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28% of M&A deals in emerging markets hit snags

India and Indonesia prove particularly challenging in Asia

[SINGAPORE] Emerging and growth markets are often an attractive destination for many dealmakers, but it is no secret that they also come with greater risks.

A substantial number of merger-and-acquisition (M&A) deals in these markets are hit by major setbacks, says a study conducted by international law firm Freshfields Bruckhaus Deringer.

Freshfields found that almost a third (28 per cent) of M&A deals in emerging and developing markets were stonewalled by issues ranging from regulatory investigations and government opposition to stakeholder litigation and management objections.

One in 10 of the troubled deals also faced more than one significant hurdle, often simultaneously.

The study analysed 132 cross-border deals in emerging and developing markets valued at more than US$750 million taking place between January 2008 and June 2013. The value of M&A investments in the world's high-growth economies has totalled more than US$723 billion since 2008.

Freshfields found that the higher the stakes in a deal, the greater the chances of it hitting a problem. Thirty-eight per cent of the deals valued at US$2 billion or more encountered an issue, compared with 21 per cent of deals valued at between US$1 billion and US$2 billion, and 26 per cent of those between US$750 million and US$1 billion.

Regulatory probes were the most common among the issues faced, affecting half of the troubled deals. Litigation impacted 35 per cent of the affected deals, while disputes such as activist protests and quarrels with landowners and employees were also prevalent, impacting 22 per cent of the deals.

"M&A deals in growth markets usually have a different risk/reward profile when compared to M&A transactions in more mature markets," said Freshfields corporate partner Stephen Revell. "This research underscores the importance of thinking through the likely issues, and putting in place effective and resilient risk mitigation solutions. No deal team at any listed company wants to deliver the message to the board that its big emerging market investment has hit an unexpected and significant obstacle."

Notably, there are particular markets in Asia that are more susceptible to difficulties during a transaction than others.

India has proved particularly challenging, with 83 per cent of the deals there encountering problems - regulatory issues proved the biggest setback, affecting half of the troubled deals.

Meanwhile, 60 per cent of deals that took place in Indonesia encountered a setback, while 25 per cent of deals in China faced issues.

Mr Revell said that, as the volume and size of deals in the region (in particular, South-east Asia) increase, buyers and sellers alike will have to react to the heightened risks of doing business in particular countries.

"As the developing markets in our region continue to grow, we will see far more large-scale transactions taking place. This means that the stakes are increasing for global players looking to expand their businesses in South-east Asia. They will need to pay particular attention to the specific challenges within a jurisdiction.

"Ultimately, the only way to mitigate trouble in deals is through an abundance of expertise during the execution," he said.

Of the cross-border M&A deals that faced significant issues, Indian telecom giant Bharti Airtel's US$10.7 billion acquisition of Nigeria's Zain Africa in 2010 encountered four major hurdles. Nigeria's High Court declared its ownership null and void, the Congo Republic launched a regulatory dispute over its telecom licence, an employee attempted to block the sale, and the Kenyan government initiated a tax investigation.

Vodafone ran into trouble when it acquired Ghana Telecom in 2008. Dismissed Ghana Telecoms workers filed a writ of summons against Vodafone Ghana over termination of their appointments, the United Kingdom's Serious Fraud Office asked officials to investigate allegations of irregularities in Vodafone's African dealings, activists staged a protest, and the deal faced heavy government opposition.

And US retail giant Wal- Mart faced opposition from the South African government when it acquired Massmart Holdings in 2010. After a two-year battle, Walmart had to set up a US$27.5 million supplier development fund for the acquisition to go ahead.

Freshfields says there are six recurring themes that any investor should consider before making its move:

  • take full advantage of available international investment treaties when identifying the ultimate deal structure;
  • use flexible strategies to combat "creative" taxes;
  • adopt a two-fold strategy to protect against bribery and corruption risk - by assessing target risk and implementing effective mitigation strategies to reduce potential investor liability;
  • anticipate the evolution of competition policies and other regulatory regimes into one's investment business model;
  • if intellectual property is key, take the necessary legal and practical steps to protect one's brands, technology and trade secrets; and
  • plan one's exit at the outset.