WEF | Emerging market firms buy up the world

WEF | Emerging market firms buy up the world

Davos: There’s a new swagger among the bosses of emerging market companies as they sign cheques for a growing list of acquisitions in both the developed and developing world. And this is just the start.

After suffering less in the downturn and rebounding faster than their US and European counterparts, corporations from China to Mexico are taking advantage of their strength to go shopping for an ambitious range of businesses. Emerging markets are, more than ever, a key topic at the annual meeting of the World Economic Forum (WEF) in Switzerland. Traditionally, most focus has been on Western firms buying assets in fast-growing developing economies, to hedge against sluggish growth at home.

But it is a two-way street and, increasingly, emerging market firms are shopping in the developed world as they move up the value chain and pursue their own diversification.

“The three words that characterize the last decade have been ‘Made in China’. The three words that are likely to dominate the next decade will be ‘Owned by China’," said Gerard Lyons, chief economist at Standard Chartered.

“And by the time we move to the 2020s it will be ‘Paid in renminbi’."

China may grab the most headlines, but it is not alone. Acquisitive companies from India, Mexico, Russia, Brazil and South Korea are also on the prowl.

Take Indian wind turbine maker Suzlon Energy, which owns 91% of Germany’s REpower and whose chairman, Tulsi Tanti, says he can “leverage huge synergies" through matching REpower’s technology with low-cost components.

Or Apollo Tyres, another Indian manufacturer that acquired businesses in the Netherlands and South Africa because, in the words of chairman Onkar Kanwar: “We are hungry and passionate and want to do things."

Cars and bread

In the five years since China’s Lenovo bought IBM’s PC business for $1.25 billion, cross-border deals have changed other parts of the industrial landscape -- from cars to bread.

Jaguar and Land Rover are now owned by India’s Tata Motors, while Mexico’s Grupo Bimbo will become the world’s largest bread maker when it closes the purchase of Sara Lee’s North American bakery business this year.

Firms in emerging markets want to move beyond the advantage of cheap labour -- anyway on the decline -- to create global organizations with the skill base found in Western companies.

The strategy looks to be working. By 2020, the top 100 stars of the developing world could collectively generate $8 trillion in revenues, roughly equivalent to aggregate S&P 500 revenues today, according to a new report from Boston Consulting Group.

The 100 “global challengers" come from 16 countries but China, India, Brazil, Mexico and Russia dominate the list.

“These companies see M&A as a path to access technology, to access channels and to access brands around the world," said Mark Foster, global head of management consulting at Accenture.

“We have to expect more of this because they’ve got the cash and, perhaps more importantly, they’ve got the confidence."

For emerging market firms, investing in sluggish developed world economies is a long-term play that sits alongside a parallel drive to snap up targets in other developing economies.

In that space, however, they are competing with Western multinationals whose growing appetite for assets in the world’s big developing economies has driven up prices.

Last year, emerging markets accounted for 33% of the world’s $2.4 trillion tally of all mergers and acquisitions -- totalling $806 billion, or a 76% increase over 2009, according to Thomson Reuters data.

Much of the activity was focused on resources, where China’s state-owned firms, backed by soft loans, have made a land-grab for commodities, often in competition with India.

Asian groups like Sinopec of China and Thailand’s PTT Exploration and Production struck deals last year ranging from buying stakes in oil fields to Korea National Oil Corp’s hostile takeover of Britain’s Dana Petroleum.

Helped by strong currencies, emerging market companies are also contemplating chunky deals in more advanced sectors.

Dialling up deals

Significantly, the biggest deal of any kind in 2010 was America Movil’s $27.5 billion purchase, including debt, of Carso Global Telecom -- a tale of Latin American empire building by Mexican tycoon Carlos Slim.

India’s Bharti Airtel, meanwhile, became the world’s fifth largest mobile operator, by subscribers, after buying Zain’s African operations for $9 billion in 2010, and Russia’s Vimpelcom is locked in its own fight for overseas expansion.

Things don’t always pan out as planned for the new players.

Last year’s $1.8 billion purchase of Ford’s Volvo unit by Geely was a notable win for “China Inc", but earlier this month Xinmao threw in the towel on a 1 billion euros bid for Dutch cable maker Draka.

The odd setback and current fears of over-heating in some emerging markets are not likely to derail a key part of what Jim Quigley, CEO of Deloitte Touche Tohmatsu, describes as “the next phase in globalisation".

“What the US and the UK accomplished in a 200-year span since the Industrial Revolution, we are going to watch China and India accomplish in a 30-year span," he said.