Rapid-growth investment opportunities to research during the lull in M&A activity


By Sabine Vollmer

Not much has changed in recent months when it comes to corporate appetite for mergers and acquisitions: Rising profit expectations – in addition to large corporate cash stockpiles – are the ingredients, it would seem, for a deal-making free-for-all.

What has changed: the places companies may find safe deals.

With economic uncertainty across the globe – particularly in the US and Europe – potential buyers remain cautious about where they are willing to spend large amounts of cash.

In late 2010, developed Western countries such as the US, the UK, Canada, France and Germany were among the six safest M&A markets, according to the M&A Maturity Index compiled by City University’s M&A Research Centre in London.

But the latest version of the index, released last month, shows that Asian countries are on the rise.

Singapore ranked second on the latest list. Hong Kong came in fourth. And South Korea was No. 5. Only the US (No. 1), the UK (No. 3) and Germany (No. 6) remained in the top six.

The annual index ranks 148 countries on their ability to attract both domestic and cross-border M&A deals. The rankings are based on an analysis of a country’s regulatory, political, economic and financial environments, along with its technological capability, socioeconomic characteristics, infrastructure and assets. The greater the maturity, the lower the risk of undertaking deals.

Risk vs. popularity

Rapid-growth markets such as China (No. 9), Brazil (No. 34) and India (No. 38), which have seen a slowdown of economic growth, remain popular despite higher risks, because their pace of expansion is still ahead of advanced economies, such as the US, the UK, Germany, Canada (No. 7) or France (No. 8) in the 2012 report.

By 2020, rapid-growth markets will account for about half of global GDP, 38% of consumer spending and 55% of capital investment, according to the E&Y report.

India, for example, is a very attractive market for investors because it is the world’s second most populous country and has a rapidly growing middle class. Ernst & Young’s Global Capital Confidence Barometer rated India No. 2 among “Top Investment Destinations.” The M&A Maturity Index gives it high scores for its railroad system, ports, population and size of GDP. But its maturity score of 63% is much lower than China’s 79%, because in India it’s difficult to enforce a contract, corruption is a challenge, and the bureaucracy is cumbersome, according to the index.

With a maturity score of 65%, Brazil harbours a little less risk as an investment destination than India even though Brazil’s regulatory and political barriers are high. The country’s saving grace is an almost perfect score for tax compliance.

According to the M&A Maturity Index, rapid-growth markets that match a smaller appetite for risk better than India and Brazil include:

  • Thailand and Malaysia in Asia, each with a maturity score of 73% and with overall rankings of 17th and 18th, respectively.

  • The United Arab Emirates (72%/No. 20) in the Middle East.

  • The Czech Republic (71%/No. 21) in Eastern Europe.

  • Chile (66%/No. 32) in Latin America.

Companies willing to risk more for a larger payoff could be attracted to Africa. 

With an M&A maturity score of 41%, Nigeria (No. 101) is among the 148 countries included in the index. The country boasts Africa’s largest population and an economy that expanded 7.4% in 2011. But political unrest and rampant corruption are Nigeria’s biggest weaknesses.

Ghana (No. 107), whose economy grew 15% in 2011, received better scores for political stability and regulatory affairs than Nigeria, but the country’s infrastructure is poorly developed and technical innovation is low.

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.

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