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Emerging markets: Time is ripe for acquisitions

Emerging markets will account for 80 per cent of global growth in the next five years.

By Matthew Lasov | Published Nov 07, 2011 | comments

Developed markets will struggle with the debt crisis and possible double-dip recession.

As a result, emerging markets will become an even more important driver of overall corporate earnings growth.

Managers responsible for emerging markets will be pressured to develop aggressive strategies to deliver on heightened expectations for earnings growth.

Some managers will opt to pursue organic growth, building their company’s presence and brand locally. For many managers, however, organic growth alone will be inadequate to meet the aggressive targets being set by boards.

As managers seek to meet or exceed ambitious growth targets during the next year, the pace of merger and acquisition activity (M&A) in emerging markets is likely to return to and exceed levels last seen in 2007.

Three drivers will push managers to execute quickly acquisition opportunities:

* The likelihood of a double-dip recession in developed economies

* Record-high cash reserves

* Scarcity of high-quality M&A targets in emerging markets

Double-dip recession

Global markets continue to be plagued by the effects of the debt crisis that began in 2008 – fundamentals point to a greater than 50 per cent chance of a sovereign-event driven double-dip recession in the European Union, with broader contagion likely to follow.

While the business climate is gloomy at best, M&A can thrive in recessionary environments because attractive assets can be acquired at reduced valuations. Opportunistic buyers can take advantage of panicked and debt-burdened sellers.

Bank of America’s recent sale of a significant stake in China Construction Bank is just one example – Bank of America sought to quickly raise cash to satisfy capital requirements, and therefore sold at a discount of roughly 11 per cent. Emerging market managers now expect discounting to intensify, creating buying opportunities.

Looking deeper, valuations of emerging market-domiciled companies have decreased sharply, and leading multinationals are on the look-out for the high-quality emerging markets acquisition targets that will drive long-term corporate growth.

Timing can be an important part of any M&A strategy as it will amplify returns for managers who are most opportunistic. According to Bain’s analysis of 24,000 transactions between 1996 and 2006, “…acquisitions completed during and right after the recession of 2001-02 generated almost triple the excess returns of acquisitions made during the preceding boom years.”

While recessionary headwinds swirl, corporate profits are at all-time highs, driving record cash reserves. With interest rates at record lows, companies are being punished for holding cash.

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