Capital Inside

Capital Insights
Helping businesses raise, invest, preserve and optimize capital
Making the market

SAPs Werner Brandt on smart M&A, organic growth and clear capital management
The top 10 acquirers India: open for business Asset management: the dawn of a new era
Q3 2013
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For EY Marketing Director: Leor Franks (lfranks@uk.ey.com) Program Director: Nathaniel Hass (nhass@uk.ey.com) Consultant Editor: Richard Hall Compliance Editor: Jwala Poovakatt Creative Manager: Laura Hodges Creative Executive: Jess Cowley Design Consultant: David Hale Senior Digital Designer: Christophe Menard Deployment Executive: Angela Singgih For Remark Editor: Nick Cheek Assistant Editor: Sean Lightbown Head of Design: Jenisa Patel Designer: Anna Chou Production Managers: Daniela Schichor, David Swettenham EMEA Director: Simon Elliott
Capital Insights is published on behalf of EY by Remark, the publishing and events division of Mergermarket Ltd, 80 Strand, London, WC2R 0RL UK. www.mergermarketgroup.com/events-publications
Contributors
Capital Insights would like to thank the following business leaders for their contribution to this issue:
Gunjan Bagla Author, Doing Business in 21st Century India Bill Bohstedt Vice President M&A, Arthur J. Gallagher & Co. Cedric Collange Senior Vice President for M&A, Schneider Electric Barry Donlon Managing Director, DCM EMEA, UBS Campbell Fleming CEO, Threadneedle Investments Chetan Modi EMEA Head of Leverage Finance, Moody's Piers Prichard-Jones Corporate Partner, Freshfields Mike Teng CEO, Corporate Turnaround Centre
EY | Assurance | Tax | Transactions | Advisory

About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of EY Global Limited, each of which is a separate legal entity. EY Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
Werner Brandt CFO, SAP
Rob Conn Founder, Innova Capital Yves Doz Professor of Strategic Management, INSEAD James M. Loree President and COO, Stanley Black & Decker Brendon Moran Co-head, Corporate Originations, Socit Gnrale Ehud Ronn Professor of Finance, University of Texas at Austin
Elizabeth Corley CEO, Allianz Global Investors Ed Dymott Head of Business Development, Fidelity
Arvind Dham Chairman, Amtek Auto Group Anna Faelten Deputy Director MARC, Cass Business School
Prashant Mara Head of India Practice, Osborne Clarke
Brian May Finance Director, Bunzl
2013 EYGM Limited. All Rights Reserved. EYG no. DE 0433

ED 1013
Adrian Mutton CEO, Sannam S4 Wolf-Dieter Starp Head of Global M&A, BASF Hugh Young Managing Director, Aberdeen Asset Management Asia
Angad Paul CEO, Caparo Alix Stewart Head of UK Corporate Bonds, Schroders
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. The opinions of third parties set out in this publication are not necessarily the opinions of the global EY organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.
Massimo Tosato Global Head of Distribution, Schroders
www.ey.com/Services/Transactions
Capital Insights from the Transaction Advisory Services practice at EY
All data in Capital Insights is correct at 1 July 2013 unless otherwise stated
About EY's Transaction Advisory Services How organizations manage their capital agenda today will define their competitive position tomorrow. We work with our clients to help them make better and more informed decisions about how they strategically manage capital and transactions in a changing world. Whether youre preserving, optimizing, raising or investing capital, EYs Transaction Advisory Services bring together a unique combination of skills, insight and experience to deliver tailored advice attuned to your needs helping you drive competitive advantage and increased shareholder returns through improved decision-making across all aspects of your capital agenda.
Paul Heartfield
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American golfing great Jack Nicklaus once said: Confidence is the most important single factor in this game. The same notion rings true for M&A. And, thankfully, it appears that confidence in dealmaking is returning to the boardroom. In EYs latest Capital Confidence Barometer (CCB), released in April, 72% of respondents said they expected global deal volumes to improve over the next year. Overall economic confidence has improved significantly: 87% of those surveyed in the CCB view the global economy as either stable or improving, up from 69% in October 2012. As self-belief grows, business leaders focus shifts back to investing. So, in this issue of Capital Insights, we explore how companies can get the very best from their deals. M&A is a three-act story. First, pinpointing the right locations. Second, doing the deal. Third, ensuring that post-merger integration plans are ready early. And we have key insights for every stage. On page 30, we explore why companies need to take a more targeted approach when entering rapid-growth markets. Elsewhere, corporates both inside and outside India provide insights into how to get the best out of deals in Asia's third-largest economy (page 24). And, on page 20, we investigate how to pull off a successful post-merger integration plan. These issues are brought together in our in-depth and exclusive interview with SAPs CFO Werner Brandt. He tells us how brave acquisitions and a strong integration policy have helped SAP become Europes most successful technology company (page 14). In another exclusive story (page 8), we reveal the top 10 acquirers of the last five years and analyze what other corporates can learn. Its good news that confidence is making a comeback, but it needs to be allied to a strong deal rationale, proper preparation and a clear growth strategy. For those not only looking to do deals but also to raise, preserve, invest and optimize capital, I hope that this issue of EY's Capital Insights will help give you the tools to go with your appetite.
Condence
Joachim Spill
Transaction Advisory Services Leader, EMEIA (Europe, Middle East, India and Africa) at EY If you have any feedback or questions, please email joachim@capitalinsights.info For more insights, visit www.capitalinsights.info where you can find our latest thought leadership, including our market-leading Capital Confidence Barometer.
www.capitalinsights.info | Issue 7 | Q3 2013 | 3
Capital Insights
Transaction insights: The top 10
In a special edition of Transaction insights, we reveal the top 10 acquirers since 2008 and discuss M&A with some of the worlds most acquisitive corporates. SAP CFO Werner Brandt reveals how intelligent deals, innovation and clear capital management have helped the European technology giant to thrive. It may not grab the headlines quite like a deal announcement, but post-merger integration is vital to M&A success. We identify the top factors behind uniting companies correctly. As one of the worlds leading emerging economies, the Asian giant is a key target for those looking to grow. But what do companies need to know before investing in India?
Top 10 acquirers
14 Cover story: Making the market
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Put the pieces together
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India, Inc.
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Corporates from developed economies are increasingly looking to emerging nations for growth. But how can companies target these markets effectively? Corporate bond markets are booming. But, as a source of capital, is their growth in popularity sustainable, or will government action change the funding cycle again? Asset management emerged relatively unscathed from the financial crisis. But, the industry must push for innovation and manage regulation to reach its full potential.
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The big issuance
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SAP
EY is proud to be the Financial Times/Mergermarket European Accountancy Firm of The Year
WINNER 2012
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Taking care of business
EY recognized by Mergermarket as top of the European league tables for accountancy advice on transactions in calendar year 2012*
*As run on 7 January 2013
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Taking aim
Paul Heartfield
Features
Q3 2013
On the web or on the move?
Capital Insights is available online and on your mobile device. To access extra content and download the app, visit www.capitalinsights.info
30
M&A targeting
India
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Regulars
06 Headlines
The latest news in the world of corporate finance, and what it means for your business.
Corporate bonds
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29 The PE perspective
EYs Sachin Date discusses how private equity needs to work hard to attract limited partners capital.
07 Deal dynamics
EYs Pr-Ola Hansson explains how companies can establish a successful platform in brand-new countries.
Find out about exclusive content available on the Capital Insights website (www.capitalinsights.info) and new apps. Plus, details on three EY thought 42 Moellers corner M&A Professor Scott Moeller reveals the leadership reports on rapid-growth markets, private equity and working signs that show a deal is in trouble and capital management. how corporates can mitigate the risks.
43 Further insights
Dorling Kindersley
Headlines
Condence is coming back
their capital again. In EYs latest Global Capital Confidence Barometer (GCCB) a survey of almost 1,600 senior executives from around the world 40% now feel their organizations focus lies in investing over the next year, up from 32% year on year. Additionally, 51% feel the economy is improving, up from 22% in October 2012. And, despite lower-than-normal M&A volumes, 72% expect global deal numbers to improve, while almost a third expect to do a deal themselves within the next 12 months. These levels of confidence are a boost for economies worldwide, as well as for companies looking to divest assets. For more on the GCCB, visit www.capitalinsights.info/gccb Corporate executives are getting ready to invest
Emerging bonds boom

their developed peers in terms of debt.
Emerging market corporates are set to overtake Standard and Poors (S&P) figures show that Chinas corporates could owe US$13.8t by the end of 2014, more than the US$13.7t set to be owed by the US. This figure could reach US$18t by 2017 over a third of the US$53t that S&P expects global companies will need in terms of debt and refinancing. And, in May, Brazils Petrobas (pictured, below) sold US$11b-worth of bonds on a single day the largest bond issue by an emerging market company ever. With investors hungry for returns, corporates in rapidgrowth economies are in an ideal position to tap the market. For more on bonds, see page 34.
Time to bet on India
India could be in store for a deal boom as international corporates look to tap the countrys increasingly prosperous population. Consumer spending growth in India is expected to average 8.9% in the next five years, according to market researcher Euromonitor. On the back of this, foreign company bids for Indian food, drink, cosmetic and household goods businesses
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reached a record US$5.6b in the year to 15 May, according to Bloomberg. Examples include Unilevers offer to raise its majority stake in Hindustan Unilever. Corporates continuing the search for new growth areas would do well to keep an eye on this Asian tiger. For more on
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The consumer evolution Safety rst for funds

The consumer sector is undergoing a dealmaking revolution in response to a changing economic climate. EYs Consumer products deals quarterly: Q1 2013 shows that there were 347 announced consumer deals in the first three months of this year, a 9% increase on deals from Q4 2012. Acquisitions by private equity groups in the consumer industry fell, however, from 60 to 55 over the same period. The US still makes up the bulk of the sectors deal activity, making up eight of the sectors top 10 deals by value the June 2013 buyout of Heinz by private equity firm 3G and conglomerate Berkshire Hathaway being a prime example and the largest deal in Q1 2013. However, corporates should keep an eye on rapidly expanding consumer markets outside their borders as well. For more on targeting emerging markets, see page 30. Asset managers are playing safe when it comes to distributing their investors capital. The BofA Merrill Lynch Fund Manager Survey for June revealed that fund managers are focusing more on the US and Japan, whereas by contrast, emerging markets are being shunned. Global emerging market equity allocations are at their lowest since 2008, according to the survey, with a net 9% underweight in that area. Optimism in Europe is returning, however, with 6% of asset allocators overweight in that area a 14 percentage point swing from Mays survey. Managers should be wary of balancing the need to safeguard funds with the imperative to generate returns. For more on the asset management sector, see page 38.
The changing face of risk

The risks involved in cross-border M&A transactions are changing. Law firm Baker & Mckenzies Opportunities in High-Growth Markets: Trends in Cross-Border M&A report shows that concerns over cultural barriers are diminishing as globalization presses on, with issues over corporate compliance (46% of respondents) as the top legal or regulatory challenge. Corruption is not so high, with 29% of those surveyed considering it a main issue. Only accounting or business fraud (20%) is seen as less of a threat. Additionally, 50% believe that pre-transaction integration planning is the biggest factor in mitigating dealexecution risk. As challenges change in crossborder deal-making, corporates competing on foreign soil need to be aware of the changing deal climates in these new regions.
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Pr-Ola Hansson
Deal dynamics
A step into the
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he search for growth will lead many corporates to boldly go where they have not gone before. In regional terms, this means moving beyond developed markets and into rapid-growth markets (RGMs) such as Turkey, Vietnam and Chile. EYs RapidGrowth Markets Forecast, published in April, expects growth in the RGMs to accelerate from 4.7% in 2012 to 6% in 2014. However, entering a market where your business has no previous presence requires corporates to make several vital decisions. When looking to penetrate new markets, corporates must decide whether to create alliances with local firms or build the business alone. This depends on the region, sector and nature of the business. For companies in highly regulated sectors, finding a strong local partner is often vital for establishing a business. For instance, in the financial services sector, Germanys Allianz acquired Turkish insurer Yapi Kredi for 684m (US$894m) in March. Board member Oliver Bte noted that this transaction fits perfectly into Allianzs strategy to use bolt-on acquisitions to strengthen its position in growth markets. For more on finding the right JV partner, visit www.capitalinsights.info/jvs. On the other hand, some companies choose to take a more organic approach. This has been the case for Swedens IKEA. Its plans to open 25 stores in India were approved by the Indian Government in May. As a privately owned company, IKEA is able to take a long-term approach to investment in a new market. As Juvencio
As companies strive for growth, they will find themselves heading into uncharted waters. Just how do they establish a platform for success?
Maeztu, IKEAs India Chief Executive, said: We will never compromise on a good location. So, even if it takes five years to [find], it is no problem. However, many listed firms cant wait that long. They have reporting requirements and responsibilities to shareholders. Its more difficult for them to think long term. Whether a company enters organically or via a partnership, another issue is finding the right model to monitor the organization. The key argument here is centralization versus localization. Corporate development officers who have no corporate development function in new regions need to redefine how they work. That can mean moving decision-making power from headquarters to where the business is growing. A prime example of this came in September 2012, when human resources consultancy Aon Hewitt opened a new office in Indonesia as part of its regional expansion strategy. At the time, Edouard Merette, CEO of Aon Hewitt Consulting in Asia Pacific, said: The fast-growing economy of Indonesia offers Aon Hewitt an important business opportunity as we continuously develop and affirm our presence throughout Southeast Asia. There is also increasing pressure for corporate social responsibility. Companies need to take environmental concerns into account, and engage in the communities and cultures they enter. Clear strategy, regional accessibility and cultural accountability are the three key drivers when seeking growth in a brave new world.
Paul Heartfield
Pr-Ola Hansson is EMEIA Markets Leader, Transaction Advisory Services, EY. For further insight, please email par-ola@capitalinsights.info
Big dealers
The table, right, shows the top 10 acquirers since 2008 by deal volume, according to Mergermarket. We have chosen this period to show which companies have been most acquisitive post financial crisis. The table shows the deal landscape of the past five years and the top 10 is not just limited to corporate giants. While some, such as tech companies Google and IBM, are predictable serial acquirers due to the sectors history of big names snapping up smaller startups, others are from sectors which are traditionally less acquisitive. For instance, Arthur J. Gallagher & Co., and Bunzl are from the insurance and distribution industries, respectively. In terms of geography, the US can boast four corporates in the top 10, while Europe and Japan have three apiece.
Top 10 acquirers 20082013

Company Country
US US UK Japan Japan Japan US US Sweden UK
Sector
Technology Technology Outsourcing Trading house Trading house Trading house Financial services Financial services Security Distribution
Deal volume
50 49 43 41 40 39 39 37 32 31
Methodology
The data for the top 10 has been gathered from the Mergermarket database of M&A transactions. The table shows deals conducted by top-level companies across the world from January 2008 to April 2013. The data only includes deals by the parent company recorded on the Mergermarket database. It does not include private equity deals, joint ventures, lapsed or subsidiary deals. As a result, deal volumes may differ from those expressed by the corporates themselves. For further Mergermarket deal criteria, please visit www. mergermarket.com/pdf/deal_ criteria.pdf
Key facts and figures from the world of M&A. This issue: the top 10 corporate acquirers by volume of the last five years. Plus the biggest deal sectors and countries since 2008.
Acquisitions are key drivers behind corporate development and growth. But which companies have been buying the most and what insights can other acquisitive corporates gain from the broad experience of those who are most active? These are the questions Capital Insights asks and, with data supplied by Mergermarket, looks to answer. In addition, we reveal the top 10 sectors and regions by deal volume since 2008 (see figures, page 9). The breakdown of the top 10 shows a mixture of sectors, regions and corporate sizes proving that growth via acquisition is not just limited to giants such as Google and IBM. With that in mind, on page 10, we talk exclusively to corporate leaders from three of the top 10 Capita, Arthur J. Gallagher & Co., and Bunzl to discover more about their growth strategies, their rationale for deals and some of the challenges they face and how they have overcome these. Meanwhile, a breakdown of the top 10 sectors (top, page 9) since 2008 shows that the industrials and chemicals sector has seen the most deals, followed unsurprisingly, by the technology, media and telecommunications industry. In terms of regions (bottom, page 9), it is interesting to note that, while developed economies dominate, China is in third place and Brazil, India and South Korea sit just outside the top 10.
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Transaction
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Google IBM Capita Mitsui & Co. Marubeni Mitsubishi International Finance Corporation Arthur J. Gallagher & Co. Assa Abloy Bunzl
Top 10 sectors by total deal volume since 2008
The top sectors
Leisure 2,330 deals
Financial services 6,210 deals Business services 7,936 deals Pharma, medical and biotech 4,744 deals Industrials and chemicals 12,901 deals Technology, media and telecommunications 9,772 deals
Transportation 2,113 deals
Consumer 8,532 deals
Construction 2,583 deals
Energy, mining and utilities 6,667 deals
The industrial and chemicals sector leads the way with 12,901 deals since 2008. And it is continuing this strong performance overall so far in 2013 with over 500 deals in Q1 alone. In second place is the technology, media and telecommunications sector with a total of 9,772 deals since 2008. The sector continues to flourish in terms of deal values. In the first five months of 2013 alone, deal values came in at US$145b from 690 deals, putting the sector first value-wise this year. Despite a downturn in consumer spending in developed countries, the consumer sector has been remarkably buoyant over the past five years. The industry came in third place, with a total of 8,532 deals since 2008. Spending has also increased across the sector. So far in 2013 there have been 565 consumer sector deals, worth US$109b, putting it third in both volume and value terms for the year. This figure has been helped by megadeals such as the buyout of food company Heinz by Berkshire Hathaway and 3G for US$28b.
Top 10 countries by total deal volume since 2008

UK 5,280 deals
Netherlands 1,596 deals
Canada 2,490 deals
France 3,010 deals
Japan 2,038 deals
USA 18,762 deals Germany 3,186 deals Italy 1,741 deals
China 3,532 deals
Top three countries by deal volume Other top countries by deal volume
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Australia 1,995 deals
The top countries
While the top 10 deal countries since 2008 are dominated by developed markets, with the exception of China, more recent data shows that times are changing. Europes economic troubles have taken their toll on some of the more popular M&A destinations in the continent. Italy, in sixth place in 2008
with 453 deals, is now down to 10th in the first five months of 2013 with just 98. Spain is faring worse, falling from 10th in 2008 (334 deals) to 16th so far in 2013 (80). One of the most noticeable trends over the last few years has been the rise of emerging markets as preferred investment
destinations. China has consolidated its position as the third-most popular M&A destination in the last two years behind the US and UK. However, Brazils rise has been much more recent. It first appeared in the top 10 geographies in 2011, rising to ninth in 2013.
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The way
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forward
he last five years have been turbulent for the M&A market. This period culminated with a peak at the end of 2012. The years final quarter saw the highest M&A values since 2008 (US$737b from 3,565 deals), according to Mergermarket. There has been a slowdown this year, with the 2,789 deals in Q2 2013 comparing unfavorably with Q2 2012s 3,327. However, the number of megadeals taking place, such as Liberty Globals US$21.9b buyout of Virgin Media, combined with rising confidence among corporates means that there is room for increased optimism. EYs Capital Confidence Barometer (CCB), published in April, shows that 72% of respondents expected volumes to rise over the next year. Half are also more confident about the number of opportunities available, compared with 37% in October 2012.
The top acquirers tell us about the strategies, challenges and keys to a successful deal
Against this background of renewed confidence, we have looked back at the top 10 acquirers by volume over the last half decade, to uncover why they have been so acquisitive and what other corporates can learn from their deal strategies.
Deal hungry
Since 2008, those in the top 10 have done more than 400 deals between them. The reasons why they have chosen M&A for growth are as varied as the sectors they represent. Bill Bohstedt, Vice President M&A for US property and casualty mergers at insurance broker Arthur J. Gallagher & Co. (AJG), believes that the rationale for acquisitions is about finding the perfect partner to grow the business. That was really our core vision for M&A growth: finding good merger partners who fit into our culture, and wanting to keep growing. By coming together with us, we grow better together than we could if we were separate, says Bohstedt. A similar sentiment is echoed by Ian West, Director of M&A for Capita, the UK outsourcing group. Small to medium-sized acquisitions that take us into new,
On the web
For more on how EYs Capital Confidence Barometer affects CFOs, read The CFO Perspective at a glance at www.capitalinsights.info/ccbcfo
complementary areas and strengthen our capabilities and scale have always played a key role in Capitas growth, says West. Google has also stated that acquisitions are about finding a perfect synergy between bidder and target. The important thing I look for is alignment between what the entrepreneur wants to do with their product and their company and what Google wants to do, said David Lawee, Googles Vice President of Corporate Development, in an interview in 2012. If there is perfect alignment, then it has a very high chance of success. If there is not, then we should not be doing it. For IBM, second in the table, one of the key drivers is innovation. Small companies are started around a great idea to change the world, said Steve Mills, IBMs Senior Vice President and Group Executive for Software and Systems, at an information and analytics forum last October. Big companies, through acquisitions and R&D, are also driving some part of that innovation agenda.
Breaking new ground
According to Bunzls Finance Director, Brian May, the companys acquisition rationale is twofold: to consolidate the business as well as to break into new territories. Since 2008, the UK distribution giant has spent an average of 167m (US$257m) per year on acquisitions. Were in a fragmented marketplace, says May. We are an acquisitive company, the only one consolidating in our industry one that is mainly comprised of family-run businesses. Bunzl has targeted South America in particular, Brazil as a key area for growth. Over the past five years, the company has undertaken a targeted acquisition strategy to build the business there. As recently as March, it bought medical supply business Labor Import, based in Sao Paulo. We identified Brazil, a market of 200m people, as a place with the scale and size of GDP that makes it interesting for us. Having then researched the market, we found there existed suitable acquisition candidates. Brazil has the need for distribution, whereas
in the other BRICs, there isnt that level of development in our market, says May. The three Japanese trading houses in the list Mitsui & Co., Marubeni and Mitsubishi have also made overseas acquisitions something of a priority in recent years. A good example of this has been Marubenis US$2.6b acquisition of US grain trader Gavilon in June this year. When the deal was first announced in May 2012, the company stated in its annual report that: This will further raise Marubenis global profile in grain trading. More importantly, it will make it possible to address expanding demand for grains in China and other emerging countries. Swedish lock maker Assa Abloy has also used acquisitions to break into emerging markets in particular, China, where it bought two companies, Shandong Guoqiang and Sahne Metal, in 2012. Speaking at the beginning of the year, Chief Executive Johan Molin stated in an interview that the volume of deals was a result of having to compete Our challenge is to cast our in emerging markets. As people [in emerging net as wide as possible, markets] get wealthier, they and get management will spend more money on spreading the message door opening, he said. Bill Bohstedt, VP M&A, Arthur J. Gallagher & Co. There are often very lowquality doors in emerging markets.
Family values and volume
Taking the acquisition route to growth is often going to be fraught with challenges. For the high-volume acquirers interviewed by Capital Insights, the three key issues identified were the type of companies on offer, the volume of businesses available and the valuations that the targets set. Doing deals in Bunzls sector often involves dealing with family businesses. This brings challenges for many firms, particularly when operating in emerging markets. When dealing with family businesses, you need to engage and build a greater level of trust. We have separate management teams, and their heads will form relationships with businesses we would ultimately like to buy. Families dont want their business consumed and their identity changed significantly, says May. The deals often come when they need more investment. But we do relatively little with the front office. The customer relationships and supplier relationships we leave with the families, who we usually tie in to stay. In the main, it is what they want as well, as they have often reached the point where to go to the next level is beyond their own resources. Its not only the types of businesses that pose issues. There is also the dilemma of getting a decent volume of
What is your expectation for global M&A/deal volumes in the next 12 months?
Return to historic highs Improve Remain the same Decline 5% 3%
69%
23%
Source: EY Capital Confidence Barometer
businesses. In the case of Bunzl, ensuring they have a good supply-line can sometimes be the issue. There are the ongoing challenges of getting a good supply of businesses. Overcoming this is all about getting the right timing and building trust in advance, he says. For AJG, the opposite is true. There are around 38,000 independent insurance agencies in the US. And the challenge is to reach out to as many as possible in an effort to find the most suitable partners. [To overcome] this issue, we have to have as many management people meeting these merger partners in their areas and at events, and starting a dialogue, says Bohstedt. Because when they get ready to sell, we want them to know who we are and consider us as a potential partner.
If we havent had that dialogue, they may decide to merge with one of our competitors. Our challenge is to cast our net as wide as possible, and get management spreading the message about the benefits of joining us. However, arguably, the main issue that many buyers face is the valuation gap between themselves and their targets. In Aprils CCB, 44% of respondents expected valuations to increase over the next 12 months, compared with only 31% in October 2012. For Ian West at Capita, the solution is disarmingly simple stick to your guns. Being disciplined around pricing is a critical factor for doing the number of deals we do and for generating the value that these acquisitions will ultimately create, West says. The biggest challenge is the temptation to become busy fools by chasing deals where pricing will always be too high. Its important to know when to leave well alone or to walk away. The high-volume acquirers all point to three key messages when it comes to successful deals find the right partner, agree on the right price, and get the post-merger integration (PMI) right (for more on this, see the PMI feature on page 20). And they should know. With over 400 deals many more, if you include subsidiary and joint venture deals between them in the last five years, theyve had the practice.
A new perspective
EYs Pip McCrostie on what is needed to lift M&A activity from its lowest levels since the financial crisis
Its a tough time for M&A. However, as weve seen, markets can change quickly. If there is to be an upswing in M&A this year and beyond, the following five changes need to happen: Greater economic stability and confidence in growth. There has been more stability around macroeconomic issues such as the Eurozone, but investors want to see this translating into an outlook for growth. Long-term stability in equity markets. This would provide a more robust longer-term
Pip McCrostie is Global Vice Chair, Transaction Advisory Services, EY
1 2
3 4
view on valuations and prices. Clarification on QE unwinding. The complex impact of the withdrawal of QE and its influence on the economy and equity indices is critical to better understanding growth prospects and asset prices. Greater shareholder influence on investments. Many large corporates have big cash piles. Shareholders may want that money to be utilized and
inorganic growth could be part of that equation. Bold movers. Three-quarters of big corporates expect M&A to rise yet less than a third intend to do a deal. The you first sentiment could turn into me too if bold moves are made and competitors are seen to be establishing an advantage via M&A.
Getty Images/Air Rabbit
The art of
EY experts
Steve Krouskos (SK) is Deputy Leader, Global Transaction Advisory Services, EY
M&A
What are your thoughts on the top 10? SK: Its a varied list. I wasnt surprised by the variation in there, as there has been no overriding theme driving the market. I also wasnt surprised by the three Japanese companies. CH: I am a little surprised that there were two UK-based businesses, but not so much by the Japanese ones. I think we are seeing the beginning of a huge outflow of capital from Japan. There arent enough good-quality businesses in Japan to invest in for growth. Will tech firms continue to be as active? SK: I think tech will be one of the more active sectors, maybe not with headline deals but more mid-sized acquisitions. Its driven by rapid change in the sector, such as the evolution to cloud, big data and mobile applications. There is a lot of disruption in the sector and companies are placing a wide array of bets to solidify their position. CH: They will continue to acquire high-quality services that they dont have, acquiring in lieu of in-house R&D. But, for the bulk of what they need to do to grow their businesses, which is customer acquisition and growing share of spend, they will continue to do that organically. What drives firms to be so acquisitive? CH: First, a number of them will need to infill services that they cannot readily build internally. IT companies, in particular, need
The top 10 acquirers have shown that sector, region or indeed, size, is no barrier to acquisition activity. Two EY experts give their views on the results
to buy services that consumers will find attractive. The second reason is that some of these deals have been defensive beating competitors by building market share. Finally, a number of these organizations have capital and need to deploy it in new markets. SK: Its hard to find a single theme. A lot of these are simply unique, opportunistic companies in search of growth. In the early portion of the last five years, there were more consolidating deals to capture cost efficiencies. But, as we move forward, deals are more about access to new markets, products and trying to control supply chains. Which sectors will be most acquisitive over the next 12 months? SK: If you look at our most recent CCB, I think sectors standing out are automotive, life sciences, technology and oil and gas. CH: Theres also likely to be some big deals in sectors such as defense. In mining, theres lots for sale, but few buyers. The volume will be seen in health care/life sciences and business services. Within all sectors, demand for acquisitions that enable growth will be the highest. Which countries will be most acquisitive in the next 12 months? SK: In terms of outbound deals, Japanese companies are cash rich and looking for opportunities to deploy capital. Chinese and US companies will also be active. These
Charles Honnywill (CH) is European Head of Sell Side Services, Transaction Advisory Services, EY
companies will look increasingly to emerging markets, and not just the BRICs, but places like Indonesia, Africa and Colombia. CH: I agree. The Japanese will continue to acquire, looking toward the more developed part of the Eurozone. There will be more acquisitions out of China: it will be looking for high-quality assets to diversify away from the Chinese mainland. The other big area is the US. I believe that their businesses will move capital from Europe to the Americas. After a slow start to 2013, what will kickstart the M&A market? CH: I do think well see an uptick and will be quite surprised by it. Confidence is returning because the imminent disasters feared from the fiscal cliff, the collapse of the Eurozone and the issues with Cyprus have not come to pass. Available capital on balance sheets and the debt available to those with the right credit rating will create the impetus. SK: I expect some small improvements in the second half of the year. Companies have cash and access to credit. However, I dont see one major event that will spark the market. Corporates are still concerned with making mistakes, but confidence will return gradually as they get more comfortable that there wont be a catastrophic event. That said, I think this market offers a great window of opportunity.
For further insight, please email editor@capitalinsights.info
Making the market

SAP CFO Werner Brandt tells Capital Insights how smart M&A, innovative thinking and a clear capital agenda have helped the company to expand its position as a global leader
Preserving Investing Optimizing Raising
hen it comes to growing a business in the ultracompetitive technology market, companies that want to succeed need to focus on the future and then deliver it now. The sector is developing at a rapid rate. Global spending on information technology (IT) products and services will grow 4.1% this year to US$3.8t, according to analyst firm Gartner. Only forward-thinking corporates with a clear strategy will reap the rewards. This is borne out in a report from late 2012 by research group International Data Corporation, which predicted that, from 2013 through to 2020, technologies built on mobile computing, cloud services, social networking and big data analytics would drive around 90% of all the growth in the IT market. This statistic highlights what Germanys SAP, the biggest technology company in Europe and the worlds largest vendor of business applications, decided to do some years ago. SAPs success 13 quarters of double-digit growth in a row is based on the strategy that we laid out in 2010, says CFO Werner Brandt. In addition to our core business of applications and analytics, we chose to focus on three major areas, which will help us to double our addressable market from US$100b to over US$200b by 2015. These areas are in-memory database technology, mobile and the cloud. Strategic moves into these three categories, alongside the continued focus on the core businesses, have helped SAP to
become one of the most valuable companies on the German DAX index. And its the only European name in the top 10 global high-tech businesses. Now we are number nine, but our ambition is to rise higher in the market, says Brandt.
SAP rising
Growth is the guiding principle at SAP and it is the priority for the CFO when it comes to allocating capital. At SAP, we generate a very strong cash flow, says Brandt. And we use cash for acquisitions, to support the implementation of our strategy. The second allocation is for paying dividends to our shareholders, and the third usage is share buyback. But, in the first instance, we use cash to grow the business. SAPs growth story is based around a mixture of a strong M&A strategy and maximizing the potential of its existing products in its five key market categories applications, analytics, cloud, mobile and database technologies. In terms of organic growth, the key weapon in SAPs arsenal is HANA, a database evolving into an application platform that provides information on a real-time basis and We use cash for can analyze massive quantities of data acquisitions to support 10,000 times faster than traditional the implementation databases. It is the fastest-growing of our strategy product in the companys history. To the end of Q1 2013, we have accumulated HANA revenue of 640m (US$856m), he says. And through the huge potential of application data being analyzed at high speed, there will be a paradigm shift for enterprise intelligence and an opportunity for far greater growth. HANA is now being used by more than 1,500 corporate customers around the world in all industries ranging from financial services to sports. For example, in February, the US National Basketball Association (NBA) announced that it would be using HANA software to give fans unprecedented access to nearly 70 years of statistical data. HANA was chosen by the NBA due to its speed, flexibility and ability to allow unlimited searches, unlike more conventional products. HANA is one of our key organic growth drivers. We need to stay focused and do everything we can to position HANA in the right way so that it is adopted by all our customers, he says. While HANA is driving organic growth, SAP has made some bold M&A moves in key areas of the business, such as cloud computing and mobile technology.
High up in the clouds
The cloud has long been seen as fundamental to the future of the industry. Indeed, the cloud services market is forecast to grow 18.5% this year to US$131b worldwide, according
Paul Heartfield
to Gartner. SAP first entered the market with a homegrown product some years ago. We initially focused on a complete solution in the cloud via a product called Business by Design. However, we learned that the cloud market was not ready for such a comprehensive approach, says the CFO. So we decided that we would invest via the acquisition of more focused cloud solutions. SAP bought the cloud software company SuccessFactors in February 2012 for US$3.4b, and followed this up in October 2012 with the acquisition of business-tobusiness trading network Ariba for US$4.3b. In the cloud business, these acquisitions were bold. But, today, we are number two in the market, and closing the gap to number one. For this year, we already expect total cloud revenue to approach US$1.3b. We are among the fastest-growing cloud companies worldwide, says Brandt. These acquisitions took SAPs cloud business to another level and meant it could provide a uniquely broad offering. We are driving the adoption of the cloud holistically, while other cloud players focus on specific products for individual lines of business, he says. We have offerings around all business aspects, whether related to money, people, suppliers or customers and, in addition, we
SAP opens its first international subsidiary in Austria
provide a full suite in the cloud. Our complete offering and the seamless integration into on-premise solutions make us unique and provide triple-digit growth. SAP used the same targeted approach in the mobile space. In May 2010, it acquired the mobile software provider Sybase for US$5.8b. It was clear that the world was going mobile and we had to push ourselves into that business. Therefore, we bought a company that was a leader in mobile, says Brandt. Sybase also had great database technology experience, which fitted perfectly into HANAs organic development and added significant value for us. SAP is not just making big money moves such as the SuccessFactors and Sybase deals. It is also looking at smaller tuck-in acquisitions such as online ticket provider Ticket-Web, which it bought in January, and insurance software provider Camilion, purchased in May to complete the portfolio.
Paul Heartfield
Target practice
However, given that many of SAPs acquisitions were not on the market, how does SAP target these companies? We look to acquire when we see a business that will give us the chance to accelerate our growth strategy in our five market categories, says Brandt. And, more often than not, if you want to do this, you have to get the number one in a given industry and these are normally not for sale. For example, we aimed to be a leader in the cloud, so we bought SuccessFactors, which was and is the leader in human capital management [HCM], the fastest-growing cloud segment. SuccessFactors really brought the cloud DNA to SAP and, today, we have 29m users using our cloud HCM solutions. Then later, we bought Ariba, because it was number one in supplier relationship management and had the biggest enterprise network in the world for business. Ariba manages a transaction volume of nearly US$500b each year. In addition to both companies fast-growing status, Brandt outlines two other key factors in the acquisition process. You have to ensure that you get a company that has the right cultural fit and which will accelerate the implementation of your strategy, he says.
SAP becomes a publicly traded company. International subsidiaries open in Denmark, Sweden, Italy and the US
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Program Development)
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SAP acquires a 50% holding in German software company Steeb, and takes over software firm CAS outright
Company started under the name SAP Systemanalyse und Programmentwicklung (System Analysis and
In some cases, these companies are already working with SAP. In the everevolving technology industry in particular, its often worthwhile keeping an eye on smaller partners who have industry-specific knowledge. This helps both partners to grow and heads off potential future rivalries. In our industry, we are working in an eco-system comprising thousands of partners. These include hardware, technology and implementation partners. Sometimes, the solutions provided by our partners become so attractive to our customers that we decide to buy these companies and build up a new business. This was the case with Camilion, says Brandt.
Getting together
A deal, whether transformational or tuck-in, can be judged both by figures turnover and margin and by the success of the post-merger integration (PMI). As Brandt puts it: If you invest almost US$8b in two companies, then you have to ensure that you get the integration right. For larger acquisitions such as SuccessFactors, Ariba or Sybase, SAP uses a bespoke PMI model. If you look at our history of integrating companies, says Brandt, we always use the tailor-made approach to effectively integrate these acquired companies. In practice, this means that SAP approaches different acquisitions from very different angles, according to the CFO. With the Sybase acquisition, we had acquired a business that was new to us. So, we decided to bring together only the market activities of both companies, in order to
SAP concludes a cooperative agreement with the largest Russian software company ZPS
capture the potential growth and combine the solution offering, he says. We kept the rest separate and then, after two years, having learnt about the database business, we integrated Sybase fully from a development and back-office perspective. With Business Objects, a business intelligence software company that SAP acquired in 2008 for US$4.8b, the company used another integration model. While Sybase was more a partial integration over time, with Business Objects, we had bought a company operating in the same field. We were blending the power of our applications with analytical applications, so we decided to fully integrate right from the beginning. This also helped increase efficiency, says Brandt. For the cloud businesses, SAP used yet another approach, which the CFO refers to as a reverse integration. In this case, the company took its existing cloud business and integrated it with the acquired SuccessFactors business to create a new SAP cloud unit. Brandt feels that this approach has been
Lessons learned
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Werner Brandt explains SAPs tenets for successful growth

When it comes to organic growth, you need to stay focused on the product or service and maximize its opportunities. Offer a complete product and services portfolio. The combination of five different market categories is what makes SAP different from its competitors. Keep an eye on smaller partners who have an attractive offering. They can help the larger partner to grow and head off potential future rivalries. With acquisitions, always look for companies that accelerate the implementation of your strategy and have a good cultural fit. Ensure that you have a tailor-made integration scenario for each acquisition, and that each shares one objective: to capture top-line growth. When integrating companies, ensure that the innovation capability of the target company is preserved. When investing in a country, build tight links with that country. SAP is not just there to sell, but to co-innovate, to train people and bring them closer to IT. Wherever possible, companies need to make the market, rather than react to what is going on within it.
SAPs global expansion continues as it opens its 19th international subsidiary in Mexico
SAP is listed on the New York Stock Exchange
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SAP acquires a 52% stake in DACOS Software
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Being CFO
Werner Brandt discusses how his role works in SAP

There are different shades between the roles of the CFO. There is the business partner role and there is the stewardship role. The business partner role helps the company to grow and ensures that all the processes are set up in a way that constantly improves efficiency. The stewardship role ensures that the company fulfils all of its obligations from a governance perspective be that related to financial reporting, or adherence to business codes of conduct and compliance. feels that SAPs bespoke approach helps to mitigate two key post-merger issues staff retention and innovation leakage from the acquired company. The first objective of an acquisition is to realize the top-line synergies. We do not buy for efficiency on the bottom line, we buy to grow. And its very important that you do everything to ensure that the growth of the acquired company is not diminished. This has a lot to do with people. The retention aspect is a very important one, he says. On the development side, you have to ensure that the innovation power within the given company is preserved, that it can develop on its own and is not diminished by the big development organization that is SAP. This is one reason why we did the reverse integration of our cloud business into SuccessFactors, and then built the new SAP cloud business.
extremely successful. After you acquire a business, what you normally see is a dip in revenue for the acquired company, he says. But, if you look at SuccessFactors, we grew in triple digits from the first quarter on. The same holds true for Ariba. When it comes to smaller acquisitions, such as Camilion and Ticket-Web, SAP has a more standardized integration concept. From a back-office perspective, it takes us 60 to 90 days maximum to fully integrate, and we also create a clear combination from a go-to-market and a development perspective, says Brandt. Why the difference between integration models? According to the CFO, its a simple matter of size and complexity. With smaller companies, we usually buy a piece of technology that we want to bring into the market or a small solution that helps us to accelerate in a given environment or within a given industry. There is no need to keep it separate, he says. Acquisitions of any size have a number of risks. Yet Brandt
SAP AG
Get involved
The company is not only looking to grow in its mature markets such as Germany and the US, it is also seeking expansion across emerging markets, in particular, China, Brazil and the Middle East and North Africa (MENA) region. And, just as it does with acquisitions and integration, SAP takes a holistic approach to its regional focus. If we look at China, we have more than 4,000 employees there 2,000 of which are developers. Its not just a country where we want to sell software, but also a country where we have a huge and well-accepted development organization, he says. We decided, in 2011, that we would invest heavily in China US$2b until 2015. We have increased our presence recently by hiring more than 1,000 people two-thirds on the sales side and one-third on development. We also decided to move our head of global customer support to Beijing. This idea of becoming fully involved in a region to maximize growth opportunities equally extends to both Brazil and MENA. In Brazil, four years ago, we decided to take the same approach of not only selling, but also developing, says Brandt. This started with a development center for Latin America in So Leopoldo. We have about 500 people there,
SAP announces a series of acquisitions, including strategy management provider Pilot Software, Yusa, Wicom and MaXware
SAP opens its ninth development location outside Walldorf in China
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retail providers Triversity and Khimetrics
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SAP
Founded: 1972 Employees: 65,000 Countries: 130 and are doubling our capacity by setting up a second facility. This is an area that has one of the most prominent universities in Brazil. We are attached to this university and can attract young talent to SAP. In MENA, SAP has taken a similar approach. We have invested in training and development centers, expanded our customer base and hired young professionals. We have done a lot in order to capture growth in these countries, he says. Market capitalization: US$74b (as of H1 2013)
The CFO
Werner Brandt
Age: 59 Appointed CFO at SAP: 2001
Saving the day
While deals get the headlines and moves to exotic emerging locations provide a level of pioneering glamor to a business, they could not happen without the work that goes on behind the scenes: improving efficiency and working capital management. In terms of enhancing efficiency, SAP has invested heavily in its shared service center (SSC) infrastructure. Finance transactions are managed out of four service centers in EMEA, the Americas and Asia Pacific. Many of the companys transactional processes are integrated into a SSC already and SAP is moving more and more processes, on top of purchase-to-pay, order-to-cash and record-toreport, to SSCs. When it comes to the day-to-day level of improving working capital, the CFO ensures that the two complementary angles day sales outstanding (DSO) and day payments outstanding (DPO) are very closely monitored in order to optimize cash flow to fund acquisitions and further growth. We have reduced DSO from 70 to 60 days over the last four years, and have a clear focus on being close to the payment
SAP completes the acquisition of Business Objects
behavior of our customers, says Educated: University of NurembergBrandt. We use a new HANAErlangen, Technical University of based solution that enables each Darmstadt manager to look into receivables Previous positions: Prior to becoming CFO at around the world via their SAP, Werner was the CFO and Labor Director mobile devices. of German-American health care company This starts with the global Fresenius Medical Care AG. From 1992 to 1999, view, and then you can dig down he was VP of European operations at health care into a country and really go company Baxter Deutschland, responsible for its into a specific account to see financial operations in Europe. how the customers payment behavior developed over time. Our internal solutions help our people understand and solve disputes with customers quickly, so they can pay. On the payables side, Brandt feels that the best way to optimize the process is to look at a better way of collaborating with suppliers. This helps to get the best terms and conditions, after which he feels the company needs to pay on the agreed day. I dont think its the right approach not to pay on time in order to get better cash flow, he says. Its better to discuss and see that you have the optimal financial supply chain in place in order to maximize your cash flow.
Unique combination
SAPs success story is a lesson in how a strong acquisition and regional strategy, a pinpoint focus on maximizing the potential of existing products and services, and solid capital management can lead to substantial growth. Yet, Werner Brandt feels that there is one final factor that gives SAP an edge over its competitors: a complete offering with customers having mobile access to all solutions, no matter whether they are deployed on premise or in the cloud. If you look at what we offer and the combination of the five different market categories, this makes SAP unique, says Brandt. I would argue that we make the market, instead of reacting to it.
SAP acquires cloud application provider SuccessFactors
SAP AG / Reto Klar
SAP acquires cloud software provider Ariba for US$4.5b
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SAP to its best quarter in history
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SAP announces plans to buy Sybase for US$5.8b. Software revenues of 1.5b (US$2b) in Q4 helps
Put the pieces
together
Deals that look good on the surface can often fall apart due to poor integration processes. How can corporates overcome this challenge and make the pieces fit?
Optimizing Investing
he post-merger integration (PMI) phase of an M&A deal will never grab the headlines like the deal itself. Yet, in many ways, successful PMI of one company into another is the only way to evaluate a deal. Bad integration is certainly seen as a key reason for a deal failing. A 2011 survey by insurance consultants Aon Hewitt revealed that a longer than anticipated integration process (41% of those surveyed) and cultural integration issues (33%) were identified by organizations as the top two reasons for deal failure. So how can corporates overcome these hurdles?
Early birds
EYs EMEIA Operational Transaction Services Leader Max Habeck strongly believes that early preparation is the key for an effective PMI process. Better planning leads to success, he says. Success is based on having a good understanding of what you are buying and why you are buying, and on effective operational due diligence. That should shape realistic expectations of synergies. Early mistakes here can create big problems later. You need clarity on the degree of integration you are seeking. You need to clearly match topdown and bottom-up views. Schneider Electric, the multinational electricity management company that has pulled off a string of successful acquisitions in the past decade including the purchase of full ownership of Russias Electroshield TM Samara in March this year has made early planning a key part of the integration process. The integration model to be used is something we discuss at a very early stage when we consider acquiring a company, says Cedric Collange, Schneider Electrics Senior Vice President for Mergers and Acquisitions. If you look at this at the acquisition stage, it is too late. German chemical company BASF has experience as a successful integrator. One year after its December 2010 acquisition of nutritional supplier Cognis, Samy Jandali, Vice President of Nutrition and Health in North America, said he had been very impressed with the integration of the two firms differing expertise areas. This was backed up by 2011s Q1 figures, which showed BASFs reported sales of performance products up 39%, which included a significant contribution from Cognis. It was fully integrated by 2012. Dr. Wolf-Dieter Starp, BASFs Head of Global M&A, says that the company benefits from thorough preparation. For successful PMI, planning for the integration has to
start during the due diligence phase, he explains. Critical issues are identified through a number of analyses, using external consultants where necessary. These include a wide variety of issues, such as the complexity of the business, the age and, condition of production plants and taxes. Both cost and growth synergies are identified in the due diligence phase and then regularly measured to see if they are being achieved in the integration phase. Having the correct teams and procedures in place early on in the lifespan of an acquistion isnt the only factor that determines a smooth transaction process. As a company with extensive experience of acquisitions, BASF has learnt that its beneficial to announce the targets organizational structure and management as soon as possible, as well. Timely and regular communication is crucial, says Starp. The new and current employees need to know where the journey is going and what the next steps are. Samy Walleyo, EYs Operational Transaction Services Markets Leader for Southern Germany, Switzerland and Austria, agrees. Companies need to plan in advance, yet often, they set up integration teams just a couple of weeks before deals close. That is far too late, he says.
Key insights
Tailoring integration
As well as starting early in the process, companies need to work out quickly whether the objective of the deal is a full or partial integration of the two businesses. The level of integration depends on your motivation, says Habeck. If you are buying innovation and skills, it may be unwise to integrate those into a large corporation. Therefore, large corporates should consider whether giving the company some autonomy, rather than fully assimilating it into the business, will yield better results.
Getty Images
Early planning is vital for the success of a post-merger integration: teams need to be set up early, preferably during the due diligence phase. Companies need to work out quickly whether the objective of the deal is a full or partial integration of the two businesses. Due diligence should go beyond the financial, legal and regulatory issues, and into the organizational and cultural areas. One key to success is communication with all stakeholders, especially management and employees. Integration is not a short-term activity, but a process that continues over a long period and must be managed actively and monitored.
What do you believe are the principal factors needed to ensure successful post-merger integration? Retaining talented staff: 54%
Source: Netjets/Mergermarket, Doing the Deal 2013
Understanding the strategic t of the target within your business: 65%
Having a clear and actionable post-merger integration plan: 46%
Cultural understanding: 46%
Early and open communication with key stakeholders 59%
Retaining talented staff 61%
60%
of respondents identified culture as a key challenge during the integration process, according to a survey by Mercer
Schneider Electric has three types of integration model, Capital of culture Walleyo says that the importance of according to Collange. These are full integration, light thorough due diligence, which goes beyond integration and no integration where the competencies in the financial, legal and regulatory issues the acquired company are very different from our own and we and into the organizational and cultural want to learn from them, rather than to integrate, he says. areas, cannot be overestimated. Its not In the no integration model, Collange explains, there only about culture between countries, will still be back-office integration, bringing the acquired but also between companies and within company into Schneiders financial systems and reporting. countries, for example, between north and An example of this was the acquisition of Brazilian south Italy, he explains. low-voltage product producer Steck in 2011. SteckThis is borne out in the 2011 study manufactured products were at a lower end of the market from Aon Hewitt. It found that over 70% of than Schneider. Therefore, Steck was set up as a separate corporates believed that the top impacts brand with a separate structure. There is some integration of unsuccessful cultural integration include of the back office, with reporting and financial controls, but decreased employee engagement, loss of otherwise, it was not suitable for integration, says Collange. key talent and reduced productivity. For the light integration model, Collange explains There is no magic recipe for due that the company needs time to understand the acquired diligence: there will always be something business and learn its culture. This means that we might that takes you by integrate after one or two years, surprise, says depending on what we find, Collange. The he says. In these cases, you The key is to communicate due diligence have to make sure that the key with stakeholders, must identify the people are comfortable before especially management key employees, you push for full integration. It especially if we is more important to keep them and employees acquire a company than to achieve full integration. Cedric Collange, Senior VP M&A, Schneider Electric for its core We would rather wait before we competencies, fully integrate to make sure we rather than for other reasons such as its understand the differences in the acquired company. products or market share. Internet giant Yahoo! also took this tailored approach in The issue of culture as a challenge its US$1.1b acquisition of social networking website Tumblr to PMI success is thrown into relief by in May 2013. In its media release, the company said that the 2012 Asia Pacific cross-border postper ... our promise not to screw up, Tumblr will continue merger integration survey from human to be defined and developed separately, under current CEO resources consultancy Mercer. Almost 60% David Karps leadership. of respondents identified culture as a key However, for creating fiscal synergies, other issues challenge during integration, yet many must be considered, says Habeck. If you are seeking to companies integration plans lacked the level lower your cost base or extend productive capacity, then of detail required to deal with the issue. questions have to be asked whether the existing operations Many mergers failbecause companies are scalable, about regulatory constraints, the practical focus on strategic and financial fits, but challenges involved in integration and the level of investment neglect the issues such as cultural and that will be required. operational fits, says Dr Mike Teng, author Companies must also consider their IT systems. of the book Post Merger Integration: IT compatibility is a big question mark in some executives Improving Shareholders Value After a minds, he adds. Its not just about pulling levers to change Merger. To deal with this, formulate a systems. Indeed, according to EYs IT as a driver of M&A vision and strategy on the direction the success survey, only 21% of corporates and 11% of private merger is going in and how the deal fits, equity firms always undertake IT due diligence prior to as well as the clear milestones. A signing deals. Yet, IT incompatibility can destroy the pre-merger process that targets the prospect of achieving synergies.
Shutterstock/EY
Viewpoint
Early and open communication with key stakeholders: 46% Building good relationships with management: 42%
potential partner with the right capabilities should also be established. Rigorously plan and build trust with the interested partner.
James M. Loree of Stanley Black & Decker explains the companys successful integration strategy
ur integration capabilities enable us to pursue value-creating M&A with confidence and conviction. We have developed a rigorous, comprehensive process that we apply to all transactions. Effective planning is critical factor. We spend time early on, generally before a deal closes, to create the teams and plans needed to capture synergies and implement organizational changes. This typically begins during our due diligence phase, with a framework in place when a deal is signed. Plans are detailed and developed before closing, where practicable. Our integration focuses on three main areas: value, people and process. We define and analyze what the value-creation drivers are and organize our process around them. Our focus on people is all important, its critical to provide clarity on Our integration organization structure and approach focuses roles and responsibilities, on three main areas: to reduce anxiety among an understandably stressed value, people and workforce. Finally, we use a process process that our employees have seen before, keeping everyone focused. We typically form an integration management office comprised of corporates and business leaders from both businesses, plus a steering committee made up of senior management to help make decisions quickly, allocate resources and remove barriers to success. Our integration process has proven successful over time such as our $US4b buy of Black & Decker in 2010. We exceeded synergy targets and met all committed franchise targets on or ahead of schedule, due in large part to our integration process. James M. Loree is President and Chief Operating Officer, Stanley Black & Decker
Merger management
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A successful integration requires work on both sides. Dont just expect the acquired firm to slot in. With so many possible pitfalls in PMI, ensuring that it runs smoothly is a tricky business. C-level executives should bear the following five tenets in mind when it comes to bringing two companies together. Sharing is caring. You need to move people from the acquired organization into the acquiring organization, not just the other way, says Yves Doz, Emeritus Professor of Strategic Management at INSEAD. Make sure the burdens of adjustment are shared. If one side has to travel a long way and the other side just sits and waits, thats an unfair burden of adjustment. This can be very dysfunctional. Expert help. Its about solid project management and having the right people available to do it, says Habeck. That is one of the issues we see most of the time. He adds that acquisitions shouldnt always be seen as a merger. Theres this romantic view of the meeting of two minds, he says. But, sometimes, its just about access to an R&D pipeline or pulling more sales through an existing asset base. Keep talking. The key to success is communication with all stakeholders, especially management and employees, says Collange. We are engaged in a large acquisition and integration of Electroshield and TM Samara, which has 10,000 employees in Russia and Uzbekistan, all of whom need to be informed regularly. We may be overcommunicating to them, but that is never a mistake. Dont forget the day-to-day. What we see very often is that the acquirer is very focused on the target, says Walleyo. Sometimes, they forget their own people and they dont tell them what to expect. You need these resources, their enthusiasm and their buy-in. You need a project team. You need all the key employees for their expertise. But these key employees are also the ones who you need for the day-to-day operations of the business. The distractions for these key employees can harm the day-to-day business. Stay late. Integration is not a short-term activity, but a process that continues over a long period that must be actively managed and monitored. Starp explains: BASF reviews the success of integrations over many years. Short-
term success factors are, for example, harmonizing IT systems without disturbing customer relations. Mid-term success can be measured if key personnel remain with BASF and the identified synergies are achieved. An extensive documentation and analysis makes it possible to learn from each integration episode, and thus do the next integration even better. Doing the deal may well be the glamorous side of M&A, but successful integration is all about hard work. So start early, plan meticulously and stay with it.
India, Inc.
Indias economy and population are growing. Capital Insights explores how to invest effectively in this rapidly growing market
merging economies attract intense scrutiny whenever their GDP figures are forecast or published. These countries are, after all, the motors of the new world economic order, something heightened by the current predicament of the developed markets. So, when Indias Central Statistical Organization estimated that growth for 2012 would come in at around 5%, compared with more than 6% a year earlier, there was concern that the countrys economy was running out of steam. But looking behind Indias GDP figures reveals a much more optimistic picture. Consumer demand is rising. According to figures published by investment bank Morgan Stanley, food and beverage sales rose by more than 21% in 2012, while home and personal care products rose by 17%. The success of Indias economy has been driving crossborder M&A. In 2012, there were 275 inbound deals valued at US$37b, an increase of 10.4% (volume) and 21.3% (value) on the previous year. Over the last few months, a string of major foreign companies have announced plans to invest in Indian businesses. Prominent acquirers include Diageo, GlaxoSmithKline (GSK) and Unilever from the UK; US health care company Mylan; Japans Sony (who announced in March that it aims to triple sales of its mobile phones in
Key insights
India to INR35b (US$614m)) by March 2014; as well the Qatar Foundation and Etihad Airlines from the Middle East. The target sectors range from consumer goods and health care products through to the airline industry, telecoms and, increasingly, multimedia.
Indian summer
According to Ajay Arora, Leader of EYs M&A team in India, inbound transactions traditionally account for well over half of all cross-border mergers and acquisitions activity in India. The appetite for deals is driven by a number of factors, not least the relative buoyancy of Indias economy. We are seeing a lot of companies seeking to establish a base here to capitalize on strong domestic demand, he says. Thats a trend across a range of sectors, including consumer products, pharmaceuticals and manufacturing. Angad Paul, CEO of UK steel and engineering firm Caparo, agrees. The company entered a joint venture (JV)
A young population and a growing middle class means that India is ripe for investment opportunity. Restrictions on foreign ownership apply in certain sectors, such as financial services, aviation and retail. In these cases, corporates need to work with established partners. State investment boards can often be a more useful source of information than their national equivalent. Valuations can be relatively high. Bidders need to build strong relationships with targets. Bidders should consider building an initial minority stake, and increase the shareholding over time. In terms of outbound M&A, Indian companies are looking at natural resources, technology and marketable brands. Indian buyers generally prefer one-to-one deals, rather than auctions, and to take 100% ownership instead of stake investments.
Raising Investing
Corbis /Lynsey Addario/VII
with Indian automotive company Maruti Suzuki and has since expanded, employing 7,000 people in 26 facilities. According to Paul, internal demand is huge: India needs everything from infrastructure through to the consumer market. As Gunjan Bagla, author of Doing Business in 21st Century India, points out, the appeal of India to overseas investors is underpinned by demographics. Indias demographic is largely quite young half the country is younger than 25 and the middle class is growing very rapidly, he says. Any sector or industry thatlinks to this growth over the next 20 years is ripe with opportunity. Figures from EYs 2013 report Hitting the sweet spot: the growth of the middle class in emerging markets bear this out. It projects that Indias middle class will reach 200m by 2020, compared with the current figure of 50m. That desire to tap into the demand created by an increasingly wealthy Indian population can clearly be seen in a recent raft of acquisitions and stake building. UK drinks group Diageos US$3.4b acquisition (53.4% stake) of United Spirits (USL) in April is a prime example. When the company announced the plan late last year, Diageos then-CEO Paul Walsh said: USL is a very successful business. Its well positioned with its range of brands across categories and price points to capitalize on the very strong growth trends that we see in India. And Diageo can now bring its skills and capabilities to that market.
Walshs comments highlight the benefits of acquiring an Indian company with an established position in its home market. For an overseas company, an acquisition offers access to well-established brands, a distribution network and contacts in the marketplace, says Arora. That has a lot of value. According to Adrian Mutton, CEO of India market entry consultancy Sannam S4, overseas companies push into the Indian market is both reactive and proactive. In some cases, businesses are seeing revenues fall in their domestic or traditional markets and are looking to India to make up the shortfall. However, we also see a lot of companies who are doing well at home, but see opportunities to grow their revenues on the back of strong demand in India. There are other factors at work, too. Although much of Indias growth has been based on the strength of its service economy, India needs everything its potential as a manufacturing center should not be underestimated. from infrastructure As manufacturing costs rise in investment through to China, we believe that India presents a the consumer market terrific alternative for locating factories, Angad Paul, CEO, Caparo says Bagla. So any company that is concerned about the rising yuan and needs Asian manufacturingto serve should consider buying a small or mid-sized company in India that has permits, workers and good access to ports. This is borne out by the results of EYs 2012 India attractiveness survey, in which 45% of investors cite the availability of low-cost labor and inexpensive manufacturing capabilities as a key attraction for their business. Mutton agrees, adding: India also offers not only an educated labor force, but also an increasingly deep well of product development expertise. For instance, when US healthcare products company Mylan announced plans to buy Indias Agila Specialties for US$1.8b in March this year, the rationale behind the deal was couched in terms of a broader portfolio of injectibles products, as well as bigger market share. Agilas product portfolio and pipeline, which is complementary to Mylans, The projected is the result of best-in-class research, said Mylan CEO percentage growth of Heather Bresch. Agila will bring us one of the most Indias internet protocol state-of-the-art, high-quality manufacturing platforms traffic from 201217, in the industry. the highest in the world, As Bresch described it, the acquisition was not simply according to the Cisco about increasing revenues and market shares within the Visual Networking Index Asia region, but part of a strategy to create a global leader, drawing on the Indian companys products and production.
Experience counts
44%
Top three completed Indian inbound deals since July 2012

Completion
AUG
Target Delhi Mumbai Industrial Corridor Development Corp (26% stake) United Spirits Limited (53.4% stake) GSK Consumer Healthcare (31.84% stake)
Buyer Government of Japan; Japan Bank of International Cooperation Diageo (UK)
Deal value
2012
US$4.5b
JAN
2013
JAN
US$3.4b
2013
GSK (UK)
US$1.4b
Source: Mergermarket
India
Population FDI
Culture clash
1.2b (2013) US$356.5b (2012)

istock/Pingebat
US$1.9t (2012)
Source: CIA World Factbook; World Bank
GDP
Several years of liberalization has seen India open up to foreign investment. Restrictions still apply in certain industries notably, financial services (only 26% foreign ownership is allowed in insurance companies), aviation and multi-brand retailing (49% and 51% foreign ownership respectively) but in most other sectors, it is now possible for foreign investors to hold 100% of an Indian company. However, there are challenges, not least in terms of Indias business culture. Arguably, the first hurdle for any foreign company seeking to invest in India through an acquisition is to find a willing seller. Indian businesses tend to be family concerns. They are dominated by entrepreneurs known locally as promoters who have worked hard to build their companies for the good of themselves and their families. Credit Suisses Asian Family
Businesses Report from late 2011 found that India had the highest percentage of family businesses in Asia (67%). But, according to Arora, they are often reluctant sellers. If the promoter can be persuaded to sell, expectations on the price will typically be high, reflecting not only the current strength of the Indian economy, but also the promoters perception of its future prospects. Indian and European business owners take a very different approach to the valuation of their respective companies, says Prashant Mara, Head of the India Practice at Law Firm Osborne Clarke. In India, the valuation is based on opportunity for the future. That contrasts with European valuations, which tend to be based on historic performance and projections for the next one or two years, he says. And, in a fast-growing economy, the expectation of rising revenues is naturally pushing seller expectations ever higher.
The lion king

to Mergermarket figures, Indian companies made 72 overseas acquisitions, valued at around US$11b in 2012, up from the previous years total of US$6.7b. One of the themes for outbound M&A is the acquisition of natural resources, says EYs Ajay Arora, which is a trend that reflects the requirements of a growing and energy-hungry Indian economy. Indeed, last year saw Indian oil and gas multinational ONGC Videsh announce a deal to acquire an 8.4% stake in a ConocoPhilips oilfield in Kazakhstan. Mergermarkets research finds that natural resources deals accounted for 55% of outbound M&A in 2012. But, as Arora points out, Indian companies are also seeking to acquire customers and distribution networks in other emerging markets. The acquisition of fast-moving consumer goods (FMCG) companies in emerging markets has been a theme, he says. Foreign markets have become hugely important to the growth plans of Indian FMCG companies. For instance, earlier this year, it was reported that ICT company Wipros consumer products division was set to earn more than half of its revenues overseas through a US$500m acquisition program. Overall, it is estimated that foreign sales account for 25%40% of revenues for Indian companies in the consumer products sector. The third trend is the acquisition of technology and marketable brands in Europe and North America. According to Mergermarket data, the US and UK provide a big focus for Indian companies. As Sannam S4 CEO Adrian Mutton points out, Indian investment has the potential to transform struggling brands.
Indian companies are looking hungrily overseas so, what do targets need to know?
Corbis/Luca Tettoni
Outbound M&A by Indian companies is arguably more talked about than the more familiar spectacle of Western companies investing in emerging markets. According
Viewpoint
Close encounters
Bidders need to build strong relationships with promoters in India in order to overcome the pitfalls of reluctant sellers and high valuations. Or, to be more precise, an overseas buyer needs to take the time to get to know potential vendors. That is often the prime factor in determining whether a deal will take place or not. Understanding the promoter is the key to the deal, says Amit Khandelwal, National Director and Leader, Transaction Advisory Services, EY India. It is the promoter who will take the calls and make the decisions, and it is vital to establish a rapport. Establishing a relationship can take time. Khandelwal counsels that foreign firms may have to be more patient than would be the case if they were expanding in Europe and North America. Promoters will understandably seek to protect their own interests. A key question theyll be asking is: what do I do and what do my family members do? adds Khandelwal. Often, they will expect a role that will retain a position of operational control, even if the strategic decisions are made elsewhere. According to Arora, the sensitivities of promoters lend themselves to deal structures that begin with a significant minority or 51% stake for foreign investors, with the shareholding growing over time based on an agreed
Caparo CEO Angad Paul tells Capital Insights about the challenges that companies need to overcome in India
When Tata bought Jaguar Land Rover (JLR), everyone said the company was overpaying for a struggling brand. What Tata saw was an underinvested business with an iconic brand that could be marketed. Tata has been proved right, as JLR continues to go from strength to strength. The latest figures show that during the first four months of 2013, JLR sold around 144,000 vehicles a year-on-year increase of 16%.
Promotion parties
For vendors seeking to sell to Indian buyers, it is once again hugely important to understand the Indian promoter. Deals can take time to come to fruition, in part because the promoter, or decision-maker, will be busy with other things, such as other deals, disclosures and so on. Once again, patience is required. A certain amount of straight-talking is also appreciated. Indian promoters like to negotiate on a one-to-one basis. They dont like getting into auction situations, says Arora. They also prefer 100% stakes.
ndia is a sprawling democracy, with a lot of diversity and power at state level. For that reason, you dont necessarily know what is around the corner. In a country of Indias size and complexity, of course there are going to be some challenges. Raising debt finance can be difficult. The banking system can be cliquey and, in my view, it really needs to open up. Interest rates are high because of government efforts to curb inflation, and that is a constraint on growth. We are a US$400m business in India, but I think we would be a much bigger business if interest rates were lower. If youre planning to take money out of India, it is important to fully understand the tax regime. But, then again, that would be true of investing anywhere. When it comes to M&A, it can be very difficult to buy a business in India. While that may not necessarily be the case for large multinational corporations, small to medium-sized enterprises (SMEs) should take time to study potential acquisition targets in detail. As an SME, tread carefully and always take time to look under the hood, so to speak. If youre starting a State investment business from scratch, I would recommend finding boards can be a more good local managers. If useful source of youre acquiring an Indian information than their business, it may be better to do so with a local national equivalent partner. Businesses with a long history of working in India, while also having strong governance practices, can be a good source for partnerships. The business culture is similar to the EMEA region, but it is extremely important to understand that the parameters that drive negotiations are different. Its vital to understand the differences that exist at state level. Companies should go state to state and get a sense of what is happening, and choose a state that makes sense for the business. There is a lot of diversity in regulation and what is available to businesses from one state to another. State investment boards can often be a more useful source of information than their national equivalent. In the final analysis, while there certainly are challenges, these are outweighed by the opportunities, and, if you have a quality product, India is wide open for business.
Angad Paul is Chief Executive Officer of Caparo
Top three completed Indian outbound deals since July 2012

Completion
DEC
Target Houghton International (US) Azeri-ChiragGuneshli Oil Field (2.72% stake), Baku Tblisi Ceyhan Pipeline Co. (2.36% stake) (Azerbaijan) Fairmont Hotels and Resorts Plaza Hotel, New York (75% stake) (US)
Buyer Gulf Oil Corp
Deal value US$1b
Viewpoint
Amtek Auto Group Chairman Arvind Dham reflects on going global
2012
MAR
2013
ONGC Videsh
US$1b
NOV
2012
Sahara India Pariwar
US$575m
roadmap as the parties get to know and trust each other. In addition, foreign companies will also seek to raise their holdings as the importance of the Indian market grows. One example is Unilever, which is seeking to raise its holding in Hindustan Unilever by 22%, to 75%. Commenting on the deal, the AngloDutch companys CEO, Paul Polman, said the move reflected Indias status as a strategic priority for the group as a whole. Indian firms arent necessarily averse to European or US ones taking a larger controlling stake. For instance, Caparos Indian operation started as a JV with a niche in Maruti Suzukis supply chain. The normal structure for such JVs was a three-way ownership split in this case, with Maruti holding a third, the partner holding a third and the rest in public hands. They knew we were more comfortable with ownership, says Paul. It was on their suggestion that we took a 75% controlling stake. If patience is required during the preliminary negotiations, it may also be a pre-requisite for the due diligence process. Small or mid-sized companies in India often have more complex financial structures that would be expected in the West, says Bagla. Many Western acquirers wish to disentangle these complexities in conjunction with an investment or acquisition. Tolerance is needed, along with support from advisors who understand the local market. Indias growing economic importance has created opportunities for corporates that are looking to buy and sell. And, while there are regulatory and cultural hurdles, the current scale of M&A activity indicates that these are far from insurmountable.
he Amtek Auto Group was established in 1987, and we began by supplying components to Suzuki Motors. In 1994, we made the decision to supply other customers. In 1999, we began to look at ways to grow Amtek from a US$100m to a US$1b company, and we did that by acquisition. At the time, there was relatively little M&A activity in India and valuations were quite low. In 2002, we began to look at the possibilities for making acquisitions in the global environment. We identified a US company, and that first deal took four months to negotiate. Since then, we have made 18 global acquisitions. The latest, German company Neumayer Tekfor, which makes steel parts for the automotive industry, was completed in May. As a company, we are now in a position where 45% of our revenue is generated outside India. Searching for talent is important. Traditionally, India has excelled in service industries and banking, but not necessarily manufacturing, where there is something of a talent vacuum. As such, the acquisitions weve made have been in our own sector to date. The companies we are looking for are those where we can add value, and have acquirable technology and Companies we look strong management. We seek to acquire for can add value, 100% of the target have acquirable company. For us, in technology and negotiations, its very important that both sides strong management put their rules on the table, while keeping the negotiating process flexible and open ended. Our acquisition strategy provides us with a number of different integration challenges. When we make an acquisition, we integrate the overseas managers into the Indian operation. We incentivize managers through bonuses not through equity. There is a lot of interchange between the Indian and global management. We have a 90-day integration plan to tie together management at every level. However, we are also respectful of local management culture. Making overseas acquisitions has been a learning process, particularly on pricing. One thing that Indian companies have traditionally looked for are low valuations Amtek has itself acquired stressed and distressed companies however, over the years, weve changed our attitude on valuations.
Arvind Dham is Chairman of the Amtek Auto Group
Sachin Date
The PE perspective
partners
Paul Heartfield
Positive
ost of the private equity (PE) industrys capital providers, its limited partners (LPs), remain positive about the industry. This is reflected in the recovery in the amount of capital being committed to funds. According to EYs Global private equity watch 2013 report, PE funds globally increased in size by 10% in 2012 year on year, to US$256b. This is set to continue. A Preqin survey found 86% of LPs planned to commit either the same amount of capital or more to PE in 2013 than they did in 2012. An example of this is The Los Angeles County Employees Retirement Association, which said it would commit up to US$1.8b to PE funds in 2013, a 140% increase on 2012s US$737m. This is encouraging, as it shows that LPs feel the industry can deliver good returns if other asset classes can not. According to Cambridge Associates data, over the 10-year period to the end of 2012, US PE funds provided annual net returns of 14.06% to LPs, with the Dow Jones Small Cap Index coming in second place at 10.98%. And LPs expect outperformance to continue. As many as 80% believe that PE will deliver annual net returns of 11% or more over the next three to five years, according to the Coller Capital Global private equity
Private equity fund investors remain supportive of the asset class, but buyout houses need to work hard to attract their capital
barometer, Winter 2012-2013. By contrast, the latest Barclays Equity gilt study expects equities to hover at 3% to 4% in that period. However, LPs are becoming more discerning in choosing their funds, leading to regional variations in fund-raising. While European LPs remain committed to funding European managers, sentiment about the region from US investors and some sovereign wealth funds has cooled. EYs Global private equity watch 2013 report shows that, as a percentage of global numbers, unused capital among general partners outside the US and European markets has increased as LPs have looked further afield for outperformance. In 2003, the rest of the world had just 3% of global PE capital unused. By 2012, this had risen to 15%. LPs are concentrating their capital on PE funds that can demonstrate past performance, a strong strategic direction, have successfully implemented succession planning, and that provide proof of genuine value creation in the companies they back. Increasingly, they are also seeking co-investment rights to help boost overall PE returns. A Preqin study from April 2012 found that 43% of LPs were seeking co-investment rights when committing to funds, and a further 11% were considering this.
Environmental, social and governance (ESG) factors are also rising up LPs agendas. Some funds have established procedures for managing these issues, devising processes to ensure that sound environmental practice is accretive to portfolio companies bottom line. The Carlyle Groups latest annual report shows that environmental initiatives have saved, or are planning to save, portfolio companies a total of US$7m. ESG factors are important not only to help LPs meet their socially responsible investing aims, but also in selling companies to corporates, which are focusing on this particular area in acquisition due diligence. Firms must pay as much attention to selling as they do to buying to attract capital. This will help them to continue delivering value to their current investors and demonstrate to LPs that they have the skills to exit, even in difficult markets. LPs are highly supportive of PE and continue to commit significant capital to the asset class. However, it is becoming clear that there will be winners and losers. And, in the future, only the best funds will be the recipients of this capital.
Sachin Date is the Private Equity Leader for EMEIA at EY. For further insight, please email sachin@capitalinsights.info
Getty Images/Westend61
Key insights
Companies that are being left behind in emerging markets (EMs) need a more targeted M&A approach. Entry into EMs can help achieve growth and also defend a companys domestic position. Screen your location precisely. Just because countries such as India and China are on the rise, it does not mean that they are right for your business. Valuations in EMs are more complex than in developed markets. Do the due diligence, establish the weighted cost of capital and quantify the risks.
Taking aim
G
rowth figures in emerging economies, from Argentina to Zambia, are attracting corporates from developed economies at a rapid pace. M&A in emerging markets (EMs) has been on the rise since 2004, as corporates in the West seek to access this new growth. According to data compiled by Mergermarket, EM M&A deal value came in below US$150b in 2004, accounting for less than 10% of global M&A value. However, by the end of 2012, EM deal value totaled US$511.9b, which was more than a fifth of global M&A value. And, in EYs latest Capital Confidence Barometer, three of the BRIC countries (China, India and Brazil) made up the top three investment destinations for corporates. The statistics seem clear. However, the realities of entering an EM are far more opaque. While numerous corporates have strong EM strategies and profiles, many
For corporates with limited scope at home, rapid-growth markets can boost growth abroad. But competition is fierce, and the need to target effectively is paramount
still hesitate to spend more in developing economies or enter a new market at all. Even huge players such as Apple have been tentative about emerging economies. At present, all of its stores are in advanced economies, with the exception of China. Indeed, only 23% of those surveyed in Clifford Chances 2012 Cross-border M&A: Perspectives on a changing world report expected to raise M&A spending in highgrowth markets over the next two years. In EMs, this means being more targeted. Working through a more rational process would help companies focus on what they want to pursue, says Harry Nicholson, Transaction Strategy Partner at EY UK.
Investing
Corporates need to ask themselves why they are entering the market, what the optimum location is, and how they can get value for money at a time when valuations in many EMs are rising rapidly.
Growing pains
In Europe, this imperative to explore new markets is strengthened by anemic domestic growth. Recent figures from Eurostat show that Eurozone GDP has fallen for six consecutive quarters up to the first quarter of 2013. Mature markets are going through an unexciting period of low growth, and they are expected to remain like that for the foreseeable future, says Nicholson. There is a strategic imperative to invest in EMs because they are far more attractive growth prospects. Also, just in terms of size, they have been growing so fast for so many years now that they are decent-sized markets in their own right. French company Danone has acted on this. In May, it formulated a joint venture and invested a 4% stake worth US$417m in Chinese dairy producer Mengniu. This came after Euromonitor International estimated that Danones sales in Chinas yogurt market will grow 57% to US$11.7b by 2015.
says. If you are not pushing into your competitors markets, you can be sure that they are pushing into yours. Companies in EMs are cash-rich and eager to move their businesses into developed economies and win market share. In the strategy of the Companies that stand still are not only missing luxury goods sector, out on growth in EMs, emerging markets are they are also leaving the now crucial door open for corporates Anna Faelten, Deputy Director, M&A Research Centre based in emerging economies to move in on their local markets. By the end of May this year, rapid-growth market corporates had ploughed nearly US$35.1b into 111 deals in developed economies. Asia was particularly busy, with Mainland China and Hong Kong (44 deals), South Korea (11) and India (9) the most acquisitive in developed markets. The biggest deal came in May, when China-based foods business Shuanghui International announced a deal with US-based Smithfield Foods Inc., worth US$7.1b.
Industry spreads
Home defense
Growth, however, is not the only reason why companies in the West have made investing and acquiring in EMs such a priority. Adrian Gibb, Transaction Strategy Partner at EY UK, believes that an emerging economy M&A strategy is also vital for defending a companys home turf. If you take a long-term strategic view, EM opportunities are not just important offensively, but also defensively, he
In some sectors, investment opportunities have presented themselves only as EMs have diversified. And corporates need to be set up to take advantage. Companies are not investing in EMs in the same way they did. Over the last 10 to 15 years, investment has evolved from targeting infrastructure, resources and industrials into a much broader range of sectors, says Anna Faelten, Deputy Director of Cass Business Schools M&A Research Centre. Indeed, Mergermarkets Emerging Markets M&A survey shows that corporates see the top three sectors in EMs as
On the web
For more information on entering rapid-growth markets, read EYs latest Rapid-growth markets forecast at www.capitalinsights.info/ emergingmarkets
energy (50%), consumer (47%) and financial services (27%). In the strategy of the luxury goods sector, for example, EMs are crucial: the need for investment is a matter of urgency. Markets for consumer goods, health care and, to some extent, technology have opened up too, adds Faelten. This importance is highlighted in the case of Burberry. The UK fashion label saw sales rise 11% to US$772m in Q1 2013, thanks in part to strong demand from China.
Looking long term
23%
The percentage of 2012s global M&A value that came from deals in emerging economies, according to Mergermarket
Rob Conn, Founder of Innova Capital, a private equity firm operating in Central and Eastern Europe, says an EM strategy is also essential for securing long-term sustainability in a globalizing world. In 2050, people will see this as a time when large EMs re-integrated into the world economy, he says. EMs can no longer be ignored. Even if youre investing in a local company with local growth prospects, you must have an understanding of how developments in EMs will impact upon that business. If you invest without that perspective, you will make mistakes. This integration is underlined by the growing middle class in EMs. According to EYs 2011 Innovating for the next three billion report, the expected three billion rise in people considered middle class over the next 20 years will come almost exclusively from the emerging world. In contrast, according to EYs Hitting the sweet spot report from 2013, the proportion of middle class people globally who will be from North America and Europe is expected to contract from 18% and 36% in 2009 to just 7% and 14% respectively in 2030.
While Mergermarket figures show that the BRICs remain the most popular EMs for M&A, raw deal data alone isnt enough to inform these investment decisions. According to EYs Rapid-Growth Markets Forecast 2013, companies committed to rapid-growth markets do not have to succeed in a BRIC economy before rolling out their products or services elsewhere. Indeed, the aforementioned Emerging Markets M&A survey shows that smaller markets, such as Turkey, Indonesia and Chile, are where investors see the best opportunities. Forty percent of respondents view these three countries as the joint-top non-BRIC EM destinations most likely to see M&A increase this year. This is particularly salient with Turkey, which saw deal values rise 33% in 2012 year on year, with 68% coming from foreign investors. The appetite for investment in Turkey has continued into 2013. For example, French company Danone signed a partnership agreement with Turkish bottled water company Sirma in May. However, it remains to be seen whether the current protests in Istanbul change the pace of investment.
Target screening
Companies should understand differences between markets and then make an informed choice about where to invest. A company needs to know what type of consumer its looking for, where it can find them, which markets are most similar to their home market and what it needs to do to change or adapt, says Faelten. It has to have a clear idea of the threats and opportunities in different markets and find suitable acquisition targets accordingly. Nicholson believes that this screening has two stages: You want to work through some macro factors, looking at things like the size of population, demographic profile, economic growth and infrastructure, he says. That is the first part of your screening. But the interesting factors
Top three completed DM into EM deals in 2013*
Completion
FEB
Target Amil Participacoes (Brazil) 90% stake EnerjiSA Power Generation Company (Turkey) 50% stake United Spirits Limited (India) 53.4% stake
Buyer UnitedHealth Group (US)
Deal value (US$m) US$5b
2013
APR
Location, location, location
Adopting a systematic approach to EMs not only helps conservative companies in developed markets to become more comfortable with the new risks involved in emerging M&A it also allows them to select the most appropriate countries in which to invest.
2013
E.ON (Germany)
US$3.9b
APR
2013
Diageo (UK)
US$3.4b
* To July, Source: Mergermarket
are the customer demand profile and the competition for supply, he says. Companies need to ask themselves the following questions: is there demand for what you are offering? If there is supply from local competitors, do you have the wherewithal to compete, either through more advanced technology, proven brands or scale advantages that you can bring into that marketplace? That should give you a sense of whether the location is right for you. This can be seen with American quick service restaurant McDonalds. In February, it announced plans to expand in Russia by adding 150 new restaurants over the next three years. This move came at a time when the fast-food industrys turnover in Russia reached US$6.4b in 2012, providing 45% of the countrys food catering market growth. Companies that have succeeded in EMs are ones that have paid close attention to these micro factors. UK pharmaceutical giant GlaxoSmithKline, for example, studied its Indian consumers diets. When it found that they did not consume enough iron, it changed the formulation of its Horlicks product accordingly.
developed economies. But corporates should be aware of some nuances.
Biggest impact on emerging markets M&A over the next year

Slowing growth in BRICs
47%
2 3
Health of Do the diligence. It is all developing about good due diligence economies practice, which you would do Health of advanced on any company, whether it economies is in a mature market or an emerging one, says Gibb. Eurozone crisis Think through what the assumptions are on revenue 0% growth, profitability growth and cash flow, and make sure that you rigorously validate those assumptions against the market and operational benchmarks.
33%
13%
7% 10% 20% 30% 40% 50%
Answer by percentage of respondents
Value for money
Test your weight. It then comes down to establishing your weighted cost of capital, Gibb adds. This refers to the blended rate that a company is expected to pay to all of its investors in order to finance its assets, often adjusted to reflect potential additional risk in EMs. Companies can be over-cautious on that and they use a high cost of capital, which means a value becomes too low and they cant compete. Sometimes, they become too aggressive and have a very low cost of capital, and that puts the valuation high. You need to make sure you think through the risks associated with the deal and come to a balanced view of what the cost of capital should be. Complexity. In an EM context, there are numerous factors that need to be taken into account when deciding whether to invest, says Piers Prichard-Jones, a Corporate Partner at law firm Freshfields. There are a range of state, transaction and operational risks that need to be assessed, and which are inevitably more complex than on a non-EM deal. Despite the risks involved in moving into these territories, companies in Europe cannot afford to ignore the huge opportunities that EMs offer. Breaking into these places is risky. But the risk is even greater for companies that do not take up the challenge and are left behind. Whether companies like it or not, having an EM strategy is imperative, says Faelten. Doing M&A deals in EMs is, for many industries, the only way to grow. It is where the growth in consumers income is, and companies cannot afford to miss the boat. For further insight, please email editor@capitalinsights.info
Valuing acquisition targets can often be more complex in developing economies. High growth rates mean that vendors in EMs are demanding top prices. In India, for example, Thomson Reuters data shows that EBITDA multiples are running at 14.7x, significantly higher than the global average of 11.8x. Higher prices are putting off acquirers. EYs latest Capital Confidence Barometer, published in April, polled 1,500 senior executives in 41 countries. A quarter of respondents would not do a deal because of the gap between the price expectations of vendor and buyer. This has clear implications for businesses looking to expand and EM corporates aiming to sell. Establishing an accurate valuation in EMs involves similar steps to those in
The big issuance

Bond markets are booming. But is their growth sustainable and healthy, or will the end of quantitative easing change the funding cycle once more?
Key insights
Companies should explore bonds as an alternative or, in addition, to traditional bank lending. Products such as hybrid bonds can give corporates a greater level of flexibility. An advantage of bonds over loans is that the terms and conditions tend to be less onerous. Ensure that a bond is the right vehicle for you, prepare your team, talk to investors and watch the costs.
onds are back. Last year saw the highest recorded amount of corporate bond issuance. US$5.4t worth of bonds were issued around the world, representing a 13.1% increase on 2011, according to Thomson Reuters. Already, 2013 has seen the biggest ever corporate bond issue (Apple raising US$17b in April) and the biggest ever emerging market issue (Petrobras of Brazil raising US$11b in May). By contrast, corporates have seen bank funding recede. Lending to emerging markets fell by 20% in 2012, according to Cordiant, the emerging market fund managers; while in the UK, the Bank of England revealed in April that business lending fell by 5b (US$7.7b) in the three
months to February. The Basel II and III accords have forced banks to hold more capital on their balance sheets. Last year was a crossover there was more activity in the bond market than in the syndicated loan market. Thats encouraging, but its slow, says Luke Reeve, Partner in EY UKs Capital and Debt Advisory Group. The ratio of FTSE 100 bank-to-bond borrowing is still in the high 70s or low 80s, and that needs to continue moving to a more US-like arrangement of 60:40 or even 50:50. Corporate lending is now expensive for banks a key factor behind its decline. Given that our cost of capital has increased and the way that we have to capitalize ourselves since the crisis has become more conservative, it has become much more
Raising
Dorling Kindersley
expensive to make loans to corporates, says Barry Donlon, EMEA Head of Corporate and Capital Syndicate at UBS. Banks have had to shrink their balance sheets considerably to return to more normalized profitability by not distributing every asset that they originate. What you have seen is a normalization, says Reeve. There is a shift from an exceptional situation of over-bank liquidity to a more normal alignment of debt capital. Increasingly, companies are taking only their short-term capital requirements from banks and seeking to place the more core elements of indebtedness on their balance sheets in the capital markets. Other issues are driving the revival. These issuances are, in part, attributable to the current extremely low levels of interest rates, and to corporates concerns they will not last indefinitely, says Ehud Ronn, Professor of Finance at the University of Texas at Austin. At the same time, investors have an appetite for yield, and so corporates pay reasonable spreads compared with very low Treasury yields.
In search of yield
With volatility defining major asset classes since the financial crisis, investors have been looking for yield at reduced risk. This played to the strengths of the corporate bond market. Its clear that volatility is back. Certainly in government bond markets, but also in equity and credit markets, says Brendon Moran, Global Co-Head of Corporate Debt Capital Markets at Socit Gnrale. As the market comes to terms with the removal of central bank liquidity, it is a timely reminder that markets do not always go up and safer haven investments, such as corporate bonds, are likely to come back in vogue they may offer more modest returns, but are very predictable and ultimately offer capital preservation. However, appetite for more yield and, by definition, risk has driven greater growth in high-yield bonds. There is a tremendous search for yield from both institutional and retail investors, says Chris Lowe, Partner in EYs UK Capital and Debt Advisory Group. To find more yield, you either go out to maturity or, more commonly now, you move down the credit quality spectrum. So now you see absolutely rampant high-yield bond market issuance and eminently high-yield credits issuing in the retail bond market. For instance, in the week ending 1 May 2013, investors ploughed US$2.2b into high-yield bond funds. This was the largest amount in almost seven months, according to tracking firm EPFR Global. The value of the incremental yield from investing in something a little bit riskier has increased, says Alix Stewart, Head of UK Corporate Bonds at Schroders. So therefore, demand is there for companies that would have found it much more difficult to come to public markets in the past.
This has changed the dynamic between bank and bond borrowing, with bonds now being perceived as a more reliable option than bank finance. When we speak to high-yield companies, they tell us about the bad experiences they had with their banks in 2009, says Chetan Modi, EMEA Head of Leveraged Finance in the corporate finance group at Moodys Investor Services. Supposedly, the model then was that the high-yield market was fickle and the Demand is there for companies bank market that would have found it much would support more difficult to come to public you but that wasnt markets in the past proven to be Alix Stewart, Head of UK Corporate Bonds, Schroders the case. A lot of companies realized that they needed to diversify their debt funding structure. On top of that, a lot of companies have had to question whether their banks will even be around or willing to provide funding.
Options for SMEs
These changes have big consequences, particularly for small and medium-sized enterprises (SMEs). Governments have introduced schemes to encourage banks to lend to companies, but these loans dont appear to be entering the SME space. In the UK, for example, the Funding for Lending scheme, which allows banks access to cheap capital if they hit certain lending targets, is increasing the concentration of lending with the largest customers. For the larger investment grade corporates,it is unlikely thatthey will change their bank-tobond mixsignificantly, because bank finance is still more efficient when undrawn, says Donlon. But if you take a small, unrated name in the UK that might have 100% bank financing, you are going to see large numbers of those corporates beginning to diversify their funding sources and issue directly into the capital markets. This is already happening in Germany where, in 2010, the Stuttgart Brse set up
5b
(US$7.7b) fall in bank business lending in the UK in the three months to February 2013, according to the Bank of England
a bond platform for SMEs, called Bondm, offering issues between 25m (US$33m) and 150m (US$196m). To date, 23 companies have issued bonds on the platform. And it is proving popular with investors too. For example, in November 2012, developer IPSAKs seven-year bond was oversubscribed in less than two hours. The popularity of the Bondm has inspired similar SME bond platforms in Frankfurt, Hamburg, Dsseldorf and Munich. Germany, Switzerland and the US have long had active retail bond markets, where companies issue bonds directly to members of the public. Italy and other European countries, particularly Germany, have seen vast expansion of SME finance into the bond market, says Lowe. We are following suit with the Order Book of Retail Bonds (ORB) market on the London Stock Exchange (LSE), where we are seeing private placements go into sub-investment grade in what was, precrisis, an investment grade asset class. This is a viable option for companies with recognizable brand names and understandable business models. Among the companies that have issued bonds on the LSEs ORB in the past 12 months are water company Severn Trent, Tesco Personal
Finance, Lloyds TSB Bank, energy suppliers National Grid, Royal Bank of Scotland and HSBC. Elsewhere in Europe, retail bond markets could prove an essential source of finance for companies in the Eurozones more troubled economies. In the peripheral regions, there are perfectly good companies who will find it difficult to get funding, so accessing a domestic investor base would be beneficial, says Donlon.
The cost of flexibility
Global annual bond issuances and proceeds 2008-2013*
2008
US$3.9t 9,644 US$5.3t 11,236 US$5.0t 14,498 US$4.8t 11,819 US$5.4t 13,022 US$2.8t 6,847 Number of issues * Up to June 2013 Source: Thomson Reuters
2009
2010
2011
Bond markets are also seeing new products, such as hybrid bonds. After a number of false dawns, the market is emerging for a new class of structured bond that is subordinated to normal senior unsecured finance, and has both equity and debt characteristics. A key advantage is that hybrid bonds can be issued without affecting a companys credit rating, because the bond is effectively open-ended and can be treated as permanent capital. Companies issuing hybrid bonds in 2013 include environmental services group Veolia, energy companies EDF and National Grid, and steel and mining giant ArcelorMittal. The terms and conditions tend to be less onerous for bonds compared with loans. Bond markets used to ask for a lot more in terms of covenants, A lot of companies realized and the that they needed to diversify high-yield market their debt funding structure obviously Alix Stewart, Head of UK Corporate Bonds, Schroders does, says Stewart. But at times like this, when people are desperate to get money invested, the market has been a bit lax on asking for these types of protections. From a company point of view, that is attractive because you are less restricted. For smaller issuers, however, bonds are not necessarily a cheap option. For a start, smaller corporates are likely to be unrated, high-yield issuers, so will have to pay a coupon considerably higher than the prevalent rate of interest. The second expense surrounds the fixed costs in terms of fees that go into an issue. These can escalate in retail bond issues, where there are arrangers and private client brokers between the borrower and the eventual holder of their debt.
2012
The known unknowns
2013
Proceeds
The future for the bond market does hold uncertainties. There are concerns that a great rotation will see a shift of funds out of bonds and into equities. However, few investors and bankers see signs of this happening in the near future,
13%
with most arguing that the market is in good health. As long as were selling reasonable companies in the right sectors at the right prices, this should be a market that develops slowly as it is developing now, says Donlon. Were seeing a slow, gradual rebalancing of the market in a healthy way. Assets under management in highyield bond funds continue to grow across Europe, and higher-yielding bond funds have continued to perform well. I dont see any particular trading out of those bond funds into equity funds, says Lowe. To the extent that the relative value game begins to shift down, there is a threat but I dont think thats a big issue. What could be an issue is that we do not know what the unwinding of quantitative easing (QE) looks like. My expectation is that it will be a very slow, gradual process that will most likely create a very low and long-term drag on economic performance and global markets. You cannot correct that scale of activity in short order. Both bond supply and demand have been driven by record-low interest rates and QE. When interest rates rise and QE ends, the bond market could be in for a shock. There has been a positive, self-reinforcing cycle whereby certain investors, responding to attractive returns, want to put money into corporate bonds, making it easy for companies to issue and refinance, which in turn reduces default risk and results in further positive returns for investors, says Professor Lucie Tepla at INSEAD. But it could take just a few months of negative returns on the asset class for bond mutual fund or exchange-traded fund investors to start pulling money out, and it could unravel in the opposite direction. In 2011, European bond markets wobbled as the global financial community questioned whether European policy-makers could address sovereign credit quality issues. This started with a focus on banks, but followed on to companies with heavy debt levels. Investors were concerned whether they would be able to do simple things like renew their bank facilities. The European bond market was the mirror for confidence of the global financial system in European politics and its ability to address the issues, says Reeve. The boom in bonds is as sustainable as quantitative easing. Looking at future bond issuance, two clouds loom on the horizon: continued economic uncertainty and the eventual winding down of QE. Corporate earnings have been robust and default rates on bonds remain low, while yield-hungry investors create demand. QE is the great uncertainty, but the consequences of a disorderly end go far beyond the bond market. For corporates, bonds will remain a viable and effective financing tool.
increase in the value of bonds issued around the world last year, which totaled US$5.4t, according to Thomson Reuters
The bond ladder
Five steps to take before issuing a bond

Validate the offering
The corporate treasurer needs to start at the point of validation. Establish the corporate strategy and identify the capital products that suit it. A bond may or may not be the most suitable form of financing and, in some instances, a rush to take advantage of open markets may lead to finance that is not fit for purpose. For example, businesses in cyclical sectors such as housebuilding or retail may not suit long-term debt finance.
Prepare your team
Need the money
Talk to investors
Such is investor demand for new credits, particularly those further along the risk spectrum, that it is easy for companies
How will you use the money raised? A big question is whether the capital can be invested for a decent return. Companies should ask if there is a market for their expanded output.
Getty Images/David Rubinger
Does your company have the skills and capacity to handle a bond issue and the associated reporting requirements? Issuing a bond is timeconsuming. The issue itself typically takes place on an accelerated 12-week timetable, and then there is the time it takes to report to investors and ratings agencies.
4 5
to get meetings with potential investors. Unlike in the past, it is not the case that holding meetings commits you to a transaction.
Watch the costs
Issuing bonds is not a cheap process, particularly for smaller companies. Typically, fees will account for 1.5%2% of the capital raised. For many companies, particularly large borrowers who enjoy privileged relationships with their banks, bank debt may be cheaper. Many bonds trade down in the immediate aftermath of issuance.
Taking care of business

The asset management sector has emerged relatively unscathed from the financial crisis. But to reach its full potential, the industry must boost innovation and work within tough new regulations
Key insights
Asset management is one sector of the financial services industry that has come through the crisis with its reputation still relatively sound. Investment in innovative products and services is vital to the continued health of the industry. Innovation must concentrate on customer needs. The industry needs to invest in products that can meet the needs of todays and tomorrows retirees. The asset management industry must harness information technology to meet its customers changing needs. Increased regulation in the sector means asset managers must deal a lot more closely at a corporate level with the relevant regulators. The industry must look at macroeconomic and microeconomic events, and be nimble in addressing short- and long-term changes in the economy.
Getty Images/Imagno
Optimizing Investing
On the web
For more on asset management, read EYs latest Innovation for asset management survey at www.capitalinsights.info/am
ith the quest for high-yield products continuing and with greater need for retirement products in developed countries as their populations grow older, the asset management (AM) industrys role in the economy is becoming ever more vital. Indeed, a November report by TheCityUK, a financial services industry body, said that the value of conventional assets (excluding assets such as hedge funds and private equity) was expected to reach US$85.2t by the end of 2012, up from the US$84.1t calculated for the first nine months of that year. Furthermore, Eurozone asset manager assets under management (AUM) increased by 11.6% in 2012, according to EYs latest Outlook for financial services report, and is expected to increase again by 8.3% this year. Much of this rise in AUM comes from market performance. But new cash inflows into multi-asset funds which grew by 30% in 2012 and German, French and Italian bond funds have been strong. Globally, the asset management industry is in good shape, says Roy Stockell, Leader of EYs Asia Pacific and EMEIA Asset Management practice. The fact that equity markets are coming back strongly is helping to push investors out of cash-based products and into equities and fixed income.
Lofts, UK Head of Asset Management at EY. Over 50% of money invested in Europe 2012 went into newly launched funds and of this, over half went into newly launched foreign investment funds. In addition, more than 50% of emerging market debt funds in Europe were launched in the last three years, which demonstrates the speed with which the industry is reacting to global economic conditions and opportunities. Emerging market debt is not the only new asset class into which the industry is seeking to move. A number of new areas are emerging, such as farmland funds, new overthe-counter (OTC) instruments such as variance swaps, and distressed assets. Overall, the industry is offering investors an increasingly diversified range of products and regions.
The customer is always right
Investing in innovation
The industry appears to be emerging strongly from the financial crisis. Campbell Fleming, CEO of Threadneedle Investments, agrees: AM is one of the few areas of financial services that escaped with most of its reputation, products and structures intact, he says. But the industry faces challenges. In particular, increased regulation and a growing demand for more diverse products is adding to the complexity of managing the worlds wealth. One of the key ways in which asset managers are attempting to meet investors changing needs is through product and service innovation investors are becoming more demanding. In addition, the persistently low interest rates we have seen over recent years, and the recognition that investor behavior is highly correlated to financial shocks, have meant that investors are searching for new products and asset classes that will generate higher returns and reduce volatility. One beneficiary of the quest for new investments has been the European high-yield bond market, which has had a record year to date. Dealogic figures suggest that issuance to the start of May 2013 was US$57.1b twice the amount for the same period in 2012. Companies have taken advantage of investor appetite for higher risk in the search for yield. Fund managers have to innovate constantly and create new products to keep up with investor demand, says Gillian
Yet innovation in the industry is no longer just about creating new products. The industry has woken up to a need for greater consumer focus over the last few years, says Ed Dymott, Head of Business Development at Fidelity, the global financial services group. Asset managers are increasingly looking at how to tailor offerings to provide clients with the best possible solutions for their needs. So, while a few years ago asset managers might have provided a single part of an investors portfolio, now they are looking at providing holistic solutions with an integrated service model in support. It is no longer product led. Leading asset managers are instead now orientating around customer and solutions. EYs Innovation for asset management survey 2012 backs this up. It found that devising creative solutions to investor needs was the highest-ranking definition of innovation provided by asset managers. Technological development underpins this trend. It allows asset managers to develop ways of helping investors to understand the products they are buying. Technology was joint second as the most important driver of innovation in the EY innovation study. There is a lot of work going into ensuring that clients understand what they are buying into and paying for, explains Fleming. The digitization of communications and documentation is helping this, as is the internet and the creation of apps. They are being designed to help people make the right choices. Successful innovation requires dedicated capital for investment, as well as embedding a product development culture throughout the organization. We spend our own capital to fund new pilot products, says Dymott. Many of these may not reach the market, but this approach lets us drive a culture of innovation. We do have product development and strategy roles, but we encourage innovation throughout our organization. Ultimately, a lot of good ideas actually come from the customers.
Asset management in numbers
of respondents see adopting regulation as their main challenge in 2013

Source: Linedata
16%
Source: EY
of asset managers who predict continued volatility to be a theme through 2013

Source: Linedata
Source: Linedata
Source: Bank of America Merrill Lynch
of asset allocators that are overweight in equities, compared with a net 41% in May
Nowhere is innovation more necessary in todays market than in the growing decumulation space the conversion of pension assets built up during a persons working life into an income-providing product. We are seeing a wave of retirees from the baby-boomer generation, says Elizabeth Corley, CEO of Allianz Global Investors. They are switching their savings needs from the accumulation stage to decumulation, and they need stable income in retirement. One of the issues here is that people in the developed world, in particular, need to save more over their lifetimes to generate sufficient income to support retirement. Figures from Aviva suggest that, across Europe, there is a 1.9t (US$2.5t) annual pensions gap (the difference between the amount needed for retirement and the amount being saved). For those retiring today, this issue has been compounded by a difficult economic backdrop. One of the Increased regulation key challenges, says Corley, is the will further polarize the low returns being winners and losers in the achieved in an era asset management sector of financial repression. Ed Dymott, Head of Business Development, Fidelity The low interest rate environment means that the incomes they can buy often provide them with significantly less than they would need. The challenge for the industry is to devise products or solutions that can meet the needs of todays retirees and tomorrows. It is far from an easy task, but it is one that would unlock significant growth for the AM space. People need an income, capital protection and yield without significant risk and these are forces that all push and pull against each other, says Lofts. At the same time, the products have to provide asset managers with a reasonable return. Its here that we will need to see true innovation from the industry. Asset managers really need to start looking at how they can benefit from growth in this part of the market. An issue for asset managers is handling risk in decumulation products. Given their long-term nature and the need for guaranteed income, they must find ways of meeting the markets needs without taking the risk onto their balance sheets. A way of doing this could be developing joint ventures and partnerships with banks and insurance companies. The issue here is how asset managers can package products that would be attractive to banks and insurance companies, which would then wrap the product for the end user, says Lofts. But this can be challenging, says Massimo Tosato, Executive Vice Chairman and Global Head of Distribution
Post-pension blues
at Schroders. The AM firm has spent three years researching a new product with a 20-year horizon, featuring growth in the early years followed by decumulation later on. This is not offered by insurers, explains Tosato. Thats because it is very hard to find distribution for it. Insurers dont want to lock this in their balance sheet for 20 years.
Changing channels
As a result of this and other trends, there are signs that the distribution channels for many asset managers are changing. One of the most important factors is the shifting of responsibility for welfare provisions, such as pensions and health care, away from the state and toward the individual. A dramatic example of this is the move away from defined benefit to defined contribution pension schemes. This shifts risk to individuals, and people must now self-direct investment decisions more than ever before. Defined benefit pension schemes, also known as final salary, continue to disappear from workplaces. In the US, between 1975 and 2007, the number of defined benefit scheme participants fell by a third to 19 million, according to the US Department of Labor figures, while the number of people in defined contribution plans increased sixfold to 67m. The picture is similar across Europe. Regulation is also affecting the distribution of products and services. The Retail Distribution Review (RDR) in the UK, for example, is leading to a greater separation of advice and investment management. There are similar, Europewide proposals in the latest Markets in Financial US$ Instruments Directive (MiFID) II. The advisors, banks and insurers that are the traditional distributors of asset managers products estimated value of will now need to charge for conventional AUM any advice they give. And globally at the end that may result in end-users of 2012 bypassing their services. Therefore, asset Source: TheCityUK managers need to work
85.2t
lc shutterstock
48%
expected growth in assets under management in 2013
8%
34%
48%
of asset managers who say the current nancial climate means they need to differentiate from competition, but will continue to invest
hard on improving their communication with customers. This means asset managers will focus more on addressing business-to-consumer as well as business-to-business audiences, says Hugh Young, Managing Director, Aberdeen Asset Management Asia. And technology will be key to this. The internet as a source of information is transforming the way investors relate to fund information, their advisors and self-selection criteria, says Young. Technologies will mean wraps and platforms become even more accessible. Institutional channels, in many countries guided by consulting actuaries, will also have to become more retail as the shift away from defined benefit schemes continues.
Up with the AM
Yet, possibly the biggest factor in all the activities that asset managers undertake is the tide of increasing regulation they face. From RDR in the UK to MiFID II across Europe, asset managers are having to cope with a raft of new standards. This affects all areas of business and is ultimately leading to increased costs. While consolidation has always been a feature of the market, some believe that the pace is quickening. Increased regulation will further polarize the winners and losers, adds Dymott. The winners will be those that are broad and big, and those that are small, niche and nimble. The challenge is for those firms who are caught in the middle. The cost of regulatory capital will make the space in-between a far from easy place to be. Ultimately, though, those best placed to cope with increasing regulation will be the ones that focus on providing exceptional customer outcomes. Indeed, increased regulation could help the industry as long as it is well drafted and achieves the right outcomes. No sensible manager should object to the principles behind the regulators aims, says Fleming. Everyone wants a level playing field, transparency around pricing, and an industry of professional players that are well capitalized and operating to the highest standards. The problems creep in when there is a politicization of the regulation and differing interpretations of the rules by different states. Thus far, the industry has been a little slow to react to the new environment. Some also suggest that the response from the industry has not been as productive as it might have been. Whats needed is engagement with policy-makers in a thoughtful way, says Corley. Managers need to provide the wider world with insight, so that people understand the importance of the industry and how customers behave. Yet, there are signs that asset managers are changing their approach. One of the key differences over the last five years has been a shift in the way that asset managers have engaged with regulators and legislators, says Corley.
Play by the rules
1 2 3
What other sectors can learn from asset managers

Create innovative products that customers want. It might seem simple enough, but providers need to create solutions that help customers achieve their ambitions and needs. Listen to customers. Successful product development requires spending time with customers to get to grips with what they want and need, says Ed Dymott from Fidelity. Moving away from product-led to customer-led can really drive innovation.
4 5
Engage with regulators early. If your industry is facing increased regulation, ensure that communication is both timely and suitably senior. Engagement rather than lobbying is what gets results, says Roy Stockell, Leader of EYs Asia Pacific and EMEIA Asset Management practice. And that engagement needs to come from the C-suite. Watch micro and macro events closely. Events affect asset management profoundly, but other industries are affected by these, too. For example, the rise of younger and more affluent populations in emerging markets is leading to enormous opportunity for businesses in all sectors of the economy. Being nimble enough to react to short- and long-term changes in the economy is essential in todays business environment.
Choose your partners wisely. For certain products, JVs may work well, but think carefully before signing. We have tended to steer clear of JVs and prefer to keep full ownership, says Hugh Young, of Aberdeen Asset Management Asia. We feel that it is important to have purity and control over the investment processes. We then have to win over distributors by the quality of our offering, service and support.
Getty Images/Jeffrey Coolidge
Where previously, this had been left to the public affairs function, now the CEO or CIO of an asset manager will be involved. Overall, AM is in healthy shape. The future is bright for the industry, says Stockell. The world needs strong and transparent asset managers. Both the regulators and asset managers need to recognize this and act by educating clients and demonstrating the value they bring. Asset managers need to get back to what they do best they exist to generate wealth and an income stream for their clients in old age.
Prof. Scott Moeller

Moellers corner
Deal or
Paul Heartfield
Professor Scott Moeller is Director of the M&A Research Centre at Cass Business School
ccording to an old Chinese proverb, of all the stratagems, knowing when to quit is the best. Perseverance can be rewarding, but walking away from a deal instead of chasing a lost cause can help corporates save themselves a world of trouble. The first signal that a deal is heading in the wrong direction can come in the due diligence phase. If the process shows issues that went unnoticed on initial inspection, this could be a clear red flag. However, the difficulty of due diligence was outlined in the RR Donnelley and Mergermarket 2013 M&A Outlook survey, in which 46% of respondents stated that it was the most complex stage in the M&A process. In the past three years, there have been numerous examples of due diligence failures costing corporations millions of dollars. At the end of 2011, a report from the UK Financial Services Authority stated that limited due diligence was one of the reasons for the failure of a deal between Royal Bank of Scotland and Dutch bank ABN Amro. Changes in the deal terms can also cause alarm bells to ring. For instance, this January, Malaysias Petroliam Nasional Berhad announced a near-US$3b takeover offer for the remaining shares that it did not already own in compatriot
An acquisition is often a risky proposition. But spotting the warning signs when a deal is going wrong, and knowing how to react, can help corporates avoid expensive mistakes
shipping business MISC Berhad. Minority shareholders rejected the deal and, after revised terms were issued, the deal eventually expired in April after it didnt get enough acceptances. Leaked information can also be a sign that not all is right. Intralinkss M&A Confidential report, conducted by Cass Business School and Mergermarket and published in April, shows that risks can increase when deal details are leaked. Leaked deals take, on average, 124 days to complete, whereas non-leaked deals take 116 days. According to a partner of a German law firm interviewed for the study, leaks can cause bidders to change strategy. And they can prove fatal. Between 2010 and 2012, leaked deals had a lower completion rate (80%) than non-leaked deals (88%). However, before you halt a deal, consider ways to head-off potential problems. For instance, built-in stop or go decision points allow you to haul in a deal before it gets past the point of no return. Betting exchange Betfair, for instance, set a deadline for buyout house CVC to convince its management of Betfairs proposed management strategy. When it did not, the deal was pulled, with both parties agreeing to go their separate ways. A second tenet to bear in mind is to constantly challenge the perceived wisdom. As most deals start at the CEO level,
no deal
confirmation bias can ensue. This means that you only look for information that backs up what you believe, and discount as irrelevant data that points in the other direction. A 2012 study by the University of Washingtons Adam Kolasinki and Xu Li of Lehigh University found that strong and independent boards can help prevent CEOs from making honest mistakes when they attempt to acquire other firms. This is also important in the long run. The research points out value-destroying deals by CEOs were more likely to be followed by less-costly ones in the future, as they become more cautious. In the aftermath, break fees may occur for companies who pull the plug on an acquisition. This may be painful, but it can be a small price to pay for averting future losses. For example, this January, US express parcel delivery service UPS paid TNT US$200m after withdrawing its bid for the Dutch distribution company over regulatory issues. In contrast, 2012 saw US$14b-worth of writedowns at mining company Rio Tinto, following failed deals in aluminum and coal. While spotting the symptoms can save a deal, knowing when to walk away can not only save face, but capital as well. The best deals are often those that you didnt do.
For further insight, please email scott@capitalinsights.info
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Rapid-growth market forecast Emerging markets are the new engines of growth. Before venturing into brave new worlds, beat the pack with Julys EY forecast.
All tied up 2013 Companies need to use effective working capital strategies to fund growth. Discover the top performers in EYs new working capital report.
Thought leadership and capital agenda-focused reports available at www.capitalinsights.info
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Today, there are many ways to raise capital. But more choice brings greater complexity. Whether youre disposing of assets, going public or tapping the capital markets, you can draw on the experience and insight of EYs 9,100 transaction advisory professionals. For more information, visit capitalinsights.info

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Capital Insights

Helping businesses raise, invest, preserve and optimize capital

Making the market

Helping businesses raise, invest, preserve and optimize capital

EY | Assurance | Tax | Transactions | Advisory

Werner Brandt CFO, SAP

Prashant Mara Head of India Practice, Osborne Clarke

Brian May Finance Director, Bunzl

2013 EYGM Limited. All Rights Reserved. EYG no. DE 0433

Massimo Tosato Global Head of Distribution, Schroders

Capital Insights from the Transaction Advisory Services practice at EY

www.capitalinsights.info | Issue 7 | Q3 2013 | 3

Transaction insights: The top 10

14 Cover story: Making the market

Put the pieces together

Getty Images/Zen Sekizawa

The big issuance

Taking care of business

Capital Insights from the Transaction Advisory Services practice at EY

On the web or on the move?

www.capitalinsights.info | Issue 7 | Q3 2013 | 5

Emerging bonds boom

Time to bet on India

India, see page 24.

cr Getty Images/Krzysztof Dydynski

The consumer evolution Safety rst for funds

The changing face of risk

tc Getty Images/Manpreet Romana/Stringer

Capital Insights from the Transaction Advisory Services practice at EY

A step into the

Top 10 acquirers 20082013

Capital Insights from the Transaction Advisory Services practice at EY

Top 10 sectors by total deal volume since 2008

The top sectors

Leisure 2,330 deals

Transportation 2,113 deals

Consumer 8,532 deals

Construction 2,583 deals

Energy, mining and utilities 6,667 deals

Top 10 countries by total deal volume since 2008

Netherlands 1,596 deals

Canada 2,490 deals

France 3,010 deals

Japan 2,038 deals

USA 18,762 deals Germany 3,186 deals Italy 1,741 deals

China 3,532 deals

Australia 1,995 deals

The top countries

www.capitalinsights.info | Issue 7 | Q3 2013 | 9

Capital Insights from the Transaction Advisory Services practice at EY

Breaking new ground

Family values and volume

www.capitalinsights.info | Issue 7 | Q3 2013 | 11

Source: EY Capital Confidence Barometer

Pip McCrostie is Global Vice Chair, Transaction Advisory Services, EY

Capital Insights from the Transaction Advisory Services practice at EY

Getty Images/Air Rabbit

www.capitalinsights.info | Issue 7 | Q3 2013 | 13

Making the market

Capital Insights from the Transaction Advisory Services practice at EY

Preserving Investing Optimizing Raising

High up in the clouds

www.capitalinsights.info | Issue 7 | Q3 2013 | 15