Emerging-market companies are on the prowl. And so they should be. A recent report by Citigroup highlights just how much value emerging-market companies can create for their shareholders through an acquisition.
The US bank reviewed all $250 million-plus, cross-border acquisitions by emerging-market companies between January 1 1991 and December 31 2003, calculating market returns to shareholders of the acquiring company. The rewards are pretty stunning.
In the one-year period following the announcement, the average excess return (measured as the return of the acquirer’s stock in excess of a risk-adjusted benchmark or market return) was 8.7%.
Even in the very short term, defined as the period starting five days before the announcement up to five days after the announcement, the average excess return was 1.9%. These figures are “similar to returns observed for cross-border acquisitions by US companies”, says Citigroup.
Break down the results further and other interesting conclusions emerge – the most important being that most emerging-market companies achieve their acquisition goals even if the market is initially sceptical.
With such impressive results, it is little wonder that bankers reckon M&A will be the biggest story in the emerging markets this year and beyond. Indeed one can argue that it has been one of the biggest stories since the turn of the century.
For example, between 2000 and 2004 the volume of cross-border activity by emerging-market companies (based in 14 leading developing economies) averaged out to $19.6 billion each year, according to Citigroup. That is a staggering 7,000% increase (unadjusted for inflation) from the period between 1981 and 1989.
This year promises to be just as good, with volumes likely to hit record highs, especially if Chinese oil firm CNOOC succeeds in its $18.5 billion hostile bid for US peer Unocal. Already there have been notable transactions including, in March, the completion of Mexican cement company Cemex’s $4.15 billion acquisition of the UK’s RMC.
That deal illustrates two important developments in emerging-market M&A. The first is that emerging-market companies now have real options to finance their acquisitions, especially in the bond and loans markets. With emerging-market bond spreads at historically low levels and increased availability of bank lending (plus the development of local debt markets), capital is not hard to find for would-be acquirers.
Cemex, for example, took out the biggest loan ever by a Latin American company to fund its purchase of RMC. The $5.8 billion facility prompted a lending frenzy among banks. More than $10 billion was raised in the first phase of syndication last October. Eventually, more than 60 banks were involved in the loan in one capacity or other.
The second big development is the growing trend for emerging-market companies to buy rivals based in the developed world. Severstal, Reliance Industries and Mittal Steel are further examples of emerging-market firms that have announced or have completed substantial acquisitions in the US and Europe.
Ten years ago this sort of thing would have been unthinkable. But today many emerging-market companies are global leaders in their fields, even if certain US politicians think differently. But then again the fact that they have this misperception demonstrates how far emerging-market companies have come in such a short space of time. The unfortunately named Market Abuse Directive is living up to its acronym. This EU regulation seeks to set in place a common framework for preventing insider dealing, market manipulation and full disclosure of information to market participants.
It implements all sorts of sensible things such as listing persons with access to inside information. Another rule requires researchers to declare possible conflicts of interest.
But the section of the regulations that governs market manipulation might well prove to be counter-productive.
One of the directive’s rules is to limit, to 5% of the total deal size, how much underwriters can go short of a new issue in order to stabilize prices. The objective of this rule is to stop arrangers bringing new issues at too aggressive a price, but few interests are served by it. Innovative or risky deals will be far harder to manage because hedge funds and other opportunists will be better able to second-guess what underwriters’ positions are.
