CHINA, INDIA AND SOUTH EAST ASIA ARE THE MOST DESIRABLE REGIONS FOR FOREIGN INVESTMENT

Executives at multinational companies consider investing in China, India and South East Asia almost as risky as investing in Africa, according to a survey commissioned by Marsh, Mercer and Kroll for their report “M&A Beyond Borders: Opportunities and Risks.”

However, despite the perceived risks, China, India and South East Asia were identified as the most attractive destinations globally for M&A activity over the next 18 months, with 57% describing potential interest there as significant or very significant. For North America, the figure was 43%, Western Europe 41%, Eastern Europe 31%, Latin America 29%, Middle East 27%, Australia, Japan and Korea 25% and Africa 19%.

Among the issues identified as the most risky in the China, India and South East Asia region were questionable business practices as well as problems with the local intellectual property regime and insufficient financial recourse against sellers.

Surveyed earlier this year about their attitudes to cross-border deals, executives at multinationals based around the world gave China, India and South East Asia an average risk rating of 5.3 out of a maximum eight for a range of business-critical risks. The average rating for Africa was 5.5, Latin America 3.8, the Middle East 3.5, Eastern Europe 2.8, North America 2.1 and Western Europe 1.9. The Australia, Japan and Korea region was considered the least risky place to invest, with an average risk rating of just 1.6.

While intellectual property risks, especially in China, are widely acknowledged, the report makes clear that the opening up of the economy in other sectors raises new concerns, especially around the environment. The Chinese government has introduced a raft of measures designed to improve environmental quality. While the degree of environmental litigation and statutory enforcement in China still lags well behind North America and Europe, companies need to be aware of the increased regulatory scrutiny of their operations and the stricter enforcement of environmental legislation.

Commenting on the findings of the survey, Karen Beldy Torborg, global head of Marsh’s Private Equity and M&A Practice, said: “Despite the perceived risks of investing in this region, the level of M&A activity in recent years suggests that the expected reward is much stronger. We are witnessing a fundamental shift of the global business landscape, with companies all around the world eyeing the potential of these countries and ramping up their investment and presence, accordingly. Having a thorough understanding of the risks will help lead to a more successful investment.

Bob Bundy, global head of Mercer’s M&A consulting business, added:  “Given how much is at stake and how difficult and complex it can be to turn two organisations that come from different geographies and cultures into one, forgetting that business is at the end of the day a human activity can prove costly indeed.”   

In Japan, M&A activity has jumped after the government further eased regulation of foreign investment. In so-called triangular mergers, the law now makes it possible for foreign-owned companies to invest in Japanese companies by means of stock-for-stock exchanges with the Japanese subsidiaries of those companies. Coupled with the country’s low interest rates, a favourable financing condition has ensued, attracting more foreign investors.

The report draws on a survey by the Economist Intelligence Unit of 670 senior executives worldwide. Other key findings include:

• Expectations for inorganic growth are high: During the past 18 months, only 35% of respondents said that 10% or more of their revenue has been attributable to mergers and acquisitions, while 68% expect it to be more than 10% for the next 18 months
• People and cultural issues are perceived as significant risks in every geographic region: Organisational cultural issues and human capital integration issues were cited as the two most significant issues faced by respondents following their previous transaction (50% and 35% respectively)
• Smaller and medium-sized companies expect more from M&A than larger firms: Those with annual revenues under US$500m hope to see the contribution of M&A to growth double, from 9% to 18%, while the biggest firms – those with revenues exceeding $10bn – expect a slight decrease, from 14% to 13%.

–     State-owned investment funds pose little competition to other acquirors: Only four per cent of potential acquirers think that state-owned investment funds, such as sovereign wealth funds, are likely to offer the strongest competition to over the next 18 months, while 29% believe it will be strategic or trade buyers from their home country and 26% believe it will be private equity firms.