Pursuing deals in growth markets can be tremendously beneficial. But, doing business in growth markets is inherently more risky, too.
What can your company do to take advantage of the benefits (low cost manufacturing, access to natural resources, market access for basic global products, buyers with access to core operations, etc.), while mitigating potential pitfalls?
For starters, you may want to read PwC's new study, Getting on the Right Side of the Delta: A Deal-maker's Guide to Growth Economies. After analyzing 200 deals (both publicly announced and private ones for which PwC was an advisor) and interviewing 20 leading dealmakers around the world, PwC found that:
The majority of deal risks typically relate to one or more of three key elements: the asset itself, the seller, or the government.
The most common barrier to deal completion is an inability to get comfortable with valuations. 40 percent of failed deals in PwC's data set fell victim to valuation concerns.
The most common problems that emerge after a deal closes concern partnering, causing 30 percent of problems post-deal. Beyond partnering, the same issues that prevent deals from closing also frequently emerge post-deal (direct government interference, problems with financial information and non-compliant business practices).
Fortunately, PwC's report also includes five key recommendations for dealmakers when pursuing deals in growth markets. PwC advises dealmakers to:
Understand the strategic rationale early. Due diligence will be imperfect and valuations are high, so a strong strategic rationale is critical to completing a deal. Educate the board and management, and be sure to address any preconceived notions or concerns about growth economies.
Prioritize markets. Limiting investments in individual markets allows a company to focus scarce resources on fewer markets to increase the chances of building scale positions that can support future growth.
Visit. Although there are common themes across growth economies, each market is different. Being on the ground helps reduce a variety of risks, such as stakeholders concerns, quality of diligence, understanding valuations, identifying the right partner and working with the local government to obtain regulatory and compliance approvals.
Put key people in place. Ultimately, the people involved will most influence whether a deal is successful or not. Companies should identify a short-list of local advisors and build a dedicated team of deal specialists.
Adopt proven approaches. You'll have to think differently. A normal' deal approach is not appropriate for a growth market.
A full copy of the PwC study is available here.