Emerging markets: Time is ripe for acquisitions

Regardless, managers will have to work hard to make the case for resources for acquisitions. Skilled managers will exploit the contradiction between aggressive growth targets for emerging markets and the view that ‘cash is king’ during uncertain times. Using cash or borrowing at risk-free rates to buy performing assets at a discount is the most effective long-term capital-allocation choice available.

Using M&A as part of an emerging markets growth strategy is effective so long as companies have the ability to acquire targets that offer the most synergistic value and growth potential.

Many emerging markets have only a handful of high-quality companies that use generally accepted accounting principles (GAAP), comply with ethical business practices, and generate consistent financial returns. Out of this group, many companies may be family-owned and unwilling to sell.

The result can be intense competition as prospective acquirers recognise this scarcity and target the same assets. When competition enters the market for acquisitions, the supply/demand curve can quickly shift in favour of the sellers, diminishing the value of the deal.

In emerging markets, the scarcity of high-quality targets means that being the first mover is imperative for asset selection and opportunistic pricing.

The economic environment is full of uncertainties for companies operating in both developed and emerging markets. However, uncertainty can be the best environment for stimulating long-term growth.

To make the best investment decisions in this climate, managers will require reliable, up-to-date data and best practices and must learn from those who have succeeded and failed ahead of them in emerging markets.

Companies that move first to pursue growth during this downturn will become the market leaders when the global economy inevitably recovers.

Matthew Lasov is director of global research services at Frontier Strategy Group