EY M&A Maturity

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  • M&A maturityAssessing country risks and opportunitieswww.mandamaturity.com

  • 2 M&A maturity assessing country risks and opportunities

    www.mandamaturity.comAssess M&A risks and opportunities in 175 countries around the world with

    the new Ernst & Young M&A maturity tool in two easy steps:

    1) select target(s) from the country heat map or list:

    2) Compare countries, analyse risks and opportunities:

  • In this reportOverview: M&A maturity index 5

    M&A maturity: Assessing country risks and opportunities 6

    The global picture: Emerging markets mature 8

    Profile: Brazil 10

    Profile: China 11

    Profile: India 12

    Profile: Russia 13

    M&A in context: The Capital Agenda 14

    About the M&A maturity index 15

    The M&A maturity index provides a high-level summary of risks and opportunities for M&A transactions in 175 countries around the world. It has been developed by MARC, the M&A Research Centre at Cass Business School, City University, London of which Ernst & Young is a senior sponsor.

  • 4 M&A maturity assessing country risks and opportunities4 M&A Maturity assessing risks and opportunities

  • 5M&A maturity assessing country risks and opportunities

    The M&A maturity index assesses the maturity of 175 countries around M&A transactions. The greater the maturity, the lower the risk of undertaking transactions. Where risks exist, there is however, the potential for significant opportunity.

    Below are the average M&A maturity scores globally and in each region. Each average is weighted by the GDP size of the countries within the group. Further detail is available online. M&A maturity average (median) scores:

    Global average: 71%North America 87% Western Europe 82%Oceania 80%

    Asia 68%CEE/CIS 57%

    Middle East 56%Latin America 55%

    Africa 44%

    www.mandamaturity.com allows users to assess each country, compare with others and identify risks and opportunities.

    Thirty-six factors are used to analyze maturity, these are within six groups:

    Economic Financial Political Regulatory

    Sociocultural

    Technological Further details on methodology are presented on page 15. Careful analysis and interpretation of these scores can identify risks and opportunities for M&A transactions, a key method of achieving growth in a competitive market.

    Overview: M&A maturity index

  • 6 M&A maturity assessing country risks and opportunities

    M&A maturity: assessing country risks and opportunities

    The markets remain in a state of flux. Each day brings news of positive economic trends, and worrying macro indicators. So the future remains uncertain. However, the level of market volatility has decreased. The VIX index (a frequently quoted measure of stock market volatility) fell from a height of 80 in October 2009, to around 20 in October - December 2010.

    Perhaps because of the increase in stability, confidence and optimism have slowly returned to many businesses. The recent Ernst & Young Capital Confidence Barometer shows that 73% of companies are now more optimistic about prospects for their business than six months previously. This confidence has once again focused many on growth both organic and inorganic.

    With the markets remaining uncertain, there is today increased competition for growth. Our recent study Competing for growth shows that 85% believe competition will increase in the coming two years. Leading organizations take a broad range of views of how to win such growth. Some have focused on cost competitiveness to improve margins. Others have concentrated on their capital agendas to source new funds via improved stakeholder relations.

    Another option has been a focus on operational agility to improve productivity. But certain businesses are focusing on customer reach, expanding their access to clients via new markets.

    The enhanced appetite for transactions has led to an increase in the volume and value of M&A. In Q3 2010, global activity totalled US$599b, the strongest quarter for two years. While well short of the heights reached in 2007, this level represents a 35% increase on the average quarter during what some are calling the great recession of 2008-09.

    Another related trend is the ever increasing volume of cross-border transactions, especially those involving businesses from emerging markets. Data from Thomson suggests that 25% of deals globally in 2009 involved emerging markets. Compare this to the average of under 10% in the 1990s. There has clearly been an increase in such deals, as companies seek to explore new markets and those in emerging markets step up overseas investment.

    Global completed M&A transactions

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 3Q

    Source: Thomson SDC Platinum/MARC M&A Research Centre, Cass Business School. Only change of control transactions included.

    Developed to emerging (domestic)Emerging to emerging (cross-border)Developed to emerging

    Emerging to developedDeveloped to developed

    Volu

    me

    of d

    eals

  • 7M&A maturity assessing country risks and opportunities

    But which markets should be prioritized for investment? If a particular target is in play or on the radar, this may drive choice. But when the strategic intent is for expansion within a broader geographic area, e.g., South America, how does one prioritize between say Paraguay and Uruguay?

    The obvious challenge of doing deals outside a home country is familiarity with the target nation. Beyond the specifics of the business that might be on the table, numerous macro issues exist. Without awareness of these, risks can be left unmitigated and opportunities overlooked.

    To help address these issues, we are proud to introduce the innovative country-level M&A maturity index. This has been developed in conjunction with the renowned M&A Research Centre (MARC), at Cass Business School in London.

    Available online at www.mandamaturity.com, this new tool provides high-level, interactive insight into 175 countries around the world. Each is attributed a score identifying the overall maturity of the market for M&A. The greater the maturity, the fewer the risks. But where there is risk, so there is opportunity.

    Using 6 factors, made up of 36 sub-factors based on publicly available data, these risks and opportunities are identified at a high level. A summary of these factors appears below. This analysis should prove a useful tool for comparing countries against each other and for surfacing issues requiring in depth-commercial due diligence.

    The index, however, is only a starting point for considering country-level issues in transactions. But the benefit to the user is to gain a sense of potentially unfamiliar markets in a short period of time. By benchmarking countries against neighbors or wider peer groups, it may be possible to begin to prioritize markets for potential transactions. And where concerns are identified, contact details are provided for Ernst & Young advisors who are positioned to provide in-depth tailored advice.

    In the following pages, we summarize the overall global M&A maturity picture. And then we look in a little more detail at four major emerging markets: the BRIC countries of Brazil, Russia, India and China. For each, a taste of the online tool is provided a summary of ratings on each factor and a profile of some of the high-level risks and opportunities that transactions in these countries are exposed to.

    Assessing M&A maturity

    Economic factors

    Economic factors include the overall macro picture the size and shape of a countrys economy and growth rates. This forms the basis for assessing the economic stability and growth potential of local markets.

    Regulatory factors

    Regulatory factors refer to the local legal and regulatory environment. These include the rule of law i.e., the consistency of application of rules and therefore the predictability of judgments under it.

    Financial factors

    Financial factors are those specifically related to capital and labor markets. These include the development of local stock markets, costs of staff and the availability of debt financing.

    Socio cultural factors

    Sociocultural factors are those relating to people and workforce issues. Of particular importance are the availability of talent and levels of skills.

    Political factors

    Political factors include both high- and mid-level indicators. At a high level, overall political stability is assessed. At mid-level, factors such as corruption are included.

    Technological factors

    Technological factors relate to the availability and direction of technology. The level of investment in research and development and innovation are examples.

  • 8 M&A maturity assessing country risks and opportunities

    The global picture: emerging markets mature

    It is no surprise that the most mature markets are also those that have traditionally played the biggest part in M&A transactions. The United States and the United Kingdom top the rankings, beaten only by another established economy: Canada. The remainder of the top 10 on the M&A maturity index are industrialized nations Japan and Western and Northern European countries. Strong ratings for technological and sociocultural factors play their parts in pushing these countries to the upper echelons of the ranking tables.

    What is, however, potentially surprising is the lofty position of other nations, often described