The Urge to Merge Is Strong Overseas


The market for mergers and acquisitions in the U.S. has been very quiet since the financial crisis cut off debt to private-equity players. But cash is less scarce in other parts of the world as is growth. So companies in those slower-growing markets are seeking growth through acquisitions. This explains the $35.5 billion deal by Prudential in the United Kingdom for AIG's Asian insurance business and India's Bharti Airtel's bid for a Kuwaiti company. But why has all the M&A activity moved overseas?

Before getting into this question, let's examine some of the details of these deals. The New York Times reports on four:

  • Britain's Prudential, an insurance company, has scooped up American International Group's (AIG) Asian assets for $35.5 billion in a deal that would give Prudential over half of its earnings from Asia.

  • Bharti Airtel, an India-based wireless services provider, offered $9 billion for the African assets of a Kuwaiti company Zain, to create the world's first emerging-market telecommunications company.

  • Royal Dutch Shell created a $12 billion joint venture with the Brazilian ethanol company Cosan; and

  • India's Reliance Industries is offering $14.5 billion for chemical company LyondellBasell Industries

Such emerging markets deals are increasingly dominating M&A activity. For example, Of the $395 billion in deals announced in 2010 through Mar. 3, $135 billion -- or 34% -- had a target or an acquirer (or both) in an emerging market, according to the New York Times.

So what is behind all this activity? Simply put, cash and a search for growth. These acquirers have cash -- whether it's from their own balance sheets or access to bank borrowing. And that capital is in search of the fastest growth it can get its hands on -- whether in China, Brazil, or Africa.

Unfortunately, for these acquirers, pitfalls await. Underneath the patina of rapid growth lurk dangers from powerful forces in those countries which could hinder or help the acquirers to achieve their growth goals. In my new book, Capital Rising: How Capital Flows Are Changing Business Systems Around the World (due out this June), my co-author Srini Rangan and I present a new concept to explain these forces.

That concept is the Entrepreneurial Ecosystem (EE), which helps explain why capital flows to some countries and not to others. The EE consists of four factors -- below I briefly explain each and then provide an example of an issue that factor raises for one of the deals mentioned above:

  • Corporate governance - the country's practices regarding how its companies' board and managers operate to help or hinder shareholder value.Can Bharti Airtel, for example, feel confident that its African managers will share its approach to financial reporting, transparency and respect for shareholders?

  • Financial markets - how the country raises debt and equity capital and the practices it demands of those seeking to tap that capital. Will Prudential be able to obtain the financing it needs for the deal and as it expands into Asia, will it begin to tap Asian investors as sources of future capital?

  • Human capital - the country's practices regarding how it develops people who can invent new products or deliver services.Can Royal Dutch Shell find, attract and retain the most talented Brazilian ethanol process designers and managers to maximize the value of its ethanol joint venture?

  • Intellectual property protection.If Bharti Airtel, for example, operates in Africa, is it at risk of losing some of its proprietary technology there?

These global acquirers will be able to achieve their growth goals only if they are sure that each of these four factors will not impede them. But given the more rapid growth in these emerging markets, a boost in capital flows is almost assured.

And investors should try to anticipate these deals so they can profit from them.