Developed market investments into emerging markets hit 10-year low, but emerging market deals with one another, show strong growth.
KPMG International’s Cross-Border Deals Tracker shows a continuing decline over the latter half of 2015 in the volume of M&A activity involving acquirers in developed markets and targets in emerging markets (D2E).
Between July and December 2015, the number of D2E deals fell by 3 percent, reaching its lowest level in 10 years. The figures follow a disappointing first-half to the year as well, leaving the yearly total 9 percent down on the previous 12 months.
M&A deals between investors and acquirers who were both in emerging markets (E2E) saw significant increases in a number of important markets. Overall, E2E deals rose by 25 percent compared to the first half of the year, to 149 deals, a similar level to the same period in 2014 (152). However, the yearly total for 2015 was not so positive – down 8 percent on 2014.
Chinese E2E acquirers were particularly active, with deals up by 78 percent from 9 to 16 deals. Other markets that saw big increases in E2E activity were CEE (up 50 percent), Sub-Saharan Africa (up 50 percent), South and East Asia (excluding ASEAN) up 60 percent, Middle East and North Africa (up 325 percent) and CIS up 400 percent (most of which was accounted for by an increase in transactions into Russia).
“We are hitting a new era in emerging markets,” said Leif Zerz, KPMG’s Global Head of Deal Advisory. “There has been a maturation over the last few years and emerging market companies are more comfortable with larger and more complex deals. China and the CEE, for instance, are not shying away from significant investment in the right markets despite market volalitity. While regulatory environment will be a strong driver for deal making, like the financial services sector in Europe, we expect developed countries investments to stay within their safe havens.”
Slower growth rates in China, low interest rates in the United States and continuing challenges in several key markets, including Russia, the Middle East and South America, seem to be holding back investors in developed markets from undertaking D2E M&A transactions.
Even China, one of the most important emerging markets for foreign direct investment activity over the past few decades, saw a substantial tailing off of D2E activity. The number of D2E transactions involving Chinese targets declined by over 50 percent to just 35 transactions in the second half of 2015, a 10-year low. Also struggling to attract D2E M&A investment was South East Asia, excluding ASEAN, where transactions fell by 36 percent, from 42 during the first six months of 2015 to 27 in the second.
Other important markets, however, managed to buck the trend for declining D2E investment. This was most notable in India, where inbound D2E transactions increased by over 50 percent in the latter half of 2015, from 35 deals to 54 deals.
M&A transactions involving emerging market acquirers of developed market targets (E2D) showed more resilience, with deal volumes increasing by 2 percent from 250 deals to 255 deals.
The highest increase in outbound E2D deals was CEE, where the volume of deals rose by 50 percent, mostly to other European countries. Increases for E2D were also shown in Middle East & North Africa (23 percent) and Russia (22 percent). China saw a modest 5 percent increase in outbound E2D M&A transactions, completing 62 deals – a 10-year high.
In terms of E2D investment locations, the UK saw the number of M&A investments from emerging markets increase by 29 percent. Other significant increases were in Australia (24 percent), Germany (62 percent) and Japan (83 percent).
“M&A is a critical tool for achieving growth throughout the developed world and, increasingly, in emerging markets,” said Phil Isom, KPMG’s Global Head of M&A. “However, in times of greater uncertainty, developed market companies will more closely scrutinize unfamiliar regions to assess the level of risk associated with local economic trends, regulatory environment and industry specific factors. Given today’s economic volatility, we expect developed markets to focus more on regions where they currently operate, while emerging market players will seek targets in both other emerging markets and developed market areas.”
KPMG’s Cross-Border Deals Tracker (formerly known as High Growth Markets Tracker) was established in 2003. It includes data from completed transactions where a trade buyer has taken a minimum five percent shareholding in an overseas company. The Tracker looks at deal flows between 15 developed economies (or groups of economies) and 13 emerging economies (or groups of economies)1. The Tracker is produced every six months to give an up-to-date of cross-border merger and acquisition activity, with the current edition featuring deals between July and December 2015. All raw data is sourced from Thomson Reuters SDC and excludes deals backed by government, private equity firms or other financial institutions.
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1The 15 developed countries or groups are: UK, US, Canada, Spain, France, Germany, Netherlands, Italy, Australia, Singapore, Hong Kong, Japan, Europe (Other), the Offshore Group and Oceania. The 13 high growth economies or groups are: Brazil, Russia, India, China, Central & Eastern Europe (CEE), the CIS (Commonwealth of Independent States), ASEAN, South & East Asia (excluding ASEAN), South Africa, Middle East.
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