Deal activity from developed to emerging economies could also be about to peak.
Trade buyers in the emerging economies appear to be losing their appetite for M&A targets in the developed economies. After a surge in cross-border activity in the first half of 2010, deal totals fell away in the second half, forcing Western businesses to reconsider their attractiveness to overseas investors.
According to KPMG’s latest Emerging Markets International Acquisition Tracker (EMIAT), 239 Emerging-to-Developed (E2D) deals were recorded in the second half of 2010. When 265 such deals were recorded in the first half of 2010 (significantly up from the 195 in the second half of 2009), the obvious inference was that emerging market trade buyers were confidently heading back to the West.
However, with deal-making conditions generally easing worldwide, this latest fall – coupled with a small rise in the volume of deals between emerging markets – may suggest that, for now at least, assets in the developed markets are no longer the attractive prospect they used to be.
In fact, the E2D deal flow is the only one registering a fall in the latest EMIAT. The volume of Developed-to-Emerging (D2E) deals increased by two percent to stand at 812. Although only a small increase, this nevertheless means that D2E activity is now back at a level last seen in 2008.
Commenting on the findings, Ian Gomes, Chairman of KPMG’s High Growth Markets practice for KPMG in the U.K, said: “After the burst of activity early in 2010, there was a general expectation that E2D deals would continue to increase. However, despite some cash-rich trade buyers and the presence of some hungry sovereign wealth funds, it hasn’t really happened. That’s not because potential targets are looking too expensive. Rather, I think that the developed markets themselves are – for the time being – no longer as attractive a proposition as they were previously to these buyers.”
“There are exceptions. Buyers will still come to the West looking for brands, technology and intellectual property – but typically to be put to use back in their own domestic markets. They’re not typically looking at the West as a market in its own right now, especially as Western consumer spending power continues to fade. This has major repercussions for Western businesses who need to reassess just how attractive they actually are to investors from those emerging markets. The problem many face is that they don’t have the right product range to make themselves more attractive. Emerging market companies are building frugally engineered products for sale both at home and abroad. As such, more highly engineered – and expensive – product ranges from developed market companies hold far less appeal than they used to.”
A key reason behind the creation of the EMIAT was to monitor the convergence of E2D and D2E deals. Conventional wisdom suggested that the gap between the two would narrow as emerging market companies developed their economic strength. Although what followed was not a smooth linear progression, the assertion largely held true. E2D activity equated to just 24 percent of the D2E total back in 2006 but had hit 35 percent by early 2009 and stood at 33 percent in early 2010.
That figure has now dropped back to 29 percent amidst fears that the convergence trend no longer merits close inspection. The Emerging-to-Emerging (E2E) trend may now be the one to watch as companies go shopping there for access to raw materials, energy sources and consumer markets which exhibit many similar characteristics to their own domestic market. Since 2005, there have been, on average, 240 E2E deals every year.
Despite having now returned to boom-time highs, even future D2E activity may be under threat as Ian Gomes explains: “A meagre two percent increase in D2E numbers – after significant increases previously – may suggest activity is now about to tail off. I feel that developed markets buyers are now starting to find emerging market acquisitions too expensive for their current tastes. With purchasers fearful of diluting the bottom line and mindful of ongoing concerns around governance, bribery and corruption in certain key markets, I think we may well see a fall in D2E activity next time around. In addition, I think we’re likely to see a growing preference for stock market investments rather than more straightforward purchases of corporate assets on the ground.”
“If businesses in the developed markets are still keen on attracting investment from the emerging markets, then they need a rethink. Some manufacturers have already started down this route, embracing the concept of “reverse engineering”; looking to create more attractive product ranges for emerging market consumers. A shift in mindset is also needed though. Attractiveness to emerging market buyers can no longer be taken for granted, especially as many had their fingers burnt by pre-recessionary purchases. For now, they appear happy to shop elsewhere.”