Ibr 2008 m and a Report Final

Mergers and acquisitions:opportunities for global growth.

International Business Report 2008

Mergers and acquisitions 1

Global mergers and acquisitions (M&A) have become a realityof life for all kinds of companies. The headlines might bedominated by a few ‘mega’ deals involving corporate giants,but that is not the whole picture. Privately held businesses(PHBs) have quietly recognised that, in an increasinglycompetitive, changing and challenging environment, well-thought-out and carefully executed cross-border M&Atransactions can boost the value of their businesses.

Whether it is ambitious entrepreneurs in fast growingeconomies seeking to acquire established brands, or maturebusinesses seeking to expand into low-cost emerging marketsoffering increasing numbers of skilled workers and consumers,international M&A is now firmly on the agenda of PHBs as akey strategic tool to drive growth.

The recent tightening of lending policy and an uncertaineconomic outlook has had an impact on transactions at thetop end of the market, but the findings of the Grant ThorntonInternational Business Report (IBR) 2008 shows that PHBsremain confident about undertaking acquisitions over thenext three years.

M&A teams within Grant Thornton member firms,all over the world have seen this trend first hand, advisingclients on both domestic and cross-border transactions.Grant Thornton member and correspondent firms operatein over 100 countries.

This study applies findings of the IBR. As well asidentifying the key plans for the growth amongst PHBs, itprovides insights into the issues affecting them in the globalM&A arena.

Ian SmartGlobal service line leader – mergers and acquisitionsGrant Thornton International

International Business Report 2008

Introduction

2 Mergers and acquisitions

Global overview: a strong appetitefor acquisitions

The results show only 8 per cent of businessowners surveyed anticipated they would be sellingduring the next three years. However, rather thanreflecting a future supply and demand imbalance,this figure may indicate that despite some businessowners putting real thought and planning into theirexit, there will always be a significant number whodecide to sell in response to either an unsolicitedapproach or an unexpected event.

The research also throws up some regionalvariations. For example, participants in countriessuch as Australia, Canada, the United States and theUnited Kingdom recorded a higher proportion ofparticipants expecting to sell their business in thenext three years than PHBs in India and mainlandChina, which were largely focused on acquisitionopportunities.

This Grant Thornton International Business Report(IBR) 2008 is a rare study providing an insight intothe M&A plans and expectations of over 7,800PHBs from 34 economies across the world.

It reveals that such companies throughout theworld are increasingly sophisticated, international andacquisitive in their outlook. Cross-border M&Aactivity might have once been the preserve of largemultinational companies, but it is now an essential andpowerful business tool wielded by a vast range ofcompanies seeking growth.Global opportunities havebecome visible and attainable and PHBs, with theirinherently entrepreneurial and dynamic character,have been quick to seize those opportunities.

Recognising the growing importance ofemerging markets, the findings from the IBR 2008have been grouped into the BRIC economies (Brazil,Russia, India andmainland China), North America,mainland Europe, UK and Ireland and the Rest oftheWorld. The study shows that all over the worldthe appetite forM&A remains strong among PHBs.In the most acquisitive regions, North America andin particular the BRIC economies, between 48 percent and 59 per cent of the business owners surveyedsaid they anticipated a transaction in the next threeyears (see figure 1).

While the tightening of lending policy by themajor global banks has had an impact ontransactions at the top end of the market,particularly those involving highly leveraged privateequity transactions, deals in the mid-market areappearing less exposed. With balance sheet gearingamong many PHBs relatively modest by historicstandards, mid-market transactions which deliverearnings and growth prospects will always presentattractive opportunities for funders. For manyshrewd, asset-rich trade buyers, the next 12 monthsshould offer an opportunity to undertake strategicacquisitions at realistic valuations.

Figure 1: Percentage of respondents planning to grow through acquisition in the next three years(average)

BRIC

North America

United Kingdom & Ireland

Mainland Europe

Rest of the World

Global

Source: Grant Thornton IBR 2008

59

48

40

30

28

44

“A sale to a trade or a financial buyer isincreasingly becoming part of business life, andin many parts of the world M&A is firmly on theradar amongst privately held business owners.”

Ian SmartGrant Thornton International

In line with the responses on acquisitions,emerging markets also topped the table ofbusinesses planning a public listing (see figure 2).The responses followed trends which were evidentin the Asia Pacific markets during the first half of2007, namely the availability of a viable local stockmarket, positive stock market conditions, and anequity culture.

Against this positive background, a far greaterproportion of respondents from the BRICcountries are expecting to undertake a public listingin the next three years compared to respondents inthe more mature markets such as the United Statesand the United Kingdom.

Figure 2: Percentage of respondents planning to undertake a public listing in the next three years(average)

BRIC

Rest of the World

North America

Mainland Europe


Global


47

11

9

8

4

22

“Throughout 2007, mainlandChina and India experienced araging bull market and while theuncertainty in the financial marketshas removed some of the shine,2007 has left a public listing as anaspiration for many businessowners in these countries.”

Fiona OwenGrant Thornton, UK


BRIC countries: a revolutionin the M&Amarket

For Brazil, following record activity in 2007, thesurvey finds no sign of a slowdown with 64 percent of participants planning an acquisition withinthe next three years, as cash-rich local firms seek todefend and solidify positions amid the buoyantlocal economic outlook.

Grant Thornton’s IBR survey reveals that businessowners in the fast growing BRIC economies arenow enthusiastically embracing M&A, and areoften more likely to grow through acquisition thanbusinesses in more mature markets. Overall 59 percent of businesses surveyed in the BRIC countriessaid they anticipated an acquisition in the next threeyears (see figure 3).

PHBs in the BRIC countries appear morefocused on building value rather than looking torealise it at this stage and are excited aboutfollowing their own growth strategies throughdomestic and cross-border acquisitions. This isclearly visible, with mainland China (67 per cent)and Brazil (64 per cent) polling the highestpercentage of participants planning an acquisition,a much higher proportion than in the UnitedStates (48 per cent).

Martin Cheung, M&A director fromGrantThornton Hong Kong says, “Chinese privatelyheld companies want to acquire brands in NorthAmerica and Europe as well as distributionchannels. This is especially important for theoriginal equipment manufacturers because theywant to move up the food chain at a time when themarket is increasingly competitive. They arebecoming more confident acquirers of foreignbusinesses helped by an appreciating renminbi.”

AlisonWong, partner fromGrant ThorntonHong Kong, adds that the growth of publicmarkets has also had an important effect on M&Aactivity in China. “Domestic M&A activity is beingfuelled by finance available from the equitymarkets, and it is this funding which is allowingleading companies to act as industry consolidators.”

Figure 3: Percentage of BRIC respondents planning to grow through acquisition in the next three yearscompared to regional averages

Mainland China

Brazil

India

Russia

BRIC

North America


Mainland Europe

Rest of the World

Global


67

64

46

40

59

48

40

30

28

44

“There is massive untapped potential for M&A inthe Greater China region. Continued growth andconsolidation across vast amounts of once statecontrolled industry is driving domestic deal flowin the private sector.”

Alison WongGrant Thornton, Hong Kong

Just behind mainland China and Brazil is Indiawith 46 per cent of the respondents planning togrow through acquisition. This is only 2 per centlower than the more established M&Amarket ofthe United States.

This comes as no surprise to Pankaj Karna,M&A partner fromGrant Thornton India whosays, the Indian economy has a young, educatedand ambitious labour force. Reforms since the early1990s have helped unlock India’s economicpotential and positioned the country as one of thefastest growing economies in the world. Growth isaccelerating, boosted by a dynamic, knowledge-based service sector and expanding manufacturingbase.

He adds, “Three factors are driving overseasacquisitions by Indian privately held companies.Firstly they want to be globally competitive andclose to their customers; secondly they want toacquire technology; and thirdly relative valuationslook favourable. Fundraising is easier now than itwas five or 10 years ago. Privately held businessesare particularly positive now.”

Russia is also a growing market and not only inthe obvious sectors. Viacheslav Kichatov, M&Apartner fromGrant Thornton Russia commented,“While headline international deals have tended tofocus on the energy and natural resources sector,when you look at privately held businesses the vastmajority of activity is Russian to Russiantransactions. There are lots of companies withineach sector of the economy and emergingchampions will continue to act as consolidators.”


“With a burgeoning Indianeconomy, a competitive privatesector and a strong entrepreneurialspirit, Indian companies areincreasingly seeking help inidentifying and acquiring suitabledomestic and overseas targets.”

Pankaj KarnaGrant Thornton, India

Given its strong sophisticated M&Amarket,it is not surprising that over 40 per cent ofrespondents across North America anticipategrowing through acquisition over the next threeyears, despite the uncertain economic climate(see figure 4).

Both the United States and Canada have depthin their domestic market, and while a tightening oflending policies associated with the ‘sub primecredit crunch’ could lead to a more challenging2008 for large deals, the survey suggests thetransaction environment for successful mid-marketcompanies appears to remain strong over the nextthree years.

North America: cross-borderambitions

“M&A is a dynamic part of theNorth American landscape,particularly the privately heldbusiness market, which remainsfragmented. Many mid-marketbusinesses serve customers acrossthe continent, rather than beingoverly reliant on any one region.”

Jack DiFrancoGrant Thornton, US

StephenMcGee, M&A director fromGrantThornton US, believes there are a number ofchanging dynamics, “It used to be that US buyerswould view the UK as the launch pad for entry intoEuropean markets. However, with greateruniformity across a pan-European market, that isno longer necessarily the case. Today, US buyers aremore willing to acquire companies acrosscontinental Europe. Further east, US buyers areusing acquisitions as a way to tackle their Asiastrategy with a dual purpose, one to acquiremanufacturing capabilities in low cost markets suchas India and mainland China, the other to gainaccess to a fast growing domestic consumerpopulation in these highly populated countries.”

Cross-border activity is an important factorboth in terms of Canadian businesses acquiringoverseas and foreign acquisitions of Canadiancompanies, with the US continuing to be Canada’smain cross-border M&A partner.

Figure 4: Percentage of North American respondents planning to grow through acquisition in thenext three years compared to regional averages

United States

Canada

BRIC


Mainland Europe

Rest of the World

Global


48

42

59

40

30

28

44


“The growth in M&A activity seen over the lastfew years in Canada has been driven by many ofthe same strategic and financial factors whichencouraged M&A around the world. However,there are some distinctly Canadian features suchas record high commodity prices which hasdriven activity in the resource sectors.”

Larry D’AndreaGrant Thornton, Canada

“At the same time we are also seeing Germanbusinesses increasingly being approached byoverseas buyers. Whilst in the past it would havebeen fair to suggest that structurally the Germanmid-market, or ‘Mittelstand’, was a challengingplace for M&A, changes to the legal and taxstructures will help to make both domestictransactions and inward investment by overseascompanies easier to complete.”

All the signs are that, in the European mid-market, finance can still be raised for attractiveacquisition opportunities. Kees Slump, partnerfromGrant Thornton Netherlands says, “Manyprivately held businesses are looking around foracquisition opportunities, both within Europe andincreasingly in Asia. The credit crunch has had onlya limited impact on them: they often have goodcash positions, meaning that good quality mid-market transactions, even those involving privateequity can still be financed.”


Mainland Europe: pan-Europeangrowth

Price transparency and stability since theintroduction of the euro in 2002, coupled with adegree of standardisation in legislation across theEuropean Union (EU), is having a positive effect oncross-border M&A in mainland Europe.

Cross-border deals, especially within mainlandEurope, are high on the agenda for EuropeanPHBs. This year’s Grant Thornton IBR shows 30per cent of European business owners anticipatemaking an acquisition in the next three years, ofwhom some 40 per cent expect to do so acrossnational borders.

In the past, cross-border activity amongst PHBswas frustrated by a lack of visibility of suitabletargets. Over the last few years, this has changedsignificantly with international M&A advisersworking together much more closely.

Another factor which helps to explain the highlevel of cross-border M&A is the geographicproximity, lower labour costs, and fast growingdomestic markets of central and eastern Europeancountries. Dr Kai Bartels, M&A partner fromGrant Thornton Germany, believes these representattractive investment opportunities for companiesseeking to expand. He says, “We continue to workwith several clients to support their acquisitionstrategies in central and eastern Europe.”

Figure 5: Percentage of respondents anticipating an acquisition who plan to grow throughcross-border transaction in the next three years

The Netherlands

Germany

France

Greece

Italy

Sweden

Poland

European

Global


50

46

42

42

41

35

17

40

23

Europe also offers attractive targets forbusinesses outside the region. “There are plenty ofcross-border acquirers, notably from India. In thiscontext we feel we are very well placed, thanks toour international organisation of member firms andexpertise in corporate cross-border work,” saysStéphane Olmi fromGrant Thornton France.

The survey also highlighted a strong correlationbetween countries which have recently introducednew growth capital markets and the level ofrespondents who anticipate undertaking a publiclisting. For example, Denmark (11 per cent) andGreece (14 per cent) both polled significantlyhigher than respondents from those countries withmore established European capital markets, such asthe United Kingdom (4 per cent) and Germany (3per cent).

“I regularly talk to my colleaguesin Grant Thornton member firmsacross the world to discuss suitableacquisition targets or buyers onbehalf of clients.”

Stéphane OlmiGrant Thornton, France


Private equity and serial entrepreneurs willcontinue to be important drivers in this market,Mike continues, “Many private equity houses havesignificant funds available and will continue toinvest if the market tightens, recognising that inmany cases the best returns can be made at a timewhen there might be an adjustment in somevendors valuation expectations. Whilst tightercredit policy may temper the larger highlyleveraged transactions, we are likely to seecontinued M&A activity in the mid-market.However, without the stimulus of cheap debt,private equity houses will need to be more creativein delivering the returns to their investors. Forexample, we continue to see a trend in some housesbecoming more specialist and making multiplestrategic investments in particular sectors, oftenusing these as platforms to enhance value throughbuy and build strategies. In addition, selectively, weare starting to see some private equity housesproviding the debt on completion as well as theequity to drive a transaction through on the basisthat they can refinance later in a more favourablebanking climate.”

Historically, transaction volumes in the UnitedKingdommid-market have remained steadyregardless of general market conditions. The GrantThornton IBR certainly suggests that deal flow willstay healthy, with 40 per cent of UK and Irishcompanies interviewed anticipating an acquisitionwithin the next three years. While the proportion ofrespondents planning an acquisition was almostidentical, 40 per cent of Irish respondents anticipatea cross-border transaction compared to only 26 percent of United Kingdom business owners.

This reflects that in many sectors the UKmarketplace continues to present a significant numberof quality targets allowing UK PHBs to transactdomestically.However, the attraction of opportunitiesprovided by high growth and often relatively low costregions, coupledwith an increased visibility of potentialtargets and uniformity of transaction process ismakingUK PHBs bolder in their acquisition strategy anddriving a greater focus on cross-border deals. MikeHughes,M&Apartner fromGrantThorntonUKsays,“An increasing amount of my time is spent in eitherpresenting opportunities identified byour internationalnetwork to our UK client base or taking specificacquisition briefs and matching them to overseascompanies where we have a direct relationship suchthat we can facilitate a M&A discussion.”

UK& Ireland: open for business

Figure 6: Percentage of UK transactions (deal value less than US$200m) involving cross-borderacquirer or target (% of businesses)

2007

2006

2005

2004

2003

2002

Source: Thomson International

25

22

22

18

21

17

“2007was a very good year for Irishcompanies, which took advantageof relatively cheap debt marketsto drive forward through bothdomestic and overseas acquisitions,particularly in the UK.”

Michael NearyGrant Thornton, Ireland

Michael Neary, M&A partner fromGrantThornton Ireland, remarks, “Looking forward,clearly we are facing a more challengingenvironment, but Ireland is still forecast to enjoyreasonable economic growth and we are likely tosee continued corporate activity.”

M&A activity levels in the UK during the firstquarter of 2008 benefited from business ownersseeking to conclude their transaction beforechanges to the UK tax regime took effect. MikeHughes remarks, “The change in UK capital gainstax created a major incentive for those sellingbusinesses to complete before 5th April andresulted in some business owners bringing forwardtheir sale plans to crystallise their gains at a lowerrate of tax.”

Although only 26 per cent of the UKrespondents who are planning an acquisitionanticipated this being overseas, when it comes toselling the United Kingdom is much moreinternational in its outlook, with 31 per cent ofrespondents anticipating being bought by aninternational purchaser.

“UK privately held businessesrepresent attractive assets toforeign buyers. It is second natureto use our international memberfirms to access overseas buyers.”

Mike HughesGrant Thornton, UK



Rest of the world

Amid a huge variety of responses from the rest ofthe world, PHBs in Australia, New Zealand andMexico stand out for their differing yet positiveviews of M&A opportunities.

The respondents from Australia and NewZealand were similar to those fromWestern Europein their attitude to acquisitions, but when askedabout their plans to sell they topped the table with22 per cent of respondents from both countriesplanning to sell within the next three years (seefigure 7).

Commenting on these findings, Scott Griffin,partner fromGrant Thornton Australia, remarksthat “The Australian andNew Zealand companyresponses in relation to plans to sell their businessesin the next three years are not surprising. UnlikeWestern Europe and US economies, the middlemarkets in the Australasian region have notundergone the inter-generational changes that manyprivate companies have in other jurisdictions havealready. Consequently many mid-market companiesare dealing with succession for the first time andcertainly would see foreign companies as likelyparticipants in the succession and sale process.

Mexico, similar to other emerging economies,might have a great deal of ground to make up withits still developing M&Amarket. But the findingsof the survey show that, as in Brazil, Mexicanbusinesses have shed their inhibitions abouttransactions. Half of the participants surveyed saidthey were planning to grow through acquisition, asthe fragmented PHB sector continues toconsolidate.

The findings also indicate that there is appetitefor M&A in other emerging economies suchas Malaysia with 36 per cent of respondentsanticipating undertaking an acquisition in thenext three years.

Figure 7: Percentage of respondents planning to sell their business in the next three years

Australia

New Zealand

Malaysia

South Africa

Argentina

Mexico

Vietnam

Japan

Global


22

22

18

11

8

3

3

1

8

“The medium term future of mid-market M&Ais particularly active in this region due to thefundamentals surrounding inter-generationalchange of ownership and also the positive impactsfrom the so called ‘super-cycle’ of resource demandand associated mining services, driven largely fromcontinued increased demand from China.”

Scott GriffinGrant Thornton, Australia

ArgentinaGrant ThorntonAlejandro ChiappeT +54 11 4105 0000E [email protected]

ArmeniaGrant Thornton Amyot LLCGagik GyulbudaghyanT +374 (0) 10 260 936E [email protected]

AustraliaGrant ThorntonScott GriffinT +61 (0)2 8297 2755E [email protected]

AustriaGrant ThorntonWalter PlatzerT +43 1 914 42 56 21E [email protected]

BotswanaGrant Thornton AcumenVijay KalyanaramanT +267 395 2313E [email protected]

BrazilTerco Grant ThorntonRoberto S.de LacerdaT +55 11 3054 0000E [email protected]

CanadaGrant Thornton LLPLarry D’AndreaT +1 416 360 5043E [email protected]

Raymond ChabotGrant ThorntonJean-Paul DavidT +1 514 954 4636E [email protected]

Channel IslandsGrant ThorntonRichard IresonT +44 (0)1534 885885E [email protected]

Dominican RepublicGrant Thornton RepublicaDominicana S.A.José Luis De RamonT +1 809 563 6183E [email protected]

EgyptGrant Thornton Mohamed HilalAmr FathallaT +202 576 9228E [email protected]

FranceGrant ThorntonStéphane OlmiT +33 (0) 472 138479E [email protected]

GermanyGrant Thornton GmbHKai BartelsT +49 40 415 224 75E [email protected]

GreeceGrant Thornton S.AGeorge DeligiannisT +30 2 10 72 80 000E [email protected]

Hong KongGrant ThorntonAlison WongT +852 2218 3037E [email protected]

IndiaGrant ThorntonPankaj KarnaT +91 11 4278 7046E [email protected]

IndonesiaGrant Thornton HendrawinataRenato LeuterioT +62 21 251 4626E [email protected]

IrelandGrant ThorntonMicheal NearyT +353 1 680 5805E [email protected]

IsraelFahn Kanne & CoShlomi BartovT +972 3 7111690E [email protected]

ItalyStudio BernoniStefano SalvadeoT +39 02 76 00 87 51E [email protected]

LebanonGrant ThorntonLeila HammoudT +961 1 741614E [email protected]

MacedoniaGrant ThorntonSlavco FilipcevT +389 2 3214 700E [email protected]

MaltaGrant ThorntonKenneth BonniciT +356 2134 4751E [email protected]

MexicoSalles, Sáinz – Grant Thornton S.C.Miguel QuinteroT +52 55 5424 6500E [email protected]

NetherlandsGrant ThorntonPeter den HertogT +31 10 2705111E [email protected]

New ZealandGrant ThorntonBrendan LyneT +64 9 300 5806E [email protected]

PakistanAnjum Asim Shahid RahmanKamran HafeezT +92 21 496 3171E [email protected]

PhilippinesPunongbayan & AraulloFrancis B AlbalateT +63 (2) 886 5511 Ext 302E [email protected]

PolandGrant Thornton Sp.z o.o.Andrew KinastT +48 22 501 9500E [email protected]

PortugalGrant ThorntonMaria José MendesT + 351 21 413 46 30E [email protected]

QatarGrant Thornton ConsultantsHossam El BesherT +974 4370211E [email protected]

RussiaGrant ThorntonViacheslav KichatovT +7 495 258 99 90E [email protected]

SingaporeFoo Kon Grant ThorntonOng Peng WeeT +65 6303 9500E [email protected]

South AfricaGrant ThorntonLeonard BrehmT +27 11 322 4565E [email protected]

SpainAudihispana Grant ThorntonRamón GalceránT +34 93 206 39 00E rgalceran@@ahgt.es

SwedenGrant ThorntonPär EkengrenT +46 8 5630 7084E [email protected]

ThailandGrant ThorntonIan PascoeT +66 22058222E [email protected]

TurkeyArkan & Ergin Grant ThorntonIzzet OzberkiT +90 212 370 0700E [email protected]

United Arab EmiratesGrant ThorntonHisham FaroukT +971 42688070E [email protected]

United KingdomGrant Thornton UK LLPMike HughesT +44 (0)1223 225608E [email protected]

UkraineGrant ThorntonVitaliy KazakovT +380 44 463 6791E [email protected]

United StatesGrant Thornton LLPJack DiFrancoT +1 248 233 6913E [email protected]

VietnamGrant ThorntonKen AtkinsonT +84 8 910 6690E [email protected]

ZambiaGrant ThorntonVictor MweeneT +260 122 7722E [email protected]

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Ibr 2008 m and a Report Final