High growth markets lose their luster for corporate investors

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The FINANCIAL — KPMG International’s latest High Growth Markets International Acquisition Tracker shows that the volume of M&A deals between acquirers in development markets and targets in high growth markets (D2H deals), declined by 19 percent during the first half of 2015. It fell to 516 deals – the lowest total for 10 years.

The fall-off comes after a year of recovery, suggesting that recent uncertainty over issues such as US interest rates and slower growth in China is having an impact on deal-makers. Some key markets, such as Mexico and the US, however, continue to show a robust level of M&A investment activity.

“Despite a relatively stable global M&A market, both developed and high growth markets have cut their investments into HGMs significantly compared with six months ago, including into previous hot spots such as India and China,” said Leif Zierz, KPMG’s Global Head of Deal Advisory.

D2H DEALS ON HOLD AS UNCERTAINTY CONTINUES

Despite widespread positivity over the long term outlook for M&A investment into high growth markets, the shorter term picture is less certain. China, in particular, saw the number of inbound D2H deals drop by one quarter. While in Russia, still beset by considerable economic and political issues, inbound D2H deals plummeted by 63 percent.

India saw a 30 percent decline in inbound D2H deals, perhaps an indication that the business-friendly reform program has yet to come into full effect. As reforms kick-in, India is expected to become an increasingly attracting target for D2H acquirers.

 “India’s economic revival, the budget reforms and the pipeline of regulatory changes and developments in the works are transforming India into a viable M&A market. Plus, the country’s fast growing consumer markets offer attractive growth opportunities for investors that are lacking opportunities in their home markets”, continued Zierz.

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Symptomatic of the tailing off of interest in HGM acquisitions is the dramatic 49 percent fall-back in D2H deals out of Canada, 44 percent fall in deals out of Singapore and the 36 percent decline in German corporates acquiring HGM targets.

Even against this general picture of caution, however, some key HGMs still managed to increase the volume of deals from developed markets. Inbound Brazilian D2H deals, for example, were up by 10 percent, while the Middle East and North Africa saw a 25 percent increase.

Mexico is another market that is bucking the trend, as low oil prices, on-going market liberalization and ease of access into the North American market prove increasingly attractive to investors from developed markets.

HIGH GROWTH MARKETS NOT ACQUIRING IN EACH OTHER

It is not only developed markets that have moderated their interest in HGM acquisitions. HGMs, too, seem to be shying away from investing in other HGMs. Matching the decline in D2H deals, high growth to high growth (H2H) deals also fell to a 10-year low between January and June 2015.

The number of deals flowing into Asia from other HGMs tumbled: ASEAN by 33 percent, South & East Asia (excluding ASEAN) by 40 percent and China by 25 percent.

Instead, high growth acquirers seem to be preferring the relative security of M&A acquisitions in developed markets (H2D);where deal volumes, although down on 2014, are still higher than they were in 2013.

Outbound H2D deals from China, remained at their highest level for 10 years in marked contrast to the decline in inbound D2H and H2H deals, as foreign investors take a more cautious approach to high growth market acquisitions.

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“The impact and scale of the domestic M&A market in China is often overlooked. Yet it is likely to have an increasing impact on inbound M&A as stronger domestic players and importantly local private equity begin to participate in a more meaningful way in the reforms,” said Rupert Chamberlain, Partner, Deal Advisory, KPMG China.

Hong Kong was one of the developed markets that saw an increase in inbound H2D deals, which rose from 18 to 26, the highest 6-month volume since 2010. The UK also saw H2D deals rise – by an impressive 63 percent, with Indian, Chinese and South African investors being particularly active.  

 

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