Higher Growth: Lower Risk Challenging times for investors Navigating M&A deal risk in high-growth markets
Navigating M&A deal risk in high-growth markets Emerging market deals valued at Investment hot spots: percentage $750m+ (2008 13) 28% hit by major setbacks Troubled deals 51% faced regulatory pr ob es Mexico 43% Brazil 17% 35% faced litigation 22% faced disputes such as activist protests Countries where listed companies faced deal issues Buyers from developed economies those from emerging markets 27% from developed economies
of deals facing issues The higher the stakes Percentage of deals with issues per deal size China 25% > $2bn > $1bn 38% 21% > $750m 26% India 83% Indonesia 50% South Africa 25% as likely to face trouble as 32% from emerging and developing economies Freshfields Bruckhaus Deringer llp 1
M&A setbacks A new scale According to Thomson One data, the value of M&A investments in the world s high-growth economies has totalled more than $723bn since 2008. However, while high-growth markets have captured the world s attention, the risk reward ratio remains incredibly high. The economic, legal and political influences in these investment hotspots make for an unpredictable deal environment. An analysis of cross-border M&A transactions, valued at $750m or more in high-growth countries (by listed companies) over the past five years, reveals the scale of the problems faced by dealmakers. More than a quarter (28 per cent) of the deals in these markets have been hit by major setbacks such as regulatory investigations, government intervention, stakeholder litigation and management outcry. And one in 10 (11 per cent) of the troubled deals faced more than one significant hurdle, often simultaneously. Emerging market deals valued at $750m+ (2008 13) 28% hit by major setbacks Troubled deals 51% faced regulatory probes 35% faced litigation 22% faced disputes such as activist protests The findings here emphasise the importance of thinking through the likely issues and putting in place effective risk mitigation solutions. Bruce Embley Partner, high-growth markets 2 Navigating M&A deal risk in high-growth markets, November 2013
We analysed 132 deals, valued at $750m or more, that took place between January 2008 and June 2013* and categorised the issues that affected the deals as: regulatory probes, including competition issues and investigations; litigation involving court proceedings; disputes such as protests, quarrels with local landowners, exodus of key personnel and disputes with shareholders; tax issues involving investigation or allegations of tax avoidance; government opposition such as blocking sale, closing factories or exercising rights of first refusal; and Key findings The higher the stakes, the greater the chances are of hitting a problem. More than a third (38 per cent) of the deals valued at $2bn or more encountered an issue, compared with around a quarter (23 per cent) of those under $2bn. Regulatory probes are most common among the issues faced, affecting half (51 per cent) of the troubled deals. Litigation affected a third (35 per cent) of the deals that encountered setbacks. Disputes such as activist protests and quarrels with landowners and employees were also prevalent, affecting one-fifth (22 per cent) of the troubled deals. other issues including credit downgrades. The higher the stakes Percentage of deals with issues per deal size > $2bn > $1bn 38% 21% > $750m 26% *Source: Thomson One and publicly available data Freshfields Bruckhaus Deringer llp 3
Risky business Mapping the risks Some emerging and developing markets have proved more troublesome for dealmakers than others. More than a quarter (27 per cent) of deals in the BRIC markets faced issues. India proved particularly challenging: more than threequarters (83 per cent) of the deals in India encountered problems, with regulatory issues proving the biggest setback (affecting half of the troubled deals). In contrast, a quarter (25 per cent) of M&A deals in China faced issues. Investors in Mexico, Indonesia and Poland also faced tough challenges. The research also revealed that buyers from emerging markets are slightly more likely to face an issue than those from more developed markets. A quarter (27 per cent) of buyers from developed economies encountered deal issues when investing in high-growth markets. Almost a third (32 per cent) of buyers from emerging and developing economies faced obstacles when investing in high-growth markets. Mexico 43% Brazil 17% Countries where listed companies faced deal issues 4 Navigating M&A deal risk in high-growth markets, November 2013
Investment hot spots Percentage of deals facing issues China 25% India 83% Indonesia 50% South Africa 25% Freshfields Bruckhaus Deringer llp 5
Countries where listed companies faced deal issues Brazil 17 China 25 Czech Republic 33 Dominican Republic 50 Egypt 33 India 83 Indonesia 50 Mexico 43 Nigeria 50 Peru 50 Poland 66 South Africa 25 Turkey 11 BRICs 27 Total 28 0% 20% 40% 60% 80% 100% 6 Navigating M&A deal risk in high-growth markets, November 2013
27% from developed economies encountered issues versus 32% from emerging and developing economies Regulators around the world have increasingly been flexing their muscles, especially since the global financial crisis. Edward Braham Global head of corporate Freshfields Bruckhaus Deringer llp 7
Troubled deals Some examples Bharti Airtel Indian telecoms giant Bharti Airtel s $10.7bn acquisition of Nigeria s Zain Africa in 2010 encountered four major hurdles: Nigeria s High Court declared its ownership null and void, the Congo Republic launched a regulatory dispute over its telecoms licence, an employee attempted to block the sale and the Kenyan government initiated a tax investigation. Vodafone Vodafone ran into trouble when it acquired Ghana Telecom in 2008. Dismissed Ghana Telecom workers filed a writ of summons against Vodafone Ghana over termination of their appointments. The UK s Serious Fraud Office asked officials to investigate allegations of irregularities in Vodafone s African dealings. And activists staged a protest and the deal faced heavy government opposition. Eurasian Natural Resources Corp Kazakh miner Eurasian Natural Resources Corp became embroiled in a dispute after the Congolese government seized the Kolwezie project from a rival company, First Quantum Minerals, and sold it for $20m to an associate of the president. After ENRC bought the mining rights for $175m, First Quantum sued, claiming they were stolen assets. ENRC settled with First Quantum Minerals for approximately $1.25bn to end the dispute. Walmart US retail giant Walmart faced opposition from the South African government when it acquired Massmart Holdings in 2010. After a two-year battle, Walmart had to set up a $27.5m supplier development fund for the acquisition to go ahead. 8 Navigating M&A deal risk in high-growth markets, November 2013
Risk resistance Getting it right The findings highlight the importance for buyers whether listed, privately held or financial sponsor, and regardless of where they are situated to build risk resistance into any high-growth market transaction. While each investment is different and warrants a bespoke approach, there are six recurring themes that any investor should consider before it makes its move. 1 Take full advantage of available international investment treaties when identifying the ultimate structure for your deal 2Use flexible strategies to combat creative taxes 3Adopt a two-fold strategy to protect against bribery and corruption risk: assess target risk and implement effective mitigation strategies to reduce potential investor liability 4Anticipate the evolution of competition policies and other regulatory regimes into your investment business model 5If IP is key, take the necessary legal and practical steps to protect your brands, technology and trade secrets 6 Plan your exit at the outset For more information, please speak to your local Freshfields contact. Freshfields Bruckhaus Deringer llp is a limited liability partnership registered in England and Wales with registered number OC334789. It is authorised and regulated by the Solicitors Regulation Authority. For regulatory information please refer to www.freshfields.com/support/legalnotice. Any reference to a partner means a member, or a consultant or employee with equivalent standing and qualifications, of Freshfields Bruckhaus Deringer llp or any of its affiliated firms or entities. This material is for general information only and is not intended to provide legal advice. Freshfields Bruckhaus Deringer llp, December 2013, 36451
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