Cross border deals: Now is as good a time as ever

EXECUTIVE AGENDA

One of the most intriguing ironies of the business world is the fact that when economies are booming and asset prices skyrocket, we see companies making audacious bids to buy other companies. On the other hand, when the economy takes a tumble and asset prices are at historic lows, we see CEOs become inward-looking and go into defensive mode, even though they might be in a relatively good position.

At A.T. Kearney, our view is that bleak economic scenarios like the present time should be used by strong companies to bolster their standing in their respective industries and to orchestrate "game-changing" initiatives, prime among which is mergers & acquisitions. It's a buyers' market and companies acting now are likely to emerge as winners when the upswing comes. Now is as good a time as ever for dealmaking.

A few strong companies have recently been making aggressive moves across different industries: IBM announced its intention to acquire SPSS. Kraft made a bold takeover bid for Cadbury, offering more than US$16 billion for the British confectionery maker. Disney has announced a $4-billion takeover of Marvel Entertainment. Among the largest of the recent deals to go through are the $68-billion Pfizer Inc-Wyeth merger and Oracle's $7.4-billion bid for Sun Microsystems. We expect more of these large deals as companies with strong balance sheets discover opportunities in the form of undervalued assets.

The rise of M&A in emerging markets: While deals from companies in developed countries buying into developing countries are up, it is the reverse - developing-country companies buying into developed countries - that is growing fastest. In fact, while global M&A value fell by 38% in 2008, acquisitions from developing countries into developed countries were up by 29% - a sign that companies in emerging markets are less affected and are thus well-positioned to take advantage of undervalued assets in developed countries.

Accounting for 27% and 14% respectively of the value of these deals, India and China are spearheading the acquisitions. What is interesting, however, is that Malaysia came a surprising third at 13%, not that much behind China. A key factor here is that oil-producing countries such as Malaysia and the Gulf countries, as well as high-growth economies such as China, have gained large current-account surpluses and are looking forward to turn them into risk-averse assets to reduce currency volatility and stabilise their economies.

We believe several Asian companies are well placed to take advantage of the current situation to effect bold M&A deals to fundamentally change their standing in their industries - both in developed as well as developing countries. Our analysis throws up a few companies that seem well placed to make some aggressive moves: PetroChina, SingTel, Reliance Industries, United Overseas Bank, Telkom Indonesia and others.India's Reliance Industries, for example, has a sizeable presence in the refining and petrochemical businesses, including the largest refinery complex in the world at Jamnagar. A few years ago, it started to make inroads into upstream oil and gas and identified it as an area of growth. In our view, Reliance could take advantage of the current situation to acquire assets in three areas: 1) downstream assets outside India to provide a channel for its refinery products; 2) upstream assets; 3) acquisitions in parts of the petrochemical business that would allow it to become a price setter in a commodity environment.

SingTel is a good example of a company that has already implemented a series of M&A deals as a market-entry strategy for countries such as Thailand, the Philippines, Indonesia, India and Pakistan. and is now pushing for entry into the African telecom market (specifically MTN Group) via its interests in Bharti Airtel. At a deal value of about $14 billion, it would count as one of the largest cross-border deals done this year.

In a subsequent article, we will discuss M&A planning for acquirers from emerging countries.

Vikram Chakravarty is a partner with A.T. Kearney Singapore and heads the Strategy & Corporate Finance practice in Asia; Karambir Anand is a manager with A.T. Kearney Singapore; Rizal Paramarta is a consultant with A.T. Kearney Jakarta. Teerin Ratanapinyowong is a principal and Thailand Country Manager. E-mail:

vikram.chakravarty@atkearney.com, karambir.anand@atkearney.com, 

rizal.paramarta@atkearney.com, teerin.ratanapinyowong@atkearney.com