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Etude PwC sur les pays à forte croissance 2013


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Entre 2008 et 2012, les pays à forte croissance ont investi 161 milliards de dollars dans les marchés matures, comparés aux 151 milliards de dollars investis dans le sens inverse. Une tendance qui se poursuit, notamment par les acheteurs chinois.

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Etude PwC sur les pays à forte croissance 2013

  1. 1. Resetting the compass Navigating success in deal-making for mature market sellers and high growth market buyersMarch 2013How high growth marketbuyers are moving M&Ain a new direction
  2. 2. Key contributorsUKCoolin Desai, Malcolm MacDonald,Mukesh Rajani, Devean George,Shen Kan, Chris Hemmings,John P Dwyer, Michael Hinchcliffe,Richard Skinner, Matthew Wood, NickPage and Rhys JoyceGermanyHansjoachim Koehler, Philip GrindleyChinaNelson Lou, Edwin WongIndiaN V Sivakumar, Sanjeev Krishan,Vaidison Krishnamurty,Alexander PriestleyMiddle EastRichard Rollinshaw, Dean Kern,Oliver Reichel, Jochem Rossel,Jonathan ThorntonSouth AfricaAnton EsterhuizenBrazilLuis Madasi, Graham Nye,Matthew BrayRussia and CIS RegionAndrew Cann, Lev Vilyaev,Alexander Ordinartsev, Mark HannyeUSAJohn D. PotterHong KongMatthew Phillips
  3. 3. ContentsExecutive summary 2Introduction 4HGM buyers – the evolution of players and drivers 6Why high growth market to mature market M&Ahas room to grow 8Understanding drivers: why it is even more criticalin cross-border M&A 11Getting to the dotted line in cross-cultural deals 14Conclusion 18Please get in touch 19Glossary 20
  4. 4. Executive summary Ready to reset your deals, HGM companies can unlock or compass? accelerate their domestic opportunities by acquiring state-of-the-art technology The geography of deal-making is and expertise or by buying into changing fast. Over the last five years established global brands. And for many we have seen more deal value flow from their home market is just one part of the largest high growth markets (HGM) their growth story. Through deals, they to mature market economies than in the are bringing their products and those of other direction. Between 2008 and 2012 others to new territories by buying into HGM companies invested US$161 billion established distribution channels, brand into mature market companies, names and know-how. A growing outstripping the opposite flow of US$151 number of HGM companies are already billion. In 2012 alone, HGM companies poised to go from being a national closed deals for mature market targets leader to a global one and are using worth US$32.6 billion, almost three strategic M&A to accelerate that move. times the amount they invested in 2005. We see this shift in dealflow direction as Getting to grips with new the start of something bigger, that will deal dynamics not just bring a much needed boost to the global M&A market but that can Over the following pages we look at how stimulate growth for both mature and the rise of HGM companies acquiring HGM market companies alike. In this mature market firms brings not just a report, we look at how dealflows are change of direction to the M&A market changing and we also consider how new but a new dynamic. For HGM companies types of HGM investors are turning to and mature market companies there can M&A and the factors driving their be very contrasting differences in investment choices. Large and mid-sized culture, political and economic context private companies have now joined the and processes. There is no recipe for a state-backed investors who were among great deal but when the ingredients the first to acquire mature market change, it becomes even more important targets. HGM investors’ scope is also that both buyers and sellers know what widening, with HGM to mature market it is the other wants from the deal. This M&A activity ranging from energy, raw issue came up repeatedly in materials and engineering to media, conversations with our clients and deals retail and consumer goods companies. partners1 worldwide. Over the following pages, we first look at what is generating From outsourcing to the rise of HGM – mature market deals. deal-sourcing We then consider what HGM buyers are looking for in mature market targets, Looking ahead, we believe that some of the most common differences in European, North American and deal approaches and how buyers and Japanese companies should also be sellers can manage them successfully. considering high growth markets, not just as a destination for their wares or for lower cost production, but as a potential source of investment. ThroughA note on our terminologyThroughout this report the term “High growth markets”, abbreviated to “HGM”, refers to China, India, the Gulf Region (covering the Gulf Cooperation Councilcountries, i.e. Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates), Russia and Brazil. Under the term “mature market”, we include the US, theUK, Germany, Australia, Japan, and Canada. The charts and figures used throughout cover only deals involving companies in and from those countries.1 Deals is a global line of service in PwC comprising lead advisory strategic advice, valuation, due diligence, sale and purchase, agreement, part dealchange and integration advice.2 | Resetting the compass | PwC
  5. 5. Getting to a good deal: critical aspects of M&A between HGM and maturemarket companiesCommon challenges Suggested measuresAddressing valuation mismatches • Greater transparency by both buyers and sellers around deal drivers can increase trust and dispel unfounded expectations. • Sellers should not assume that an HGM company may have easier access to capital, including state funds. • Sellers need to understand the buyer’s investment timeframe and shareholder environment before setting premia – Sellers may demand a higher premium from buyers they think are likely to be slow to complete. • Clarify valuation techniques to ensure both parties are working with the same parameters. • While multiples can be a guide, past deals are not always a reliable yardstick.Agreeing a timeframe for completion • Both parties need to understand what constitutes a ‘normal’ timespan for negotiations and completion for the other party to set expectations from the outset. • In cases where special approval processes need to be followed, e.g. the deal needs to be vetted and/or finance approved by a regulator, buyers should educate sellers early around their approval processes and timelines so that they do not become an obstacle. • Foster relationships with key decision-makers from an early stage so that dialogue is possible if the deal timetable begins to slip.Connecting with decision-makers • Take time early in the process to understand decision-making hierarchies – and who has the final say. This is particularly true for deals involving State Owned Enterprises. • Buyers bidding for targets with Private Equity involvement should have direct contact with the PE side as well the target company’s management. • The time needed to develop relationships varies greatly from culture to culture; consider this when approaching decision-makers. Seek advice from people who understand these finer points and stay attuned to signals.Reconciling deal process differences • Plotting the deal process and due diligence approaches of both the buyer and seller will highlight where they diverge and provide a basis for discussion. • Communicating the reasoning behind due diligence practices can make the other party more comfortable/willing to cooperate with the process. • High growth markets can have very different reporting, tax and legal demands and systems that can slow the due diligence process and necessitate more requests for information: both the buyer and the seller need to be explicit about this. PwC | Resetting the compass | 3
  6. 6. Introduction A new direction for global M&A PwC’s deals partners spend their time the last five years have seen more deal working with clients, buyers and sellers, value flow from the largest high growth across our many different territories. markets (HGM) to mature market Even in the best of times, clients can find economies than in the other direction. deal making a testing process. In 2012, HGM companies closed deals Identifying the right target or potential for mature market targets worth purchaser, aligning expectations and US$32.6 billion, almost three times the valuations and making the outcome figure for 2005. HGM companies, both work is a time-consuming process that state-and privately-owned and more requires experience and resources. Years recently private equity houses are out of growth and consolidation in their key looking for acquisitions and competing markets mean large global companies with their domestic and overseas rivals are usually geared for complex for deals. transactions. But the geography of deal-making is changing fast and so are the players. As the chart below shows,Figure 1: Role reversalHGM companies invest more in mature market ones than vice versaThe flow of investment from ‘Emerging’ to ‘Mature’ markets is at scale and greater that the flow the other way forthe past five years $151 bn ‘Mature’ ‘Emerging’ Economies Markets $161 bn US China UK India Germany Middle East Australia Russia Japan Brazil CanadaNote: Deals included are completed, disclosed deals where the final shares acquired was >20%Source: PwC analysis of data from Dealogic4 | Resetting the compass | PwC
  7. 7. Figure 2: Investment from high growth markets to mature markets on“As we emerge from the the risefinancial crisis in Europe, Investment flows, 2006 – 2012our deal-making will needto change to accommodate 700 140the new buyers from the 120 600East and South. If we don’t 500 Mature to Emerging Deal number — # 100 Deal value ($bn)change we risk missing an 80 400 Emerging to matureopportunity to engage with 60 300 Emerging to mature, # Mature to Emerging, #businesses that will play an 40 200important role in shaping 20 100our future”. 0 0 2006 2007 2008 2009 2010 2011 2012Nick Page, PwC UK Note: Deals included are completed, disclosed deals where the final share acquired was >20% Source: PwC Analysis of data from DealogicYou need more than tough part. HGM buyers can have very Make the most of PwC’sacronyms to understand different approaches to their mature experience for better deals market counterparts, reflecting theirthe markets This report draws on the experience of own strategic, commercial and culturalDespite the convenient acronyms, no DNA. Few mature market companies PwC’s global network of deals advisorstwo high growth markets or high will have experience of working with, let and our insight from advising ongrowth market companies are alike. alone being acquired by, a HGM market hundreds of deals across very differentUnderstanding where a potential company. Meanwhile, HGM buyers are markets. We look at the transactioninvestor is coming from, in the true also on a steep learning curve, which continuum from deal sourcing tosense of the term, can make a huge some have already climbed, about completion. In the following sections,difference to the success of a deal. There mature market approaches to deal- we consider the aspects of deals that ourare many reasons why HGM and mature making. Both sides are going to have to experience shows us to be the mostmarket companies are increasingly learn fast to take advantage of a complex and we offer suggestions onlikely to find themselves sitting across changing deal environment. how to head them off or resolve them.the table from one another in thecoming years. Many mature marketcompanies need an investor or a partner Figure 3who can bring access to high growth Investment flow - Emerging to mature, 2011-2012markets. On the other side, HGM buyers 35are looking for access to sales channels,know-how or brands. Despite a slow- 30 Deal value ($bn)down from the frenetic double-digit 25growth of a few years ago, high growthmarkets look set to continue as the 20motors of the global economy for sometime yet. As long as each side needs the 32.6 15 28.5other, no one at the table can afford toget a deal wrong. 10Pricing deals in roubles, rupees or 5renminbi can be challenging, but gettingdeals done when buyers and sellers do 0not speak the same language – 2011 2012figuratively and literally – is the really Note: Deals included are completed, disclosed deals where the final share acquired was >20% Source: Dealogic PwC | Resetting the compass | 5
  8. 8. HGM buyers – the evolution of playersand driversChina’s private sectoremerging as an M&A actorMany of the first Westward bounds dealsfrom high growth markets were by stateslooking for the resources or know-how tostoke their economic growth. State-owned enterprises (SOEs) and SovereignWealth Funds (SWFs) from Chinaproduced several high profile deals overthe last decade. Looking ahead, while itsSOEs and SWFs will continue to investoverseas, we see the rise of Chineseprivately owned enterprises (POEs)looking for mature market targets.Chinese Private Equity and financialservices firms will also have an impact asthey seek more investment opportunitiesthan China’s domestic market currentlyoffers. As the spending power of China’sdomestic market grows, many ChinesePOEs are looking at outbound M&A as a Russian dealmakers may India Inc remains a likelymeans to acquire technology and brands look for more mature source of investment forthat they can leverage at home and to market targets mature market sellersgain access to overseas distributionchannels and markets. Though ranked seventh in the world in Like Russia, India’s outbound M&A terms of outward FDI flows in 20111, activity has been driven by its private much of Russia’s outbound M&A has sector. India’s state-led investment has“We expect to see more flowed east and south rather than into focused heavily on securing access toChinese private equity mature market companies. However, much needed energy resources. Many several large Russian privately-owned of India’s larger privately-ownedbuyers following their companies have invested westwards, companies have also been active in thecorporate counterparts in with Severstal and Rusal acquiring steel energy sector, with deals by companieslooking to markets in the US assets and bauxite supply in the US and such as Adani Enterprises Ltd.’s 100% Europe respectively. Many Russian acquisition of an Australian coal mineand Europe for businesses to investors are cash rich and have already (worth US$2.7billion) or Reliancepartner with and invest in”. acquired mature market companies to Industries, which took stakes of between complement their domestic business, and 40% and 60% in three differentCalum Davidson, Asian Deals expansion plans, with new technology American shale gas companies in 2010.Leader, PwC Hong Kong and expertise. Reports suggest that the Over the last three years, UK companies latter were the drivers for Russian attracted more US$100 million plus Railways US1$ billion acquisition of 75% investments (a total of five) from Indian of Gefco, Peugeot’s logistics subsidiary. buyers than any other county in the Meanwhile, some of Russia’s domestic region. Though generating fewer deals giants in banking or telecoms are and with lower M&A spend, India’s seeking growth opportunities beyond outbound deal record has followed a their consolidated home market. Russia’s similar pattern to that of China and recent accession to the WTO may mean India has historically been the second that Russian companies may face fewer biggest source of HGM investment for barriers to M&A involving access to mature market companies. technology and intellectual property, perhaps encouraging more Russian buyers to look to mature market1 Global FDI Flows 2011, UNCTAD companies.6 | Resetting the compass | PwC
  9. 9. Figure 4: Chinese investors lead on mature market M&A followed by India 35 140 35 140 30 120 30 120 25 100 25 100 Number of deals Number of dealsDeal value, $bn Deal value, $bn 20 80 20 80 15 60 15 60 10 40 10 40 5 20 5 20 0 0 0 0 2006 2007 2008 2009 2010 2011 2012 2006 2007 2008 2009 2010 2011 2012 China deal value China # of deals India deal value India # of dealsNote: Deals included are completed, disclosed deals where the final share acquired was >20%Source: PwC analysis of data from DealogicBrazil poised to build on particular aim of encouraging the diversification strategy to build domestichistorical ties emergence of Brazilian-based global capacity in areas such as advanced companies in core industries, including technologies and to reduce theirBrazil’s business leaders traditionally agribusiness and mining. Following a dependency on the US$. Abu Dhabi’shave good ties with the US and Europe. A period of tightening since 2010, the International Petroleum Investmentstrong Real and slightly softer domestic government is encouraging more lending Company’s (IPIC) mature market dealsgrowth meant that Brazil looked for to business, particularly through state include energy targets but alsooverseas M&A opportunities, with a owned banks, with a view to enabling engineering acquisitions such as Ferrostal.particular focus on North America and them to expand abroad. Mid-sized Another Abu Dhabi SWF, Mubadala, hasother high growth markets over the past Brazilian companies might look at more mature market investments includingyears. National champions like Vale, JBD European targets, though our Latin stakes in Finmeccanica, EADS and GE.and Gerdau have led this drive in some of American partners expect to see Brazil The Qatar Investment Authority andBrazil’s traditional strongest industries – maintain its focus on the US and on high Kuwait Investment Authority have had amining, agribusiness and steelmaking, growth markets, particularly in Africa, focus on financial targets. For the mostrespectively. However, Cielo’s acquisition building on historical ties with Angola part, the region’s SWF investors seem toof Merchant e-Solutions (payments and Mozambique. prefer small minority stakes in matureprocessing) and loche’s acquisition of market targets but those small stakes canHayes Lemmertz (an automobile parts The Gulf Region deals be very valuable.manufacturer), both in the US, are good in diversityexamples of outbound, mid-market dealsin emerging, fast-growing Brazilian The Gulf Region’s M&A activities havesectors. The Brazilian Development Bank been primarily SOE and SWF-led. Some,has recently stepped up its policy to such as Abu Dhabi, have identified specificpromote Brazilian outbound deals, with a industries as part of a long-term economic PwC | Resetting the compass | 7
  10. 10. Why high growth market to maturemarket M&A has room to growAlthough 2012 saw a lull in global M&A, Figure 5: Room to growtotaling US$2,058 billion, a drop of5.2% on 2011 and barely half of its peak Emerging to mature share of global deals has increased since 2009in 2007, the global M&A market is still Investment from Emerging to ‘mature’ as a percentage of global deals valueover twice the size it was just over adecade ago2. While they regularly make 2.0front-page news, mature market deals 1.8by HGM acquirers accounted for just Percentage of global deals1.5% of total global deal value in 20123. 1.6However, the number of mature market 1.4acquisitions by HGM companies has 1.2been rising and values are following a 1.0similar trend. A decade ago the US and 0.8Europe were the motors of M&A activity,looking ahead, we expect to see steady 0.6but significant growth in both the 0.4number and value of deals done by HGM 0.2buyers in both mature market and other 0.0high growth markets. 2006 2007 2008 2009 2010 2011 2012 Investment from Emerging to ‘mature’ as a percentage of global cross-border deals value 6 Percentage of global cross-border deals 5 4 3 2 1 0 2006 2007 2008 2009 2010 2011 2012 Note: Deals included are completed, disclosed deals where the final share acquired was >20% Source: PwC analysis of data from Dealogic2 ‘Reaching out in the search for growth’, ‘Deals & Dealmakers’, Financial Times, September 19, 20123 Dealogic figures: covering disclosed completed deals for stakes of >20%8 | Resetting the compass | PwC
  11. 11. The appeal of mature Divestment spells“Doing deals in the West market targets to opportunity foris probably much easier HGM buyers HGM buyersthan in Asia, as we get the Our experience shows that high growth Our transaction teams know HGM buyersflexibility to restructure the market SOEs and POE buyers can have who see the Eurozone as one distressedbusiness to suit our needs” very diverse reasons for seeking market – not a great starting point for overseas investment opportunities. negotiations. However, the outlook forChief Financial Officer, However, Europe and the US are far the region is far less uncertain than it wasChemical Industry, India from being their only M&A destinations. even six months ago. Even with the HGM buyers are very active in other travails of some countries, Europe still high growth markets. Throughout South attracted 23% of total cross-border M&A East Asia, Africa and Latin America, value by non-Western buyers in 20124. HGM companies have been doing deals Many European businesses are doing for access to raw materials, to secure well, with improved cost bases and supply routes, to benefit from even lower exports aided by a weaker Euro. For labour costs or to compete for many, weathering the crisis has made government contracts. So why invest in them focus on their core business and mature market companies? reducing debt. The Financial Services sector (FS), in particular, has seen many Looking at Westbound deals by HGM firms restructure, which has involved the buyers over the past five years, we can divestment of non-core activities or begin to see what it is that pulls them retrenchment from certain geographic towards mature market targets. Though areas. The FS sector has generated each has their own centre of interest, we considerable deal volume, with have identified some common significant levels of intra-European M&A, motivators. In seeking out mature and some good deals for HGM buyers5. market companies, HGM buyers are Russia’s OAO Sberbank acquired doing deals to access established Volksbank Int AG and DenizBank distribution channels and robust supply Financial Services Group from their chains as well as the resources they have respective European parents. The deals sought in the past. Many use their M&A brought Sberbank exposure to central to acquire technology and know-how. and eastern European markets and Some are looking for a brand, or Turkish markets6. management expertise, which they can use to gain an edge on their competition. We believe that continued deleveraging Larger HGM companies may be using across Europe and the trend toward M&A to grow from being a local or divestment of non-core activities will regional player to being a global one. bring very interesting M&A opportunities to well-positioned HGM buyers. We expect this rise in availability of interesting targets combined with HGM buyers’ access to finance, to produce even more HGM- market deals in 2013 and beyond.4 Mergermarket, PwC analysis5 See also ‘PwC Sharing Deal Insights’ – European Financial Services news and views, October 20126 ‘Sberbank to buy Volksbank International’, Wall Street Journal, September 9, 2011 PwC | Resetting the compass | 9
  12. 12. Deal sourcing – the powerof networksFor both buyers and sellers,continents apart and faced withchoices on a global scale, a network ofcontacts and experienced people is agood approach to narrowing downthe possibilities. People withknowledge of local culture andindustries are a vital part of any dealsearch. Sellers need to reach out topotential buyers in a structuredmanner to avoid time-consumingtrips that may produce few concreteleads. Relationship building shouldbe seen as an investment. There arefew short-cuts but through ourestablished global networks withinternational perspectives, we canhelp you to develop relationships withpeople across all of our differentmarkets. Organised road shows cantake the strain and ‘shot in the dark’element out of going to visitprospective buyers or sellers and theiroperations. For mid-sized companies,a simple introduction can speedthings up considerably. Largercompanies may have a teamdedicated to M&A but their scope israrely wide enough to cover aseffectively as necessary the number ofnew and different markets nowopening up.10 | Resetting the compass | PwC
  13. 13. Understanding drivers: why it is evenmore critical in cross-border M&A Deciphering deal rationale 30% stake in the German automotive“The traditional strengths and electrical parts maker, Helbako The motivations of both buyers andand values of German sellers – and the degree to which they Gmbh. It had previously formed a joint venture (JV) with another German autobusinesses have attracted make them explicit – influence not only parts supplier, Sellner Group in 2011.considerable interest from price expectations and valuations but With its 14 established subsidiaries how deals progress. Even buyers andboth Chinese and Indian sellers from the same region and and JVs in Europe and the US, Ningbo Huaxiang aims to become ancompanies and these new industry need to comprehend their international player in the autopartnerships are opening up respective drivers. The experience of our parts industry. transactions teams around the worldsales and distributions shows that this is even more important Indian investors have also followed thischannels that will prove for deals involving buyers and sellers route, with deals such as that by from high growth and mature markets. Samvardhana Motherson Globalmutually beneficial”. HGM buyers may not realise that their Holdings Ltd. (a joint venture betweenVolker Strack, European Deals drivers are unclear to their target. The Motherson Sumi Systems Ltd. andLeader, PwC Germany mature market seller may have very Samvardhana Motherson Finance Ltd.), little knowledge of the HGM company or in 2011 for an 80% stake in the German its domestic market and may be unable car parts maker, Peguform GmbH, for to see their rationale. While it is US$197 million from Cross Industries impossible to generalise, in discussions AG. Also in 2011, Wipro Technology with PwC transaction advisors in Services acquired 100% of the global oil different markets, several common HGM and gas information technology practice company deal drivers came to the fore. of the US company Science Applications International Corp. (SAIC) for US$150 Access to market channels million, thus gaining access to an established global customer base. For many HGM buyers, access to established sales channels for their goods and services is their primary rationale, as evident from a number of “The US and UK are Chinese and Indian deals. Beyond its state-led headline deals into energy and attractive markets, allowing utilities, much of China’s outward us to do both scale-based investment has been into the and skill-based acquisition” engineering sector. German engineering companies have often been the target of Group M&A Head, Technology choice. While these deals bring the Industry, India Chinese buyer access to technology, they also bring access to German firms’ valuable distribution chains. Ningbo Huaxiang Electric Co. recently took a PwC | Resetting the compass | 11
  14. 14. Access to technology and Volvo operations and in February 2013, Buying into brand namesknow-how it completed a deal to acquire the assets of Manganese Bronze Holdings, which Given how much time and expertise, notSeveral factors can drive a HGM owns the London Taxi Company (LTC) to mention luck, it takes to build acompany to buy into new technology – the maker of the UK capital’s iconic brand, it is hardly surprising that HGMand expertise. As their economies black taxis. It had previously bought a buyers may prefer to buy rather thanadvance, competing on costs alone, stake of just under 20% of Manganese build them. Brand names can give HGMparticularly as wages rises, becomes Bronze in 2006 and started an assembly companies an advantage at home andmore difficult. Developing a business line in Shanghai. With this new deal, abroad. The Chinese company Brightthat is more skills-based can bring Geely will to supply parts to LTC, which Foods bought into Weetabix to take agreater value to their business – and has will assemble the cabs in the UK. Geely share of China’s rapidly expandinga valuable knock-on effect on their wider will also seek to develop a market for the market for western style food. Tatadomestic economy. The latter being taxis in other countries. Motor’s acquisition of Jaguar Land Roversomething high growth market (JLR) was in part an opportunity togovernments are clearly keen to While access to technology remains a create a synergy between the carmakersencourage. In the short to medium term, driver for many deals, it is becoming technology and Tata’s lower cost labourhowever, many HGM firms can still more of a two-way street. Certain base. The historic brand names andextract a lot of value from matching leading HGM companies, such as China’s Tata’s planned engine production andaccess to technology and innovation Huawei, with reportedly half of their R&D facility near Shanghai (a jointwith their lower cost base. One example 150,000 employees devoted to research venture with China’s Chery Automobile)of this is the Indian wind power and development7, are innovators in have given Tata a ticket to benefit fromcompany, Suzlon’s acquisition of their own right. With its 2005 China’s booming demand for luxuryGermany’s REpower. Equally, the acquisition of IBM’s PC division and, cars. A decade ago, JLR sold just 431Chinese automotive company, Zhejiang more recently, its purchase of the cars in China, in 2012 Tata sold 71,940Geely Holding, has made several German PC company, Medion, Chinese cars from its JLR stable, an increase ofacquisitions to tap into design and computer giant Lenovo has leveraged its 70% on 2011 and making China Tataengineering expertise that it can own R&D investment, through it access JLR’s biggest car market, ahead of theleverage with its domestic production to new distribution channels, as well as UK, the US and Russia8.capacity. In 2010, it acquired Ford’s expanding its product lines through these acquisitions.7 ‘Schumpeter: The best since sliced bread’, The Economist, January 19–25, 20138 ‘Tata’s JLR to add 800 new UK jobs on China demand’, January 14, 201312 | Resetting the compass | PwC
  15. 15. Going globalUS$2.64 billion was the price Dalian may feel uncomfortable in negotiationsWanda Group, Asia’s biggest cinema with a company whose reach extends tooperator, paid in the second half of 2012 markets in which the mature marketfor 100% of AMC Entertainment Holdings, firm has no presence, or whose decision-a US multiplex cinema group. Now the making processes appear opaque. Ifworld’s largest cinema operator, Wanda neither side is willing to drill down tointends to invest another US$10 billion understand the others’ reasoning theinto the acquisition of US companies over deal process is unlikely to be successful.the next decade. Global expansion is a key For buyers or sellers, an experienceddeal driver for Wanda in an industry that advisor can shed light on the motivations, but also the constraints “To date we have only seenvalues volume and reach but it also hopesthe deal will help overcome some of the and concerns that could make or break the tip of the iceberg inrestrictions on the Chinese movie the deal. relation to HGM companiesindustry. Indian companies have also long expanding inorganically, theused M&A to expand globally. In 2012,India’s Sun Pharmaceutical Industries Ltd. stage is set for what should There is no ‘one sizeinvested over US$592 to complete its fits all’ be substantial growth overacquisition of Taro Pharmaceutical the coming few years”.Industries Ltd., and paid US$230 million If acronyms such as BRICs blur thefor 100% of Dusa Pharmaceuticals Inc., reality of just how different high John Dwyer, Global Deals Leader,both US drugs companies. Healthcare is a growth markets are from one PwC UKsector where established distribution another, clinging to culturalchannels are critical and costly to develop clichés can also distort thefrom scratch. These acquisitions brought perspective of both buyers andSun Pharmaceuticals a combination of sellers. There are differences in theexpertise, access to markets in the US and way companies do deals but theyelsewhere, as well as the scale needed to may come as much frominvest in future drug development generational, commercial orprogrammes. procedural differences as from cultural aspects. Our deals teamsInvesting in understanding put a lot of effort to stop the sum offor a better deal these differences getting in the way of a good deal. Purely culturalFrom negotiating approaches to differences rarely scupperrelationship building, the cultural, completion but they can complicatecommercial and even generational communications and goodnorms of both buyers and sellers can communications are essential toheavily influence the deal-making effective negotiations.process. In PwC’s experience, it is Experienced, cross-culturalimportant that both sides establish an advisers can help the client factorunderstanding of the other’s motivations in different norms and improve theto dispel misconceptions and to build deal A company wishing to go globalmay not initially see the concerns oflocal management as a potentialdeal-breaker. An ‘old world’ incumbent PwC | Resetting the compass | 13
  16. 16. Getting to the dotted line incross-cultural dealsAn analysis of the past six years of HGMto mature market M&A, and discussionswith our deals partners in differentmarkets, highlight several issuesaffecting deal closure between HGMbuyers and mature market sellers.Perhaps unsurprisingly, reaching amutually acceptable valuation tops thelist but other factors also emerge. In thissection, we explore those mostfrequently occurring; how the culturaland commercial differences amongmarkets can trigger them and how theycan be resolved, if not avoided.Addressing valuationmismatchesGiven the macro economic conditionsin Europe and the US over the pastyears, HGM buyers looking at targetsin Europe or the US could feel that slightly lower multiples. These averagesbargains should abound. On the other however do not tell the whole story and “Don’t undermine theside, some mature market companies the deal price spectrum can be verycan too readily assume that HGM wide for HGM-mature market importance of customerinvestors have easier access to funds, acquisitions. In deals in the Mining and diligence – focus on customerparticularly from the state, and are Metals sector, multiples can run high to contracts, understand thewilling to pay above the odds for their reflect high capital investments. On thetechnology, brands or distribution lower end, historically many Indian- strength of the relationshipchannels. Mature market sellers can mature market deals have relatively low and the underlying currencyseek a higher premium if they lack multiples. For example, Mumbai-based Essar Group paid a multiple of just four to which the contractsconfidence in the buyer or expect aprotracted process to complete. times EV/EBITDA for 100% acquisition are exposed” of the US business processing outsourcing (BPO) company Group M&A Head, TechnologyHGM buyers = generous Peoplesupport Inc. The deal, worth Industry, Indiamultiples = an urban myth US$250 million, made Essar’s BPO arm,There is evidence that some HGM buyers Aegis BPO Services, an internationalhave been willing to pay a higher BPO leader.premium. Our own analysis of publicallyavailable information on deals from thepast six years suggests that, on occasion,Chinese companies have paid aboveaverage multiples9 but that on averageIndian buyers seem to purchase at9 or a closer look at factors driving Chinese investors’ valuations, we recommend the article ‘From deal-breakers to deal-makers: Closing the valuations gap…’ F from our report ‘China deals – a fresh perspective’, October 2012 Download the pdf: from | Resetting the compass | PwC
  17. 17. The past is no guide to the future In some regions, inflated valuation expectations are based on past deals. Some investors can be keen to dispel the notion that they are prepared to pay ‘over the odds’ and may be more recalcitrant about their price. This may have been a factor in Qatar National Bank’s bidding for Franco-Belgian owned Denizbank, which operates in Turkey. Denizbank’s parent, Dexia, also received a bid from Sberbank of Russia. Despite assumptions about Qatar’s readiness to spend, they did not increase their offer and Russia’s state-owned savings bank won the deal. Buyers from the Gulf Region typically do not like public transactions and, where this is unavoidable, will not want to be perceived as having paid more than fair market value. Some Gulf investors are able to deploy larger amounts of capital for longer periods of time but they expect the deal terms to reflect this, in their favour. Generally buyers from the area look for evidence of partnering and relationship buildingWhen the premium is behaviour, in addition to getting the right price. Mature market sellers shouldnot enough be careful not to develop inflated expectations of a HGM buyer’s ability to pay high premia. Ability and willingness to pay are very different and indeed,As HGM buyers can also experience, Chinese and Indian buyers are just as keen as their developed marketoffering a high premium is no guarantee counterparts to win deals on the most favourable terms they can achieve.of closing the deal. Mature marketsellers may discount that premium oraccept a lower rival bid for severalreasons. While it may be frustratingfrom a bidder’s perspective, seller It is hard to generalise across different Suggested measuresuncertainty around the bidder’s ability high growth markets but in some casesto secure finance or unfamiliarity with the premia HGM buyers are willing to • Greater transparency by both buyerstheir approval processes can result in a pay may reflect synergies they know and sellers around deal drivers candeal going to a lower bid. they can leverage in ways that are not increase trust and dispel unfounded always obvious to the seller or more expectations.When competition for the target and significantly, not accessible to the seller. • Sellers should not assume that antight timelines are inevitable it is This underscores the importance of the HGM company may have easierimportant that the buyer does the seller’s rationale being defined and access to capital or to state-funds.groundwork to expedite the approvalprocess as much as possible and that the comprehensible to the buyer. • Sellers need to understand thebuyer educates the seller before the buyer’s investment timeframe andprocess gets fully underway. Few sellers shareholder environment beforewho are fully aware of the situation “Size is not a measure of a setting premia.would intentionally structure their good or bad deal” • Clarify valuation techniques toprocess to exclude viable buyers but an ensure both parties are working with Chief Financial Officer, Chemicalunderstandable lack of knowledge can Industry, India the same parameters.mean some issues are put on the back • While multiples can be a guide,burner by both sides only to scupper past deals are not always athe deal later. reliable yardstick. PwC | Resetting the compass | 15
  18. 18. Agreeing a time frame Suggested measures “Don’t get emotionallyfor completion in a • Both parties need to understand what attached to a deal” constitutes a ‘normal’ timespan formultispeed world negotiations and completion for the other party to set expectations from Chief Financial Officer,Deal processes can take longer to Chemical Industry, India the outset.manage with a wider group onstakeholders as buyer teams from HGM • In cases where special approvalcompanies may be less familiar with, processes need to be followed, e.g.comparatively under-resourced or lack the deal needs to be vetted and/orthe skills and experience of ‘formal’ finance approved by a regulator, Private equity and buyers should educate sellers early openings for HGMdeveloped market transaction processes. around their approval processes andAs already noted, timescales can also be timelines so that they do not become buyersaffected by the need for state approvals, an obstacle. A misperception among HGMwhich though usually granted, can move • Sellers may demand a higher buyers is that management inslowly. Even without bureaucracy, premium from buyers they think are private equity backed companiesinvestors in certain regions can move at likely to be slow to complete. will not have plans to cede controla different pace, preferring not to work • Foster relationships with key of their business and that privateto accelerated timelines and, in some decision-makers from an early stage equity involvement is passive. Thecases, demanding exclusivity. so that dialogue is possible if the deal developed market reality is thatGiven that access to decision-makers is timetable begins to slip. with a private equity fund in anot always straightforward, and that majority position, there is a veryprocesses may not follow their due real chance of a transactioncourse, there are many reasons why happening. HGM buyers shouldtransactions can face delays with HGM consider that, based on theiracquirers. Delays and lengthier tenure, a significant number ofprocesses can also mean that mature private equity investments couldmarket vendors have less confidence that be for sale in the short to mid-term.the deal will complete. As alreadydiscussed, this lack of confidence maytranslate into the seller seeking a higherpremium from the buyer.16 | Resetting the compass | PwC
  19. 19. Connecting with Reconciling deal Suggested measuresdecision-makers process differences • Plotting the deal process and due diligence approaches of both the buyerPart of any successful deal is ensuring HGM companies new to MA involving and seller will highlight where theyat least the backing, if not personal mature market companies may question diverge and provide a basisinvolvement, of the decision-maker or the value of due diligence processes. for discussion.–makers. In some HGMs, a mix of Some can view it as expensive, irrelevant • Where the buyer faces complex orcultural, hierarchical and linguistic and even as ill-adapted to their needs potentially lengthy approvalfactors can mean that the deal team is and their business approach. Even if processes, the seller should beseveral degrees removed from those others, such as buyers from Brazil, India informed from the outset so that theywith decision-making power. In and Russia are more comfortable with understand what is ‘normal’.certain regions, the deal process may the demands of due diligence, they may • Communicating the reasoning behindbe delegated, with the key decision- have different requirements. Brazilian due diligence practices can make themaker only stepping in very late in the buyers, for example, will be highly other party more comfortable/willingday. Elsewhere, many Indian POEs are concerned by tax and labour issues, to cooperate with the businesses where the decision perhaps even more so than their US or • High growth markets can have verylies with one person, often the UK counterparts, because these areas different reporting, tax and legalfounder, and these decision-makers are particularly tightly regulated in requirements and systems that cantend to play an active role in deals. Brazil. slow the due diligence process andBuyers in the Gulf Region and Latin necessitate more requests for Some HGM buyers’ due diligenceAmerica can also be ‘family heads’ information, both the buyer and the processes can appear opaque towho have the ultimate say but direct seller need to be explicit about this. outsiders. For example, even privatelyaccess to those at the top can be owned Chinese companies needdifficult. In the Gulf countries, owners approval for overseas investments from Building trust – the rolemay be members of a ruling family, several state bodies10 and banks willmaking negotiations more of the advisor not green light funds until the deal hascomplicated. However, something we Building trust in the value of the been approved, which can be a slowhave noted across all regions is that due diligence process is critical to process. In Chinese SOEs, theirwhen the buyers (or sellers) are reaching a successful deal. But chairperson’s sponsorship is usuallyentrepreneurs, who have built the despite the obvious need for key to the process and outcome, andbusiness up, they do get personally experienced advice, if not familiar thus Chinese deal teams may devoteinvolved in deal-making decisions. with US or European MA considerable time to his or her information requests. Reconciling approaches, executives in HGMSuggested measures mature market due diligence practices companies can be uncomfortable• Take time early in the process to with the processes particular to with external advisers. Leaders understand decision-making overseas investments by HGM may be unused to relying on a hierarchies – and who has the final companies is often complex and really third party for advice and insight, say. This is particularly true for deals requires experienced advisors. especially when the deal may be involving SOEs. the first overseas one they do. The• Buyers bidding for targets with adviser’s role must sometimes be to private equity involvement should convince HGM buyer’s – or mature have direct contact with the private market sellers for that matter – to side as well the target company’s look at the bigger picture and, if management. necessary, to take ‘bad news’ on• The time needed to develop board: not always easy if it means relationships varies greatly from disappointing a superior. culture to culture; consider this when Moreover, in more hierarchical approaching decision-makers. Seek cultures, deal teams and leaders advice from people who understand may not wish to be perceived as these finer points and stay attuned ‘needing’ external advice. Some to signals. HGM buyers can see advisers almost as peripheral to the process, rather than leveraging their expertise fully.10 ll outbound deals require approval from the Ministry of Commerce and the National Development and Reform Commission (NDFC). SOEs also require sign A off by the State-owned Assets Supervision and Administration Commission (SASAC). Overseas deals in foreign currency must also be approved by the State Administration of Foreign Exchanges (SAFE). PwC | Resetting the compass | 17
  20. 20. Conclusion Re-setting the compass for a new direction in global MA As this report illustrates, there is no one are far from being the only targets HGM size fits all approach to MA companies are considering. As we transactions between high growth suggest in this report, HGM to mature market buyers and mature market market MA has the potential to grow a sellers. Deal-making is always a complex very long way. We believe that we will mix of strategy, economics and see acceleration in this type of MA personalities. Cultural differences add over the coming years. A better another layer of complexity but they can understanding of the make or break be reconciled and may make the process areas – valuation mismatches; differing even more rewarding. As HGM completion timeframes; the need to companies step up their role in their connect with decision makers; and own economies and look abroad, their process differences – can only improve expansion will help drive value and the chances of a successful deal. The volume in the global MA arena. HGM buyers and mature market sellers Competition for investment is also best prepared for those differences will growing, as mature market companies have a lot to gain.18 | Resetting the compass | PwC
  21. 21. Please get in touchGlobal Deals Leaders Author Transaction Services, UKJohn Dwyer Nick 020 7213 1133 +44 020 7213 1442Global Deals Leadership teamUK Germany Central Eastern EuropeJohn Dowty Hans-Martin Eckstein Mike 020 7804 9548 +49 69 9585 6382 +48 22 523 4413Chris Hemmings Volker Strack 020 7804 5703 +49 69 9585 1297 Malcolm Lloyd Jackson-Moore +34 915 685 038 020 7213 2703 Martyn Curragh Rimmer +1 (646) John P Glynn+44 020 7213 2041 +1 (646) 471-8420Peter 020 7212 6032ChinaCalum 2289 2323The preparation and editing of this paper was lead by Nick Page, Rhys Joyce and Jacqui Rivett of PricewatehouseCoopers UK. The content was developed based oninterviews with and contributions from those named on the inside front cover of this report. PwC | Resetting the compass | 19
  22. 22. Glossary FS Financial Services HGM High growth market MA Mergers and acquisitions POE Privately-owned company SOE State-owned company SWF Sovereign Wealth Fund20 | Resetting the compass | PwC
  23. 23. 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 containedin this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the informationcontained in this publication, and, to the extent permitted by law, PwC does do not accept or assume any liability, responsibility or duty of care for any consequences of you oranyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.© 2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details.130218-144610-MS-OS