by Marcos Dussoni Regional CFO Sodexo
For the growth-oriented enterprises, there are still opportunities aplenty in the emerging economies of the world. But maximizing them through M&A transactions is challenging if you are an outsider who does not know local regulations and customs and lacks relevant information.
Companies should pursue some strategies in order to avoid big mistakes. For example, they should have a clear understanding of how M&A in emerging markets will fits with into your overall strategic growth plan. In another words, what countries you want to enter, why you want to be there, what customer or product segment offers the most potential and how you will compete…
Another strategy is to monitor your course carefully such as establish and practice a strong M&A governance.
Mergers, acquisitions, joint ventures, and other transactions are crossing borders at a rapid pace and those markets are an interesting opportunity for companies which is pursuing growth, but has to be remembered that those markets are still emerging… Emerging markets can be complicated but has been proofed that deserves an strategy since the acquisitions and/or development of types clients you want to have in your portfolio.
Some markets, most the big ones such as Brazil & China, transactions structure are much more complicated than the US, Europe and UK to avoid surprises. For example, you can´t structure to avoid liabilities in Brazil. In China, you need structural protections other than contracts terms, which is often ignored. It is time-consuming to get any deal done in these markets due to the difficulty of conducting due diligence, getting necessary approvals and other issues.
Navigating in an emerging market means deal with risks and to create value, a deal must master, no matter where the enterprise is located the five critical areas:
The regulatory, political, and economic environments
The accessibility of key information
The quality of resources is critical especially in areas such as tax, contractual and in a buy-side make sure you understand the ownership of the company you are dealing with.
Some countries have different rules for domestic and non-domestic enterprises. China is an example. As a result, a foreign acquirer may have costs that a local competitor does not.
Mechanisms for protections should be considered in a manner that cover certain risks. For example escrow accounts has a stronger weight than provisions.
In emerging markets, the gap in understanding between leadership and the stakeholder groups is magnified, and without proper preparation and a clear communications plan for the entire process, that gap can erode shareholder value.
While emerging markets can offer significant M&A growth potential, sometimes the endeavor to the value creation for the acquiring company could be more complicated than expected. A bumpy road lies ahead as short term benefits may be lower than expected. However, some companies have proved that, when armed with the right strategies, they can be successful.