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Une étude de PWC sur les fusacs dans les pays émergents

Une étude de PWC sur les fusacs dans les pays émergents



Plus de la moitié des acquisitions envisagées sur les marchés émergents échouent à l’issue des étapes dites de due diligence. Price Waterhouse Coopers nous dit pourquoi.

Plus de la moitié des acquisitions envisagées sur les marchés émergents échouent à l’issue des étapes dites de due diligence. Price Waterhouse Coopers nous dit pourquoi.



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    Une étude de PWC sur les fusacs dans les pays émergents Une étude de PWC sur les fusacs dans les pays émergents Document Transcript

    • www.pwc.com Getting on the right side of the delta: A deal-maker’s guide to growth economiesJanuary 2012
    • Editorial team:John Dwyer, Alastair Rimmer, Nick Page, Richard Skinner, Ward Duvall,and Claire DaviesKey contributors:China: Matthew Phillips and Curt MoldenhauerIndia: N.V. (“Shiv”) Sivakumar and Amit NawkaRussia: Lev Vilyaev and Andrew CannBrazil: Luis Madasi, Alexandre Pierantoni and Mikail OjevanMiddle East & North Africa: Hani Ashkar and Ziad Sarkis (Saudi Arabia),Nitin Khanna (UAE), Maye Ayoub (Egypt) and Antoine Abou Mansour (Lebanon)Sub-Sahara Africa: Simon Venables and Peter McCrystal (South Africa)Eastern Europe: Jonathan Thornton and Charles Bates (Czech Republic)US: Manuel IraolaJapan: Philip Blythe and Matthew WybornUK: Sir John Stuttard, Leonard Sinclair, Yael Selfin , Simon Harris, Maciej Grygiel,Craig McVicar, John Glynn, and Jacqui RivettFrance: John Hadley and Ghislain de La Tour d’ArtaiseCanada: Vanessa IarocciAustralia: Richard Shackcloth and Sean GregoryNetherlands: Johannes Postma
    • ContentsIntroduction 3Executive summary 4The importance of deals in growth markets 10Avoiding the pitfalls of past deals 141) Lack of transparent financial information – minding the gaps 142) Justifying developing market valuations – getting real 173) Non-compliant business practices – discerning the manageable from the deal breakers 204) Post completion operations issues – integrating and taking control 225) Difficulties with negotiating and contracting – making it to the dotted line 246) Partnering conflicts – reconciling differences and managing great expectations 277) Government interference – managing an additional stakeholder 30Nuances of individual markets 33 Getting on the right side of the delta January 2012 1
    • 2 PwC
    • IntroductionDoing deals in growth markets is a topic that features regularly While there are plenty of examples of successful dealsin our client conversations. For many companies doing a deal is in growth markets, the deal makers we interviewedthe best – or only – way of tapping into growth markets, largely acknowledged that deals in growth markets are inherentlybecause it is faster than going-it-alone. And deals in growth riskier. There is a much bigger deviation, or range, of potentialmarkets are not just about low cost manufacturing, access to outcomes. We refer to this range as the delta, and in growthnatural resources, or market access for basic global products. economies, the delta between a good deal and a bad one isDoing a deal in a growth market can also provide buyers with much bigger than in developed markets. If things go well,access to best practice in core operations, innovation investors stand to make a lot of money. But if things gocapabilities and capital. badly, investors can lose big – an average of 50% of their investment in the deals analysed where transparentFor this study, we carried out an assessment of over 200 deals, information was available. And the impact on reputationsincluding publicly announced deals and a broader set of can be considerable, as evidenced by the many high profileprivate deals that PwC has advised on. We interviewed 20 examples of problems that emerge after the ink has dried onsenior deal makers who have bought businesses in growth the sale and purchase agreement.markets to understand the root causes of problems, and howthey overcame the challenges encountered. Collectively, the Growth markets are different, which is why our strongestcompanies they represent have completed over 140 acquisitions recommendation is to build the local machinery needed toin growth markets, with considerable success. In addition, the get a deal done well in advance of executing the first deal.contributors to this study have been involved in hundreds of This and other recommendations resulting from this study willdeals in growth markets. help companies to avoid doing bad deals, to successfully complete on good deals, and to make sure a good deal doesn’tDeals in growth markets remain incredibly challenging. Our turn bad after the deal trophy is on the shelf. In short, theresearch suggests that over 50% of deals that enter detailed study aims to help deal-makers get on the right side of theexternal due diligence in growth markets fail to complete. delta between a bad deal and a good one. Anyone can getWe believe this is materially higher than in developed markets. lucky on one deal, but it takes investment and a rigorousOne key reason for this is that many companies’ boards struggle approach to consistently get it right.with perceived ‘sky high’ valuations in growth markets. John Dwyer Alastair Rimmer PwC Global Head of Deals PwC Global Head of Strategy Getting on the right side of the delta January 2012 3
    • Executive summary It’s tough, but you’ve got to do it The majority fail to complete, Doing deals in growth markets is a tough and failure can hurt business but not doing those deals, or Our study shows that 50-60% of deals failing to make them work could make that go into external due diligence in the broader business outlook even growth markets fail to complete. tougher. Access to high growth economies, All of these failed deals represent a with large populations, rising affluence considerable opportunity cost – whether and the potential for innovation make a it is letting a good deal get away, or presence in growth markets a necessity for spending management attention, time many companies. Doing deals in growth and money that could have been better markets is a challenge worth taking on. used elsewhere on a good deal. Exploring And challenges abound: negotiations can deals that don’t complete can also damage drag on, and considerable time and credibility with investors. Though deal effort can be spent on a deal that does completion rates are also low elsewhere not complete. Even if a deal does in the world, the cost of failing in a complete, a lot can still go wrong: it can growth market can be much higher due emerge that risks were missed during to the scale of the opportunity lost. due diligence, post-merger operations can be mismanaged, and conflicts with The delta factor for completed partners can arise, ultimately resulting in deals is high costly failure. In addition, once business Even after a deal is sealed, a large managers have had their fingers burnt percentage of deals subsequently result in a particular market, they are often in significant difficulties – and at a very reluctant to return, hence closing off high cost. Where sufficient data was key markets. available in the public domain, we found that post-deal problems cost the buyer on average c. 50% of the original What we mean by growth markets investment. And in half of these cases, In this report, we have taken a broad definition of growth the buyer either lost control or divested markets that consists of the world excluding Western the business at a loss. Post-deal problems Europe, the US, Japan, Canada, Australia and New also bring a number of other intangible Zealand. Obviously, this represents a wide range of costs, foremost among them being economies. The BRICs are in a league of their own, negative investor sentiment and and within the BRICs, each market varies considerably. unrealised deal value. Conversely, if you However, the rest of the E7 (Mexico, Indonesia, and get it right, the upside is great. Turkey), and the next tier of large and growing economies (South Africa, Nigeria, Egypt, South Korea, Vietnam, and Although only a small percentage of the Philippines) also present attractive opportunities. deals that have problems make it into the public domain, there are a much larger number of deals with problems that don’t make it into the press. This includes a group of under-performers that is potentially the most dangerous of all.4 PwC
    • Figure 1 Assessment of deal issues in growth economies Deals that failed to complete Deals that resulted in issues post-completion Transparency of Transparency of financial information financial information Justifying valuations Justifying valuations The asset Non-compliant Non-compliant business practice business practice Post completion Post completion people issues people issues Negotiation & Negotiation & contracting difficulties contracting difficulties The seller Partnering conflicts Partnering conflicts The government Government interference Government interference 0 10 20 30 40 0 10 20 30 40 % of deals % of deals Source: PwC Analysis database of growth market deals with problems.Investments that under-perform, but not and competition for assets in growth markets, government involvement isso much to justify closure or divestment, markets is stiff. Three other issues often part of partnering. Problems withcan be both difficult to fix and difficult explain another 50% of problems. financial information, such as a USto exit. These investments take up Teams fail to obtain approval from the private equity firm’s recent concernsconsiderable management attention, and government. Financial information is over accounting at an investment in amay prevent the company from pursuing less transparent – there is less of it, children’s apparel company in India, cana more successful strategy in the market. managers are less willing to share it, emerge after a deal completes. FinancialThey’re not dissimilar to the ‘walking and accounting practices are different – information may have been signed offdead’ of the venture capital industry. which make it difficult for buyers to get by an inexperienced auditor, financial comfortable with a deal. Often there are information may not have been signedNearly 40% of deals failed non-compliant business practices (e.g. off at all, or there may be issues that areto complete because of a corruption, labour & tax compliance) not identified by local standard auditingvaluation mismatch which can become deal breakers. procedures. Non-compliant businessDeal risks typically relate to one or more practices are also common problems.of three key elements: the asset itself, 30% of post-deal problems For this reason, FCPA (Foreign Corruptthe seller, or the government. Through concern partnering Practices Act) and Anti-Bribery reviewsour past deal analysis and through The most common problems that are critical. We have identified a numberinterviews, we have identified the most emerge after a deal completes concern of situations where these were notcommon pitfalls both before and after a partnering, causing c. 30% of deal carried out properly and problems weredeal completes. These problems are not problems post deal identified in our later encountered with outside authorities.unique to growth markets. What is survey. Even sophisticated investors can There is also a range of potentialspecific to growth markets are the have problems in this area. High profile operational issues that make it difficultdegree, frequency, and root causes of examples of partnering problems include to integrate and take control of an asset.these problems. Danone disputes with its partner in China, and the TNK-BP joint venture in Russia. By examining a number of deals weAs shown in Figure 1, the most common Beyond partnering, the same issues that traced the root causes of these problemsbarrier to deal completion is an inability prevent deals from completing also to a set of critical differences in practicesto get comfortable with valuations, frequently emerge after a deal completes. and governance between growth marketsexplaining 40% of failed deals in our Direct government interference is a and developed markets. This has led todata set. The magnitude of future growth common problem, and with a prevalence the following set of recommendations.is uncertain, there are few comparables, of state-owned enterprises in many Getting on the right side of the delta January 2012 5
    • Recommendations 1) Understand the strategic Finally, developing a rationale is hard. There is no silver bullet to increase the rationale early Developing a strategic rationale also chances of success in doing deals in We see a common theme across less takes time: 1-2 years in our experience. growth economies, but drawing on the successful or less experienced companies Often, it requires building up data from experience of successful deal-makers of not developing a strategic rationale for primary sources. Also, interviewees and our own expertise, we have five growth market deals early enough. consistently highlighted the need to recommendations to ensure you are on Companies often only have limited educate the boards and shareholders of the right side of the delta factor. resource charged with developing Western companies. Board members business across a number of markets. and shareholders often hold pre- Their boards wait until a target conceived concerns about growth acquisition has been identified before economies, which may be easily seriously looking at a market. dispelled myths, or easily addressed risks. Our view is that this element of The reason for this is understandable for developing the rationale is not given many companies. It’s difficult to build enough attention. the international deal infrastructure of a multinational company. Due diligence “Doing deals in developing countries will be imperfect and valuations are is a cultural challenge. There is a high, so a strong strategic rationale is need to educate the management in critical to completing a deal. However, mature markets on the necessity to there is also a tendency to under-invest take higher risks in growth markets.” in resources in doing deals in growth economies. Some companies focus on M&A Director, the short-term potential of growth Global Electrical Distributor economies. We see companies that treat growth markets as high risk ventures that could generate a small percentage of 2) Prioritise markets current sales, as opposed to markets that Although there are common themes could generate 30%, 40% or more of across growth economies, each market is global sales. We also see companies that different. This is one reason why local fail to consider strategic considerations capabilities are critical for success. With for a deal like checking the rise of a a requirement for increased investment potential global competitor. in individual markets, there is a case for prioritising markets. This allows the There is also a risk of underestimating company to focus scarce resources on the need for developing a strong fewer markets to increase the chances strategic rationale for a deal. The need to of building scale positions that can develop a strategy for a new market may support future growth. This is particularly sound obvious, but we are surprised that the case for smaller companies, who may our survey suggests that some companies lack the international deal infrastructure go ahead with a deal without addressing of a multinational company. Also, some key questions about the market and of the most effective M&A strategies are competitors. ‘platform strategies’, or making a large initial acquisition to enter a new market and then bolting on smaller acquisitions. This strategy requires greater focus on fewer markets.6 PwC
    • 3) Go there • Understanding market potential to “I can’t emphasise enough theGrowth markets are different. Reflecting help with valuations; importance of doing on the groundthis, being on the ground was consistently due diligence... If you don’t ask the • Identifying a target short-list toidentified by interviewees as the best question, you don’t get the answer. improve the chances of choosing theway to reduce risks in a number of right partner; and A lot of people discover key risks onareas, including: day one, because they didn’t ask the • Engaging with multiple levels of• Giving stakeholders context to government to increase the chances of right questions.” address their concerns; obtaining approval and to understand Partner, Global Asset Manager• Improving the quality of diligence to potential future changes in the increase the transparency of financial government’s position. information and reduce risks from non-compliant business practices; Figure 2 Views of local PwC contributors Eastern Europe Russia & CIS “Eastern Europe is in some ways becoming closer to a “Very often, small-and medium-sized Russian companies developed rather than a growth market, but corruption in have issues with tax compliance. This can lead to potential businesses related to government contracts is still an issue tax liabilities, especially as an acquisition often triggers a in many Eastern European countries.” review by tax authorities.” “We strongly recommend that an FCPA or similar review “Thorough due diligence can often identify these practices is undertaken to identify any practices ongoing in the and therefore the risks can be quantified. But this takes company that a western buyer cannot continue post deal.” time and patience.” Jonathan Thornton, Partner, Deals Andrew Cann, Partner, Deals China Middle East & “Strong competition from rival North Africa bidders and alternative sources “There are issues specific of funds makes valuations the to individual markets such key issue for China. Based on as living hardships and our data, differences in security risks. expectations around valuations explain nearly 50% of deals “Companies need to start withdrawn after beginning recruiting for key managers external due diligence.” even earlier, and factor in higher costs for key staff.” “Bring your stakeholders on board early on. Spend more Hani Ashkar, Partner, time on the strategic rationale Middle East Deals Leader for the investment. Discuss what approach you’ll take to valuations.” Brazil Sub-Sahara Africa Matthew Phillips, Partner, China Transactions Leader “The regulatory environment, “Government policy is more central particularly for tax and to deals in Africa. There is often a labour, is a complex one. There higher level of political interest and India are high taxes and social perceived interference in deals. Some “Indian companies often have a large charges on payroll, sales and countries can change the rules on tax number of transactions with companies income. Taxes are diverse and or legal parameters quickly.” owned by other family members. Other legislation changes fast.” family members who are not in the forefront “Local knowledge is paramount. “Conduct a phased approach Investors need to visit government often play a significant role in making or to due diligence so you can departments and ambassadors to breaking a deal.” identify the key issues, understand anything which could “Find the real decision makers and start including corruption, and then cause the government to intervene.” talking to them early on.” focus on them.” Simon Venables, Partner, N.V. Sivakumar, Partner, Luis Madasi, Partner, Deals Southern Africa Deals Leader India Deals Leader Getting on the right side of the delta January 2012 7
    • 4) Put key people in place Identifying people in the organisation or Ultimately, the people involved will recruiting people to fill key positions will most influence whether your deal is take time, but is worth the investment in a success or not. Companies should: any case. • Build a short-list of local advisors including finance, strategy, corporate “By day one, decide on your project finance, law, forensics, and integration or integration manager – a local or specialists. In selecting advisors, local someone who knows the market is knowledge and experience are as best. Get your senior management in important as previous relationships. place and make sure all lines of communication are completely clear.” • Build a deal team of both dedicated Head of M&A, Global Insurer deal leaders and deal ‘moonlighters’, people who can work part-time on a deal to provide specialist input across finance and operations. The deal team should include nationals who are on the ground, and should also include the people that will manage and go into the business post-completion.8 PwC
    • “When we do deals in emerging 5) Adopt best practice for deal. These choices largely reflectmarkets, we do the normal due approaching deals in growth markets trade-offs between risk and rewarddiligence: financial, tax and legal. Many boards need to accept that a (either speed or upside). These choicesBut that’s not enough for some of ‘normal’ deal approach is not do not have obvious answers, rather they appropriate for a growth market. reflect preferences specific to companies’these assets and some of these places. There is too much ground to cover; cultures and strategies.You have to do more than the normal competition from rival bidders can bedue diligence. Sometimes you have to strong and appear irrational; sellers’ The delta between a good deal and a badbe creative.” expectations are different; and there is one is that much greater in growthAfrica M&A Executive, too much uncertainty over future markets, but we believe it’s possible toStrategic Industry performance. Past deals show that there get on the right side of this delta. are a number of best practice measures Companies can de-risk deals in growth and tips to manage individual risks in economies by recognising these markets“Due diligence needs to be wider in growth markets. as large opportunities that require somegrowth markets to cover things you initial strategic thought, by prioritising How a company applies these measures markets and establishing a presence onwould not normally consider in the will be influenced from the outset by its the ground in those markets, putting keyWest like employee relations, size, culture and risk-appetite. There are local resource in place, and adoptingpolitical risk, and market practices” a number of difficult choices about how best practice for a deal. We believeHead of Corporate Development, to approach deals in growth economies companies that take these steps increaseGlobal Bank – such as how much weight to give to the their chances of doing a good deal and long-term strategic option value of a avoiding bad ones.“It is difficult to use traditionalvaluation methods to come to asingle figure. Having an option value Figure 3is a key way to mitigate this. We use Best practice measures and tipsearn-outs. We like it when people areleft with minority stakes to help Area Measures and tipscrystallize value.” Financial information • Phase diligence: first thorough high-level initial screen, then in-depthPartner, Global Asset Manager • Gather data in a bottom-up manner in priority areas (with exclusivity if possible) Valuation • Conduct additional research to improve comfort with forecasts • Use earn-outs/deferred consideration to align interests of management • Combine long-term strategic option value with conservative DCF (e.g. scenarios, higher discounts) Business practices • Conduct FCPA/Anti-Bribery review • Conduct diligence on key individuals/partners and common issues (tax, labour, related party transactions) • Understand if non-compliant practices can be managed Post-completion • Address critical areas such as governance from day 1 operations issues • Slower pace thereafter Negotiation & contracting • Adapt to local negotiating approaches (e.g. relationship focused, more direct negotiations with stakeholders, engaging a broader group of stakeholders) • Encourage seller to use an experienced advisor • Have a back-up (e.g. negotiate with multiple parties, develop an organic option) Partnering • Avoid 50/50 JVs • Research partner extensively • Discuss exit plans with your partner early Government interference • Run scenarios for changes in government positions Getting on the right side of the delta January 2012 9
    • The importance of deals in growth markets 92% of CEOs expected growth in You have to be there growth markets are the key drivers of this their Asian operations, 86% Though the activity levels of multinational economic growth. In particular, growth is expected growth in Latin America, companies doing deals in growth markets based on increasing wealth for the circa and 75% and 72% expected growth in 2011 remained subdued in volume 4 billion people who fall into the world’s terms, in value terms 2011 activity poorest socio-economic group, earning in Eastern Europe and Africa surpassed 2006 levels. between $1,000 and $4,000 per year, and respectively. Conversely, only 55% often referred to as ‘the Next 4 billion’. and 48% of CEOs expected growth The key motivation behind both current in North America and Western and future activity is access to large and Acquiring a business is one way – Europe respectively. growing markets. Roughly six billion of and in some countries the only way – PwC 2011 Global CEO Survey the world’s seven billion people live in for foreign companies to access these growth economies.1 PwC forecasts that, at markets. Deals can also provide current market exchange rates, the GDP of multinationals with local capabilities, the E7 (The BRICs plus Mexico, Indonesia manufacturing bases, or access to and Turkey) could surpass that of the G7 resources. They can also be a way of (the US, Japan, Germany, France, the UK, acquiring growth markets rivals that Italy and Canada) as early as 2031. may be tomorrow’s key threat in the Increasing productivity and wealth in global market. 1 World Bank statistics.10 PwC
    • Figure 4 Deals from North American & Western Europe to growth economies, £bn £bn 200 176 180 161 160 138 140 127 120 106 100 80 66 60 40 20 0 2006 2007 2008 2009 2010 2011 Number of deals 1,900 2,033 2,148 1,406 1,712 1,720 Source: Dealogic, PwC Analysis.Figure 5PwC macro economic outlook – January 2012Source: PwC Economics. Getting on the right side of the delta January 2012 11
    • It is important to note that deals in Also, capturing growth is likely to require growth markets are not necessarily only local innovation capabilities. Customers about bringing best practice to growth and consumers have different tastes markets. In many cases, companies in across growth markets. With increased growth markets are not constrained by competition for their Yuan, Rupees, legacy investments, so building a Real and Roubles, global products are business from scratch provides an insufficient to gain share. This is even opportunity to learn from the mistakes more so the case for serving the low of the past to establish world class income consumers within the next four operations. The banking industry is a billion. Many of the ground-breaking good example of this, where banks in innovations to serve this market will Brazil and Turkey have developed some come out of growth markets. of the best technology in the world.12 PwC
    • But deals in growth markets arecostly from many anglesThough the rationale for seeking dealsin growth markets is clear, finding andvetting such deals can be costly andtime-consuming. This upfrontinvestment can make it hard to walkaway if a deal proves to be a bad one. Figure 6But if the potential deal was truly bad, Cost of deal issues as % of total investment or book value for ten public casesthe effort to identify the risks thatmake it a bad deal represent time and %money well spent. Much more money 120will invariably be spent if a bad dealgoes through.Of the problem deals we looked at, 10010 had sufficient public informationavailable to estimate in a robust way thecost of the issues. For these, we foundthat the cost of problems on these“bad” deals averaged around 50% of 80the total investment. While this doesnot represent a statistically significantsample size, it indicates the order ofmagnitude of costs of post-deal problems.Costs consist of divesting the business at 60a loss relative to book value or initialinvestment, fines, and write-downs Average: 49%against book value.In addition, there are also considerable 40indirect, intangible, or personal costs,in terms of share price impact, negativeinvestor reactions, or even individualsserving prison sentences. In many casesthe total investment is written off or sold at 20a loss, meaning diminution of capital andstrategic market position, as well as higherpsychological and reputational risk hurdleswhen seeking to re-enter the market. 0 Beverages Media Forestry Banking Travel Telecoms Banking Beverages Manufacturing Financial ServicesAs the experience captured in our surveyillustrates, 50-60% of deals that enterdue diligence in growth markets fail tocomplete. Comparing publicly announceddeals, deals by developed economycompanies in growth markets fail moreoften than the deals they do in developed Indicates the business was closed/exitedcountries.2 We also believe deals in growthmarkets are more likely to result in Source: Company reports and press articles.problems after completing.Over the next pages, we look at each of themost common pitfalls in turn, consideringtheir root causes and the suggesting waysthat companies of all sizes can mitigatethose risks from pre-deal, throughnegotiation to post-completion. 2 Source: Analysis of Dealogic data comprising deals by Western European and North American multinationals investing in growth economies vs. deals by the same buyer set investing in Western Europe and North America. Getting on the right side of the delta January 2012 13
    • Avoiding the pitfalls of past deals 1 Lack of transparent Common problems & root causes than in similar companies in the West. financial information – Difficulties understanding financial In the case of a carve-out, building up minding the gaps information in a business often prevent information can be even more difficult. deals from going ahead. But there are a much greater number of examples of Secondly, information can be completed deals that had worse than presented in a different way, because Common problems expected performance or where local accounting policies and practices • Difficulty understanding financial unexpected liabilities emerged because can differ from those in the West, information prevents necessary the true financial position of a business making it difficult to verify financial disclosure was not understood before completing information. Financial accounts are the deal. It is rare for a shareholder to generally in the local language and may • Risks are not given enough weight publicly fall out over the validity of be in a different format. There may be company accounts, but that is what has less discipline around recognising bad been reported in relation to a US private debts, and a desire to avoid bad news can Root causes equity investment in an Indian children’s result in costs building up in the balance • Managers place less emphasis on apparel company.3 Elsewhere, a series of sheet and liabilities not being recognised. financial information, so less is allegations made by analysts and available – e.g. poorer accounting investors of false financial reporting by systems Chinese companies listed on Western exchanges remain unresolved and have • Accounting policies and practices led to regulatory investigations and differ from those in home markets “There are a lot of family-owned market uncertainty.4 – e.g. two sets of books companies who are often disorganized in how they keep • Managers are less willing to A lack of transparency can come in three forms. Firstly, there is less information. information and are understaffed in provide information because of Many businesses are understaffed in key positions. This makes diligence concerns with confidentiality finance and IT and have less developed difficult and lengthy.” • Deal teams obtain insufficient financial reporting systems, because local advice companies in growth markets tend to “They don’t understand what selling have less stringent requirements for practices should be in terms of information than companies in providing information on the Mitigating actions developed markets. Because owner business. They think a two page • Conduct thorough initial review managers and family-owned businesses financial statement is sufficient and are common, there is less need for don’t fully realise the time and effort • Prioritise issues: decide what is financial and management reporting, important in conjunction with required to carry out a full due and there is a greater focus on cash- local advisors diligence process.” rather than accrual- based accounting. • Where possible, obtain exclusivity This will vary by type of business. For South America Investment Manager, and spend time building up key example, public companies generally Global Private Equity Fund data bottom-up have better information than private companies, but even public companies in • Put risks in context to take growth markets have less information calculated risks 3 “Asia fundraising goes on despite fraud allegations”, Financial Times, October 13, 2011 4 “Muddy Waters Claims on China Companies Have Yet to Be Proven,” Bloomberg, December 1, 201114 PwC
    • A prevalence of local GAAP can make it This would suggest flat or declining sales difficult to present financial information rather than growing sales and that the in a way that is meaningful to foreign seller’s portrayal of the growth of the companies on IFRS or US GAAP. In business was better than reality, which markets such as Brazil, local GAAP is can lead to valuation problems. relatively easy to reconcile to IFRS, but compliance with local GAAP by many Thirdly, even if the information is small and medium-sized enterprises is available, the seller may be unwilling poor. Finally, third party confirmations to share information, because of“In terms of accounting, lots of can be unreliable. concerns with confidentiality.things are not completely clean inbusinesses in Eastern Europe. If it’s One executive that we spoke with about “They also don’t want to providetotally misleading, we won’t do it. a deal in Sub-Saharan Africa provided an information as they see it asBut often, the entire industry in the example of the first problem area. He confidential. There are alsomarket does it a certain way. It indicated that even three years after frequently ‘creative accounting’might technically be a liability, but completing the deal, “the financial decisions and the quality ofin the local context the liability will systems are still appalling”. What the deal accounting and financials is notnever materialize.” team found after completing the deal was the target’s finance team lack of good.”Investment Manager, Global Private basic spreadsheet skills. South America Investment Manager,Equity Fund Global Private Equity Fund There are also extreme examples, as a China-focused deal executive with a“There was nothing malicious. It was global FMCG company we spoke witha lack of experience and insufficient highlighted. “I have been to companiessystems. Their attitude to the that said they have 30% growth, but whenfinancial accounts was not cooking you get there, they have a warehouse full ofthe books, but they were more finished products, and no raw materials.”flexible in representing financialinformation.”“We quantified the impact and asked Case study – Latin Americaourselves, ‘are we willing to take On a deal PwC worked on in Latin America, the team encountered boththis risk?’” inadequate financial information and weak accounting policies. There wereInvestment Manager, European several short comings in accounting procedures and no control testing in thePrivate Equity Fund external audit. Most concerning, the auditors had not signed off on one set of accounts because one month’s financial data had been lost when the company’s server had been moved To help address the inadequate financial information, a PwC team first spent time understanding what was available in the company and to identify critical gaps. A key objective at this stage of the due diligence was to explain what was common to the market and which areas were unique to the company. Subsequently, PwC continued to work with management to build information up from trial balances. They built profit & loss statements by product and region, identified key performance indicators and worked with the management team to alter systems to track these indicators. Getting on the right side of the delta January 2012 15
    • Mitigating actions from growth markets, there is likely to be In terms of how to overcome these even greater pressure on deal teams. issues, the key theme coming out of both Buyers from other growth markets are our discussions and our experience is often more prepared to do a deal around using local advisors in the without data in key areas, because they diligence teams so the context of the frequently are more focused on the risks involved can be put into focus. strategic rationale for a deal (e.g. access Deal teams will be unlikely to get to markets or raw materials) rather than comfortable with all risks, but the financial rationale. This can put “When you do diligence in emerging understanding context allows deal teams those less exposed to developing markets, you have to roll-up your to take calculated risks. markets at a disadvantage. sleeves and get your hands dirty.” Africa and Southeast Asia M&A By understanding what is normal for On average, there is less transparency Executive, Global Branded an individual market, and what is not, in company accounts in growth markets Drinks Company it is possible to focus on the issues that than in more developed economies and are critical for the business in question. this presents a risk to foreign investors. Given the breadth of issues at play, this However, we do not think it is feasible “The problem is you can’t spend that initial scan may need to be wider than a or even necessary to eliminate all of this diligence in developed markets. risk. What is important is to focus on much time with people during a critical areas and spend the time with diligence because you will scare Once critical areas are identified, it is local advisors to obtain data, bottom-up management.” necessary to take an approach to due if necessary. Exclusivity greatly diligence that is different from that taken facilitates this: there is unlikely to be “You can send in your advisors to in developed economies. Local teams are time or appetite for working with trial help. It came down to PwC doing important for this process. Shared balances in an auction. This makes it hard work on paper ledgers.” language and culture help teams to critical to identify off-market deals, explain the need for specific types of rather than solely relying on a limited Africa M&A Executive, analysis, find solutions to build the data, network of intermediaries and Strategic Industry and understand what the data is saying. corporate finance houses. Another challenge to obtaining exclusivity is that However, in order to do this, significant it exposes the vendor to the risk that the access or exclusivity is needed. To buyer withdraws. To obtain exclusivity, contrast the above case study, another foreign buyers may need to offer some PwC team worked on a separate deal in concessions, for example in terms of time Latin America where the client did not frame, and they must be able to convince have exclusivity. It faced the similar a vendor that they are likely to go ahead difficulties understanding financial with the deal. To do this, it is important information. The PwC team was able to that Board members and senior produce an initial red flag report executives are familiar with doing deals identifying information gaps, but the in growth markets and are bought in client was not able to persuade the target early into the strategic opportunity, to work with PwC to address those gaps. and where possible into the specific deal In the end, the buyer lost out to a rival in question. bidder. With increasing competition for assets from up-and-coming multinationals16 PwC
    • 2 Justifying developing market valuations – getting real Common problems • Large gaps in expectation between buyer and seller • Worse than expected performance Root causes Common problems Root causes • Uncertainty over future growth: Nearly 40% of the deals we assessed Valuations using traditional techniques market demand, distribution failed to complete because the bidder are difficult because of greater channels, and future competitor was unable to get comfortable with the uncertainty about future revenue actions valuation of the business. The beer growth. The key sources of this industry, with frequent auctions, has uncertainty are future market demand, • Few comparables numerous examples of international distribution channels, and competitor • Competition for assets companies losing deals because of high actions. Valuations may also be higher valuations in growth markets. The because many sellers have strong bidding war over Harbin Brewery in alternatives to doing a deal with a Mitigating actions China is one of the highest profile foreign investor. There are often rival • More research to increase comfort examples over the past decade, but there bidders. Stock markets also offer with projections have been a number of recent auctions as attractive valuations. Finally, many well, for example the Sona Group in companies have access to low cost capital • Structures such as earn-outs Nigeria. These competitive auctions were from local banks. • Combine conservative short-term affected by a number of factors, but Discounted Cash Flow valuations were potentially the key “The risk/return profile is often not (e.g. scenarios, higher discount determinant of who won the bid. For the there. Sellers have inflated price rate) with long-term strategic winners, there is the risk of having expectations. They’re too big to fail option value over-paid, while those that lost the bid in their own territory. They know the now lack a strategic asset. local banks, can get favourable terms, and can roll over loans. They High prices are often predicated on high“There is always someone willing never have to sell. I’ve not seen one growth, but there are cases of lowerto pay the asking price and price distressed seller of a good, sizable than expected growth post-completion.in 12% growth, or more.” For example, several consumer banks Eastern European business.” from Western Europe invested in Russia Investment Manager,“The hard part was getting just ahead of the financial crisis only to Global Private Equity Fundcomfortable. There were no good find subsequent performance was worsehistorical precedents or data. Real than expected. Not simply the result ofestate had only been a real business the financial crisis, the main reason citedin India since 2005, when the doors is actually stronger than expectedwere opened to foreign investment in competition. Barclays has divested itsIndia, and there was not a lot of Russian retail business, and Swedbank isinformation available to help judge in discussions to divest its retail business in Russia after selling its retail bankinghow much cash flow would be unit in the Ukraine in 2011.5generated from these investments.”Director, Global Asset Manager 5 “Swedbank In Russia Retail Talks With Raiffeisen”, Dow Jones News Wires, 4 August 2011. “Barclays announces sale of Russian arm to Igor Kim”, Reuters, 25 October 2011. Getting on the right side of the delta January 2012 17
    • “One of the pitfalls of doing deals in As with financial information, the main However, taking these actions is unlikely growth markets is getting reliable challenge with valuations is a lack of to provide the board of a global company market and economic data. information. It is difficult to obtain with the same level of comfort as it Understanding historical and accurate historical data on market spend, would be able to obtain in home markets. much less good forecasts for future Uncertainty around future growth, and projected beer consumption is key demand. While most companies are good difficulty in understanding the business’ for valuations. It is difficult to get at short-term cash management, there is financial situation, mean that the data that is reliable, precise and strategic rationale for a deal must generally less long-term planning. specific enough.” Companies may have a one-year budget, be that much stronger to justify Head of M&A, Global Brewer but many are unlikely to have a three- or proceeding with a transaction that might five-year plan. There are fewer otherwise look expensive. As such, some comparable transactions to suggest what flexibility with traditional valuation “It is difficult to make a valuation growth rates other buyers have assumed mechanisms is necessary. We believe based on DCF. Growth hypotheses in recent transactions. what is important is a degree of conservatism in short-term projections, and wacc are more volatile in growth Mitigating actions while separately considering the markets than in developed countries. There are ways to mitigate these risks. strategic rationale for an investment Working capital is difficult to which might therefore justify a much The global brewer we interviewed does predict, as it is not necessarily its own consumer research to underpin higher multiple than in developed followed in the financial reporting.” projections and uses larger than normal markets. Considering the option value contingencies with revenue of an acquisition in conjunction with “PER and other multiple ratios projections. Structuring solutions like a conservative Discounted Cash Flow are difficult to obtain. Multiples/ earn-outs can also share risk and align model is one way to ensure that you are valuations are less often disclosed in the interests of managers and partners. taking into account upside and strategic the BRICs. Companies are not easy to rationale without throwing the compare in terms of growth dynamics.” credibility of underlying assumptions into question. M&A Project Leader, Global Facilities Management Provider Case study – forecasting out of a conflict In one private equity investment in a growth market, the minority private equity investor had developed a conflict with another shareholder. The parties reached an agreement for the private equity investor to buy out the other shareholder’s stake. However, the private equity investor could not justify the valuation, largely because of uncertainty over future growth. PwC was hired to build a detailed model to support long-term forecasts. The resulting growth projections helped to support the valuation, so the private equity fund could buy out the other shareholder.18 PwC
    • “You need to do as much as possibleto ground the business commercially,but you have to apply more of astrategic lens. You need to be moreflexible about how you think. No onecan tell you what the market willlook like in ten years time. You needto treat it more like an option playdue to the high level of uncertainty.”Africa and Southeast Asia M&AExecutive, Global BrandedDrinks Company The high valuations and risks of The 3-7 year investment horizons of growth markets mean that private most private equity funds can present equity firms must have clear value potential challenges when funds seek propositions to clear their hurdles to help their portfolio companies rates for return on investment. For invest in growth markets. Entry into a example, one value proposition in new market has a long-term strategic China is helping mid-market option value for a company. However, companies prepare for an initial private equity investors may not be public offering. Many of the largest willing to fully value this option private companies in China have because they are unlikely to be able to access to lower cost capital from realise the value at exit. Entry into a banks and public listings, while many new market may not be valuable to a smaller companies are unable to future trade buyer who already has a obtain debt financing and lack the presence in that market. Also, in a financial reporting and governance secondary buyout, a private equity capabilities required for a listing. For fund may not fully value the option these smaller companies, private value if it only impacts profits in the equity can provide much needed long-term. capital while putting in place the systems and controls to prepare the company for a public listing in three to five years. Getting on the right side of the delta January 2012 19
    • 3 Non-compliant Business Common problems a subsidiary of a global corporation practices – discerning In understanding financial information, or private equity fund. Many of these the manageable from the there are a number of accounting and business practices can present deal breakers information practices in growth markets considerable risks for a foreign buyer. that differ from those in developed Common areas of problems include tax economies. In most cases, these practices and labour compliance, corruption, and are common and innocuous, but some fraud & misappropriation. These problems Common problems reflect a more serious risk. can expose a foreign buyer to potential • Tax compliance – “black cash” reputational damage from bad public transactions In the same vein, there are a number relations, or investigations and fines from of business practices that may be more outside authorities. If rectified while local • Corruption common in a developing economy, competitors continue the practice, the • Fraud & misappropriation and thus present a limited risk for the business may become uncompetitive. business, but would not be acceptable for • Labour practices & compliance Root causes Figure 7 • Less developed/unenforced Business practices that present problems for multinationals business and regulatory Area Description Example environments Tax compliance • Companies often keep two sets • In the Latin American case mentioned of books previously, PwC identified tax liabilities • Less formal governance structures • Low levels of tax compliance that represented 35% of the target’s (both corporate and personal). enterprise value We have come across staff paid in cash in paper envelopes, which Mitigating actions did not go through the accounts to avoid payroll taxes • Spend time on the ground with • For company directors who are also local teams/advisors paid in dividends or shares, this can present a significant risk for the company • Targeted due diligence covering key individuals and common Corruption • Some practices may be acceptable • Within a year of eLandia International under local law or norms (or Inc.’s acquisition of Latin Node Inc., FCPA issues (e.g. tax, labour, corruption) unacceptable but poorly enforced), issues in Honduras had caused it to but fall afoul of international bribery discontinue the target’s operations, and • Understand if the practice can laws incur additional costs relating to the FCPA – Foreign Corrupt Practices Act in the investigation, its attempts at remediation, be managed United States and Latin Node’s bankruptcy6 – Bribery Act in the UK Fraud and • More related party transactions7 than • One high profile example of alleged misappropriation in developed markets although more misappropriation of funds in growth often than not, these are benign markets concerns recent accusations of • However, some will have unrecorded embezzlement in the NASDAQ-listed transactions, fraud (potentially China Medical Technologies8 including false audit evidence such as fake invoices) or misappropriation of funds Labour • If a foreign buyer discovers child • Black empowerment regulations in labour in a business, it poses an South Africa ethical dilemma and a reputational • There are often stricter workers’ rights risk. The child may be the sole bread regulations in former communist countries winner for a household. The foreign • Other markets, such as Brazil, are difficult owner may need to consult with because of extensive labour laws and government and local and regulations international NGOS to find the right solution • Foreign ownership may require the company to comply with new labour laws Others • Range of other risks which may • Melanine milk contamination scandal in present risks for foreign investors, but China in 20089 primarily concern health & safety, and loss of intellectual property 6 “Latin Node Inc.: Undiscovered FCPA Violations Wipe Out an Investment”, Shearman & Sterling, April 15, 2009. 7 A related party transaction is an arrangement between two parties who are joined by a special relationship prior to the deal, for example a shareholder’s company being hired as a supplier. 8 “China Medical shares plunge on fraud allegations”, Reuters, December 6, 2011. 9 “Fonterra puts up $8.4m to provide care in China”, New Zealand Herald, October 11, 2008.20 PwC
    • “I can’t emphasise enough the Many of the issues we come across in this Once identified, it is possible toimportance of doing on the ground area concern related party transactions. understand if the risk can be managed,due diligence. I was in the office on For example, sales and purchases can be or if it runs throughout the company.Friday and some cash arrived in a made through related party special First and foremost, we recommend that purpose vehicles at below and above companies conduct and FCPA or Anti-brown envelope. We wouldn’t have market rates respectively. This moved Bribery review. In general, we believediscovered that in a normal profits out of the target company (thus that tax compliance can be managed,management Q&A process.” minimising taxes). Related party vehicles either through new policies orPartner, Global Asset Manager can be nearly impossible to trace to the indemnities in the sales & purchases ultimate shareholders, may be agreement. However, indemnities are unregistered for tax purposes, and are often only effective with an element of“There may be corruption, but unless often closed down after a short time deferred consideration. The key tothe business has a high component of frame (e.g. six months). managing fraud and misappropriation isgovernment interaction, then it’s less to understand if any identified Root causes irregularities are benign related partylikely that there are high levels of While multinationals are subject to transactions, or evidence of somethingcorruption in the business, and it strict regulations and standards, many worse. We believe this can best beshould be manageable. If there are growth market companies use less understood by assessing individualhigh levels of government formal governance structures. We transactions, as well as conducting dueinteraction, then we spend a lot of believe buyers can rectify these practices diligence on key managers andtime making sure the business by putting in place specific policies and stakeholders.doesn’t rely on extra payments and improved controls. The key risks arebribes.” failing to complete a deal because of Industries with high levels of business practices that could be government involvement (e.g. mining &South America Investment Manager, corrected, or failing to identify and plan metals, industries where the governmentGlobal Private Equity Fund to rectify inappropriate practices. is a key customer) generally present the greatest risks for corruption. However, if “Partners can have a different corruption is not endemic, then it may be“There is rarely a sufficient level of possible to put in place controls which approach to regulatory compliance.control in place: no statutory audit limit corrupt practices and the risk of In China, some may open storesprocesses, no business continuity running foul of global regulations. first and then ask for planningplanning, etc. It is necessary to permission later.”understand and recognise this and In some cases, it may also be possible toput into place a programme to bring Corporate Development Manager, employ constructive solutions to raisethe business under control over a Asia Pacific Retailer standards. In one example of potential12-15 month period.” child labour, the buyer created an Mitigating actions apprenticeship program with reducedHead of M&A, Global Insurer The key challenge to managing business hours, equal wages, and a training practice-related risks is determining program. Whatever the solution, what can be rectified and what cannot. rectifying these practices can add“If we can cordon off the part of the Spending time on the ground and costs to the operations of a businessbusiness where [there are non- asking targeted questions is often the which local competitors are unlikelycompliant practices] and put in place key to identifying business practice- to incur. But the impact of anya plan to stop the practice – for related risks. rectifying measures on theexample in parts of procurement – competitiveness of the businessthen we will do the deal. On the deal should be considered as part of thewe did, procurement had to be rebuilt valuation of the business, and couldfrom the ground up. However, if there therefore become a deal breaker.are questions around corruption inthe core business, or its operatinglicense, then it’s a deal killer.”Africa M&A Executive,Strategic Industry Getting on the right side of the delta January 2012 21
    • 4 Post completion Common problems A senior executive in the banking operations issues – There were several instances of people industry acknowledged these same integrating and taking issues post-completion creating language and cultural risks, but also control operational difficulties in the deals we difficulties navigating informal assessed. Given the nature of these governance structures. issues, we believe a large number of these people problems are likely to go “When you buy a company whose Common problems unreported and the actual percentage of staff is local, they have often had no • Wide range of factors causing deals that experience problems in the exposure to an international bank’s worse than expected performance integration and taking control phase is policies and procedures and we have post completion much higher than reported. to impose these upon them. This is a massive cultural shift and people do In a joint venture we advised on in India, the buyer put none of its own employees not appreciate the extent of this. Root causes on the ground in India. Within a few Language barriers only serve to • High requirements of foreign- years, the JV ran into trouble. The make this more difficult.” owned businesses: local operating foreign buyer had complaints around experience, deep business & a lack of transparency, and difficulty “There are also informal social finance expertise, foreign achieving global standards for structures and deferential dealings. language skills, cultural affinity governance, quality and technology. In Africa, we found the head of risk • Different attitudes to management After protracted legal proceedings, was deferring decisions to someone among local staff the international buyer was forced to in the team two notches below him.” surrender its share in the investment. • Living hardships in some markets Head of Corporate Development, One public example of post-deal people Global Bank issues is a major UK industrial group’s Mitigating actions investment in metal fabricating mills in • Getting the right people in place Russia. There were delays launching • Setting the right pace operations and the investment under- (address critical areas from day 1; performed against expectations. slower thereafter) “Bringing people into Russia with good project management skills took us longer than we expected. And so we did not execute our projects... this is our delay. I thought we could do it much quicker. You are dealing with import licenses, you are dealing with approvals from the government and they are helpful, but it takes time. We thought it would be easy. But we have a language barrier.” Group President of Division22 PwC
    • “Frequently we find the quality of Root causes “We don’t send in expats foradmin and support staff is too low or We believe that people issues emerge integration. We tend to leaveunderstaffed in finance, IT and HR. primarily because there is often a businesses fairly autonomous.Family-owned companies often do shortage of managers that meet the We tend to do integration remotely. strict requirements of foreign-ownednot have a CFO, just a controller or It’s cost effective, but also causes businesses in growth markets. To beaccountant that grew with the growing pains.” successful, foreign invested companiesbusiness but has limited knowledge require managers with local operating Emerging market CFO, Informationand sophistication. Finance, IT and experience, affinity with the buyer Technology CompanyHR are not seen as functions that (loyalty and knowledge of companyadd value.” culture), deep expertise in businessSouth America Investment Manager, and finance, and considerable “You have to know what you areGlobal Private Equity Fund language skills. Many have a smaller going to do about fraud and pool of business and finance expertise to corruption by the time you complete pull from. This is also the result of many the deal.” local business owners not placing as much importance on finance, IT and Head of Corporate Development, HR as foreign buyers do. Finally, in Global Bank some markets (e.g. Saudi Arabia, Iraq)“Have a six month plan for day one.” local mores and customs, or difficult living conditions make attracting and “It is important to anticipate theHead of M&A, Global Insurer deploying top talent difficult. integration process before the acquisition, and to build the Mitigating actions communication strategy.“There’s a honeymoon period for To manage these issues, the executivesa while post deal but you have to Communication is critical in that we interviewed made suggestions in Emerging countries where employeesactivate. Post-merger integration two broad areas: getting the rightconsultants say that speed is the may be less loyal to their company, people in place, and setting the rightanswer, but I’m not sure. Because in order to retain employees after the pace. Most interviewees indicated theof the speed of the market, it’s importance of bolstering key functions acquisition.”important not to rock the boat. You such as finance and IT. Most interviewees M&A Project Leader, Global Facilitiesneed to decide the priority projects, also suggested the importance of having Management Provideronly do those projects, and go at least one key person in the businessstep-by-step.” loyal to the buyer, either a long-standing When deal teams go into assess the employee of the buyer or a direct hire. operations of a target company, theyChina Business Development Director, Given the need to strengthen capabilities should be sure to look for not onlyConsumer Goods Company in IT, finance and HR, and most global opportunities for improvement, but also companies’ expertise in this area, these elements of best practice that can be functions are obvious areas for which to taken back to home markets.“A lot of market leaders [in Eastern identify key staff to work in an acquiredEurope] are built from scratch and business. This however, brings its owndon’t have any legacy issues.” complexities and there are countless examples of joint ventures failing“We’ve looked at hospitals because factions develop within thethat are better than those in management team. In part to avoid these factions, many investors hire peopledeveloped markets.” from the local market. It is important toInvestment Manager, Global PE Fund recruit these individuals early, and ideally provide them with some training and emersion into the company’s culture.“When we sold a Turkish bank, theacquiring bank’s consumer finance In terms of pace, interviewees indicatedteam went in during due diligence to it was important to plan early but not tosee where they could add value. They rush the actual implementation. Thisactually found that the Turkish bank contrasts with the need to communicate and address critical issues – in particularwas ahead of them in many areas. around unacceptable business practicesThey began looking for things to take – from day one.and apply elsewhere in the business.”Former M&A Advisor,Global Investment Bank Getting on the right side of the delta January 2012 23
    • 5 Difficulties with negotiating and contracting – making it to the dotted line Common problems • 3rd party claims against the asset • Enforceability of agreements • Local negotiating practices Root causes • Less developed legal infrastructure • Less experienced and less support in doing deals Common problems Another challenge is trust in the • Different approaches to We found these difficulties fell into four enforceability of legal agreements. negotiating main areas: claims by a third party For example, it can be very difficult to against the asset being purchased; execute warranties and indemnities in • Stakeholders whose interests may negotiations taking longer than expected; many growth markets. be difficult to ascertain difficulties enforcing legal agreements; and deals failing because of buyers fell Root causes foul of local negotiating practices. Evolving legal systems can and do Mitigating actions contribute to the difficulty of negotiating • Establish local presence One common problem in growth markets and contracting. However, we believe that • Adapt negotiating approach deal negotiations is the emergence of a problems with negotiating and contracting claim by a third party against the are accentuated by several attributes • Prepare before starting the deal assets being purchased. Examples of more common in growth markets. • Encourage seller to use an this in the public domain include a experienced advisor UK-listed mining company’s efforts to A less developed legal infrastructure sell assets in South East Asia. After the in some markets is another root cause. • Negotiate with multiple parties company agreed to sell the assets, its This makes it more difficult to enforce former partner in the region sued the agreements. Working with the courts can company, claiming that it had previously take a long time and if seeking “We have no guarantee that the agreed to sell the partner the assets.10 compensation from a seller or partner, seller will have assets in the future if there may be limited assets to pursue. we need to go after them. When a There are also several examples of Also legal frameworks in some regions dispute occurs, no one can get access negotiations stretching on far beyond are not flexible enough to accommodate to the money until the judge solves the 18-24 months customary for deals in deal structures used elsewhere (e.g. the issue. Any dispute can take years growth markets. One French company special purpose vehicles, management and years to resolve – a small dispute we spoke with spent over four years in incentive schemes). can take 4-6 years and parties can discussions with a partner in Brazil slow this down even more if they before completing the transaction. In an example in China, the listed Dutch want to.” chemicals company, DSM, spent over six South America Investment Manager, years in negotiations with North China Global Private Equity Fund Pharmaceutical Group before discussions were suspended in 2010. In 2011, DSM partnered with a different company, Sinochem.11 10 “Avocet sued by former partner over Asian asset sale”, Reuters Africa, November 28, 2011. 11 “Sinochem deal ends DSM’s search for partner”, Specialty Chemicals Magazine, September 2011.24 PwC
    • “It depends on the type of seller. Growth market sellers are frequently Many sellers, in particular state-ownedSellers can be extremely inexperienced families or entrepreneurs, and often businesses, also have numerousand a traditional deal process is have less experience in the process of stakeholders, and it can be difficult touseless. The seller is often not used to selling businesses. Many tend not to ascertain who holds influence and their use experienced advisors. In many interests. For family-owned businesses,selling businesses. If a seller is a markets, even if sellers do use advisors, in particular in the Middle East, the keyself-made man, it can be a once-in-a- they may be less sophisticated and may decision-maker may not even be at thelifetime event for the seller.” not have a trusted role. Because M&A table. The same is true for Chinese stateHead of M&A, Global Brewer markets are smaller and have been owned entities (SOEs). operating for a shorter period of time, advisors – investment banks, accountants Growth market sellers often prefer“The classic problem is you have an and lawyers – tend to have less cash, but for buyers of developinginvestment bank send you 1-2 pages experienced teams in growth markets market assets, it is more important toon a company. Sometimes, the than in developed M&A centres like New use mechanisms such as deferred York and London. While it may seem that consideration and a larger proportion ofinvestment bank hasn’t even met an inexperienced seller would give a the consideration in escrow, because ofthese companies.” buyer an advantage, this is not the case. the difficulty of enforcing contracts, toChina Business Development Director, Given the complexity of negotiations, resolve valuation gaps and, as we discussConsumer Goods Company foreign buyers’ needs for information, in the next section, to align interests with and the potential for the seller to stay on partners. The challenge is negotiating as a partner, it is better to foster an the right level of escrow.“The owner frequently has a price in environment of open communicationhis mind which he is looking for. To and trust, rather than pursue a zero sum “Advisors suggested a 30% escrowcome to this, he has usually talked game negotiation. Negotiating on a guarantee. This was almost a dealwith people and bankers who have common footing and using a shared way breaker. Three years after the of thinking about deals is a good starting acquisition, only 2% of thetold him that US companies in the point for this. Advisors also offer ansector are trading at X.” acquisition price was at risk.” opportunity for the seller to learn aboutSouth America Investment Manager, deals and still save face. M&A Project Leader, Global FacilitiesGlobal Private Equity Fund Management Provider Generally, growth market sellers also have a different approach to“There is a prevalence of family- negotiations. Negotiations may be lessowned businesses. There is a culture formal and place a greater emphasis onof people who have a lot of intrinsic trust and relationships than in developedvalue built in. They may have seen markets. Also, sellers’ bases for valuation often limit the ability for discussion andlots of growth over the past 10-15 negotiation. Sellers often have a singleyears, and project a trajectory of number in mind based on transactionsgrowth that people in developed that may not be comparable in terms ofmarkets aren’t comfortable with.” industry, business model or size.Director, Global Asset Manager Getting on the right side of the delta January 2012 25
    • “On a deal that failed, we were Mitigating actions “We often establish escrow accounts obliged to communicate solely Deferred consideration, larger escrow against risks. Escrows are a through a local investment bank (that accounts and taking a smaller stake necessity. The amounts tend to be was unfortunately inexperienced), with an option to buy a bigger stake at higher than in the US. US escrow a later time are all structural approaches because it was owned by the seller. accounts are typically 5-10% of to reducing risk. We tried to send messages through purchase price whereas in LATAM, the advisor to the key decision A local presence is the best ways to it is 10-20%.” makers, but the advisor wasn’t identify potential claims on assets in a South America Investment Manager, passing on messages well enough.” deal, and to increase the chances of being Global Private Equity Fund able to resolve a claim. This local presence “On one of our recent successful should include active use of local deals, we negotiated with the CEO, advisors and a clear strategy to engage “Target companies are usually family but we had an open line of both national and local government, as owned businesses. It is important to communication with the owner too. well as key business partners. understand the point of view of the Therefore, we could manage all the family.” stakeholders and keep up It is important for foreign buyers to adapt their approach to local ways of communication throughout the “Pricing is not the only concern. negotiation and potentially using it to process.” It is important to demonstrate the their advantage. In order to be flexible Head of M&A, Global Insurer around changing timescales, preparation respectability of your company as a is needed. Buyers should also address buyer, and its ability to take good stakeholders’ preconceived market care of the business and its employees concerns before starting the deal, and after the acquisition. As a result, have stakeholders bought-in to a walk- establishing a personal relationship away price before making an initial offer. with management is critical... and it takes time to build.” To a degree, foreign buyers must recognize long lead times as par for the course for “I am very cautious in the selection doing deals in growth markets, but it of the right advisor. It takes time in may be possible to reduce the chance of extremely long (e.g. 2-6 year) negotiations emerging countries, but it enables by ensuring that you are have a line of us to avoid wasting time during the communication open with decision acquisition process.” makers and are considering multiple M&A Director, Global Electrical acquisition targets. Distributor Case study – a tale of two private equity houses “In our experience of working with private equity houses in Russia, we  have seen sharply contrasting approaches. In one, the deal team brought in a small army and proposed a sales and purchase agreement 3 inches thick. In another fund, the team generally went in with a smaller team and a softer, more pragmatic approach. Obviously a number of other factors are at play, but the second fund is generally regarded as having been one of the first funds to ‘get it right’ in Russia.” Andrew Cann, PwC Deals, Russia26 PwC
    • 6 Partnering conflicts Common problems Problems in partnering were the most – reconciling differences Historically, the main reason for common reason for problems post- and managing great partnering was regulatory: certain completion in the deals we assessed. expectations industries did not permit wholly owned Common issues were differences of foreign investments. And in some sectors opinion over future strategy or and some countries (e.g. retail in India), conflicts over competition outside of regulations still require partnering. the venture. Common problems While there has been a tendency to • Conflicting views over strategy favour wholly-owned investments in Public examples of partnering problems growth markets in the past, partners generally concern conflicts over • Conflicts of interest outside the offer a number of benefits. Foreign competition outside of the venture in venture investors are increasingly partnering or question. French consumer giant Danone, • Cultural differences taking minority stakes to obtain access to one of the world’s most experienced domestic markets. growth market investors, has had very different experiences in investments in Root causes “A joint venture is attractive for the China and Russia. The latter has been a seller, as it enables the family to get resounding success while the • Misalignment of interests relationship with their partner in China cash, and still benefit from the company’s growth. A JV is also has been the source of a public dispute.12 Mitigating actions interesting for the acquirer, as it Joint ventures can be notoriously difficult • Choose the right partner by enhances the management loyalty.” to manage, particularly in the developing holding discussions with multiple markets where litigation is regarded as companies identified through a day-to-day business practice. One high M&A Director, Global Electrical bottom-up screening exercise profile example is the 50/50 TNK-BP Distributor • Research any partner extensively joint venture in Russia between BP and a group of Russian billionaires known as • Consider exit and avoid 50/50 AAR. In early 2011, when BP negotiated joint ventures when structuring “We kept the founder on post-deal as a partner. He knew the operations. a separate alliance with OAO Rosneft, the partnership a Russian state-controlled oil company, When it came to decisions about new AAR attempted to block the agreement, lines and new distribution channels, claiming that the new alliance would he was an invaluable advisor. He have violated exclusivity provisions in knew the market inside and out. the TNK-BP joint venture agreement.13 We would have made many mistakes without him.”“We are brand new to this country. Investment Manager, EuropeanWe don’t want to write our own book Private Equity Fundof mistakes when somebody else thathas been in this country for 60 yearshas already written the book andcan say, hey come work with me andI will help you avoid the pitfalls.”Director, Global Asset Manager 12 “Danone: Russia get the cream”, Financial Times, February 15, 2011. “Danone ends Wahaha dispute, to sell China JV stake”, Reuters, September 30, 2009. 13 “TKN-BP partner relishes conflict”, WSJ, November 14, 2011. Getting on the right side of the delta January 2012 27
    • Where there are conflicts, they can all too easily become protracted, because for partners in growth markets, time may be less important than it is for global private equity investors focused on IRR, or listed companies with short-term pressures from the markets. “Local partners don’t care about timing. They’re happy with their lives. In a dispute, a local partner often just sits on their hands.” Investment Manager, Global Private Equity Fund Identifying the right partner can be difficult because of low level of quality deal flow. There are generally fewer auctions in growth markets, and industries are generally smaller, with fewer strong companies, than in developed economies. Ways to increase the chances of finding the right partner include considering a broader range of targets and spending more time getting “We find a local partner we can trust Root causes to know them and their shareholders. and with competitive advantage. The We believe the key reasons for most key driver for us is getting the right partnering problems is that partners partner in the first place, getting the often have horizons beyond the investment in question, and there is cultural affinity so we can work also a strong chance that these together in the future. It takes a lot of expectations can change. We believe ongoing TLC to make sure you’re in the attributes that make a partner bed with the right person.” attractive are competitive advantage, alignment of interests, similar business “We always seek control. If we can’t, cultures, and capabilities that are we seek at least blocking control.” complementary to the buyer. As mentioned previously, holding Partner, Global Asset Manager discussions with multiple companies increases the chance of choosing the right partner.28 PwC
    • “The partner has to appreciate and Mitigating actions It is also important to plan for exit. Inactually need the value you can add. We recommend that companies identify these same joint ventures, problems onlyOtherwise, it will not be a true potential partners via a bottom-up began to arise after the initial years ofpartnership.” screening exercise, also considering partnership. The longer the partnership potential new entrants from adjacent is, the greater the potential for changes sectors. Once buyers have conducted in interests. Also, after initial years,“Uncovering true intentions is one of initial research into a company’s partners will bring less benefit to eachthe most difficult aspects of partner other – the foreign buyer will have gained background, we recommend that thedue diligence. Often, companies will deal team spends time getting to know local knowledge, and the local partner issay what they think you want to the partner face-to-face and doing likely to have learned best practice. Inhear to attract investment. Never detailed research on the ground. cases of entrepreneurs and family-ownedpass up an opportunity for a business, they often have a long-termmeeting. In India, it’s about having “For new markets, we tend to do a interest in exiting the business. Thus,lunches, coffees and getting to know large initial acquisition and then structuring an effective partnershipeach other. You can’t rush the smaller bolt-ons. We engage someone may also mean appropriately definingprocess.” under what circumstances and how it to do a market study when we enter will end to align interests. For example,Director, Global Asset Manager a market and for large deals. For when one partner intends to ultimately new markets, we use the study and leave the business, it is important to do a scan to identify target define valuation mechanisms in opportunities.” anticipation of exit. Emerging Market CFO, Information Technology Company However, many state-owned businesses and larger private companies aspire to The key considerations for structuring grow into different geographic markets“We never consider 50/50 JVs partnerships are avoiding 50/50 joint or different product areas. This can bringbecause you need to know who is ventures and planning for exit. The them into direct competition with thein control.” majority of deals with partnering foreign investor. In these cases, we problems that we assessed were 50/50 believe discussion of exit is likely to bringChina Business Development Director, any conflicts of interest to the forefront, joint ventures.Fast Moving Consumer Goods potentially illuminating a way to exit theCompany partnership that is amenable to both This may not mean taking control immediately. In more mature growth parties. For example, an IPO may be a markets like the BRICs, strong domestic domestic partner’s long-term goal for a“We believe in reaching a majority companies often require majority control. business, while a foreign partner maystake, and increasing it with time : This represents a change in position from intend to ultimately take full control.51% in the first year, 70% to 75% the first wave of joint ventures after Facing up to the realities of theseafter 3 years, and 100% after 5 years.” these economies first opened. One of the situations up front can help to avoid reasons for this is that listed companies conflict in the future.M&A Director, Global ElectricalDistributor may want to be able to consolidate joint venture results. If you are not in control, Even with the best structured of it is important to negotiate to obtain veto partnerships, changing interests mean and other protective rights, while that there is likely to be a need for“People often say that a contract further negotiation in a partnership. balancing the need to establish asigned in China is a right to future Therefore, deal teams should ensure foundation of trust for a broad andnegotiations. You have to rely on long-standing relationship. continuity between initial negotiationsgoodwill and interests. and subsequent responsibility for the partnership. One way to do this is toThe problem is that within a few have the person who will be ultimatelyyears, the people in Western responsible for the venture as a keycompanies who sign the deals have person on the deal team.usually moved onto different roles ordifferent companies.”Sir John Stuttard, Former Lord Mayorof the City of London and Chairman ofPwC China Getting on the right side of the delta January 2012 29
    • 7 Government interference Common problems In addition, the recent suspension of the – managing an additional In the deals we assessed, government decision to open the Indian retail sector stakeholder interference prevented a large number of to foreign investment, to permit 51% deals from completing and also created a foreign ownership of supermarkets will number of issues down the road for deals limit the level of foreign investment in that did complete. Key problems the sector. Moreover, a lot of planning Common problems identified include governments not done by foreign companies • Government delay or non- approving transactions (e.g. because of approval of transactions (e.g. competition considerations) and post-deal Root causes anti-competition commission) changes in government positions – either on regulation, tax, or specific its While government interference is not • Post-deal changes in government approval of specific transactions. specific to growth economies, there positions remains a much greater level of There are several relatively high profile uncertainty as to timing and impact. examples of government interference in We believe several connected issues lie Root causes deals, particularly post-completion. In at the heart of deal problems stemming • Grey regulations 2006, Shell was forced to cede control of from government interference. its investment on Sakhalin Island in Many areas of regulation are grey, • Changing power within Russia to Gazprom. The case is a largely because they remain under government complex one, with local public relations development. Combined with the fact • National or regional interests in issues and environmental concerns, in that in many growth markets, as in strategic industries and foreign addition to control over a strategic developed markets, governments and direct investment asset.14 Three years later, Shell was power within governments can invited to invest in two new fields on change, this presents a risk that the Sakhalin Island.15 government’s position can shift. This can Mitigating actions have unintended effects, to the • Engaging with multiple levels of Two deals with government interference detriment of foreign investors, because government that we assessed in detail took place in of national interests to control foreign Africa. After investing in Nigeria in 2004, investment and nurture the • Scenario planning Virgin Atlantic claimed that the development of strategic industries. government forced it to move its Also, a less developed appeals process operations from the international and lengthier time-lines for legal and terminal to the domestic terminal, administrative proceedings makes violating a deal signed by the previous decision makers in the civil service “The deal was referenced in the government.16 In another deal in Africa, more important. [incoming] party’s manifesto, and after the deal completed, there was a parts of the sales and purchase change in government, and negotiations We believe the risks of government agreement were read on radio. were re-opened. interference are greatest in three main Because there was no concept of a areas: industries that are important to the In India, there is currently a high profile national economy, that are sensitive freehold agreement, we used a 999 case concerning a major UK corporate because of their impact on the population, year lease. This was read on air as an in the courts about the tax treatment and that are a source of government example of imperial colonialism.” of investments in business activities revenue beyond corporate taxes. Africa M&A executive, in India. The case has potential wide- Strategic Industry ranging implications for a number The nature of government involvement of foreign investments. In China, tax is changing as regulatory regimes in circular 698 will increase the scrutiny growth markets develop. For example, of the sale and related capital gains from the BRICs have achieved considerable shares in offshore holding companies economic success, and are now less whose only asset is a China business. incentivized to court FDI. 14 “Shell shakedown”, CNN Money, February 1, 2007. 15 “Russia invites Shell back to Sakhalin as finances plummet”, The Telegraph, June 28, 2009. 16 “Virgin in talks to sell out of Nigeria”, Financial Times, August 19, 2008.30 PwC
    • Figure 8 Industries subject to greater government involvement Important to the Sensitive because of Sources of national economy impact on population government revenue • Retail • Media • Telecommunications“The biggest government risk now is (e.g. bandwidth licences) • Financial services • Pharmaceutical/healthcarethat political and regulatory systems • Natural resources • Natural resourcesare still changing and the (e.g. oil & gas in Russia) (e.g. exploration rights)governments do not anticipate the • Energy & utilitiesmedium- and long-term impact of • Certain manufacturing sectorstheir policy changes. For example, in (e.g. auto in China)Brazil in 2009, the government putin capital constraints to prevent theReal from further depreciating There is arguably now a greater incentive “It’s important to understand theagainst the dollar. This had a to protect local industry and encourage attitudes of the person responsiblesignificant impact for us as it the development of national champions. for making a decision towards your Examples of this include Brazil’s domestic industry, your company, and evenrestricted the currency transactions sourcing requirements. Some of thewe were making.” your country. These attitudes can be countries with policies most conducive biased based on their personalPartner, Global Asset Manager to FDI could now lie just beyond the BRICs, in countries like Mexico, Vietnam experiences.” and Indonesia.17 Sir John Stuttard, Former Lord Mayor of the City of London and Former Mitigating actions Chairman of PwC China Although there is no way to remove the risk of government interference There is a corruption and bribery risk completely, we believe it is possible to associated with developing direct hedge this risk by developing a relationships with government officials, government strategy before doing a deal. but there are ways to develop The strategy should include scenario relationships while avoiding this risk. For planning and engaging the relevant parts example, many regulators are interested of government as a key stakeholder. in learning how industries are regulated abroad. Companies can facilitate this Through scenario planning, it is process through educating the regulators possible to anticipate the impact of and making introductions. a change in government by engaging with strong opposition parties and Whichever strategy is pursued, it is considering strategic responses to them important to begin developing a coming into power. An advisor that government strategy early. This may be focuses on country risk, embassies, able to turn government involvement chambers of commerce, and business into a source of advantage over rival councils can help to understand how the foreign bidders. government is likely to change and the impact on business. “We would have kicked off both the corporate social responsibility Engaging with multiple levels of programme earlier, as well as government enables the diversification addressing areas like pensions that of this risk, and engaging with industry are important to the government. level regulators can further reduce the risk of changes in power. Engaging the It is important to start on the more government often has the additional complicated issues earlier, so you benefit of minimising other risks such as can drive it, so you can help the intellectual property loss. This should government to understand the issues.” include identifying decision-makers and Africa M&A executive, understanding their individual Strategic Industry perspectives. It is important not to rely solely on your partners as the conduit to discussions with government officials. Independent channels should be created. 17 Eurasia Group. Getting on the right side of the delta January 2012 31
    • “We would have done more scenario Figure 9 planning with mitigation strategies Key ways in which governments influence deals – pre and post deal. It’s important to Level of government lobby both the current government as well as the opposition.” Local National Africa M&A executive, Strategic Industry • Taxes • Competition/ M&A • Subsidies commission Formal • Foreign investment regulations “It is important to get the support of • Industry-specific Type of interaction the right people in China, in order to regulations lead an efficient lobbying effort and ease the process with government institutions.” • Access to partners • Access to partners M&A Director, Global Electrical • Planning/land and • Access to foreign Informal Distributor utilities access exchange, raw • Access to local materials, import/ financing export quotas, etc. • Public relations “Protectionism and the role of the • Industrial relations government are both a challenge and an opportunity. Because we enter the market early and develop it, staying for a long time, we build up good Source: PwC analysis. relationships with some governments. They appreciate that we are not just coming in when the market is hot and then disappearing. Our local network enables us to navigate through the regulatory system quicker.” “We don’t get involved with presidents and prime ministers, because they have a short shelf-life. Private equity: an even stronger case for working with We work with ministries of finance.” the government Partner, Global Asset Manager In developed markets, private equity has had to manage negative public perceptions on a number of occasions. In growth economies, where the asset class is likely to be even less well understood, the risk of negative public “It is necessary to get to know the perception is potentially even greater than in developed markets. Working with important influencers and decision the government as part of a social responsibility programme is one way to makers a long time before you do a address this risk. deal in growth markets. It is In addition, the combination of low quality deal flow and a broader coverage of necessary to lay the ground work.” industries mean that private equity funds should spend time thinking about Head of Corporate Development, different ways of sourcing deals in growth markets. Working with local Global Bank government is one alternative way of sourcing deals.32 PwC
    • Nuances of individual markets The risks discussed throughout this This reinforces the need to tailor deal report are common themes across processes to specific markets, to have growth markets, but some risks are more nationals on the deal team, to have team prevalent in specific markets. There are members spend considerable time on the also nuances to how risks manifest ground, and to use local advisors. themselves in individual markets. Getting on the right side of the delta January 2012 33
    • Figure 10 Regional differences to deals in emerging markets Market Local nuances Mitigating actions China “Strong competition from rival bidders and “Bring your stakeholders on board early on. Spend alternative sources of funds makes valuations the key more time on the strategic rationale for the Matthew Philips issue for China. Based on our data, close to 50% of investment. Educate them about multiples in the Partner, China deals withdrawn after beginning diligence are market, in particular for IPOs. Discuss what Transactions Leader aborted because of valuations .This is not surprising, approach you’ll take to valuations. How conservative given the fierce competition in the Chinese M&A will you be with DCF assumptions? How will you market, and IPO markets in Shanghai, Hong Kong calculate the option value of a presence in the and overseas. This has been exacerbated by the market?” emergence of local PE funds over the past few years.” “Government interference is largely a legacy of the late 90s and early 2000s. We see government interference most often in deals with state-owned enterprises, but deals with SOEs are not that common anymore.” India “Indian companies often have a large number of “Find the real decision makers and start talking to transactions with companies owned by other family them early on. This often requires industry contacts, N.V. Sivakumar members. These related party transactions need to local intelligence and talking to advisors and Partner, India Deals Leader be appropriately identified, understood and factored accountants to determine who this may be.” in order to obtain reassurance that the revenue and profitability is reflected correctly.” “It is critical to get buy-in with the target’s support network, especially when it relies on a large “In private or family run companies, the key decision distribution network (such as in retail or consumer makers may not be the people on the negotiation goods), which may not stay loyal to new owners.” table. – Other family members who are not in the forefront often play a significant role in making or “Have back up options to fall back on, and start the breaking a deal. Although a deal might appear to be process with them so you don’t lose too much time if going well, it could easily fall through.” your preferred deal falls through.” “Sell-side advisors are often local lawyers or family members with little M&A experience.” Brazil “The environment is improving rapidly, and has been “Conduct a phased approach to due diligence so for the past ten years, because of growth of the you can identify the key issues, including corruption, Luis Madasi private equity industry, increased awareness of and then focus on them. Engage tax advisors. Work Partner, Deals issues from IPOs, the implementation of mandatory with industry regulators to understand where the statutory audits and a number of other regulations are going.” developments. However, a number of issues remain” “Consider post-deal changes like addressing “The regulatory environment, particularly for tax and corruption or any organisational changes. It’s labour, is a complex one. There are high taxes and important to understand these costs as part of your social charges on payroll, sales and income. Taxes valuation.” are diverse and legislation changes fast.” “Compliance with corruption laws is an issue in many companies, and there may be undisclosed off- balance sheet transactions and commitments.” “There are post-merger integration challenges as well. Many companies are not organised in the best way, and the costs of employee termination is high.”34 PwC
    • Market Local nuances Mitigating actionsRussia & CIS “Very often, small-and medium-sized Russian “Thorough due diligence can often identify these companies have issues with tax compliance. This practices and therefore the risks can be quantified.Andrew Cann can lead to potential tax liabilities, especially as an But this takes time and patience.”Partner, Deals acquisition often triggers a review by tax authorities.” “Investors must be very careful to commission an “In some small- and medium-sized companies, there FCPA review.” is the potential for infringements of the FCPA or UK Bribery Act.” “Understand legal frameworks and use local Russian lawyers. If things go wrong, you will be subject to the Russian courts.” “While there may be problems to overcome, you can still make a lot of money out of doing deals in Russia.”Eastern Europe “Eastern Europe is in some ways becoming closer to “Investors need to be very careful in these areas. We a developed rather than a growth market. Many strongly recommend that an FCPA or similar reviewJonathan Thornton countries in the region are members of the EU and is undertaken to identify any practices ongoing in thePartner, Deals some, such as Slovakia, are also members of the company that a western buyer cannot continue post Euro zone. As a result many of the issues found in deal.” other growth markets, such as black cash schemes, have become significantly less prevalent over the last “Investors need to focus on what is really important 10-15 years. However, the region is still diverse and and manage the expectations within their own some countries have developed much further than company as to what level of financial information others.” they can reasonably expect to get.” “Corruption in businesses related to government contracts is still an issue in many Eastern European countries, although Governments are taking steps to be more transparent in their purchasing, for example using on-line auctions.” “Another continuing concern is the quality of financial information, which is still typically lower than in the West.”Middle East & “In two specific deals, the main reason for post deal “Investors cannot rely solely on management. They issues was that management was not experienced have to monitor KPIs, even more closely than in otherNorth Africa enough to deliver on the business plan.” markets.”Hani AshkarPartner, Middle East “Many local businesses have under developed “Investors should hire a competent CFO as well asDeals Leader control and reporting systems. If this issue is not actively follow-up to make sure that the control addressed early, it results in delay in reporting red system and financial reporting functions improve to flags in the business and related issues, which could an acceptable level.” have a significant negative impact on operations.” “Companies need to start recruiting for key “There are also issues specific to individual markets managers even earlier, and factor in higher costs for such as living hardships and security risks.” key staff.”Sub-Sahara Africa “Government policy is more central to deals in Africa. “Go there. Local knowledge is paramount. Investors There is often a higher level of political interest need to visit government departments andSimon Venables perceived interference in deals. Some countries can ambassadors to understand the political views onPartner, Southern Africa change the rules on tax or legal parameters quickly.” the acquirer country and anything else which couldDeals Leader cause the government to intervene.” “People with ‘untested’ political and business connections who make a living out of these connections can convince companies to invest and therefore testing the underlying relationships is key.” “There is a massive deviation of culture and economies within regions. Companies which have failed often have not had enough of a grasp of the local people, business conditions and environment.” Getting on the right side of the delta January 2012 35
    • PwC firms help organisations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Design & Media – The Studio 21004 (01/12)36 PwC
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