All-time high: M&A in emerging markets

February 2022  |  FEATURE | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

February 2022 Issue

Cracking the fundamental risks associated with investing in emerging markets has long been the holy grail for M&A practitioners across the globe. That task appears tantalisingly closer in light of deal activity in this sphere over the past 12 months.

By any measure, activity has been momentous in both volume and value. According to Refinitiv’s ‘Emerging Markets Announced M&A – Macro Industry Composition Emerging Markets Mergers & Acquisitions Review’, deal value totalled $920.1bn during the first nine months of 2021, a 34 percent increase compared to 2020 levels and the strongest opening period for emerging markets deal making since records began in 1980.

In terms of deal size, emerging markets M&A greater than $5bn totalled $159.7bn during the first nine months of 2021, with 14 megadeals accounting for 17 percent of announced activity. The top three deals were the $44.1bn Naspers share swap in South Africa, a $12.4bn infrastructure investment deal signed by Aramco Oil Pipelines Company in Saudi Arabia, and an $11.3bn rescue plan for bankrupt Peking University Founder Group in China.

Drilling down, cross-border emerging markets M&A activity totalled $361.3bn, a 94 percent increase compared to the first nine months of 2020 and the strongest opening period for cross-border M&A since records began. In addition, private equity-backed buyouts in emerging markets, which accounted for 18 percent of overall activity, totalled a record $163.4bn over the first three quarters of 2021, an increase of 60 percent compared to 2020 levels.

‘Excessive’ fundraising in 2018 and 2019 is the foundation of much of this activity, which finally gained momentum in the fourth quarter of 2020 after months of pandemic-induced inactivity. “A large pool of dry powder is one of the key drivers behind the surge in M&A transactions seen in 2021,” notes Christopher Kummer, president of the Institute for Mergers, Acquisitions and Alliances (IMAA). “Additional drivers include low interest rates and supportive capital markets.

“Major players such as the technology, industrial and consumer discretionary sectors account for most of the transactions undertaken last year,” he continues. “Corporates, private equity and special purpose acquisition companies (SPAC) are key contributors to M&A activity in emerging markets.”

South East Asia

One emerging market that has experienced particularly high levels of M&A activity over the past year or so is South East Asia (SEA). In its 2021 report ‘Mergers & Acquisitions Developments in South East Asia’, the IMAA states that “M&A activity in SEA has been on an upward swing representing positive post-pandemic recovery”.

By way of example, in Q2 2021, SEA recorded $17.8bn across 431 deals – equal to a 100 percent increase in value and a 40 percent increase in deal count compared to Q2 2020. M&A activity in SEA is also increasing in terms of cross-border deals, with Singapore and Thailand, two of the region’s fastest-growing investment destinations, at the core of these transactions. SEA is also expected to benefit from the realignment of global supply chains.

Elsewhere, M&A activity involving targets in China, India and Brazil accounted for 56 percent of overall emerging markets M&A activity during the first nine months of 2021, as revealed by Refinitiv. Furthermore, strong year-over-year growth in South Africa, Israel and Brazil offset double-digit percentage declines in Russia and the United Arab Emirates.

Challenges and risks

Deciding when and how to invest in emerging markets is often an exercise in uncertainty, with a raft of potential exposures, such as fraud and corruption, as well as unfamiliar politics, cultures and business practices, lying in wait for companies that fail to carry out quantitative and qualitative level research.

“Adding to the challenges is the existence of ‘three books’ auditing – for management, government and buyers – that is not comparable to Western standards and many others,” says Mr Kummer. “M&A practitioners in Western markets tend to have a very determined view of what constitutes corruption.

“In some emerging markets, however, relationships often serve as a safety network as the legal and court systems may not be well developed and thus reliance on friends and family members is very common,” he continues. “Management with ties to government officials are often difficult to assess but should be uncovered during due diligence.”

Emerging expectations

For M&A practitioners, there is no denying the appeal of investing in emerging markets. Not only are emerging economies growing faster than developed ones, they also now account for an estimated 85.9 percent of the world’s population and 57.5 percent of its gross domestic product.

“The same drivers that have been in place during the recent surge are still in place and continue to contribute to increased M&A activity in terms of size and numbers,” observes Mr Kummer. “For example, due to the contagion risk in the Chinese real estate sector, companies in China and other Asian countries will be subject to takeovers due to either discount valuations or bankruptcies.”

With record amounts of dry powder waiting to be deployed, M&A practitioners are currently seeing as many opportunities as they have at any point in the last 10 years – a compelling time to be an M&A practitioner in the emerging world.

© Financier Worldwide

BY

Fraser Tennant