Podcast #41:
Global M&A: Emerging from the Great Recession
Transcript:
By Jim Tompkins, CEO, Tompkins Associates
Hello, this is Jim Tompkins, President and CEO of Tompkins Associates and Tompkins International.
I would like to welcome you back to our 8th podcast series on mergers and acquisitions. This is the fifth podcast in our series of six for this series and, we will be focusing on global M&A, emerging from the great recession.
This time I want to take a step back and look at the broader global framework for M&A and some recent trends, as we move out of the Great Recession and into the Great Comeback.
And I don’t want to spend a lot of time today on the Great Comeback, but let me point out that we are right on track with the predictions we made. and that we are going to have a stronger comeback than many have predicted early on.
To help us move over into the global M&A scene, I have invited Dr. Kim Woodard to join me today. Kim is the Vice President at Technomic Asia, the Tompkins International company that is headquartered in Shanghai, that is helping us expand our reach in Asia. Kim is one of the most experienced China hands in the business – having first gone to mainland China in 1971 as part of China’s first opening to the West.
He has worked in the Greater China region for over 20 years, including stints in senior executive positions in China with A.T. Kearney, John Deere, and AMP Incorporated (now Tyco Electronics). Kim has worked on many investment projects in China over the past thirty years and spent the last decade developing an M&A advisory practice for multinational clients that are acquiring local Chinese companies as part of their global growth programs.
He is one of the most experienced deal makers operating on the ground in China and throughout Asia.
Kim, welcome to the Tompkins M&A podcast series. Let’s get right into it. What is your take on the trends in the corporate M&A activity as we move out of the Great Recession and into the Great Comeback?
Kim:
Thanks Jim – always great to talk to you, and I am very pleased to be part of the Tompkins/Technomic team here in Shanghai. We are working hard to expand our transaction support practice in this part of the world. To answer your question, the basic picture is very simple. Global M&A activity tanked by 40% in the first half of 2009 and was down 27% for the year as a whole last year, to just under $1 trillion.
Acquisitions started to pick up again in Q4 2009 and and then further in Q1 2010 in the “core economies” – that’s the North American and European markets as companies with strong balance sheets and competitive positions that have been looking for bargains. But for the moment, M&A activity remains on the slow side in the rest of the world, including in large growth markets like China and India.
Multinational corporations that went into the Great Recession with very strong balance sheets, good cash reserves, and strong competitive positioning are working hard to preserve the health of their balance sheets so that they will be positioned for strong growth going forward, particularly through acquisition of their weaker competitors, again as the core economies pick up again. The big multinational companies need to feel comfortable that their home markets are going to get better before they get too aggressive.
So at the present time, they are doing strategy studies and have started to hunt again, but basically they remain a bit cautious about actually doing deals in the emerging economies.
Jim:
Help me understand this. There should be a surge of new M&A not only in China, which just experienced 12% year-over-year GDP growth in the first quarter of this year, but also in the other BRIC countries – Brazil, Russia, and India. Coming out of the recession, the growth will clearly be in the BRIC countries.
Won’t the multinationals take advantage of that by acquiring local companies in the emerging market to accelerate their growth? Also, it is clear that private equity firms and hedge funds have retrenched as their own capital and credit sources have dried up. But it is my impression that corporate M&A by global multinationals hit bottom in 2009 and is on the way back up again.
Kim:
Jim, I appreciate the points you’re making, and it’s all about competitive positioning, timing, and who is doing the buying. You are absolutely right that our corporate clients are focused like a laser on growth in the BRIC countries.
Furthermore, they are no longer picking just one of these high-growth economies, but in my experience with my clients, they are sorting out strategies that will leverage growth in all four BRIC markets in tandem. For our clients, it is no longer about “India vs. China” but now about “India and China and Brazil and maybe Russia.”
Let me do a quick rundown on what has happened with M&A in the BRIC countries over the past year. To do this let’s do it by the order of the acronym and go through all four countries. First, let’s talk about Brazil.
Brazil –
Total M&A deal volume dropped 32% from $107 billion in 2008 to $81 billion in 2009, which is still substantial. Keep in mind that this is not just multinational companies buying Brazilian companies, but also includes inbound, domestic, and outbound deals. Optimistic forecasts suggest maybe this year we’ll see a recovery of 30-40% this year, which would take us back to the 2008 level for Brazil.
But the composition of M&A activity is shifting. A lot of the action is Brazilian companies buying other Brazilian companies, and this has accelerated. Inbound investment and acquisitions focus in the mining and energy sectors, financial services, and retail. And guess who is driving the large mining and energy deals – this time it is not the U.S. and European multinationals, but China, another BRIC country.
Russia –
Faced with falling oil prices and a GDP that declined 9% in 2009, M&A activity in Russia went into the deep freeze last year. That is a very big dip by any standard. Total M&A transaction volume peaked at about $160 billion in 2007, then $122 billion in 2008 and went off the cliff to just $46 billion in 2009, almost all of which was domestic consolidations (consolidations of Russian companies as they did M&A on themselves). Inbound M&A fell 80% in 2009 – basically the multinationals just stopped buying the Russian companies, so there was just $7.8 billion for the year. Recovery of M&A activity this year will again be tied to oil prices and positive growth in GDP, but is very likely to be anemic in 2010.
My own sense is that we may see it recovering in 2011 as rising crude oil prices drive economic recovery. It is understandable that multinationals are cautious in Russia’s volatile economic and financial environment, despite the lure of future growth potential.
India –
Total M&A transaction value for India is actually a bit surprising to me in that it is a bit modest – just $34 billion in 2008 and then dropped 52% to just $23 billion in 2009. China reached this level of activity more than five years ago. Combined with the size and continued growth of the Indian economy, this suggests that we will see a lot more acquisition activity in the next couple of years. On the outbound side, we will see more headline deals, perhaps not a lot but a few headline deals, by emerging Indian multinationals, such as the Tata’s acquisition of Corus Steel, Jaguar, and Land Rover or the huge Mittal Steel acquisition of Arcelor in 2006.
I expect the big focus in India will be inbound transactions. I expect to see a lot more small and mid-sized transactions, particularly on the inbound side and particularly in high growth sectors such as healthcare, consumer products, and financial services. India should be a good hunting ground for the multinationals over the next couple of years, but valuations are high and it may be difficult to get deals to the finish line. I think the market is attractive enough that multinationals will make the effort. This is what happened in China in the 2003-2007 period when we had a spike in both the total number and the number of inbound deals in China, and India may well follow the script.
Jim:
OK, I buy the argument that there may be some good reasons for corporate caution on re-starting M&A programs in Brazil, Russia, and India too quickly, despite the lower asset valuations that are currently available in these countries. But what about the Giant Panda? I just read that China’s GDP grew 12% in the first quarter of 2010. Auto sales in China doubled in 2009 to 10.5 million passenger vehicles and now exceeds the size of the U.S. auto market. China comes to the M&A party with a $200 billion sovereign investment fund and $800 billion in its back pocket in U.S. treasuries. I would think that any multinational in its right mind would be buying local companies in China to leverage the Great Comeback that is occurring there as we speak.
Kim:
Now for China.
Let’s talk China. This is my home turf, so I get a little excited about the drama. On the inbound side of the equation, multinationals behaved in China very much the way they did in the other BRIC countries – capital budgets were locked down for new investment in 2009 to preserve the strength of corporate balance sheets. That’s the basic equation. When you’re faced with recession, financial crisis, corporate boards across a wide range of industries behaved in a way that was totally rational to preserve their businesses.
Inbound M&A dropped from about $45 billion in 2008 to somewhere south of $20 billion in 2009. Different sources have different numbers, and final numbers are not yet available. Some put the 2009 inbound number as low as $11 billion, but their estimates miss many of the smaller deals. The point is that inbound M&A by multinationals, despite the continuing strong growth in China, faded in the last year, as it dropped by about 50%.
To go back to your original point, when is it going to restart? Shouldn’t it be restarting now? Our corporate clients are just now re-starting their China investment programs, doing strategy and target identification work, getting out and kicking the tires at potential target companies.
Above all, they are focusing first on critical organic investments (getting those restarted, new plants finished, etc.) and expansion of existing capacity and will pick up acquisition activity as a somewhat second priority. I anticipate that we will see a recovery in corporate acquisitions in China later this year or in 2011. Not sure at this point whether we will see a gradual return to the levels reached in 2007 and 2008 or whether the dam will break and everyone will start doing deals at once. Have to wait and see about the shape of the recovery curve.
Another point to keep in mind is that the coming recovery in corporate inbound acquisitions, in China as well as elsewhere, will vary in speed and intensity, depending on the sector of the economy involved. In general, the consumer-linked sectors that are focused on the domestic Chinese market – and on individual sectors, and I’m talking health care and pharmaceuticals, food & beverage, retail, and consumer durables – in acquisitions, in the M&A market, they will move faster than heavy manufacturing or export-oriented industries.
These are I believe recovering more slowly. Also, let me point out that total M&A transaction value in China, dipped 15% from $154 billion in 2008 to $131 billion in 2009. That is still a very substantial number. We will definitely see total transaction value go north of $150 billion in 2010, so back to 2008 levels or better. But Jim, the exciting part of the story is that M&A in China is actually on the outbound side of the equation.
China, which never fails to surprise, delivered total Overseas Foreign Direct Investment or OFDI of some $150 billion to global markets in 2009 – at the bottom of the Great Recession -- according to official data from the Chinese Ministry of Commerce.
Jim:
So what is going on here is an underlying shift in the balance of M&A activity between China and the rest of the world. China is shifting more to the buy side of the equation.
That’s really amazing. But at the same time, multinationals based in Europe, North America, and Japan cannot afford to miss out on the China growth opportunity and will continue to make strategic acquisitions of local Chinese companies to support their global market presence and operating platforms. Assuming this trend accelerates over the next five years, we should see increasing levels of cross-border deals and increased integration of operations – particularly supply chain integration opportunities.
This trend toward greater integration of investment and operations will be particularly clear in the BRIC countries, and within the BRIC group, will be especially strong for China. We need to wrap up this podcast, but cross-border investment flows and operational integration go to the heart of what Tompkins International is all about.
So I would like to extend this conversation to the next time and have another sub-segment in our podcast series. So our six-part series has just become seven. Let’s dig down a bit next time on the China story with some deal cases and anecdotes from your experience. I would also like to get into some of the trends on cross-border operations integration in China, particularly in supply chain. As we have discussed in other parts of this series, there is a direct link between the success of M&A deals and the effectiveness of operational integration between the merged companies.
I would like to explore this a bit in the context of M&A deals in China. To close, or rather to pause, because we’ll be coming back to Kim in a few weeks, let me thank Dr. Kim Woodard for joining us today. We look forward to a further exchange on global M&A in our next podcast.
Thank you, Kim, I really appreciate it, and see you next time. To the audience, thank you for being with us, excited about where this series is going, in fact we’re ad-libbing as we go. Talk to you again real soon.
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