M&A maturity. Assessing country risks and opportunities.

Transcription

1 M&A maturity Assessing country risks and opportunities

2 Assess M&A risks and opportunities in 175 countries around the world with the new Ernst & Young M&A maturity tool in two easy steps: 1) select target(s) from the country heat map or list: 2) Compare countries, analyse risks and opportunities: 2 M&A maturity assessing country risks and opportunities

3 In this report Overview: M&A maturity index 5 M&A maturity: Assessing country risks and opportunities 6 The global picture: Emerging markets mature 8 Profile: Brazil 10 Profile: China 11 Profile: India 12 Profile: Russia 13 M&A in context: The Capital Agenda 14 About the M&A maturity index 15 The M&A maturity index provides a high-level summary of risks and opportunities for M&A transactions in 175 countries around the world. It has been developed by MARC, the M&A Research Centre at Cass Business School, City University, London of which Ernst & Young is a senior sponsor.

4 4 M&A maturity Maturity assessing risks country and risks opportunities and opportunities

5 Overview: M&A maturity index The M&A maturity index assesses the maturity of 175 countries around M&A transactions. The greater the maturity, the lower the risk of undertaking transactions. Where risks exist, there is however, the potential for significant opportunity. Below are the average M&A maturity scores globally and in each region. Each average is weighted by the GDP size of the countries within the group. Further detail is available online. M&A maturity average (median) scores: Global average: 71% North America 87% Western Europe 82% Oceania 80% Asia 68% CEE/CIS 57% Middle East 56% Latin America 55% Africa 44% allows users to assess each country, compare with others and identify risks and opportunities. Thirty-six factors are used to analyze maturity, these are within six groups: Economic Financial Political Regulatory Sociocultural Technological Further details on methodology are presented on page 15. Careful analysis and interpretation of these scores can identify risks and opportunities for M&A transactions, a key method of achieving growth in a competitive market. M&A maturity assessing country risks and opportunities 5

6 M&A maturity: assessing country risks and opportunities The markets remain in a state of flux. Each day brings news of positive economic trends, and worrying macro indicators. So the future remains uncertain. However, the level of market volatility has decreased. The VIX index (a frequently quoted measure of stock market volatility) fell from a height of 80 in October 2009, to around 20 in October - December Perhaps because of the increase in stability, confidence and optimism have slowly returned to many businesses. The recent Ernst & Young Capital Confidence Barometer shows that 73% of companies are now more optimistic about prospects for their business than six months previously. This confidence has once again focused many on growth both organic and inorganic. With the markets remaining uncertain, there is today increased competition for growth. Our recent study Competing for growth shows that 85% believe competition will increase in the coming two years. Leading organizations take a broad range of views of how to win such growth. Some have focused on cost competitiveness to improve margins. Others have concentrated on their capital agendas to source new funds via improved stakeholder relations. Another option has been a focus on operational agility to improve productivity. But certain businesses are focusing on customer reach, expanding their access to clients via new markets. The enhanced appetite for transactions has led to an increase in the volume and value of M&A. In Q3 2010, global activity totalled US$599b, the strongest quarter for two years. While well short of the heights reached in 2007, this level represents a 35% increase on the average quarter during what some are calling the great recession of Another related trend is the ever increasing volume of cross-border transactions, especially those involving businesses from emerging markets. Data from Thomson suggests that 25% of deals globally in 2009 involved emerging markets. Compare this to the average of under 10% in the 1990s. There has clearly been an increase in such deals, as companies seek to explore new markets and those in emerging markets step up overseas investment. Global completed M&A transactions 25,000 20,000 15,000 Volume of deals 10,000 5, Q Developed to emerging (domestic) Emerging to developed Emerging to emerging (cross-border) Developed to developed Developed to emerging Source: Thomson SDC Platinum/MARC M&A Research Centre, Cass Business School. Only change of control transactions included. 6 M&A maturity assessing country risks and opportunities

7 But which markets should be prioritized for investment? If a particular target is in play or on the radar, this may drive choice. But when the strategic intent is for expansion within a broader geographic area, e.g., South America, how does one prioritize between say Paraguay and Uruguay? The obvious challenge of doing deals outside a home country is familiarity with the target nation. Beyond the specifics of the business that might be on the table, numerous macro issues exist. Without awareness of these, risks can be left unmitigated and opportunities overlooked. To help address these issues, we are proud to introduce the innovative country-level M&A maturity index. This has been developed in conjunction with the renowned M&A Research Centre (MARC), at Cass Business School in London. Available online at this new tool provides high-level, interactive insight into 175 countries around the world. Each is attributed a score identifying the overall maturity of the market for M&A. The greater the maturity, the fewer the risks. But where there is risk, so there is opportunity. Using 6 factors, made up of 36 sub-factors based on publicly available data, these risks and opportunities are identified at a high level. A summary of these factors appears below. This analysis should prove a useful tool for comparing countries against each other and for surfacing issues requiring in depth-commercial due diligence. The index, however, is only a starting point for considering country-level issues in transactions. But the benefit to the user is to gain a sense of potentially unfamiliar markets in a short period of time. By benchmarking countries against neighbors or wider peer groups, it may be possible to begin to prioritize markets for potential transactions. And where concerns are identified, contact details are provided for Ernst & Young advisors who are positioned to provide in-depth tailored advice. In the following pages, we summarize the overall global M&A maturity picture. And then we look in a little more detail at four major emerging markets: the BRIC countries of Brazil, Russia, India and China. For each, a taste of the online tool is provided a summary of ratings on each factor and a profile of some of the high-level risks and opportunities that transactions in these countries are exposed to. Assessing M&A maturity Economic factors Economic factors include the overall macro picture the size and shape of a country s economy and growth rates. This forms the basis for assessing the economic stability and growth potential of local markets. Financial factors Financial factors are those specifically related to capital and labor markets. These include the development of local stock markets, costs of staff and the availability of debt financing. Political factors Political factors include both high- and mid-level indicators. At a high level, overall political stability is assessed. At mid-level, factors such as corruption are included. Regulatory factors Regulatory factors refer to the local legal and regulatory environment. These include the rule of law i.e., the consistency of application of rules and therefore the predictability of judgments under it. Socio cultural factors Sociocultural factors are those relating to people and workforce issues. Of particular importance are the availability of talent and levels of skills. Technological factors Technological factors relate to the availability and direction of technology. The level of investment in research and development and innovation are examples. M&A maturity assessing country risks and opportunities 7

8 The global picture: emerging markets mature It is no surprise that the most mature markets are also those that have traditionally played the biggest part in M&A transactions. The United States and the United Kingdom top the rankings, beaten only by another established economy: Canada. The remainder of the top 10 on the M&A maturity index are industrialized nations Japan and Western and Northern European countries. Strong ratings for technological and sociocultural factors play their parts in pushing these countries to the upper echelons of the ranking tables. What is, however, potentially surprising is the lofty position of other nations, often described as less mature, recently matured, or even emerging. Israel, Chile, the Czech Republic and Malaysia all appear in the early twenties of the rankings. These nations are boosted by rather distinct factors. Israel scores best in technological factors. Chile in the political arena, Czech in sociocultural and Malaysia in economic factors. These states lead the BRIC countries that are typically mentioned in analysis concerning major emerging markets. M&A maturity rankings (top 10, leading less mature market countries and BRICs) Rank Country Maturity score Economic factors Financial factors Political factors Regulatory factors Sociocultural factors Technological factors 1 Canada 90% 82% 80% 100% 75% 100% 100% 1 United Kingdom 90% 75% 75% 94% 98% 100% 100% 3 United States 87% 79% 75% 94% 85% 88% 100% 4 France 86% 75% 75% 94% 73% 100% 100% 4 Japan 86% 82% 75% 94% 65% 100% 100% 4 Netherlands 86% 86% 75% 100% 83% 75% 100% 7 Denmark 85% 82% 70% 100% 85% 75% 100% 8 Sweden 85% 82% 75% 100% 78% 75% 100% 9 Germany 84% 82% 79% 100% 67% 83% 92% 10 Finland 83% 79% 60% 100% 83% 75% 100% 10 Norway 83% 75% 63% 100% 88% 75% 100% 23 Israel 73% 79% 60% 69% 65% 63% 100% 24 Chile 72% 75% 63% 94% 73% 63% 67% 24 Czech Republic 72% 71% 54% 75% 54% 92% 83% 24 Malaysia 72% 82% 79% 69% 71% 58% 75% 29 China 70% 82% 83% 50% 40% 67% 100% 49 Brazil 57% 54% 54% 44% 31% 75% 83% 49 Russia 57% 54% 55% 19% 38% 92% 83% 52 India 56% 64% 75% 38% 44% 42% 75% Source: MARC M&A Research Centre, Cass Business School 8 M&A maturity assessing country risks and opportunities

9 Of the BRICs, China perhaps surprisingly tops Brazil, India and Russia in the M&A maturity rankings. Technological maturity has contributed strongly to the success of China, while regulatory and political issues have impinged on its progress. Brazil also shows strength in technology but is again held back by the same factors. Russia offers a similar profile, with a strong performance in the sociocultural arena, but an even weaker political score. And in India, good performances in financial and technological arenas are hit not only by regulatory and political concerns, but by sociocultural issues as well. The exact causes of the success of countries such as Malaysia and Israel and difficulties seen in the BRICs requires a closer look into detailed sub-factors. On the following pages, each of the BRICs are profiled in some granularity. When analyzing these scores, it should not be forgotten that while a high score suggests maturity and ease of transacting, a low score offers challenges that, when overcome, may offer significant opportunities for forward thinking managers. An example of where a risk might pose an opportunity is in the political group of factors. On one level, dealing in a country where stability is low and corruption is rife may seem off-putting. Risks around legal action under the US Foreign Corrupt Practices Act or local equivalents may deter many buyers from entering these markets. But with the right due diligence and with appropriate insight into local issues, there may be the potential to navigate these concerns and do deals to grab growth opportunities that competitors are either unaware of, or unable to take. Such risks and opportunities are not necessarily unique to one country, these may be present in several or pervade an entire region. As the graph below shows, the overall level of maturity varies between regions. While there are outliers in each geographical group, a definite trend emerges from the regional average. As mentioned above, Western markets lead on maturity, but perhaps surprisingly, Asia performs most strongly among less developed regional groupings. The challenge of understanding regional trends and local variations is a testing one. But a good understanding of the nuances of each market can help reduce risks and improve opportunities. Picking the right country in which to invest may yield growth opportunities that help win the competition for growth. See com for more detailed analysis of all 175 countries and contact details for professionals who can help you turn insight into action. M&A maturity score M&A maturity average scores by region (weighted by GDP of constituent countries) 100% 90% 80% 70% 60% 50% 40% 30% 40% 30% 20% 10% 0% North America Western Europe Oceania Asia CEE/Middle East Latin America Africa Economic factors Political factors Sociocultural factors Financial factors Regulatory factors Technological factors Source: MARC M&A Research Centre, Cass Business School M&A maturity assessing country risks and opportunities 9

10 Profile: Brazil Brazil, with its significant natural resources, is seen by many as a power in the making. Over the past decade, Brazil s economy has grown on average 3% each year, taking it to a leading regional position. And with strong technological and people indicators, the market for M&A appears appealing. Recently, however, in an attempt to prevent the market overheating, new rules have been implemented around inward flows of capital. The impact of this has been to make M&A in Brazil harder to execute. Key facts Country of c195 million people 2010 GDP growth estimated at 6% Leading economy in South America Strengths Brazil s strongest attributes around M&A are in technological and sociocultural factors. In the technological category, Brazil scores top marks for innovation. This is due to the high level of patents granted, indicating that new products are in the pipeline. In sociocultural, 100% is scored for both population size and, more significantly, level of training offered. This latter category is important as it shows that the local workforce is becoming increasingly skilled and therefore capable of undertaking more sophisticated tasks. All of these indicators are positive and offer opportunities for investors. But they also pose threats a highly skilled fast growing population will demand increased wages, leading to inflation. M&A maturity score: 57% Economic score: 54% Financial score: 54% Political score: 44% Regulatory score: 31% Sociocultural score: 75% Technological score: 83% Weaknesses Brazil scores lowest in the regulatory and political categories. Areas of particular concern are around labor regulations, business licensing and taxes. In all three categories, Brazil scored only 20%. The impact of this low score in labor relations is that there are likely to be difficulties around effectively managing staffing. The poor score for business licences indicates a substantial burden around applying for and obtaining licenses to trade. And the score on taxes indicates a significant challenge around dealing with the tax regime. Clearly these factors suggest weaknesses in the M&A environment in Brazil. The opportunity, however, is to fully understand these issues and successfully manage them. M&A maturity The M&A market in Brazil is recovering. In the first three quarters of 2010, deals involving an impressive 252 Brazilian targets were completed according to Thomson data. This suggests that this year will be the most active for M&A in Brazil other than the boom years of 2007 and As the scores outlined on this page suggest, undertaking M&A transactions in Brazil may be more complicated than some might assume. Careful attention should be paid to issues around regulation for example. Where issues lie, there may, however, be opportunities to drive growth. Further insight is available at www. mandamaturity.com 10 M&A maturity assessing country risks and opportunities

11 Profile: China China today is unrecognizable from its former self. Over the past several decades, the economic miracle that this emerging global superpower has enacted has been the envy of most. Growth over the past 10 years has averaged an impressive 10%. With top marks in technological factors and strong results in both economic and financial areas, there is a significant pull towards undertaking M&A in China. On the other hand, challenges remain in the regulatory and economic environments in China for undertaking transactions. Strengths China s key strength around M&A is technology. Top marks are assigned for high-tech (local production and exports), R&D expenditure (investment in new technologies) and innovation (level of patents granted). All these factors indicate that new, innovative technology is in the pipeline of Chinese companies. China also scored highly for M&A maturity around the economic and financial environment. The availability of credit (both banking and bonds) and openness of the equity markets received 100% scores. This suggests that raising finance in China may be a practical option. The reality, however, is that the markets are not as easy to navigate as the scores suggest. Weaknesses China scores lowest in the regulatory and political categories. Sub-factors affecting the M&A maturity score include labor relations, completion formalities and political details. The impact of the lower score in labor relations is that issues may exist around effectively managing staffing. The completion formalities score recognizes red tape that must be cut through in order to set up a new business. And the impact of political factors is that certain investors may find the environment beyond their risk apetite to commit to. These issues obviously need to be considered in assessing the attractiveness of China as a destination for M&A. But with good understanding of the nuances, opportunities can be leveraged. M&A maturity score: 70% Economic score: 82% Financial score: 83% Political score: 50% Regulatory score: 40% Sociocultural score: 67% Technological score: 100% M&A maturity China is renowned for its recent growth and new found economic might. The M&A market, however, is far from reaching its full potential. In the first nine months of 2010, 545 deals completed in China according to Thomson. This level is well below the heights of and seems unlikely to reach the levels of or even that of 2009, when around 1,000 deals were completed annually. While there are clearly numerous areas of M&A maturity in the market as outlined in this summary, there are also areas where issues exist. Further exploration of these is warranted to identify both opportunities and risks. Mandamaturity.com may be a starting point on this journey. Key facts Country of c1.3b people 2010 GDP growth estimated at 10% Now second largest economy globally M&A maturity assessing country risks and opportunities 11

12 Profile: India India as a market offers tremendous opportunity. With a massive population, much of which is yet to reach economic maturity, there is significant potential for development of the M&A markets. Growth in India has averaged 7% over the last 10 years. This is clearly a positive sign, and India scores well for its economy and financial situation. It also gets good marks around technology. The key areas of M&A immaturity are, however, around its political and regulatory environment and its sociocultural situation. Strengths India s key M&A strengths are around financial and technological factors. In the financial arena, top marks are awarded for the development of its equity markets. This suggests that access to capital may be an achievable goal. Debt markets are also strongly rated, both in terms of bank funding and bonds. Labor costs too are well rated as they remain competitive. In the technological arena, India scores 100% in innovation a statement on the high level of new patents filed each year. The suggestion here is that new technology may be in the pipeline. The concentration of India s maturity around several key factors is, however, a risk. Changes to the inflation climate for example could quickly erode its strengths. Weaknesses As with other BRIC economies, the key M&A immaturities in India are centered around the political and regulatory environment. The main issues here include low scores for political issues (lack of certainty about future developments), the payment of taxes (high levels and significant administrative burden) and the enforcement of contracts (difficulties in using the judicial system to enforce agreements). These issues will reduce certainty around making the most of investments. In addition, India also scores poorly on sociocultural factors. The key deficiency here is the low level of training of the workforce. With a good understanding of these challenges, investors can however take advantage of the opportunities that exist. Key facts Country of c1.2bn people 2010 GDP growth estimated at 8% Leading position in Asia M&A maturity score: 56% Economic score: 64% Financial score: 75% Political score: 38% Regulatory score: 44% Sociocultural score: 42% Technological score: 75% M&A maturity India is seen by many as a still slumbering giant. Yet to motivate its population in the way that China seemingly has, M&A market activity in India has fallen back on recent years. According to Thomson, in the first nine months of 2010, 398 deals were completed in India. This is barely half of the average of 730 deals done during the boom of As summarized opposite, India is a market with numerous areas of strength, and weaknesses that may present opportunities. Further analysis of these issues is advised visit www. mandamaturity.com for more insight. 12 M&A maturity assessing country risks and opportunities

13 Profile: Russia Of all the key emerging markets discussed, Russia is perhaps the most complex. A world power for much of the last century, this market has recently been through a process of recovery, while its peers are in the ascendancy for the first time. Despite a blip in 2009, GDP growth in Russia has averaged 5% over the past decade. From an M&A maturity perspective, Russia scores very strongly in sociocultural factors. Its performance, however, in regulatory and political arenas is less impressive. Strengths Russia s key strength in an M&A maturity context is undoubtedly in the sociocultural arena. While also scoring strongly in technological factors, its performance around people issues sets it apart from other BRIC nations. This is largely driven by the top marks received for the standard of workforce training and good results for the level of skill among its employees. On the technological front, a top score in patents suggests a good pipeline of technological developments, and investment in R&D and high-tech bode well for future growth. The risks associated with these strengths are that, by virtue of their foundation in knowledge and skills, they are transferable and potentially not unique. Weaknesses One of the greatest challenges for undertaking transactions in Russia is around political and regulatory issues. Of some concern is the poor score achieved around rule of law. This implies that there is a high risk that legal requirements are not adhered to. At the same time, a low score is achieved for business licensing, as a significant administration burden exists for those who intend to comply. Another area of concern is the poor score for trading across borders as significant requirements exist in order to legally transact internationally. Detailed investigation into these issues can however enhance the potential for opportunities to be realized. M&A maturity score: 57% Economic score: 54% Financial score: 55% Political score: 19% Regulatory score: 38% Sociocultural score: 92% Technological score: 83% M&A maturity Russia, despite its long-standing presence on the world stage, remains a mystery to many investors. This uncertainty however seems to be diminishing. According to Thomson data, 2010 may be a record year for M&A in Russia. In the first nine months of the year, 1,951 deals were completed. If deals complete at a similar rate in Q4, the heights reached in 2009 may be met or event surpassed. The common perception of political and regulatory risk in Russia, however, appears to be borne out by the M&A maturity index. Investors considering transacting in Russia are presented with a series of risks and opportunities. For more details, see Key facts Country of c140m people 2010 GDP growth estimated at 4% Leading economy in Eastern Europe M&A maturity assessing country risks and opportunities 13

14 M&A in context: The Capital Agenda Capital is perhaps more important today than at any time in recent memory. M&A, and in particular investing through acquisitions, is but one element of the wider Capital Agenda that management should consider. Leading businesses are adopting a range of disciplines around capital in four key areas to build competitive advantage: 1. Preserving: reshaping the operational and capital base 2. Optimizing: driving cash and working capital, managing the portfolio of assets 3. Raising: assessing future funding requirements and evaluating sources 4. Investing: strengthening investment appraisal and transaction execution Where investing capital is on the agenda, detailed consideration should be given to the strategy behind this decision, the methods under review and the assets in focus. Mandamaturity.com is a starting point for this debate. With high level analysis of countries and suggestions as to the opportunities and risks associated with transactions in each state, this is a useful tool for stimulating debate around M&A. The Capital Agenda Stress and distress e.g., liquidity issues and turnaround plans Customer and supplier analysis Preserving tax assets and minimizing costs Refinancing or restructuring debt, equity and other obligations Dealing with stakeholder relationships and pressure Optimizing asset portfolio Delivery of synergies and effective integration Improving working capital and releasing cash Optimizing capital structure Optimizing tax and corporate structure Dispute resolution The Capital Agenda Acquisitions and alliances Planning and structuring transactions to optimize stakeholder return Focused due diligence to mitigate risk and drive value Asset valuations Cost- and tax-efficient structures Fundraising (equity and debt): IPO readiness, rights issues, PE, private placement and capital markets Optimizing funding structures Asset divestment Infrastructure projects Cost- and tax-efficient structures 14 M&A maturity assessing country risks and opportunities

15 About the M&A maturity index The M&A maturity index was produced for Ernst & Young by MARC, the M&A Research Centre at Cass Business School, City University, London. The concept behind the index is that the more mature a country, the greater propensity for, or ease of doing, M&A deals. Where there are risks, there are however opportunities. Using 36 publicly available data sets from governmental and supra-national organizations, the index rates a total of 175 countries to create an overall M&A maturity score. These 36 sub-factors are aligned to six groups using a standard analytical framework and the average of these six groups is itself averaged to create the overall score, with 100% being most mature and 0% being least mature. All factors are equally weighted. Factors assessed are as follows: Assessing M&A maturity Economic Current account balance Economic freedom Economic structure risk GDP growth GDP size Inflation Investment climate Financial Access to finance Availability of domestic banking credit Currency risk Development of bond market Development of equity market Labor costs Political Control of corruption Corruption potential Political details Sovereign debt rating Regulatory Business licensing and permits Completion formalities Enforcing contracts Foreign investment approval Labor regulations Merger control Paying taxes Protecting investors Registering property Regulatory quality Rule of law Trading across borders Sociocultural Labor skill Level of education Level of training offered Population size Technological High-technology exports Innovation R&D expenditure For further details on the methodology and data behind the M&A maturity index, and to assess each of the 175 countries covered for yourself, please visit For questions on how to deal with the risks and opportunities the tool highlights, please contact the Ernst & Young professionals listed overleaf. M&A maturity assessing country risks and opportunities 15

16 Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit About Ernst & Young s Transaction Advisory Services How organizations manage their Capital Agenda today will define their competitive position tomorrow. We work with our clients to help them make better and more informed decisions about how they strategically manage capital and transactions in a changing world. Whether you re preserving, optimizing, raising or investing capital, Ernst & Young s Transaction Advisory Services bring together a unique combination of skills, insight and experience to deliver tailored advice attuned to your needs helping you drive competitive advantage and increased shareholder returns through improved decision-making across all aspects of your capital agenda. Contacts Alexis Karklins Capital Transformation Leader alexis.karklins.marchay@fr.ey.com Leor Franks Marketing Director lfranks@uk.ey.com 2010 EYGM Limited. All Rights Reserved. EYG no. DE0212 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. 1110EDA062. EMEIA Design Agency