest high-speed technology for Höttges understands that the telecommunications industry be rewarded in terms of growth in new markets tomorrow,” savings,” says Höttges. wireless services). “By the end of 2012, all ‘white spots’ (areas needs to invest in the future. Fixed-line phones have been he says. “We need to take risks. There will be ideas that we In July, Deutsche Telekom also went into partnership currently uncovered) in Germany will be covered by 4G LTE.” replaced by mobiles, which are themselves being usurped are pursuing which will die over time. But if we don’t try, we with Mastercard to produce products that enable consumers by smartphones — and, in terms of data, the world is now will stay in the classical access business that is declining.” to use their mobiles as a secure payment method. Höttges Stateside success looking to the cloud. In order to achieve these investment goals, the CFO realizes that using others’ expertise will be beneficial. One country outside Europe where Deutsche Telekom is There are three core areas into which Deutsche Telekom has implemented a strategy that combines innovative “We cannot invent new products alone,” he says. “Mobile investing money is the US. After the failed merger with AT&T is investing — cloud services, mobile internet and new digital partnerships and financial prudence. internet services such as Skype and other applications make last year, Höttges reveals that the company will now look to innovations. “We believe it is about creating an image of it possible to buy content under more attractive conditions. grow the business. innovation and generating a future for the 230,000 people Collaborate to innovate If we think we can bind customers to us in the long term with “It is always right to continuously improve your in our organization,” says the CFO. Competition and the speed of technological advance unfriendly price models, we’re wrong. Telecommunications operational business activities,” says Höttges, who does not Cloud computing services are on the rise. In Germany mean that standing alone is not an option in the companies should actively offer these kinds of products to rule out structural changes, “if they improve the business.” alone, market forecasts from Deutsche Telekom show an telecommunications industry. their customers to prevent cannibalization.” As far as the merger with AT&T is concerned, the CFO increase in expenditure on the cloud from €1.9b (US$2.4b) A clear example of the significance of collaboration is However, Deutsche Telekom is not just teaming up with has consigned the deal to history. “We believed that we had a today to €10.7b (US$13.4b) in 2016. “There has been a Deutsche Telekom’s joint venture (JV) with France Telecom large corporates such as France Telecom and Mastercard. It ‘win-win’ deal for everyone,” he says. “Unfortunately, it wasn’t huge uptake and we want to gain our portion,” says the CFO. in the UK, which has created Everything Everywhere. The JV, is also looking to new businesses that can help it advance. approved. We had to restart, which wasn’t easy. Our first and “Many larger corporates are using our cloud services but we which was formed in 2010, has proved successful for both Recent deals have included a strategic partnership with most important task has been to regain competitiveness in also want to bring them into the SME and consumer space.” partners. Figures from Q2 this year show that Everything mobile security firm Lookout. the US market. To that end, we have decided to modernize Deutsche Telekom will also be looking at investing in Everywhere climbed 3.4% in revenue year-on-year, more “We need to invest in these businesses,” says Höttges. infrastructure toward 4G LTE.” mobile internet. Investment will be concentrated in upgrading than double the growth in the final quarter of 2011. But why “This is the new world. These are agile players, growing at Deutsche Bundespost Deutsche Telekom launches Deutsche Telekom obtains Deutsche Telekom takes Telekom becomes a public T-Venture, its venture majority ownership of Hungarian over US mobile phone stock company and is renamed capital division. company Matav Hungarian service providers VoiceStream Deutsche Telekom AG. Telecommunications. and Powertel. 1995 1996 1997 2000 2000 2001 2001 IPO: Deutsche Telekom (DT) Deutsche Telekom buys 51% stake in Deutsche Telekom takes over Debis shares traded for first time. Slovenske Telekomunikacie from the Systemhaus, a German IT services Slovakian Ministry for Transport. company, from DaimlerChrysler. Capital Insights from the Transaction Advisory Services practice at Ernst & Young 17
  • 10. standardization in IT, Deutsche Telekom’s CFO found the In order to drive The CFO best way was to cut back spending and to limit resources. He Timotheus Höttges realised that the more money he gave IT, the more complex IT became. Age: 50 Appointed CFO at Deutsche Telekom: 2009 Deutsche Telekom Educated: University of Cologne speeds you cannot imagine. We cannot build everything on Höttges. “Our company is dependent on IT and, therefore, a better to deleverage further. Founded: 1995 Previous positions: Before becoming CFO, our own in a vertical way, it’s a lateral world and therefore lot of savings are dependent on IT.” But, with the break-up fee from Timotheus Höttges was the group board of we have to be open. This is easier said than done. How does he intend to make the AT&T deal, we reduced our Employees: 233,000 management member responsible for the “For example, in our strategic partnership with Lookout, these savings? His answer is simple. debts by €2.2b (US$2.8b).” company’s T-Home unit. He joined the company Countries: 50+ we could not have created the security product on our own. “The mistake I made as CFO in the past was that I gave IT When it comes to equity, in 2000 as MD, finance and consulting, of T-Mobile Meanwhile, there are others who understand parts of the more money to push standardization. However, the lesson I Höttges is adamant that a Market capitalization: €40.3b Deutschland. Prior to this, he was a member of internet better or differently than we do, so we need to learnt is the more money you give IT, the more complex your stable, long-term strategy is (US$51.6b) (as of 23 August 2012) the extended management board responsible for become exclusive partners with them.” IT gets. The best way to drive standardization is to cut back vital for the investors. controlling, corporate planning and mergers and spending and limit resources. The lack of resources drives “After 2008, short-term acquisitions at VIAG Group in Munich. As project Saving for the future people into more standardization.” gain was not the play for us,” says Höttges. “We believe that “Europe manager, he played a central role in the merger of VIAG and VEBA to form E.ON. Yet this investment and these partnerships can only thrive if being reliable is valuable and we have a clear stakeholder lags behind there are solid financial foundations. And the CFO has been Capital complexities approach in equity and capital allocation.” in terms of building them during his tenure at the company. While the company has cut costs through the S4S program In 2010, the company committed to paying its digitalization “If you want to invest more, you have to save for it,” says and is looking to invest €8—€9b (US$10b—US$11.3b) a year shareholders a dividend of at least €0.70 (US$0.9) per share due to regulation,” says Höttges. “After more than a decade Höttges. “In our private lives, we seem to understand this. in the aforementioned projects, the CFO still needs to service for the following three years. It has kept that promise. of regulation, we now have intense price competition. In most But in business, that doesn’t appear to be the case.” To that a debt burden which stands at around €41b (US$51.4b). “My role is to do what is right for all stakeholders. This markets, it is time to release the former incumbents from end, the company implemented the ‘Save4Service’ (S4S) However, he feels that the debt is manageable as Deutsche means that we have to consider the needs of the debt capital regulation and to introduce symmetrical competition rules program in 2006. Since then, S4S has seen more than €10b Telekom is well covered with a broad range of instruments. market as well as the needs of our employees. And, of for all players. At the same time, regulators should foster (US$12.6b) of cost savings across the business “There is absolutely no need for us to divest assets to course, the company’s investment needs. Our shareholders infrastructure competition and create incentives to invest However, in terms of net savings, the figure is smaller. raise the money as we have unrestricted access to capital need to be happy in our transformations,” says Höttges. “In into network infrastructure. In Germany alone, to build an “Most of the money is reinvested into the business,” says markets,” he says. “The corridors for our balance sheet ratios the past few years, we have changed our shareholder base entire fiber network to the home, the investment would be Höttges. He believes that this reinvestment strategy is “good are well known, they are accepted and they have not changed tremendously — 70% of our investors are now long-term €60b—80b (US$75b—US$100b). But if you don’t know what motivation for teams working on the projects. They are not for many years — this makes us a predictable and trustworthy value investors. The short-term activists are out. We have a a product’s price will be in two years, how can you invest?” just doing the job to improve short-term profitability; they issuer of debt. Undisputed access to debt capital markets sustainable long-term shareholder base. But there seems to be hope. “The recent change in the are doing it to keep up long-term competitiveness.” is a prerequisite for our company. Our additional liquidity “These people rely on us keeping our policy on dividends regulatory environment announced by Neelie Kroes, Vice So in terms of S4S, where does the CFO see further reserves of a minimum 24 months being financed with no and on the debt side. We have a clear strategy toward capital President of the European Commission, sounds positive. We capital optimization? need to access capital markets remain untouched, despite allocation — a commitment for a certain dividend yield. welcome this change. But, of course, we have to wait for the “Process standardization is the name of the game,” the crisis. This helps us to ensure financing and reduces our Investors aren’t worried about their investments. It has measures on the European and national level to implement says Höttges. “To that end, Deutsche Telekom is looking at refinancing cost.” worked out well for them and for us.“ this new regulatory policy,” says Höttges. optimizing its Enterprise Resource Planning (ERP) systems. Deutsche Telekom enjoys favorable refinancing rates. The CFO remains optimistic about Deutsche Telekom’s From hire to retire, from order to cash, from buy to scrap: An indication of this was shown when the company issued Overruled future and believes that the combination of efficiency and we are trying to standardize nearly every process.” a US$2b bond offering in February 2012. A 5-year bond The CFO has financially stabilized the business through the innovative thinking will reap rewards. Another area in which the CFO is looking to make savings was set at a 2.25% coupon while a US$1b 30-year bond was current crisis. But, according to Höttges, one major hurdle “Risk management, strict cost discipline and the courage is information technology (IT). “Outsourcing of IT is not issued with a 4.875% coupon. stands in the way of effective investment in the European to drive innovation have helped us get through the crisis,” rocket science. But integrating all different IT units while “We are refinancing at a significantly lower cost telecommunications market — and that is overregulation. says the CFO. “However, at the same time, we have told a keeping the company up and running and reducing IT cost by than many governments,” says Höttges. “We don’t want He believes that politicians are taking away the incentives solid story to our investors. And this helps them. It is reliable, €1b (US$1.3b) at the same time is creating complexity,” says additional debts and, in this environment, it may have been for investment. maybe even boring. But, right now, boring has its value.”Deutsche Telekom becomes Deutsche Telekom takes over Timotheus Höttgesmajority shareholder in HT — wireless carrier SunCom Wireless, appointed as CFO ofCroatia Telecom, with the Croatian a wireless operator in the Caribbean the group.Government retaining a 49% stake. and south-east USA, for US$2.8b.2001 2006 2008 2008 2009 2010 René Obermann appointed Deutsche Telekom acquires 25% stake Deutsche Telekom’s UK brand T-Mobile merges as CEO of the group. in Greek telecom provider OTE. Raises with Orange UK to create new telecommunications its stake to 40% in the following years. company Everything Everywhere.Capital Insights from the Transaction Advisory Services practice at Ernst & Young 19
  • 11. Raising One of the key issues in Europe is that borrowing from banks is still the preferredcapital raising option. Companies need to explore bond issues, private placements and new funding vehicles to meet their needs. Withdrawal symptoms if the renewing banks are prepared to take up securities market issuance outpaced the loan market. As banks back away from cross-border lending, we look at the the slack being left by exiting banks.” According to Dealogic data, 52% of the €467b (US$586b) alternative borrowing opportunities that are coming to market A recent successful syndicated loan was the cross-border loan to Formula One. of new European corporate funding was via bonds. This compares with just 29% for 2011, the average rate since Its US$2.2b recapitalization in April was the euro’s introduction. significantly oversubscribed in the US. Large companies can today borrow at unprecedentedly T he evidence of banks retreating from abroad and medium-sized enterprises, as well as But the process may not be so easy low coupons and for unusually long maturities. British beer running home is growing. Figures from the Bank firms located in stressed countries and, in for others. “To raise money from the giant SAB Miller’s US$7b bond, priced in January, was the for International Settlements show that, in Q4 particular, countries under EU/IMF programs international markets today, you need to be largest US bond sale since 2010. Issued in four tranches, the 2011, banks heavily cut global lending, with those — remain more vulnerable to restrictions in extremely well organized in terms of your bond has maturities ranging from three years (with a coupon in the Eurozone slashing lending by US$84b. the credit supply.” business plan, your due diligence and credit of 1.85%) to 30 years (at 4.95%). Banks’ cross-border exposure fell US$799b to US$30.3t risks,” Middleton says. “Would-be borrowers Big bonds issued this year include British American in that period. The largest fall in lending was to developed The big squeeze need to work much more closely with their Tobacco vehicle BAT International Finance’s US$2b note in nations — down US$626b. Lending to developed economies Changes in finance cost and availability, would-be funders.” May, while oil-exploration company Inmet Mining Corp issued and emerging Europe fell US$77b and US$14b respectively. especially in widely syndicated lending One of the key issues in Europe is that US$1.5b the same month. In June, Brazil’s Embraer issued a Widespread deleveraging in Europe is reducing bank facilities where these types of loans are borrowing from local or multinational banks US$500m 10-year US bond yielding 5.15%. loan availability, as well as the distribution. In July, decreasing fast, are becoming a growing has been the preferred way to raise capital. Chris Lowe, Partner in Ernst & Young UK Capital and Ernst & Young’s Eurozone Financial Services Forecast issue. Bloomberg data shows global According to Germany’s Bundesbank, just Debt Advisory Group, says SMEs and above should consider predicted: “The Eurozone’s banks will shrink their balance syndicated loans fell by almost a third in H1 9% of corporate credit in the Eurozone bond issues, whether they are privately owned, publicly sheets by €1.6t (US$2t) in 2012, as a result of disposals 2012 compared with H1 2011, reaching comes from debt markets, compared with listed or backed by private equity. of non-core assets and a fall in lending activity. only US$1.3t. In the EMEA region, lending 64% in the US. “It is now expected that corporate loans will contract by fell by 38.3% in H1 2012 to US$363b, So, with banks greatly restricting Going private 4.8% this year — representing the fastest pace of contraction compared with H1 2011’s US$509b. their cross-border lending, what are the The US private placement market has proved very liquid, for loans on record for the Eurozone.” “It requires hard work to keep a syndicate alternatives for those wishing to borrow? even when public markets closed. In a private placement, It could get worse. The International Monetary Fund’s together when a borrower is looking to a company can typically source funding directly from (IMF) Global Financial Stability Report for 2012 states that: refinance,” says Dougald Middleton, A strong bond investors in return for yield. Investors are usually large “…if the euro area crisis re-escalates, there is a risk that the Ernst & Young UK Head of Lead Advisory Global investment-grade bond issuance’s pension funds or asset managers. Deals don’t need to be deleveraging process could gather momentum and become Services. However, he adds that there growth in value underlines the emergence registered or listed on an exchange. Getty Images/Mint Images/Frans Lanting a disorderly rush for the exits.” may be room for optimism. “The situation of alternatives to cross-border bank lending. Private bond benefits include flexible terms, maturities The report warned corporates: “Those segments is eminently manageable if banks and European corporates tapped more bonds that can be set from 3 to 15 years and — unlike the public that are most dependent on bank funding — small and borrowers work closely together, and than loans in H1 2012 — the first time bond market — there is no need for the company to provideCapital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 21
  • 12. When it comes to evaluating borrowing needs,cost should not be the focus. Borrowers need to assess factors such as deliverability as well as flexibility. The structure and convenants need to be right for the business. Discovering a public rating (private ratings may be needed), although pricing in both markets are fairly equal. The private placement market has also stayed open for business in hard times. “The advantages of a private placement issue are clear,” Mitsui each revealed 24% increases. This growth means that overseas loans rose to 19% of loans at Mitsubishi, 16% at Sumitomo Mitsui and 13% at Mizuho. Fitch expects the banks to continue hunting growth by increasing their overseas exposure, most likely through direct lending. new sources says Lowe. “From a borrower’s perspective, there is the In addition, Middleton believes that markets are As traditional lenders increasingly retrench, a host of new ability to build a direct relationship with providers of capital. With a direct relationship, borrowers can negotiate more continually evolving to fill the funding gaps. “The availability of long-term, low-cost funds from secondary banking, non- players have entered the fray to fill the gap in the market bespoke terms. Typically, buyers are not intending to trade bank financial institutions, peer-to-peer lending and other T out, but to hold their bonds.” less traditional sources also creates an excellent opportunity he retrenchment by banks has left a gap that Many of these loans offer longer-term financing than Private placement has grown significantly as the for corporate borrowers.” is being filled by debt funds. For UK companies banks and can be more flexible. Eurozone crisis leaves many firms unable to secure bank Many organizations and funds are considering stepping looking to borrow, fund manager M&G has a UK “Banks are often rigid in terms of credit,” says Fobel. financing. “We have completed a number of refinancings in in. “AIG is opening an office in London. Insurance firm Companies Financing Fund. Mark Hutchinson, “The advantage of this type of fund is that it is more flexible the past 12 months in which borrowers have diversified their Metropolitan Life and financial services institution Pricoa M&G’s Head of Alternative Credit, says the downsizing of in terms of covenants, delivery and duration.” lending relationships among this newly reopened source of are active, and GSO, the credit arm of private equity banks was a key reason behind the fund, which has already The challenge for companies is awareness. European capital,” says Lowe. “Private placement investors are looking house Blackstone, has US$46b under management — mostly lent £830m (US$1.3b) to firms such as hauliers Eddie corporates are used to dealing with banks and are, for more yields. Gilts and other government yields are down; CLOs (collateralized loan obligations) — but a significant Stobart and developer Taylor Wimpey. understandably, wary of new funding streams. they want a higher return and are prepared to take lower portion is direct lending,” says Lowe. (See Discovering new “We felt it was necessary for UK companies to “When the board sees bank financing of 100–150 basis quality credit for a higher return.” sources, right, for more.) have access to long-term finance,” says Hutchinson. points less than the fund, they will often go with this option,” Middleton says firms should seek investors who know “International banks are withdrawing to their own says Hutchinson. “However, decision-makers may forget that about the company, and about the sectors in which it is Joining the crowd borders. Companies need to find other forms of funding.” the bank loan is for 3 to 4 years and will ultimately have to active. “This plays to the strengths of the larger US These types of funds may be here to stay, but other options Additionally, Hutchinson doesn’t rule out the possibility of be refinanced 18 months before the maturity date. Whereas private placement investors,” he says. “Unlike some other such as crowd-funding and peer-to-peer lending are on the establishing a European fund. our loan is for 7 to 10 years and, in that time, you may have investors, they like industrial companies, businesses they rise. Peer-to-peer lending links lenders directly to borrowers. London-based investment company Tenax Capital has three banks refinancing with all the fees that are associated can understand, touch and feel. Industrial companies meet The arrival of John Mack, ex-CEO of Morgan Stanley at peer- raised a €250m (US$313m) fund which makes loans to with those.” those criteria.” to-peer company Lending Club, is widely interpreted as a small and medium-sized businesses across Western Europe. Fobel believes funds should reassure borrowers. “If In February, Glasgow-based Weir raised US$1b in the serious enhancement of its credibility. “With the banks in retreat, the Credit Opportunities Fund businesses fall into difficulty, they aren’t sure what funds will US over 7, 10 and 11 years to finance the purchase of a US Although a largely consumer-focused avenue, some peer- can and has stepped into their role, providing a vital source do. It is up to fund managers to demonstrate that they can fracking technology business. And French chemical company to-peer houses are focussing on businesses. For example, of lending,” says Andrey Panna, Tenax’s Portfolio Manager. deliver what they promise in terms of flexibility and funding.” Air Liquide Finance raised US$700m in a US private Funding Circle matches private investors with businesses British multinational asset management company There seems to be no set definition for companies placement in June. The company said that the financing will looking for finance, and has funded over £30m-worth Schroders is also evaluating whether to provide debt who would qualify for loans, but a strong business plan “contribute to the development of the group’s business in (US$47m) of loans to 703 companies in the last two years. finance to property owners and developers. A recent is essential. Panna says: “Tenax is looking for the US and enable it to continue to grow over the long term.” study by De Montfort University on UK banks’ lending fundamentally good companies with strong assets “There needs to be a minimum size of around £30m Flexible friends intentions found that only 44% expected to raise loans and good business models.” to £40m (US$47m to US$63m) for private placements. So, how should corporates evaluate borrowing needs? Lowe to the property sector in 2012. “We don’t differentiate on companies,” says Hutchinson. And, more generally, if companies are in a position to go, believes that price shouldn’t be the only issue. Deliverability Duncan Owen, Head of Property Funds at Schroders, “There are no set qualifications — we do our own due they should go now,” says Lowe. “All-in coupons are at an and flexibility have gained in importance as vendors see says the fund “would provide traditional senior loans.” diligence. If the company fits with our criteria and the all-time low, and markets are very uncertain looking ahead. certainty that a bidder can follow through on a deal as “We feel there is a dearth of lending to the market and investors have an appetite, we then make our decision.” Borrowers from just about any respected geography and any increasingly critical. Schroders is considering a debt fund. Although, at the “Our main focus on lending would be to SMEs, with a viable industry sector can tap the market.” “Deliverability is the ability to get funds to the lender,” moment, we are reviewing all possibilities.” focus on senior lending against good-quality assets,” saysGetty Images/Mint Images/Frans Lanting says Lowe. “Where there is a shoot-out between potential Anthony Fobel, Head of Private Lending at London-based Owen. “This is fixed income lending against property and New avenues providers, the decisive factor is normally who can provide fund manager BlueBay Asset Management LLP, believes gives investors a steady income stream.” Strong multinationals have access to bond markets and others the funds at the lowest cost. As an advisor, we think that’s these types of funds will increase. Fund managers agree that more non-bank loans will can tap private placements, but where does this leave the important, but flexibility is also vital. The structure of a “Many companies can’t get the credit they need for develop as banks retrench further and that there will be remainder of mid-cap companies who need to raise capital? facility, and its covenants, should be right for the business growth. In their simplest form, debt funds are a replacement more financing along the US model. “In Europe, banks fund Non-European banks are increasing activity in the that is doing the borrowing. Whichever method you are to fill the gap left by banks retrenching,” he says. “There are 70% to 30% against capital markets. In the US, it is more like region as cross-border demand grows. Fitch Ratings says using, you need to ask yourself whether the facility and its a number of such funds now available and we believe that 80% capital markets and 20% banks,” says M&G’s Hutchinson. Japanese banks have benefited greatly from European bank structure meet the borrower’s needs.” these will grow. The idea is to provide finance to SMEs at “There needs to be a shift in terms of education for banks deleveraging. Mitsubishi UFJ has reported a 27% increase the senior end of the structure. More precisely, event-driven in marketing alternative forms of funding to mid-sized and in its overseas loan balance, while Mizuho and Sumitomo For further insight, please email lending — for growth and acquisitions.” the larger SMEs.” Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 23
  • 13. Investing Eastern Poland promise Population 38.2m (2011) FDI US$15.1b (2011) seeing a five-year value high of US$23b. However, in line GDP US$513b (2011) with the global M&A slowdown, Q2 2012 saw deal values down by over 50% compared with Q1 2011, despite deal GDP growth 4.4% (2011) volume staying the same at 25. Last year, large deals were happening, particularly in the telecoms sector where Source: CIA World Factbook Polkomtel was acquired by Spartan Capital Holdings. This deal was Europe’s largest leveraged buyout in 2011, valued at PLN18.1b (US$5.5b). Deal drivers Brendan O’Mahony, Managing Partner in Ernst & Young’s A key to Poland’s success is its large internal market and Transaction Advisory Services in Poland, sees the growth in growing consumer culture. According to the Polish statistical the mid-market as the new direction for M&A in Poland. agency, retail sales grew at an annual rate of 6.9% in July. “Since Polkomtel, there have not been many large deals. Poland has also developed a qualified and knowledge-rich But M&A activity is not dependent upon big deals. There workforce, backed by a positive business environment, low is a growing middle market that has substantial potential taxes and a transparent legal system. In the Ernst & Young for investment by Polish entrepreneurs and for foreign M&A Maturity Index, it scored 92% in the demographics investors,” he says. category, which looks at the percentage of the population aged between 15 and 64. Call to consumers However, deal-makers need to consider other issues. Multimedia and consumer sectors will present opportunities Poland scored poorly in the Maturity Index on areas such as for acquirers and investors alike, according to O’Mahony. property registration and enforcement of contracts. It also “I think we will continue to see M&A in consumer goods, suffers from high levels of bureaucracy. because of the strong consumer demand,” he says. “Health O’Mahony also warns that acquisitions can be costly. care is another up-and-coming sector. It’s an area in need of “The Polish stock market has given some generous valuations reform and that presents opportunities.” on some mid-market companies,” he says. “This raised Recent deals in the consumer space have included pricing expectations, which we have seen in some consumer Three countries in Central and Eastern Europe in particular offer French financial institution AXA acquiring confectionary company Delic-Pol in June. In March, Czech-based PE house market deals in recent months.” He suggests a commonsense approach mixed with solid interesting deal-making opportunities. Capital Insights explores Penta bought a 39.6% stake in NFI Empik Media & Fashion due diligence when it comes to deal-making. “Ensure you have the transaction climate in Poland, Ukraine and the Czech Republic for US$134m. good advice and know the market. And be aware that, with The IT and computing sector also has great potential, due diligence, sometimes the depth of mid-market data is not W hile the Eurozone crisis brings negative Poland according to Wojciech Pytel, a member of Polkomtel’s the same as you would expect in other parts of Europe.” growth to much of Southern Europe, there Poland is the fastest-growing economy in CEE and the management board. “The internet market in Poland Polkomtel’s Pytel says the secret to deal-making in Poland is room for optimism further east. Several second most attractive destination for foreign direct is significantly bigger than in other EU countries. is understanding the country. “There is a need for advice countries in the Central and Eastern Europe investment (FDI) in Europe, according to Ernst & Young’s Approximately 40% of inhabitants live outside of big cities, on local laws,” he says. “The demographics and customer (CEE) region have withstood the crisis well. They are European attractiveness survey 2012. It attracted 3% of all with limited alternatives for internet access,” he says. segments need to be understood. From the customer continuing to attract deal-makers and investors who seek to European FDI last year, bettered only by Germany and Russia. perspective, society is still cost sensitive, but overall maximize returns through low labor costs and high levels of Poland has the largest population of any former Private partners disposable income is growing, with high future potential.” new technology skills. Ernst & Young’s M&A Maturity Index, communist EU Member State and is fully committed to Poland’s privatization program offers profitable Alamy/Gregory Wrona tr iStockphoto/Pingebat published in July, identified the Czech Republic, Poland and economic reform. It outperformed all other OECD countries The Government regards the completion of its privatization Top three Polish M&A deals (2012) Ukraine as the region’s strongest destinations. during the global economic crisis. The OECD expects growth program and the adoption of public private partnerships (PPPs) Completion Target Buyer Deal value Their move to market economies is a continuing of 2.75% to 3% in 2012 and 2013. Ernst & Young predicts as fundamental to the development of its capital markets. JAN process involving privatization and the development of that the rate will reach 4% in 2014. It is seeking to generate €40b to €50b (US$50b to Polskie Gornictwo 2012 PGNiG Termika US$1.3b capital markets. These economies are characterized by External investors are recognizing Poland’s potential US$62b) in investment through PPPs and remains committed Naftowe fast-expanding consumer demand that domestic companies as its economy matures. FDI lines have changed from to privatization. “A lot of the main privatization deals have APR often don’t have the capacity to meet fully. labor-intensive processes to knowledge activities, with high been done, but there are discussions over energy, chemicals 2012 Polbank Raiffeisen Bank US$670m Each of these countries can boast that GDP growth, and levels of investment in modern automotive production. and mining, but when and how those will happen is difficult M&A activity — both internal and cross-border — has remained For example, automotive companies Volkswagen and to know,” says O’Mahony. “The Government has already JUN stable despite the global downturn. However, each country Bridgestone were major investors last year. raised 40% of the 2012 privatization target by selling down 2012 TU Europa Talanx/Meiji Yasuda US$430m faces different challenges and offers different opportunities Poland is a strong performer in M&A terms. There shares in certain listed entities. So it doesn’t need large Source: mergermarket as they progress to becoming modern market economies. has been year-on-year growth since 2009, with 2011 transformational deals to meet its privatization targets.” Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 25
  • 14. Czech Republic Ukraine Population 10.5m (2011) Population 45m (2011) FDI US$5.4b (2011) FDI US$7.2b (2011)Czech Republic GDP US$215b (2011) Ukraine GDP US$164b (2011)The Czech Republic is one of CEE’s rapid-growth markets.Growth of 1.7% last year was led by exports, which in the GDP growth 1.7% (2011) The Ernst & Young Rapid-Growth Markets Forecast predicts 3.1% growth in 2012 for Ukraine, down from 5.1% in 2011. GDP growth 5.1% (2011)third quarter of 2011 were some 13.5% above pre-crisis Growth is expected to approach 5% in 2013 and 6% in 2014.levels. Despite this, the Eurozone crisis has damaged the Source: CIA factbook In terms of M&A, Ukraine has recovered from Source: CIA factbook, Ernst & YoungCzech economy. Ernst & Young’s Emerging Markets Center the low of Q3 2011 even though announcedexpects GDP to fall 1.4% this year. run utilities. These have large investment plans, which need volumes fell 49% in Q2 2012, compared with Vladislav Severa, head of Transaction Advisory Services to be financed,” says Severa. “There are plans to upgrade Q1. Deal volumes were 12% lower on the year.for Ernst & Young in Central and South-east Europe, says: the Czech highway network, which may involve PPPs. Announced deal values for Q2 2012 were 39%“The Czech Republic is outperforming many CEE countries, There are also plans to expand nuclear facilities, managed lower quarter-on-quarter and 77% lower on the year.but it is underperforming against Poland. The biggest growth by national electricity company CEZ.” Average deal values, in contrast, were 18% higher comparedsection of the economy is exports. with the previous quarter, at US$86m. after this autumn’s elections and the framework legislation “The EU is still the main export market, but the fastest- Deal drivers In the past 12 months, two cross-border deals stand out. has already been prepared.”growing aspect is the emerging economies such as India and Ernst & Young’s M&A Maturity Index states: “The Czech In December 2011, Russian mining company Mechel bought While the recession hit Ukraine in 2008, “right now weChina. This is encouraging because it reflects the innovation Republic should be an obvious destination for M&A investors, steelmaker DEMZ for US$537m. In March, Glencore acquired are seeing a recovery,” says Litvak. “The economy is growing.taking place in the Czech Republic and the high value added.” and the quality of its potential targets for investment is the grain and oilseed producer CHAO Kolos. This is a country of 45 million people with significant natural Deal activity in the country fell in H1 2012, with 19 most clear sign of its maturity as an M&A market.” It scores resources.” In the M&A Maturity Index, Ukraine performs bestannounced according to mergermarket data, down from 35 well in terms of infrastructure and assets, getting 80% for its Return tickets in socioeconomic factors, scoring 84% for population size andin H2 2011. But brewer Molson Coors’ US$3.5b acquisition railways and 100% for roads. Ukraine’s economy is open to foreign investment via 85% for population demographics.of StarBev in June skewed disclosed values, meaning that H1 Michal Mravinač, director for UK and Ireland operations privatization and M&A, despite not being as developed “Whatever you think the challenges are, the opportunities2012 totals have already surpassed those for all of 2011. for CzechInvest, expects the country to attract more as some in Europe. There are opportunities in consumer here will outweigh them,” says Litvak. “The question for any investment. “In the latest Gartner benchmarking report, the sectors, as well as energy and mining. company or investor is risk tolerance.”Innovation leads the way Czech Republic scored highly on education and IP security, Vladyslav Ostapenko, an Ernst & Young Ukraine Senior The difficulty of doing business in Ukraine is at the top ofTapping consumer demand growth isn’t acquirers’ only route. and favorably on all other indicators, including cost, making Manager, says investment can create high rates of return. the risk factors. Ukraine is ranked 152 out of 183 countriesThe energy and IT sectors offer potential, says Severa. it a desirable location for offshore services, particularly “There are only a few cases where you will hear of a company in the World Bank Doing Business Index, marking it out as “[Energy company] RWE is looking to divest its Czech in IT,” he says. that is growing by less than 25% per year,” he says. “That’s Europe’s most difficult country for trade. To overcome this,gas pipeline subsidiary, Net4Gas. That is such a large deal In Ernst & Young’s M&A Maturity Index, the country a good indicator of the opportunities that exist. I have never Litvak suggests a thorough knowledge of the country’s legalthat it should attract foreign buyers,” he says. scored lowest in the economic and financial category heard of any reputable or large company that, once it entered and economic structures is needed before seeking deals. “It Severa also points to the growth of Brno’s “Silicon Hill” (which looks at GDP size, growth, inflation, equity market Ukraine, has exited. This tells you that they are making is wrong to assume close parallels between Ukraine and other— where university research in IT is beginning to spin off into development and credit availability) and the regulatory significant amounts of money.” CEE countries,” he says. “The way that business is done, thestart-up businesses. This innovative spirit is seen in anti-virus and political category (which observes factors including However, infrastructure needs improving. Given the way the economies function, the legal frameworks — they aresoftware developer AVG, which listed on the New York Stock rule of law, completion formalities, property registration, Government’s fiscal deficit, it cannot fully fund such very different. You need to have extensive risk tolerance.”Exchange in February. “The only way for the Czech economy tax payment, cross-border trading, contract enforcement, projects, so development is likely to involve PPPs. Indeed, However, Litvak also feels that companies need to moveto grow is through innovation,” says Severa. political stability, sovereign debt rating and corruption). While a legal framework for PPPs was agreed by the legislature in fast. “The ‘first-mover’ advantage is huge,” he says. There are no immediate privatization plans, according to its large economy scored 75%, it only scored 20% for its GDP 2011. Sectors needing PPPs include toll roads, sea ports, “If you compare risk and reward in Ukraine to other EUSevera; but there will be calls for public private partnership growth. And while it scored 82% for political stability, it got gas, electricity and water. states, it may provide higher returns. But if you take too much(PPP) investment. “There could be some PPPs with the state- 8% for tax administration ease and 44% for the ability to finish Many privatizations have occurred — including last year’s time to analyze the situation, you can lose that opportunity.” contracts with little interference. US$1.3b buyout of state telecoms provider Ukrtelecom, Top three Czech Republic M&A deals (2012) Investors must note the risks, including with Vienna-based PE firm Epic acquiring 93%. This was one Top three Ukrainian M&A deals (2012) Completion Target Buyer Deal value the koruna currency’s valuation, says of CEE’s largest privatizations in recent years. Completion Target Buyer Deal value Severa. “Investors need to ask themselves Ernst & Young estimates that 70% of Ukraine’s potential JUNE MAR three questions when it comes to Czech privatizations have happened. But one of the largest asset Donbas Fuel and 2012 Starbev Molson Coors US$3.5b 2012 OAO Dniproenergo US$150m deal-making,” he says. “What are the sales — agricultural land — has yet to occur. There are 40m Energy JAN opportunities? Where is the Government hectares of farmland, owned by the Government and private MAR t iStockphoto/Pingebat 2012 LMC Alma Media US$51m seeking investment? And what are the Czech individuals, with a value of up to US$1,500 per hectare. 2012 CHAO Kolos Glencore US$80m public procurement rules? You need to answer “The President is coming to accept the idea of opening AUG these or get solid advice before investing the market for agricultural land sales,” says Ernst & Young JUN 2012 PSJ PPF US$49m in the country. Also, get familiar with the Ukraine Partner Dmitriy Litvak. “Land is the biggest 2012 PJ-SC Ukragno OSTCHEM US$35m* regulatory environment in the sectors where opportunity for privatization. But it is hard to predict Source: mergermarket Source: mergermarket *58.04% stake regulation is relevant.” when it will happen. The ban on land sales could be liftedCapital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 27
  • 15. Jan Krzysztof Bielecki Polish Prime Minister in 1991. Minister for European Integration P oland is the fastest-growing economy in the CEE in the Cabinet of Hanna Suchocka. region. It also continues to perform strongly in From 1993 to 2003, represented terms of deal activity (despite a dip in the first half Poland at the European Bank for of 2012) and foreign direct investment (FDI). To understand its current unique economic standing, one Reconstruction and Development. needs to look back to over two decades ago. A year after Later, CEO of Bank Pekao S.A. the deep shock that our economy received in 1991, due to (now UniCredit Group). Now Head structural economic and political reforms, we experienced our first GDP increase in post-transformation history. of Economic Council to the Polish Since then, despite a few major setbacks in the Prime Minister. global economy, including the bubble and credit crunch crisis, Poland has never been in recession. This demonstrates Polish economic success and is a key factor in our growing importance in Europe today. multinational companies in Europe. To put it simply, FDI to Poland is now looking more for white, than blue collar workers. Growing up Among almost 30 CEE countries that transformed their The privatization project economies in the nineties, only Poland has never come off In the years to come, privatization of the state-owned companies will be the path of growth. We’ve had a clear goal ahead of us — to one of the key drivers of investment inflows to Poland. There are around catch up with “the Western world,” or to come back to where 600 state-owned companies in Poland today. we were in 1937 when the standard of living in Poland was Having said that, the Governments goal is to remain involved comparable to that of Greece. in a dozen or so strategic asset ownerships — mainly in the energy I would dare say a spirit of sporting competitiveness and utilities sectors. For Polish privatization, it is vital that these has been awakened in the nation with the beginning of assets are privatized in the full meaning of this word. We do not the transformation. We want to belong to the “world of consider an acquisition of a state-owned company by another state- the strongest” — so much so, that the success we already owned company, only from a different country, to be a fully effective achieved makes us crave for more. It is a sort of perpetual privatization. And we have been receiving many bids of this kind motion that can be easily observed in the statistics. For 18 in recent years. of the last 20 years, we have experienced faster growth in As far as capital outflows are concerned, the expansion of Polish workforce productivity than the growth in average salary. companies outside of the country is gaining momentum; however, it is still extremely cautious. White collar FDI FDI requires lots of experience, which Polish companies gained by In pole Our motivation and the internal driving force have been investing in the East — mainly, in Ukraine and Russia. We must admit that helped by external factors, such as EU funding and FDI. not all of these investments were successful. Nowadays, this situation Since Poland joined the EU in 2004, the amount is changing and we see large foreign investment projects from Polish of external support for our economy coming from EU companies, helped by the fact that the projects are preceded by reliable position funding and FDI has been more or less equal in terms of financial analysis, while geographic proximity plays a smaller part. capital expenditure. Nowadays, we are seeing a shift in the perception of Poland as an investment destination. In the Back to business beginning of the transformation process, we were perceived Polish companies’ cautious approach to outbound FDI is no coincidence. as a low-cost, and low added-value manufacturing location. Avoiding risk and being cautious — even in fiscal decisions where we have Now, FDI is becoming more and more focused on been conservative — is what Poland has been all about recently. exploring the Polish nations intellectual capital. Today, were Our monetary and fiscal policies have been strict and cautious for seeing numerous outsourcing centers opened in Krakow, years, which is proving to be effective and has positively influenced the l Getty Images/Flickr/4eye Wroclaw, Łódź and many other cities. We are starting current state of the Polish economy. Back to basics practice in business is As Poland’s stature grows as a destination for M&A and investment to attract R&D investments: the Polish Information and what Poland welcomes these days and, to be honest, it is something that in general, Capital Insights hears from former Polish Prime Minister Foreign Investment Agency reports that 45 multinational works in our country. companies currently run R&D centers in Poland, with firms Let us hope it will work for the whole of Europe as well. Jan Krzysztof Bielecki about the country’s remarkable growth over including Samsung, General Electric and IBM. We are also the past two decades and how it plans to stay ahead hoping to become the center of operations for a number of For further insight, please email editor@capitalinsights.infoCapital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 29
  • 16. Investing Sachin Date The PE perspective Dealing with differenceExpanding F or a cross-border deal to succeed, deal-makers need to get to grips with the tangible business staples horizons of financing, due diligence and regulation. However, making deals across borders requires businesses to engage with other, less obvious, cultural factors. And how you manage these could have just as big a bearing on whether your transaction turns out to be a successful one. Cross-border deal levels are rising and the direction of deal flows are changing. According to mergermarket, in Q2 2012 thePrivate equity has gone global over the last ten years as international and value of cross-border M&A rose to its highestlocal firms spot openings in emerging markets. But with greater competition level since Q4 2010 to stand at US$243b. In addition, the volume of outbound M&Afor deals in the BRICS, many are looking further afield for new opportunities activity from emerging markets increased by 64% in Q2 2012 (US$32.2b) from the sameT he last decade has seen a example, in Eastern Europe, Mid Europa These new markets can be challenging. period in 2011 (US$19.7b). dramatic expansion of private Partners has created large health care Intermediary networks and legal and due Europe was the top destination for rapid- equity (PE) beyond the groups through roll-up acquisitions. diligence capabilities are in their early stages, growth markets, accounting for US$28.5b established Western economies There is evidence that PE firms are and corporate governance standards may of deals in H1 2012 — an impressive 87.1%and into emerging markets. In 2003, PE bringing their experience into new markets. be lacking. However, many firms are using up on H1 for emerging markets was An Ernst & Young study of exits in Latin innovative methods of risk mitigation. Yet culture doesn’t figure highly onUS$4.6b. By 2011’s end, funds targeting America demonstrated that EBITDA growth They are harnessing local knowledge deal-makers’ agendas. “Culture in deals israpid-growth economies raised US$38.5b, was the main driver of returns, mirroring via partnerships with regional PE firms generally not looked into and that’s one of theaccording to data from the Emerging Markets similar trends in North America and Europe. and corporates, alongside building reasons why the failure statistics are aroundPrivate Equity Association (EMPEA). Last While openings are developing in local teams. 85%,” says Professor Steven Appelbaum,year, investment in these markets reached many growing economies, competition is A recent example of this includes US PE from the Department of Management atUS$26.9b, or 11% of the global PE total increasing in some larger countries. As firm TPG’s share swap with buyout group Montreal’s Concordia value; in 2002, emerging markets’ PE much as 43% of the total raised for emerging Northstar Pacific in Indonesia. This is borne out by new research frominvestment accounted for just 2.5%. markets funds was destined for China, PE will continue to drive into new the Economist Intelligence Unit (EIU) and PE has sought to capitalize on the while Brazil had 18%. India’s PE market has markets. This expansion provides not only Education First (EF) which has found that aopportunities that these markets present developed fast and there is now a significant new deal opportunities, but also the prospect large number of companies face big culturalas disposable incomes rise. In 2011, for capital overhang (the amount that is waiting of increased levels of capital from investors. challenges when investing capital acrossexample, disposable incomes for Chinese to be invested) in the country. At the same Many PE limited partners are looking for borders. Forty nine percent of firms haveurban residents rose by 14.1%, according to time, some markets are starting to slow new growth sources at a time of stagnation Cultural differences — be they social, corporate or linguistic suffered financially because communicationthe National Bureau of Statistics. Popular down. China’s Q2 2012 GDP growth, at 7.6%, in developed economies. And they have — are not always taken into account in transactions. misunderstandings or problems stood in thesectors for investment among PE firms in was the slowest recorded for three years. a clear appetite for emerging markets. A way of a major cross-border transaction. However, they can have a significant impact on deals. l Getty Images/Stone/Duane Riederemerging markets include consumer-related Greater competition and overheating recent EMPEA study showed that three- An example of how culture can affectareas, such as fast moving consumer goods, fears in the main markets are leading PE quarters of limited partners expected their How can companies manage the culture clash? deals comes from pharmaceutical firm Bayer.retail and food. Yet PE is also getting involved pioneers to seek out new growth sources. commitments to emerging markets’ PE to Despite the company being in the processin financing infrastructure improvements Not only are local and international firms increase in the next two years. As this trend of buying a Chinese medical care company,in some countries, with funds such as Actis branching out into smaller cities in markets grows, PE will become a truly global form Bayer’s Head of Global Business Nigel Sheailhaving raised a specialist infrastructure fund. such as Brazil and China, many are also of investment. was reported by healthcare intelligence As the lifestyles of people in rapid-growth looking to countries with strong growth provider Biopharm Insight as saying culture Sachin Date is the Private Equity Leader for EMEIAmarkets change, health care is becoming fundamentals such as Peru, Colombia, at Ernst & Young. For further insight, please email was one of the challenges as to why thereanother key investment sector for PE. For Indonesia and some African markets. might “not be many deals in China.”Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 31 3 Q2
  • 17. 8% Not at all 33% 35% 54%This figure shows responses tothe question: To what extent canbetter cross-border communications Profit improve Revenue improve significantly improve somewhat 51% 35% improve improve Market share We try to be a local company significantly wherever we are present. Weimprove the following three aspects 7% somewhat significantly(profit, revenue and market share) 8% assimilate the culture, nuances 55% Not at allat your company? Not at all and the way of working.(% respondents) Ravi Kant, Vice Chairman, Tata MotorsSource: Economist improveIntelligence Unit/ Dave Murray, EMEIA Markets somewhat Samy Walleyo, Ernst & Young Partner and Operational and Chile’s Lan Airlines. Murray agrees.Education First Leader, Transaction Advisory Services Transaction Services Markets Leader for Southern Germany, According to Lewis, the “Before you even do the deal, you need to have a culture at Ernst & Young, says that culture is Switzerland and Austria points out that information in a Spaniards and Chileans were put out by the tightly focused briefing beforehand,” he says. “Make sure the team is an aspect deal-makers can’t afford to overlook. “In some deal data room is of limited value in doing cultural due way the British and Finns were running the meetings. experienced and do a pre-transaction review, talking through countries, culture is the number one issue for deal-makers,” diligence. “You should be able to draw some conclusions from To resolve the problem, the Spaniards and Chileans were what the local social and behavioral issues may be.” he says. “There is no point in investing money in a deal if, on management interviews,” he says. “And your sales people given the opportunity to organize meetings. “They ran A clear example of the importance of corporate cultural both sides, there is unwillingness to work together.” could provide some feedback based on data they’ve picked up the meetings very differently,” says Lewis. “They worked understanding comes from Japan’s Takeda Pharmaceutical’s from customers you share with your target company.” from an agenda but allowed more opportunities to US$14b acquisition of Swiss company Nycomed last year. The right networks digress from it.” Takeda recognized from the outset that the companies’ One key cultural issue that firms have to deal with in cross- New approaches While it is not certain that companies will encounter all respective cultures could be fused together successfully. border transactions is getting the right connections. Over Companies across the globe must adapt to new ways of these problems, there are four key ways in which they can Takeda made note of the cultural synergies in its 1 half of the respondents in the EIU/EF survey stated that doing business with new partners. “For example, in many mitigate cultural risk: 2011 annual report, saying: “Nycomed’s corporate culture cross-border collaboration was very important when dealing rapid-growth markets, it takes more time to build trust,” has a distinctive, entrepreneurial ‘can do’ corporate spirit that with external partners, suppliers or outsourcers. says Murray. “You often need more face-to-face meetings. Partner up has underpinned its progress in Europe and emerging markets Murray saw an example of this when working with In China or India, for example, you may need as many as Joint ventures (JVs) and minority stakes are becoming thus far. The ‘can do’ spirit contains common elements with a company bidding for an asset in an African country’s half a dozen face-to-face meetings before the client will increasingly important as companies seek ways of sharing Takeda-ism (integrity = fairness, honesty and perseverance). privatization program. “In this case, what was vitally open up to you.” and mitigating risk in cross-border deals. The cultural and Takeda will work to capitalize on the strengths of the Nycomed 3 important was the ability to understand how the culture Conversely, Asian companies looking to Europe will need financial risks inherent in cross-border deals mean that culture to transform the global organization.” affected the way in which the decision would be taken to modify the way they do deals if they are to get value. As many companies are taking a more gradual approach to by government officials,” he says. “This was even more Japan’s outbound M&A hits new peaks, its companies need to gaining a foothold in the market. It’s good to talk important than due diligence or the financial aspects. alter a number of their traditional approaches. Saburo Nakao, In the July 2012 Clifford Chance report, Perspectives in There is no better way of understanding the culture of Without the cultural nous to influence the Government, partner at law firm Squire Sanders, at a mergermarket M&A a changing world, partnerships came top of deal structures the counterparty in a deal than by spending face-to-face the deal would never have happened.” event in May, noted that Japanese firms tended to be “too that corporates would pursue in cross-border deals. time with them, according to Murray. “Some businesses, The issue of making the right connections is particularly serious or honest” with their written correspondence, even A clear example of this is US fast food firm Burger particularly in more developed markets, don’t always true for deal-making in China, says Alexis Karklins-Marchay, when such correspondence is not legally binding. King, which in June this year, allied itself with the Kurdoglu understand the need to physically meet people regularly.” co-leader of Ernst & Young’s Emerging Markets Center. “The Corporates must understand and adapt to the culture family and the Cartesian Capital Group in order to expand its He uses the example of a deal which was snatched from deal climate is very different,” he says. “You need good of the country they are doing business in. “Don’t go into the business into China. Meanwhile Mexican telecoms company an over-confident team. “They had relied too much on phone intermediate people. A key principle in Chinese business deal with preconceived ideas of behavior,” says Murray. “You America Movil, took on a cross-border minority stake in June, and email and had been unable to pick up the nuances they 4 is ‘Guangxi,’ which in essence means creating the right need to interpret behaviors and social styles so you don’t agreeing to take a 23% stake in Telekom Austria and has would have gained from more face time,” he says. networks. This can be expensive and time consuming, but it make a bad impression. I’d recommend having local people offered to buy up to 28% of Dutch firm Royal KPN. America is vital for dealing in China.” with you to bridge the cultural divide as well as someone who Movil’s Chief Financial Officer Carlos Garcia Moreno said that Post-deal persuasion Another issue that corporates often overlook is access knows the culture as part of your deal team.” the company felt more comfortable taking minority stakes Cultural problems may only emerge after the deal is done. to the right decision-maker. “This is true in certain emerging It’s easy for negotiating teams to get off on the wrong in Europe, because it is less familiar with that continent’s Then management needs to find a route that absorbs the markets, where identifying the key decision-makers is not foot, simply because of language difficulties. competitive dynamics and customer preferences. best of the merged organizations’ respective cultures. always easy, especially in family-run businesses, so you may “The issue for those speaking a second language is that JVs and minority stakes are particularly beneficial when Indian group Tata’s success following its acquisition of have difficulty finding who makes the final decisions,” says you’re searching for words,” says Walleyo. “As a result, what dealing with family-run business cultures. “When dealing Jaguar Land Rover in 2008 has been based strongly on Karklins-Marchay. you say may not always be quite what you mean. It is not with a family-owned business, we recommend maintaining a cultural integration. In 2011, Ravi Kant, Vice Chairman of that the meaning is lost in translation, but more a case that family presence,” says Murray. “Companies entering into a Tata Motors, was quoted as saying: “We try to be a local Management styles listeners may fail to ‘read between the lines’.” new culture should typically take a minority share in a family company wherever we are present. We try to be a South Different cultures have various management styles. Some The EIU/EF survey says that the key strategy companies business. This will help minimize risk and provide continuity.” Korean company in South Korea, a British company in Britain are more centralized, others decentralized; some are more employed to improve cross-border communications was Allied to this is “the war for talent”, according to and a Thai company in Thailand. We assimilate the culture, hierarchical, others more entrepreneurial. sending managers to operating markets to learn their teams’ Karklins-Marchay. “If you invest in a company, you need to nuances and their way of working.” To overcome a management style clash, deal-makers language and customs. ensure that you have the right staff in place to drive the 2 must be more astute at doing “cultural due diligence”. “When Culture is so pervasive in cross-border deal-making that business locally,” he says. For cross-border deals to work, according to Applebaum, you look at who you’re going to merge with, you need to have it can even influence the way corporates approach meetings. the participants have to adopt a clear value system. “This done your due diligence not just financially, but culturally,” “Various nationalities go to meetings with a different Understand the impact [system] is going to be the new culture of the organization. says Appelbaum. “Have you done attitude surveys and concept of the meeting’s role and with different aims,” says “Deal-makers who take such cultural characteristics on And that has to be communicated over and over again to all psychological examinations of the key players that are going Richard Lewis, author of the book When Cultures Collide. board from the start are likely to be more successful of the employees of new organization,” he says. to be on the management team? Most companies don’t. They He recalls a culture clash at meetings of the One World in negotiating a merger and handling the integration take for granted that everybody will cooperate.” airline confederation, which includes BA, Iberia, Finnair afterward,” says Lewis. For further insight, please email editor@capitalinsights.infoCapital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 33
  • 18. Preserving Driving Investing change With investors increasingly taking a more active role in their investments, corporates need to make sure they are fully engaged with shareholders in order to make certain that any potential problems are headed off before they begin. The US has seen similar trends as and are increasing coordination with European investors, new regulations such as Dodd-Frank who are also increasingly engaging.” have increased companies’ disclosure “Activist investors have always been around,” requirements, leading to a more focused says Tim Medak, M&A Partner, Head of PLC and Equity approach from investors. “The fact that Capital Markets at Ernst & Young UK. “These investors, The widely reported “shareholder there is so much more disclosure required often hedge funds, have aggressively built up stakes to spring” appears to have caught of companies now, such as the publication shake up businesses. But now we are seeing institutional of the ratio of CEO pay to average investors being more vocal and active — they are some companies off guard. employees, means that investors can be vociferously opposing or not supporting board proposals.” But with boards and investors much more targeted and sophisticated And while hedge funds might previously have been in their engagement,” explains James viewed with some hostility by longer-term investors, united by a shared interest in Buckley, executive vice president and this is changing. “Despite the efforts toward increased growth and success, how can partner at investor relations consultancy transparency by many companies in recent years, in Sharon Merrill. some instances, there remains a perception that there is damaging revolts be turned into no state of equality or that boards are not meeting their constructive collaboration? Deal focus fiduciary responsibility,” says Buckley. “In those cases, Yet corporate governance is not the activists are no longer seen as just stirring the pot; they only target for investors. A September are welcomed as agents of change.” T he last few months have seen many high-level An average of 9% have done so in 2012, up 2012 report from law firm Schulte, For example, the involvement of American What do you expect to executives forced out of public companies. from a historical average of around 3%. Roth & Zabel (SRZ) on US corporate business magnate Carl Icahn at Chesapeake Energy happen to the volume They were the victims of assertive shareholders investors found that 84% of respondents Corp has helped rally investors, who have been of shareholder activism who backed up their concerns about issues, Getting active expect shareholders to be more active in agitating for change at the top since allegations of over the next 12 such as executive remuneration and company performance, Part of the reason for this spike in investor influencing company M&A strategy over potential conflicts of interest between the CEO’s months/next proxy season? 26% with action. Sly Bailey’s departure from media group Trinity dissent is the greater focus among asset the next 12 months. personal investments and corporate duties were Mirror and Andrew Moss’s resignation from Aviva are just two managers on being more active in managing There are many recent examples of revealed in July. examples. Elsewhere, several board members at railway firm their clients’ capital, particularly at a how this is already affecting companies’ Significantly Canadian Pacific have quit in an intense proxy battle, which time when their performance has been investment plans. Mining businesses Rules of engagement increase exemplifies the phenomenon that has been dubbed adversely affected by the downturn. “There Glencore and Xstrata originally postponed The signs are clear: boards need to ensure that they the “shareholder spring.” is increased pressure on institutional the shareholder vote on their proposed are actively engaged with shareholders to head off any Shareholder engagement with companies is nothing shareholders to strengthen their stewardship merger in July in response to investor potential confrontation. “Once you’re on the back 22% 52% new. However, the difficult role,” says Christoph van der Elst of the concerns about the terms of the executive foot with shareholders, life becomes very difficult economic environment has Tilburg Law School and a research associate retention arrangements offered by the indeed,” says Medak. “Boards should seek to The difficult economic brought many concerns into of the European Corporate Governance merged entity. avoid this at all costs.” Somewhat sharper focus for investors Institute. “They should be voting on many of “No matter how attractive the A large part of this is good, old-fashioned Remain increase environment has brought faced with the prospect of these matters in any case.” acquisition, a company cannot assume investor relations. “There needs to be regular the same many concerns into lower returns. “Investors have stepped up to the that it will get its M&A transaction rubber- dialogue between boards and shareholders,” says sharper focus for investors “Many of the issues that mark,” adds Murrall. This is due to a stamped by its investors,” says Buckley. Medak. “That doesn’t mean just pitching up to road are causing shareholder variety of factors: “The Stewardship Code, Perhaps one of the most interesting shows. Having a proactive investor relations program dissatisfaction have been under discussion between continuing weakness in perceived pay for aspects of the trend is that shareholder means updating investors quarterly at least and being shareholders and companies for some time — it’s just that performance, and media and government activism is now no longer seen as the as inclusive as possible. While the focus will often be Source: SRZ/ mergermarket they have come to a head over recent times,” says Liz interest in areas such as executive pay. preserve of hedge funds. While these are on the larger investors, boards need to find ways of Murrall, Director, Corporate Governance and Reporting This in turn has driven clients to ask more certainly among the most active — the communicating effectively with smaller shareholderstl Getty Images/Veta/Andrew Rich at the Investment Management Association (IMA). “Many of asset managers, and fund managers are SRZ study found that 74% of respondents wherever possible.” of the shareholder revolts have been caused either by responding to the wishes of their clients.” expected hedge funds to increase Regular dialogue should increase understanding management not listening or not taking into account the The IMA’s annual Stewardship Survey activism over the coming 12 months — between boards and shareholders, leading to a relationship broader economic context. Some executives, for example, of asset managers for 2011 found that others are getting in on the act. As an of greater trust between the two sides. Most shareholders continued to extract value from companies when they had stewardship resources had increased by Ernst & Young paper published earlier would rather negotiate behind the scenes with failed to deliver value for shareholders.” 4% from 2010 figures. It also found an this year, Proxy Perspectives, points management than enter into a public battle. Indeed, figures from UK proxy advisor PIRC show a increase in voting levels from 81% in 2010 out: “US institutional investors continue In the SRZ study, dialogue with the board was cited by spike in investors voting against remuneration packages. to 86% in 2011. to work together on governance issues the highest proportion of respondents — 50% — as the Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 35
  • 19. 50% Dialogue/negotiations Compared to the last year, how active will Which activist strategy 8% with management In which sector(s) do you expect to see the most shareholder activism over the next 12 months*? shareholders be in influencing companies’ M&A decisions over the next 12 to 24 months? is most effective for achieving desired results? Shareholder resolutions Viewpoint 10% Defense 8% Publicity Pharma, Stephen Benzikie discusses the 32% medical and campaigns key ways in which companies can 38% biotech 27% Retail 21% most effective means you are a company with average keep their investors onside Proxy contest/ 46% More active of achieving desired performance compared with your Government 10% Industrials and results. As Murrall peer group, you may find that consent solicitation chemicals 60% says: “Investors tend shareholders will engage to ensure T Significantly to vote against board your performance improves to above oday, chief executive officers are believed to spend around a more active proposals only if their prior average,” says van der Elst. third of their time engaging with three core stakeholders — the Construction 25% engagement has not worked.” Boards need to examine each aspect of their business, buy side, the sell side and the financial media. Yet 15 years 16% Positive outcomes ensuring they have correct strategies in place for growth as well as the right people and systems to support them. Business TMT 50% ago, support from the buy side, or the company’s investors, was taken as read. A lot has clearly changed since then, as larger institutions Remain services 6% the same This dialogue should pay dividends at times of Board makeup, for example, is an obvious shareholder in particular have hired dedicated people to monitor companies’ Source: SRZ/ stress. “When a company is facing challenges, target. “Take a look at your board composition,” suggests Energy 44% corporate governance, pay levels and trading issues. Even some mergermarket this is a critical time for the board to have its Buckley. “Are there any weaknesses? Do you have the of the smaller institutions have in-house people, while others, finger on the pulse of investor sentiment,” says Buckley. right financial experience or M&A expertise if you are particularly in the US, look to proxy advisors to help them keep tabs Real estate 13% “Equally as important, discussions need to be two- doing a lot of deals? Assess what areas might make you on the companies in which they have stakes. Financial way communications, where the company is gathering more vulnerable to an activist that becomes involved with Source: SRZ/mergermarket services 79% Boards of public companies, for their part, now treat shareholders *Respondents could select more than one sector information from the street just as much as promoting its your company.” — much more appropriately — as owners of the business, dedicating own messaging. This will help avoid nasty surprises down Examining dividend policies in conjunction with much more resource to investor relations activities. Yet mistakes are the road and fortify relationships with the company’s executive performance metrics is vital given recent to performance to ensure alignment of interest between still made, with the result that board members fail to gain shareholder investor base in the event that activists come calling.” shareholder dissent over board pay. “Companies often management and investors. You can’t have a miserly approval for re-election and mergers get stalled or rejected. Poor or Yet, while effective investor relations activity is argue that they need to pay well to get the best people,” dividend policy if your investors feel that executives are irregular communication between the board and shareholders tends important, it is unlikely to be enough. Shareholders says Stephen Benzikie, Director at Pelham Bell Pottinger, being overpaid.” to be at the root of many of these issues. are monitoring results even more keenly than before. the financial and corporate communications agency. Boards should also look at their shareholder register As recent examples have shown, it’s more important now than ever “Investors are watching performance closely and, if “That’s fine, but packages need to be linked very clearly and attempt to attract new investors if needed. “If your before to keep shareholders shareholder base is highly concentrated and a couple of onside; so boards must your top investors disagree with you on a proxy issue, engage closely and Boards must engage it is likely to be hard to turn the situation around,” says carefully with them, and closely and carefully There may be trouble ahead Buckley. “It’s important to consistently work on your shareholder base to ensure it is diversified.” consult widely on strategic issues such as M&A activity. with shareholders What should boards do if they find themselves targeted by an activist While boards need to protect themselves from hostile If investors fully grasp a and consult widely on strategic issues 1 takeover bids that aren’t in the business’s interests, company’s strategy, they investor or organized shareholder revolt? measures such as poison pills (implementing methods to are far less likely to make a Know what you’ll do in advance. It helps to be prepared, even investors that are unhappy, negotiate. “You are more likely make a company unattractive to an unwelcome bidder) fuss if a particular acquisition might at first appear before the prospect of revolt looms. “Think about what the to compromise if several long-term investors are dissatisfied and staggered boards (when only a portion of the board a slight departure from the strategy previously articulated. Early potential areas of opposition could be and what your strategy versus an investor who has parachuted in for short-term is elected annually rather than all at once) can only buy-in to a company’s vision is vital for successful execution. Some 4 should be to protect the interests of the company gains,” says Buckley. invite unwelcome attention and so should be carefully of the best companies now have quarterly capital markets days. At and shareholders,” says Michael DeFranco, partner at law scrutinized. “These kinds of provision leave you wide open these events, corporates can invite both the buy side and sell side, firm Baker & McKenzie. “Should your response be through Engage more with shareholders and the press. “Make clear to to shareholder criticism, particularly if your performance allowing management to outline what they see as the key value drivers formal legal action or would it be better to go for discussions investors what your strategy is and how that benefits them,” dips,” says Buckley. in their business and how their proposed action will affect their people 2 with the activist?” says Stephen Benzikie. “Also, gain the confidence of respected However, there are advantages to seeing shareholder and profits. financial journalists so they can help tell the story about where engagement in a collaborative light rather than as Most importantly, boards need to be as open and honest as 5 Work out the likelihood of being targeted. If there are signs that the company is heading.” confrontational. “Shareholder activism will continue to be possible with their shareholders. Don’t think for a minute that youtr all images iStock and Shutterstock this may happen, “get ahead of the issue and take action so that on media and Government’s agendas,” says Murrall. “But can pull the wool over their eyes. That’s simply not sustainable and you are controlling the story,” says DeFranco. “That way, you’ll be Remember what is in the best long-term interests of the firm large dissenting votes, press coverage and CEOs standing is not in the interests of either management or investors. The more taking management’s preferred actions rather than being forced and its shareholders. “Boards need to be cognisant of what down are not good for companies or their owners over the visible and regular the communications effort, the better for all of 3 into a strategy you may not believe in.” it is that might lead to a compromise and avoid an expensive, long term. As a result, I would expect this to drive more the parties involved. protracted battle,” says Buckley. “Sometimes, however, the best and better dialogue between shareholders and boards. Examine who is agitating. If it looks like short-term investors, option is just to dig in your heels because it’s the right thing to Those boards that may not have responded in the past get your long-term supporters on side. Explain why those do for the long-term performance and value of the company, as will do so in the future.” Stephen Benzikie is a Director at financial and corporate agitating aren’t acting in their best interests. If it’s longer-term well as being in the best interests of all shareholders.” communications consultancy Pelham Bell Pottinger. For further insight, please email Capital Insights from the Transaction Advisory Services practice at Ernst & Young | Issue 4 | Q3 2012 | 37
  • 20. Prof. Scott Moeller Further insights Moeller’s corner Listen M&A Maturity Index 2012 M&A in a two-speed world Growing Beyond Assessing risks and opportunities in rapid-growth markets M&A in a two-speed world Private Equity Transaction Advisory Services Multiple European buyouts watch Q2 2012 Buyouts — a waiting game? Q2 2012 Transaction Advisory Services M&A Tracker The rise and fall of M&A After falling for four consecutive quarters, does recent global bid activity show that M&A is once again on the rise? Enter The rise and fall learn Europe plays of M&A With fewer assets coming to market, the waiting game Multiple: European what deals are being done and where? M&A Maturity and buyouts watch Q2 2012 Index 2012 M&A Tracker Q2 2012 When planning a deal, it pays to find out While European private equity (PE) is Ongoing uncertainty has restrained where the best opportunities lie. This 2012 waiting for macroeconomic conditions Eurozone M&A activity in Q2 2012. This Shareholders don’t just put capital on the table; report, published in collaboration with to stabilize, parts of the market remain report finds the small upswing in average they also bring expertise that corporates should tap into Cass Business School, explores investment active and the pipeline continues to grow. bid value and a strong pipeline of conditions for M&A across 120 countries This report finds out when and where deal megadeals could indicate an increasing including 25 rapid-growth markets. flow will return. level of confidence among buyers. Our findings showed that shares in Central Hispano brought with it a 5% stake Professor Scott Moeller is acquiring companies that were purchased in Germany’s Commerzbank, while, by Growth in Brazil: capturing Positioned for Growing Beyond Growing Beyond Growing Beyond Capturing the momentum Positioned for growth Director of the M&A Research by investors with foreign expertise in the 2005, it had built up a 10% stake in Italian Ernst & Youngs 2012 attractiveness survey Ernst & Young’s 2012 attractiveness survey new markets the momentum growth Brazil Russia Centre at Cass Business School. market outperformed the FTSE All-Share lender Sanpaolo (however, this stake wasHe also teaches Mergers & Acquisitions by 37 percentage points over the two years sold after Sanpaolo/IMI merged with Intesa Rapid-growthmarkets Rapid-Growth Markets Brazil attractiveness Russia attractiveness on the MBA and MSc programs. following the deal. Companies that were not in 2006). With this came board seats. This Ernst & Young Rapid-Growth Markets Forecast Summer edition — July 2012 supported by these shareholders saw their was part of Santander’s long-term strategy Summer 2012 survey 2012 survey 2012 stock rise only 14 percentage points. of expansion outside its existing exposure fc So what can corporates learn from these and ultimately resulted in them taking over “monitoring investors”? the UK’s Abbey in 2004. In 2008, it acquired On a cross-border deal, investors Alliance & Leicester and bought Bradford & Although recession, stalling growth Brazil leads the attractiveness scores Although Russia offers a high-growth can provide local market knowledge. Our Bingley’s branch network, renaming all three and high unemployment are continuing in Latin America. Learn more about economy, a large domestic market and research suggests that superior returns can Santander in 2010. to impact many consumer markets, the strengths, challenges and future a highly-skilled work force at moderate be gained by building a dialogue between Even though Santander ended the RBSF the data and insights in this Summer growth opportunities for the cost, investment challenges remain. amed US businessman Jack Welch companies and investors with knowledge of partnership after the Abbey deal, the bank 2012 forecast predict strong prospects 2016 Olympics host in this 2012 This survey explores the opportunities once said: “A company’s ability to a target market, before entering. would have learnt a significant amount for RGMs. attractiveness survey. for growth. learn, and translate that learning Long-term investors may also be able to about the Northern European market. into action rapidly, is the ultimate help with planning issues. It’s not just price This intelligence gave them an edgecompetitive advantage.” that matters within a local market, but also over their competitors. But when it comes to deals, who time frames and the terms of an agreement. Clearly, regulations do not allow ashould organizations listen to and learn While firms can get data about local company to have a confidential conversationfrom? Surprisingly perhaps, shareholders markets from bankers and other advisors, with one shareholder that is not then shared Coming soon to Capitalinsights.infoare a group that companies should be expertise from your institutional investors with others and the market. Discussions • Ernst & Young Capital Confidence Barometer — A regular survey of senior executives from large companies around the world,tapping into more readily when it comes enables you to test the information received should abide by appropriate market rules, that gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companiesto transactions — especially cross-border from your advisors and check up on how especially those of the country in which thedeals. The right shareholders can bring accurate the information is ”at ground level.” company is listed. manage their capital agenda. Available from 8 October 2012.extensive market knowledge. A good example of a company that Incorporating these experienced • Ernst & Young Eurozone Forecast — How is the Eurozone performing in the ever-changing global economy? This Autumn 2012 A July 2011 study from Cass Business gained a competitive advantage by acting, in investors is critical. While a little learning can edition looks at the risks and opportunities for business and governments. Available from 27 September 2012.School entitled Learning from your some ways, as its own monitoring investor, be a dangerous thing, if you listen to yourinvestors: shareholder support in M&A is banking group Santander. In 1988, way shareholders, it’s your competitors who maytransactions revealed that institutional before it began fully acquiring banks in be faced with danger.investors clearly affect the chances of Northern Europe, Santander formed anmanagement making a successful cross- alliance with Royal Bank of Scotland (RBS). For further insight, please emailborder merger or acquisition. In 1999, Santander’s merger with Banco Capital Insights app available now via Featuring key content from the magazine enriched with interactive featuresCapital Insights from the Transaction Advisory Services practice at Ernst & Young and regular updates from the website. | Issue 4 | Q3 2012 | 39
  • 21. At Ernst & Young, we understand that in sport, as in business, you succeed by getting talent to work together. That’s why we are proud to be an Official Partner of The 2012 European In a team game, Ryder Cup Team. everyone has a Find out more at hand in victory. See More | Teamwork© 2012 EYGM Limited. All Rights Reserved. ED 0914