Emerging markets close M&A gap

The number of merger and acquisition deals involving Western firms buying into emerging markets has hit a six-year low, according to market watcher KPMG.

With the lowest number of deals recorded since 2003, the gap has narrowed between the volume of deals made from developed into emerging markets and those made in the opposite direction.

The latest Emerging Markets International Acquisition Tracker (EMIAT) from KPMG’s Advisory practice has revealed the second half of 2008 experienced a 28 per cent decline in the number of emerging-to-developed (E2D) deals compared to a 37 per cent decline in developed-to-emerging (D2E) acquisitions.

Ian Gomes, chairman of high growth markets practice for KPMG in the UK, said many companies are switching focus back to their domestic market due to a lack of confidence: “Cross-border deals emanating from the emerging markets appear to be holding up slightly better than those from their developed market counterparts – although both are still in serious decline.

“Just as such deals initially inspired confidence, the way in which some of them have subsequently run into trouble has now dented confidence back at home, stifling the collective acquisitive urge.”

In the six-month period, 107 E2D deals were registered, the lowest total since the second half of 2006.

The EMIAT also recorded 230 D2E deals, the lowest since the beginning of 2003. However, in the second half of 2006, E2D deals represented 23 per cent, which now stands at 47 per cent in the most recent EMIAT.

Gomes said trade buyers around the world are constrained by the lack of available credit: “Many assets are currently available at vastly reduced prices but buyers in the emerging markets are proving unwilling to buy into severely ailing, even dying, businesses, no matter how much of a bargain they would appear to represent.

“We are seeing a marked decline in terms of deals into the emerging, high-growth markets. However, this is more indicative of the purchasers struggling for credit than it is of the emerging markets losing their appeal.”

According to the EMIAT, the past five years have seen 1,022 E2D deals recorded, with Indian trade buyers accounting for the largest share of them.

India’s 387 deals placed them ahead of Russia (111), central and eastern Europe (110) and China (106).

In contrast, D2E deals fell from 364 to 230 in the second half of 2008 with the UK and the US contributing most to the decline. UK deals fell from 74 to 50 while US deals plummeted from 154 to 99.

Gomes concluded: “The trend of increasing capital flows from west to east is not cancelled; it is merely postponed.”