By Mark Arian
Looking at large publicly traded concerns, cash as a percentage of enterprise value is at an all time high. Many Asian companies ― public, private, and state-owned enterprises (SOEs) ― are also flush with cash. Strengthening currencies, such as the Korean won, coupled with stabilizing debt markets, low interest rates and a historically low stock market valuation in the U.S. and European markets, measured by forward price/earnings (P/E) ratio, have led many Asian companies to openly vet cross-border M&A opportunities with their management teams and boards.
With this backdrop, it is not surprising that global M&A activity in the first quarter topped $799.8 billion, the most since 2007′s pre-crash frenzy, according to a recent report in Forbes magazine. Consolidating industries include energy and mining, pharmaceuticals, telecom, financial services and technology. Deal-making in Asia has also hit a high water mark through this spring, with cash-rich conglomerates investing in specific sectors such as energy and industrials.
Many Asian companies struggled in the early part of this decade with cross-border acquisitions. Prominent acquisitions such as TCL's acquisition of France's Thomson, SAIC's takeover of South Korea's Ssangyong Motor Company, Ping An's investment in the Belgian-Dutch financial services group Fortis, Doosan's acquisition of Bobcat, and the D'Long Group's purchase of America's Murray all made headlines ― often as the poster child of deals that did not meet goals. According to the Aon Hewitt Global Deal Survey, the rate of deal failure is alarming with nearly 50 percent reporting a failure to achieve transaction objectives.
Burned by their initial forays into the global M&A market, Asian buyers remain skittish about complex cross-border acquisitions, particularly those that require significant integration and integration synergies. The initial outbound deal activity from Asia was predicated on strategic objectives such as acquiring brand, sales networks, goodwill, market access, or talent. Many of these large transformational acquisitions failed badly as Asian buyers struggled with human capital issues that have bedeviled their Western counterparts ― organizational and national culture, leadership team defections, and mastering the challenges of integration-related growth synergies.
But, in failing, Asian buyers learned valuable lessons. Many Korean conglomerates retreated to home markets that they knew intimately and acquisition activity was confined to domestic Korean targets. In turn, Chinese buyers migrated to acquisitions of hard assets, like mineral deposits and oil reserves, or state-of-the-art technology that could be leveraged to deepen and strengthen positions in the rapidly expanding China market itself without necessitating a complex integration process.
However, as Asian buyers have become more adept and confident, and as both Chinese and Korean markets have begun to show some evidence of slower growth, acquisition strategies that have been avoided in the past are being explored anew. More Asian buyers are re-considering cross border deals as a mechanism to drive future growth. Interestingly, some, including large Chinese SOEs, have even begun to explore future growth through reverse merger strategies ― folding existing businesses into acquires and using the management team and infrastructure of the acquiree as a platform for future growth and monetization. This trend is supported by our global research; M&A in the next one to two years is all about growth.
Korean companies have been picking on these trends and have recently initiated significant cross-border deals. In late 2007, Samsung Electronics made its first large scale global acquisition in over 10 years wherein it acquired Tel Aviv-based TransChip Israel. TransChip will become its 17th global R&D Center.
Like their Chinese counterparts, they too will face a plethora of challenges as risk and complexity levels ― especially around unfamiliar terrain such as national and organizational culture; leadership team decision making and authorities and accountabilities; talent retention; and communications and change management ― would be much higher than domestic deals. Acquirers would encounter unfamiliar organization designs, different standards in data recording, language barriers, unfamiliar regulations, complex taxation laws, cultural barriers and different governance models.
Firstly, with these higher levels of risk in the deals, a much more thorough and focused due diligence is highly recommended to any Korean company wanting to expand through cross-border deals.
Secondly, Korean firms should pick a few best practices from recent Chinese M&An experience. For instance, experimenting with simpler integration requirements by focusing on internationalization vs. globalization i.e. targeting within a specific geography or another Asian country) rather than a large scale global acquisition.
Thirdly, no matter, what approach to deal making is adopted, developing enough expertise to handle people issues that is often identified as a tripwire by CEO s and CFOs of organizations that are frequently doing deals.
Cross-border M&A is rebounding as a legitimate growth strategy for many Asian buyers, and is increasingly prominent in corporate development plans at Korean conglomerates. They will need to pay attention to "soft issues" that can hit the bottom line if they are to avoid the mistakes of the past. Careful due diligence focused, in particular, on organizational culture, leadership integration and retention, and change management will all contribute to better integration execution and deal optimization.