In this age of globalisation, Merger and Acquisition (M&A) has become a keyword in the business world. The phenomenon has developed with the passage of time and today, in most developed economies, corporate M&A has become a usual feature. From time to time, a different trend is noticeable in worldwide M&A activities, which fluctuates from region to region. This happens mainly because business environment around the world has been changing over time. Government structure, trade policy, labour policy, taxation policy, consumer taste and availability of resources are not the same in all regions. That is why M&A activities and trend varies from region to region and country to country. Companies try to overcome the limitations of one market by merging (or acquiring) with another business in different regions. M&A trends are important in order to judge the market movements of any particular economy.
Numerous trends are currently affecting the cross-border M&A market around the world. US dominancy in the business world has been decreasing day by day. New markets are coming up and giving greater competition to the developed economies. Study shows that emerging countries, mainly BRIC, are dominating the market in the current wave of M&A. Investors from emerging economies are increasingly interested in developed economies. Activity by private equity funds is growing in emerging economies. National investment strategies are growing and new attractive sectors are emerging, mainly energy and infrastructure.
Providing an accurate and straightforward outline of M&A activities and trends all over the world is not something that can be outlined by a single line. Different markets have different waves and driving forces behind M&A activities. To notice and present these differences in different regions is important and therefore it is desirable to present the recent trend in global M&A activities by separating the regions from each other.
Global M&A - a sector- wise overview
The Economist reported that financial industry had seen the largest volume of M&A last year, but the oil industry took the top spot in value terms. This may happen because of the decline in the dollar prices and increase in the oil prices. Financial experts believe that emerging economies keep the financial sector at top position in M&A.
Consolidation in the financial sector has been more focused on developed countries because of the banking and financial crisis that started in 2008. Industries such as energy, power and materials have seen substantial increases compared to last year primarily because of the developing regions and countries.
The M&A around the world in value ($) term
It is quite evident from Thomson Reuters statistics that financial deals have been taken mostly by Energy and Power sectors. Mergers and acquisitions in the energy sector are growing up because enterprises look to invest their bundles of cash stock in clean technologies, along with oil and gas. In addition, the cost of natural gas and electricity came down because of the new drilling techniques adopted by different companies. Companies are once again looking for ways to use their finance to expand their reserves and snap up promising oil and gas fields. Currently, companies are focused on buying fast-growing small companies, or on acquisitions that expand their reserves. Many companies are now finding new places to drill. These are companies that avail their fields in Ghana and Sierra Leone, self-governing gas producers in the United States and companies that control fields in the deep waters of the Gulf of Mexico. So in future, it is most likely that this sector will give a tough competition to the other common industry of M&A. Statistics provided by Thomson Reuters also shows that M&A in telecommunication sectors came down a bit compared with 2010 first quarter. Healthcare sector deal values remain almost the same while finance, industrial and materials deal increased significantly compared to 2010.
M&A in Emerging World
Emerging markets witnessed a surge of M&A transactions last year and more than half of all deal value generated by emerging markets last year was contributed by the BRIC nations (Brazil, India, China and Russia). The future for continued M&A activity in the BRIC countries remains very promising heading into 2012/2013.
Although China captures much of the world's attention, other Asian nations also present great opportunities. There is increasing activity in the emerging markets other than India and China, such as: Vietnam, India, Malaysia, Indonesia, Thailand, the Philippines and Cambodia. The opportunities in these explosive growth economies justify the investment of time and capital that needs to be dedicated in order to establish and develop a presence in what are undoubtedly the markets for tomorrow. In Europe, Prospects for the Baltic economies are also bright. Since the re-birth of these countries, all of them have seen a surprising growth in GDP, with some of the highest growth rates in Europe. The economies of Lithuania, Latvia and Estonia are flexible because they are small, open and offer many opportunities.
Privately Held Business (PHB) in Brazil, Russia India and China (BRIC) are among the most acquisitive in the world, with on average 44 per cent of them considering an acquisition, an increase of some 17 per cent on last year (graph 2). Acquisitive PHBs in the BRIC economies are motivated mostly by the need to access new markets, build scale and obtain new expertise or established brands.
Although BRIC is considered as a common group of emerging economies but there are differences in each economy because the regions are different and often the rules of cross border M&A are not the same.
China is clearly the leader in M&A activity in BRIC in terms of both the financial amount and the volume. Report by Financier Worldwide explains that recently Chinese manufacturing enterprises are upgrading the industrial process and costs are also high, so as well as catering for the desire to enter high-end markets this has driven their expansion overseas. Deals conducted in China last year clearly show that the energy and resources sectors were mostly chosen by Chinese acquirers and with strict energy safety guideline in China, Chinese energy enterprises accelerated the pace of their overseas acquisitions. While Chinese companies are doing deals abroad foreign companies are trying to enter the Chinese market. There were a few cases in China that involved companies from abroad acquiring local companies in Pharmaceuticals and food and beverage sectors, which was a major concern for local authority. Following this incident, a new law has been introduced. According to the new law, every M&A of a local Chinese company acquired by a foreign acquirer requires permission by the Ministry of Commerce (MOC) or its local office.
Brazil's M&A market is seeing more investment from private equity firms and investment banks this year. Cross-border mergers are a common feature of Brazilian deal activity. Besides significant contribution to deals by the private equity industry, the amount of debt financing available for deals could be higher, especially to middle market companies. Unlike China, the acquisition of a company or business in Brazil does not require government consent except for merger control approval if the transaction meets certain antitrust thresholds. There are a number of reasons why the market for M&A will be even more active through the next couple of years than in the past year. The 2014 FIFA World Cup and 2016 Olympic Games will involve further foreign investment and offer extra demand for products and services in Brazil.
Financial analysts feel that Russia's accession into the World Trade Organisation (WTO) will be a driver of foreign M&A. Russia also received EU backing for its bid, which will create a new period of competitiveness .Moreover, if Russia succeeds in joining the WTO this should increase Russia's GDP growth rate and attract investment from major international companies looking to capitalise on Russia's growing economy. Low borrowing costs are currently encouraging large companies to pursue M&A; Russia's accession to the WTO as well as the fact that it is hosting the 2018 FIFA World Cup, which will require investment for new stadiums, roads and hotels, will be a driver of foreign investment going forward.
Currently, India is one of the world's most happening markets both in terms of economic growth and M&A activities. In the telecommunication and steel industry, India is definitely leading the race. India is not only the top destination for foreign investors because of availability of cheap labour and resources but also because of its continuous economic advancement. Half of Indian M&A deals in 2011 were accounted for by overseas acquisitions and it was the biggest year for outbound deals from the third largest economy in Asia.. Access to cheap and easy finance for large buyers, a need to expand in new markets, and the rush to tap natural resources are expected to be the main triggers for driving deal volume.
M&A in Latin America
For the past few years, Latin American countries have seen a high level of M&A activity. This mainly happened because of their economic advancement and improvement in legal system. With a few exceptions, the countries in Latin America have largely lived up to their promise to ensure political and economic steadiness.
Latin America's recent upward trend in M&A is also fuelled by strong trading partner relationships with the growing Asian economies, especially China and India. The most appealing M&A sectors in Latin America are food, oil and gas, services, financial services, technology and mining. Multilatinas (Latin American based multinationals) are acquiring smaller family owned business under a buy, build and hold strategy. Multinationals with slow economies in many of their hub markets are now seeing the emerging markets in South America as a good strategic investment, offering growth opportunities for their goods and services.
Undoubtedly, Brazil is Latin America's largest and fastest growing economy and has emerged as the biggest M&A story in South America. However, countries like Chile, Peru and Columbia are also in a better position to fuel South American M&A activity. After Brazil, Chile is the largest FDI receiving South American country and is making important market reformation to attract foreign investors. Columbia is the second largest populous country in Latin America and undergoing significant investor friendly reforms to accelerate its economic growth. Peru is rich in natural resources and one of the fastest growing economies in Latin America. The mining industry, major infrastructure projects, and its recent free trade agreements with the US and China will surely drive its future growth in M&A activity.
There is no logic to think that this upward trend will not continue for the next few years. Mainly because developing economies accelerate at a greater pace than saturated markets of US and Europe and because inflation levels, access to capital and law rule create a hospitable environment for M&A. As for most targeted sectors, energy and natural resources is definitely leading the race and will continue to do so. Telecommunications, transport, beverages along with consumer goods and financial services will most likely dominate M&A activity in 2012 in Latin America. Altogether, today Latin America presents an outstanding example of how a developing region can transform itself to make possible a level of business expansion that is poised to take full advantage of its vast potential.
The availability of abundant natural resources, low-cost labour and growth opportunities makes investments in emerging nations an inspiring, feasible and beneficial proposition for countries in the developed world. Conversely, such opportunities bring their share of risk, as conducting M&A in these markets can pose a large number of uncertainties. One should remember that regulatory challenges could pose a huge risk when conducting deals in emerging markets and often a conservative view of regulations could make a transaction unfeasible and an aggressive interpretation could lead to future regulatory action.
Md. Nazmul Hasan is a Bilingual graduate (MSc) in International Business (Distinction) from Department of Economic Studies, University of Dundee, Scotland. His major research interests are Globalisation and Modern Business, International Trade and Investment Policy and Labour Market Economics.