India, China to reign as asset sellers, buyers

Mumbai: With the credit crunch in the US now a harsh reality, “emerging market champions” will now lead corporate finance activities, especially cross-border activities, says Carsten Stendevad, managing director and global head of financial strategy group Citigroup Global Markets Inc.

In his latest report, Corporate finance priorities for the year ahead, Stendevad says despite “liquidity disruptions,” emerging market firms, especially from China and India, “will play a key role” whether as sellers or buyers of assets.

The report also states that as the dollar declines, “global corporate finance has become less US-centric and the dollar’s status as the sole global reserve currency is being called into question.”

Amid these developments, “new players have emerged and activities of existing players are being reshaped,” he says.

According to the report, emerging market acquirers “accounted for a record 17% of global acquisitions,” and the trend is expected to continue in 2008. After the subprime fallout in the US, emerging market share of global mergers and acquisitions shot up to 27% between August and December, from 15% in the January-July period.

Little wonder then that Stendevad, who traditionally spends the first few weeks of a new year meeting the largest corporate clients of Citigroup Inc. across the world, beginning with the US, has spent the better part of January, meeting 40 clients across India, China, Hong Kong and Singapore.

Stendevad and his 30-member team play the role of a “think tank” to investment bankers, credit rating analysts and even corporate finance professors.

“We work shoulder-to-shoulder with investment bankers and provide expertise on matters such as valuations,” he says.

According to Stendevad, with “heightened financial volatility in the developed markets, driven by the credit market turmoil,” emerging market companies have the advantage of currency, valuation and the “interest cost differential between emerging market companies and their global counterparts are at an all-time low.”

A depreciating dollar has given the competitive advantage to even smaller firms in emerging market economies which are looking to “diversifying production facilities” and “expanding reach”.

Optimism is the greatest driver of these firms, Stendevad says.

The current year is poised to become the year of evolution, with firms across the globe adapting to new ways to deliver shareholder value in a “world without unfettered access to cheap liquidity.”

According to Stendevad, the challenge in 2008 will not be the cost of financing but “securing access to capital needed for long term growth.”

By June 2007, announced leverage buyout (LBO) volumes reached $511 billion (Rs20.13 trillion), but by July finance markets sharply reduced LBO activities and there were restructuring and cancellation of several deals.

An LBO is a strategy involving the acquisition of another firm using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.

The equity component of the purchase price is provided by a pool of private equity capital.

The report says private equity activity will not come to a halt but there will be a shift to smaller and less LBOs and a “greater focus on distressed securities emerging markets and infrastructure investments” in 2008.