Marsh, Mercer, Kroll M&A Report Examines Global Risks, Opportunities

April 15, 2008

A survey commissioned by Marsh, Mercer and Kroll for their report “M&A Beyond Borders: Opportunities and Risks,” found that multinational companies consider investing in China, India and South East Asia almost as risky as investing in Africa.”

Despite those concerns, the report notes, “China, India and South East Asia were identified as the most attractive destinations globally for M&A activity over the next 18 months, with 57 percent describing potential interest there as significant or very significant. For North America, the figure was 43 percent, Western Europe 41 percent, Eastern Europe 31 percent, Latin America 29 percent, Middle East 27 percent, Australia, Japan and Korea 25 percent and Africa 19 percent.

“Among the issues identified as the most risky in the China, India and South East Asia region were questionable business practices as well as problems with the local intellectual property regime and insufficient financial recourse against sellers.”

In an earlier survey Marsh determined that “executives at multinationals based around the world gave China, India and South East Asia an average risk rating of 5.3 out of a maximum 8 for a range of business-critical risks. The average rating for Africa was 5.5, Latin America 3.8, the Middle East 3.5, Eastern Europe 2.8, North America 2.1 and Western Europe 1.9. The Australia, Japan and Korea region was considered the least risky place to invest, with an average risk rating of just 1.6.”

While the report confirms that the “longstanding threats to intellectual property risks, especially in China, are widely acknowledged,” it also found that “the opening up of the economy in other sectors raises new concerns, especially around the environment. The Chinese government has introduced a raft of measures designed to improve environmental quality. While the degree of environmental litigation and statutory enforcement in China still lags well behind North America and Europe, companies need to be aware of the increased regulatory scrutiny of their operations and the stricter enforcement of environmental legislation.”

Karen Beldy Torborg, Global Head of Marsh’s Private Equity and M&A Practice, indicated: “Despite the perceived risks of investing in this region, the level of M&A activity in recent years suggests that the expected reward is much stronger. We are witnessing a fundamental shift of the global business landscape, with companies all around the world eyeing the potential of these countries and ramping up their investment and presence, accordingly. Having a thorough understanding of the risks will help lead to a more successful investment.”

Bob Bundy, global head of Mercer’s M&A consulting business, noted: “Human capital-related risks are often magnified in cross-border M&A, and must be taken into account in every phase of the deal process.” He explained that “how difficult and complex it can be to turn two organizations that come from different geographies and cultures into one, forgetting that business is at the end of the day a human activity can prove costly indeed.”

The report also found that M&A activity in Japan “has jumped after the government further eased regulation of foreign investment. In so-called triangular mergers, the law now makes it possible for foreign-owned companies to invest in Japanese companies by means of stock-for-stock exchanges with the Japanese subsidiaries of those companies. Coupled with the country’s low interest rates, a favorable financing condition has ensued, attracting more foreign investors.

“In Western Europe, 44 percent of respondents had either significant or very significant appetites for investment into Eastern Europe. Chris Morgan Jones, Head of Kroll’s Private Equity and M&A Practice in Europe, the Middle East and Africa, commented: “Central Eastern Europe is perceived by many as one of the most fertile areas of investment opportunity. Confidence in the region is strong among both domestic corporations and multinationals contemplating investments. Nevertheless, a number of significant issues including dependable judicial systems and political influence on business do require more attention if Eastern Europe wants to have a risk profile similar to those of its Western neighbors and other developed states.”

The report draws on a survey by the Economist Intelligence Unit of 670 senior executives worldwide. Other key findings include:
– Expectations for inorganic growth are high: During the past 18 months, only 35 percent of respondents said that 10 percent or more of their revenue has been attributable to mergers and acquisitions, while 68 percent expect it to be more than 10 percent for the next 18 months
– People and cultural issues are perceived as significant risks in every geographic region: Organizational cultural issues and human capital integration issues were cited as the two most significant issues faced by respondents following their previous transaction (50 percent and 35 percent respectively)
– Smaller and medium-sized companies expect more from M&A than larger firms: Those with annual revenues under US$500m hope to see the contribution of M&A to growth double, from 9 percent to 18 percent, while the biggest firms – those with revenues exceeding $10bn – expect a slight decrease, from 14 percent to 13 percent
– State-owned investment funds pose little competition to other acquirers: Only 4 percent of potential acquirers think that state-owned investment funds, such as sovereign wealth funds, are likely to offer the strongest competition to over the next 18 months, while 29 percent believe it will be strategic or trade buyers from their home country and 26 percent believe it will be private equity.

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Source: Marsh

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