PwC analysis of 200+ deals identifies common problems
Over 50% of deals in growth markets fail to move from external due
diligence to completion
Of the deals sampled, on average 50% of the investment was lost
TORONTO, Jan. 18, 2012 /CNW/ - Doing deals in growth markets is an
important way in which companies in developed countries can seek to
drive growth as their traditional markets remain stagnated. But these
deals can be both fraught with risk and costly when they go wrong. PwC
has analyzed 200 such deals to identify the root causes of the problems
and suggests a number of measures corporates should take to manage the
risk and boost their chances of a successful deal.
The report Getting on the Right Side of the Delta: A Deal-maker's Guide to Growth
Economies http://www.pwc.com/ca/EMDeals flags the scale of the problem: in 2011, the value of deals from
companies in Western Europe and the US into growth markets was
significant; but more than half the deals that entered external due
diligence didn't complete; and of those deals that did complete but
later ran into problems, the average cost to the buyer was around 50%
of the deal value.
In addition, the failure rate of deals entering external due diligence
is higher than in developed counties. This adds additional cost in
tangible terms (i.e. cost of diligence) and intangibly (e.g. investor
confidence). The common barriers to deal completion are the inability
to get comfortable with local market valuations, government
interference, the lack of transparent financial information and
non-compliant business practices.
Once the deal is completed, by far the biggest problem is reconciling
differences arising out of partnering, plus there is also a risk of a
range of operational issues that make it hard to integrate and take
charge of an asset.
Kristian Knibutat, PwC's Canadian Deals leader, said: "Too many
businesses are still failing to avoid the common pitfalls and apply the
lessons learned from aborted or failed deals. Doing deals in growth
markets is a tough business - not least the challenge of modelling
future growth potential in developing markets. Having people on the
ground and good local knowledge, well in advance of responding to the
first opportunity is vital, as is building the strategic rationale
early for investment in the country and industry. This should provide
the foundation for every deal in a growth market."
"We expect the volume and value of deals in growth markets to increase
this year, and for companies to continue to look further afield for new
deal opportunities. There is a wide range of growth economies to choose
from. The BRICs are obvious choices but others such as Nigeria,
Indonesia and Mexico hold considerable potential. It is critical to
prioritize among growth markets in order to focus scarce deal
The difference or 'delta' between a good deal and a bad one is that much
greater in growth markets. But this difference need not be as big as it
currently is. PwC believes that companies that take the right steps can
reduce risk on deals in growth markets, and increase their chances of
delivering long term value.
The report says that aligning interests with local partners is also key,
while structuring solutions such as deferred consideration or options
for further investment can reduce initial investment risk. Corporates
should be prepared for higher than anticipated valuations to reflect
the significant growth potential in these new markets, and to accept
that due diligence may be less than perfect. It is important to
understand what is manageable in the process and what constitutes a
"How a company assesses opportunities in growth economies will be
influenced from the outset by its size and risk appetite," says
Knibutat. "There are a number of difficult choices about how to
approach deals in growth economies - such as how much weight to give to
the long-term strategic option value of a deal. These choices largely
reflect trade-offs between risk and reward, and do not have obvious
answers; rather they reflect preferences specific to companies'
cultures and strategies."
Getting on the Right Side of the Delta: A Deal-maker's Guide to Growth
Economies draws on the assessment of over 200 deals - both publicly announced and
a broader set of private deals that PwC has advised on. We have
identified the most common problems that occur, and examined the
issues, including cost, associated with the biggest problems. We also
interviewed 20 senior deal-makers at multinational companies who have
bought businesses in growth markets, to understand how they overcame
the challenges encountered. The interviewees represent global
businesses across a number of industries and home countries; on
average, 27% of their revenues come from growth economies. This study
is independent, and has not been commissioned by any government,
business or other institution. You can find a copy of the report here: http://www.pwc.com/ca/EMDeals
About PwC's Deal Team
PwC's Deal Team (www.pwc.com/ca/deals) helps clients to achieve deal success—from concept to close and
beyond. As part of the world's largest Transaction Advisory practice1, with more than 10,000 people working in its Deals business worldwide,
the PwC Canada Deals Team is your gateway to an exciting new world of
emerging M&A opportunities.
About PwC Canada
PwC Canada helps organizations and individuals create the value they're
looking for. More than 5,700 partners and staff in offices across the
country are committed to delivering quality in assurance, tax,
consulting and deals services. PwC Canada is a member of the PwC
network of firms with close to 169,000 people in 158 countries. Find
out more by visiting us at www.pwc.com/ca.
© 2012 PricewaterhouseCoopers LLP, an Ontario limited liability
partnership. All rights reserved.
PwC refers to the Canadian member firm, and may sometimes refer to the
PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
1 Source: Kennedy;"Business Advisory Services Marketplace 2009-2011" ©BNA
Subsidiaries, LLC. Reproduced under license.
For further information:
David Rowney, 416 365 8858