Connecting our clients to the emerging markets | video transcript
Martin Wolf in the FT has come up with an excellent description of where the market is going to go over the next say 5 – 10 years. He’s phrased it as “we’re going to see converging incomes as a result of diverging growth”, and that very succinctly describes how we’re going to see some massive population centres around the world achieve much greater purchasing power through the accelerated growth that emerging markets are going to experience compared to the developed world. I think over the next 2 – 3 years we are expecting 40% of the world’s GDB growth to come from four countries, the four BRIC countries despite the fact that they only represent 17% of the worlds GDB today. So that is a hugely divergent trend, and as a result of that we are seeing real pressure on CEOs in the developed world from their shareholders to explain what their strategies are for building business in those emerging economies and to explain how they are going to implement those strategies.
What we’re seeing with corporates is in the developed world there is huge pressure now on corporates who have deleveraged over the last couple of years are cash rich to use that cash to invest in the development of their businesses in emerging markets in growth markets around the world and that is coming out in the form of M&A; activity or at least the discussion of M&A; activity where at least the discussion of M&A; activity but we’re also seeing coming back the other way, perhaps a much faster increase than we had expected in emerging market corporate heading overseas to buy things other than natural resources and commodities. They want technology and competitive advantage, so we’re seeing quite a rapid change in the way that M&A; is happening with increase cross border activity.
The main problems in trying to engage in this sort of M&A; activity cross border particularly with emerging markets is corporates are very concerned about the cultural issues and the impact that has on integration of businesses. They are very nervous about the different inflationary exposure they would experience in these emerging markets and whilst there is significant growth there the valuations on these businesses are very very high indeed particularly in the four main BRIC territories, and in a funny sort of way it is a lot easier for those emerging market companies to buy into the developed economies because valuation isn’t as significant an issue when they’re buying back into the lower growth economies. So you have got a number of issues that are causing corporates problems in trying to actually implement a strategy for growth and then to integrate those businesses successfully into their own.
Despite the difficulties what we have noticed over the last year is a distinct pick-up in activity and discussion around deal flow between the emerging and developed economies. And in particular over the last quarter we’ve seen a very definite increase in the number of deal closures. Whilst mining is going to be a common theme for the next 3, 4 years what has been particularly interesting is we’ve seen a lot of activity in the industrial products space between China and Germany, and we’ve seen a lot of consumer activity between Japan and Brazil. So this is not just a mining commodities story and it’s not just a developed economy’s into emerging economy story, it’s much broader than that.
Over the last quarter we’ve closed more than 10 transactions between emerging and developed economies. And the common themes there valuation, culture and integration are things that we have helped the corporates deal with by using a joint cross border teams capable of understanding the different dynamics in the different territories that are involved in these transactions. I think corporates have to think carefully about how they used sensibly their advisors to bridge the gap between developed market, emerging market so that they as the buyer can get themselves comfortable in entering into transactions and making the investment.
