Cross-Border M&A Ready for Takeoff with Emerging Markets as Main Target

The stars are aligned for a substantial rise in cross-border mergers and acquisitions this year as the global economy recovers and financing becomes more readily available. There is considerable pent-up demand as a result of deals postponed in the past 12 months when companies focused on making sure they had adequate cash on hand to survive the crisis, analysts say. CEOs are hunting for foreign acquisitions that make strategic sense and that are likely to boost their companies’ earnings as economies around the world rebound. The best prospects for economic growth are in the emerging markets.

Telecommunications, food and beverages, and utilities are likely to be the hottest sectors for cross-border deals in 2010, according to a forecast by Thomson Reuters and JPMorgan. Rising consumer spending in emerging markets will prove to be a strong magnet for attracting foreign buyers, particularly those companies based in the slower-growing industrialised countries. Meanwhile, rising electricity demand and the need to develop renewable energy sources for power will prompt a surge of activity in the utility sector, aided by further privatisations in emerging markets.

“In 2010 and beyond, we anticipate unprecedented cross-border deal flow among the emerging markets and this prominently includes transactions between Indian and Russian companies as well as between Indian and African companies,” says Stephen Jennings, CEO of Moscow-based Renaissance Group, which includes Renaissance Capital, a leading investment bank in Russia, the Commonwealth of Independent States (CIS) and Africa.

Russian, Indian Banks Team Up

Renaissance Capital and Mumbai-based Kotak Investment Banking announced an agreement in December 2009, which is already in effect, to cooperate on cross-border M&A advisory assignments between the emerging markets in which they operate. In the resources sector, Indian companies are actively seeking to acquire energy and mining assets in the CIS and Africa, Jennings says. “India’s fast-growing economy also offers huge opportunities for companies from [Renaissance Capital’s] geographies,” he says.

China is likely to be the most acquisitive nation in the year ahead as it seeks to expand its access to foreign technology and natural resources. Whether it will have any more success than in the past in purchasing companies in the United States, however, seems unlikely due to political pressures, analysts say. Nonetheless, sovereign wealth funds will continue to look for good returns on their investments in global markets.

While credit markets are easing for some participants, financing will remain as the main challenge to M&A activity in the United States in 2010, increasing the pressure on middle-market deals, according to PricewaterhouseCoopers’ New York-based transaction services practice. Strategic buyers with strong balance sheets and a lot of cash on hand will be in a good position to manoeuvre in this restricted environment and will pursue deals with a focus on synergy, it says.

Best Values in Recent Times

“Those who have built their balance sheets for a rainy day might come out of last year’s storm to find the rainbow and, at the end of it, nicely valued acquisition targets that provide opportunities for revenue growth and enhanced productivity,” says Bob Filek, partner with PwC Transaction Services. “As a result, M&A activity in 2010 will be driven by strategic buyers who have access to capital and the strategic vision to capitalise on some of the best values we have seen in recent times.”

Companies have already cut costs and to drive further efficiency, they will look to combine with similar competitors to increase scale, drive revenue growth and improve margins, Filek says.

Greg Peterson, another partner at PwC, says there is still more than $1 trillion of capital committed to alternative investment funds that is sitting on the sidelines, waiting for the appropriate opportunities. “The diversified private equity players have been bulking up their debt, hedge and distressed [opportunity] funds, reflecting their ability to evolve and successfully navigate choppy waters,” he says.

Meanwhile, the IPO (initial public offering) market has been re-established as a viable exit vehicle for private equity investments, Peterson says. The divestitures market will also be active as more companies decide to unload holdings which they do not consider to be part of their core business. The percentage of M&A activity attributed to divestiture transactions has begun to increase in recent months, according to PwC.

Guardedly Optimistic

The year-end 2009 survey of M&A professionals by the Association for Corporate Growth (ACG) and Thomson Reuters found that dealmakers were guardedly optimistic about 2010. The percentage of survey participants who expect an increase in merger activity in the next six months rose to 82% from 56% when the previous survey was released in June 2009.

“Dealmaking continues to be caught in the doldrums with limited activity outside of distressed sales and select strategic investments, but the fact that merger professionals express heightened optimism about 2010 is a hopeful sign that a freshening wind will arise,” says Dennis White, ACG chairman and senior counsel at international law firm McDermott Will & Emery. ACG’s members are middle-market dealmakers worldwide.

Harris Williams, a subsidiary of Pittsburgh, Pennsylvania-based PNC Financial Services and one of the largest M&A advisory firms focused on the middle market, is opening a London office as part of an international expansion. The firm says it anticipates increased global M&A activity throughout 2010.

Thierry Monjauze, former co-head of European technology investment banking at Deutsche Bank, was named to head Harris Williams’ London office. “We continue to build our platform to position the firm for future growth,” says Chris Williams, co-founder of Harris Williams. “We have considerable experience serving clients globally and expect Europe, in particular, to be an area of opportunity within the middle market,” he says.

Fundamental to any pickup in M&A activity is economic growth, according to the latest report from Thomson Reuters and JPMorgan. “Business conditions for companies to consider undertaking M&A are improving,” it says.

A double-dip recession is a potential wild card that could spoil the sunny outlook and rain on the M&A parade, according to Filek of PwC Transaction Services. “However, while we may see some challenges and market disappointments in 2010, the underlying fundamentals will outweigh the short-term stress, and companies will stay committed to their strategic vision and complete a lot of transactions,” he says.

Global M&A totalled $2.1 trillion in 2009, a decline of 28.2% from 2008, according to Thomson Reuters. While that was the lowest total since 2004, the trend showed improvement throughout the year. The fourth quarter total of $625 billion was the highest since the third quarter of 2008. In terms of number of deals, the 2009 total of more than 38,000 was down only 6.6% from a year earlier.

Morgan Stanley led worldwide deals announced in 2009 by value, followed by Goldman Sachs, which slipped from the top spot for the first time in the decade. JPMorgan, Citi and Credit Suisse completed the top five listing of financial advisers in 2009.

Two pharmaceutical mergers were the biggest transactions of last year. Pfizer’s $64.4 billion acquisition of Wyeth was the largest, followed by Merck’s $45.7 billion acquisition of Schering-Plough.

ExxonMobil’s $40.6 billion acquisition of natural gas producer XTO Energy, announced in December, was the largest deal in the energy and power sector in 2009.

This article first appeared in the February 2010 issue of Global Finance. For more information, please go to