China and India eye new deals
Corporates in emerging economies have their M&A deal-making sights firmly set back on developed economies, after recording a 25 percent increase in cross-border deal activity in the past six months.
According to KPMG International's annual Emerging Markets International Acquisition Tracker (EMIAT), 243 Emerging-to-Developed (E2D) deals were recorded in the first half of 2010, compared to 194 in the latter half of 2009.
The 25 percent increase in E2D deals was in no small part down to a resurgent India. After three relatively quiet six-month periods, India recorded 50 deals, well up on the 21 deals of the previous six months. China was also up nine deals to 39, while Southeast Asia increased from 34 to 37.
In addition, the latest EMIAT – which covers all countries worldwide and also monitors deals between the emerging economies themselves – has revealed that cross border deal activity between emerging markets is also on the rise. For Emerging-to-Emerging economies (E2E), analysis of the numbers going back to 2003 reveals that Southeast Asia has been the most popular destination, registering 302 inbound deals. China was the next most popular market with 197 deals, ahead of the The Commonwealth of Independent States (CIS) with 176 and India with 167.
"The latest findings indicate that deal-making confidence is returning far quicker for emerging economies than for their developed market counterparts," says Jeremy Fearnley, Head of M&A at KPMG Corporate Finance in Hong Kong. "One reason for this trend is that emerging economies are capital rich. In the case of China for example, there is increasing demand for commodities in this market, as it continues to industrialise and invest heavily in infrastructure. Resource rich countries are often emerging markets themselves, hence the marked increased in E2E deals. We are experiencing this first hand and are working with Chinese companies looking at deals in Africa, Central Asia and Latin America."
"The other side of the coin is the emerging market domestic consumption story, where we continue to see increased demand for Western products and brands. The focus of Chinese outbound acquisition activity is therefore introspective, as buyers seek to acquire more established Western brands to sell into their domestic market," Jeremy adds.
In terms of sector trends, China M&A activity in consumer markets remains buoyant, driven largely by the Chinese government's policy of moving from an export-based economy to a service-based economy, buoyed by consumer spending. According to United States Central Intelligence Agency (CIA) figures for 2009, the services industry in China accounted for 43 percent of China's GDP, compared to around 77 percent in the United States. This indicates there is considerable room to grow.
The market reflects this, whether it is international companies trying to enter, or domestic companies developing global ambitions. A lot of M&A activity is being driven by private equity houses, which are taking on a value-added, long-term supporting role rather than just providing financial backing and driving short term profitability.
The EMIAT Tracker also notes that China inbound and outbound flows into developed markets indicate more movement for the latter (32 percent in 2010, up from 11 percent in 2006).
Commenting on the findings, Jeremy adds: "This is mainly due to rising demand for technology and intellectual property by Chinese companies. We also see a geographical shift in terms of capital and consumer demand - China has both in abundance."
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