Increasing appetite for cross-border deals

Businesses seek growth outside home markets.

More than three-quarters (78%) of respondents to Clifford Chance’s Cross-border M&A: Perspectives on a changing world survey of large global companies are looking for growth outside of their established domestic markets. The research study into current trends in cross-border M&A found that over half of companies surveyed (56%) are focusing their M&A strategy on the high growth economies.

The research, which was conducted by the Economist Intelligence Unit on behalf of Clifford Chance, surveyed nearly 400 companies each with revenues of more than $1 billion

Key findings

  • Growth markets feature highly as attractive destinations for M&A.  North America was the region with the highest number of prime M&A opportunities. China, India and Brazil all appear in the top 6. Although China was named as the number two destination for M&A, it is also considered to have the highest risk factors for cross-border M&A.
  • Concerns about cultural differences – despite the growing need for companies to invest in new markets more than half say that they are discouraged from acquiring in new markets because of concerns about bridging cultural differences.
  • Joint ventures to manage risk - joint ventures and other minority structures are being used to manage sector-specific regulation and foreign ownership restrictions, and 37% of respondents selected joint ventures and strategic partnerships as their preferred deal structure.

Guy Norman, Head of Clifford Chance’s Middle East corporate practice said: “The survey supports what we are seeing across our offices in this region – an increasing appetite to take advantage of the higher growth potential found in emerging markets. This is not only evident among organisations in developed economies like Europe and the US, but also on a regional level with a clear rise in intra-emerging market activity.”

But according to Norman, political uncertainty, protectionism, restrictions on levels of foreign ownership, corruption, antitrust and tax laws all rank high as areas of concern, requiring the need for international quality advisers with local knowledge and contacts, and of course the resources and technical ability to get the deal done.

Global perceptions and trends

Current political, social and economic uncertainties and cultural challenges, particularly in growth markets, are leading many organisations to adapt their strategies and look towards joint ventures and partnerships as the preferred route to accessing new markets. Cash is king, with more than a third of companies (37%) planning to use their accumulated cash reserves to finance future deals, rather than bank lending or raising finance through equity or debt on public markets.

Diversification into new areas of business is low on the agenda for many, with the top driver for M&A being a focus on strengthening core business.

The survey also examined the top risks and barriers to cross-border M&A deals. Competition for assets took the number one spot, reflecting that there are currently more potential buyers than there are attractive targets and investment opportunities.

The survey exposed various regional perceptions and attitudes. European respondents rank China as a prime region for M&A opportunities, followed by Germany with India in third place.  North Americans don’t share this optimistic view of the East – they rank China down in tenth place, with South East Asia and Japan in 13th and 15th places respectively. More than half of North Americans selected South East Asia as the most risky destination for M&A activity, compared with only 8% of European respondents.

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