• KPMG's annual Emerging Markets International Acquisition Tracker (EMIAT) shows corporates in emerging economies have recorded a 25 percent increase in cross-border deal activity in the past six months.
• China, India and South East Asia continue to drive deal activity between Emerging and Developed (E2D) economies.
• KPMG research highlights the extent of activity between emerging economies (E2E) as tomorrow's multi-nationals begin to take shape.
Corporates in emerging economies have their M&A deal-making sights firmly set back on developed economies, after recording a 25 percent increase in cross-border deal activity in the past six months.
According to KPMG's annual Emerging Markets International Acquisition Tracker (EMIAT), 243 Emerging-to-Developed (E2D) deals were recorded in the first half of 2010, compared to 194 in the latter half of 2009.
The 25 percent increase in E2D deals was in no small part down to a resurgent India. After three relatively quiet six month periods, India recorded 50 deals, well up on the 21 deals of the previous six months. China was also up nine deals to 39, while South East Asia increased from 34 to 37.
In addition, the latest EMIAT - which covers all countries worldwide and also monitors deals between the emerging economies themselves - has revealed that cross border deal activity between emerging markets is also on the rise. For Emerging-to-Emerging economies (E2E), analysis of the numbers going back to 2003 reveals that South East Asia has been the most popular destination, registering 302 inbound deals. China was the next most popular market with 197 deals, ahead of the CIS (The Commonwealth of Independent States) with 176 and India with 167.
Jeremy Fearnley, Head of M&A at KPMG Corporate Finance in Hong Kong, says: "The latest findings indicate that deal-making confidence is returning far quicker for emerging economies than for their developed market counterparts. One reason for this trend is that emerging economies are capital rich. In the case of China for example, there is increasing demand for commodities in this market, as it continues to industrialise and invest heavily in infrastructure. Resource rich countries are often emerging markets themselves, hence the marked increased in E2E deals. We are experiencing this firsthand and are working with Chinese companies looking at deals in Africa, Central Asia and Latin America."
"The other side of the coin is the emerging market domestic consumption story, where we continue to see increased demand for Western products and brands. The focus of Chinese outbound acquisition activity is therefore introspective, as buyers seek to acquire more established Western brands to sell into their domestic market," Fearnley adds.
On the other side of the deal making equation, the latest EMIAT reports 748 Developed-to-Emerging (D2E) deals in the past six months, a nine percent increase on the previous six month period.
Ian Gomes, Chairman of KPMG's High Growth Markets practice for KPMG in the UK, said: "The latest findings suggest that in absolute terms, E2D deals still only equate to 32 percent of the D2E total for the past six months, but it is apparent that they have worked through the financial crisis far quicker. By contrast, I sense a degree of reticence amongst many of the developed economy trade buyers to get back on the M&A trail before all the nagging doubts over double dip recessions and sovereign debt fall-outs have fully receded."
"This somewhat subdued period in the M&A market does nevertheless provide an opportunity to consider the extent of E2E deal activity. This is an area of cross-border activity which has been given little or no attention - yet I believe it is where the multi-nationals of tomorrow are being created."
In terms of sector trends, China M&A activity in consumer markets remains buoyant, driven largely by the Chinese government's policy of moving from an export-based economy to a service-based economy, buoyed by consumer spending. According to US Central Intelligence Agency (CIA) figures for 2009, the services industry in China accounted for 43 percent of China's GDP, compared to 77 percent in the US. This indicates there is considerable room to grow.
The market reflects this, whether it is international companies trying to enter, or domestic companies developing global ambitions. A lot of M&A activity is being driven by private equity houses, which are taking on a value-added, long-term supporting role rather than just providing financial backing and driving short term profitability.
The EMIAT Tracker also notes that China inbound and outbound flows into developed markets indicate more movement for the latter (32 percent in 2010, up from 11 percent in 2006).
Commenting on the findings, Fearnley adds: "This is mainly due to rising demand for technology and intellectual property by Chinese companies. We also see a geographical shift in terms of capital and consumer demand - China has lots of both."
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