Dealmakers that are not yet pursuing targets in emerging markets may be putting their legacies at risk, according to participants at an Ernst & Young panel discussion on May 14 in New York.
Cross-border M&A is often considered risky for private equity and strategic buyers alike, but not taking action could be detrimental to a firm’s longevity, explains partner Herb Engert, who heads E&Y ’s strategic growth markets.
“Is there risk by sitting on the sidelines? Yes, you won’t be here,” he says, citing the opportunities that are available to corporations and sponsors that have built up cash on their balance sheets and are looking to grow. Engert was joined by panelists Steve Krouskos, head of global M&A advisory services, and E&Y partner Jacqueline Kelley at the Ca Va Brasserie restaurant.
China, India and Brazil top the list of most promising foreign markets, according to an April survey from E&Y. But Krouskos cautions that the next phase of emerging markets — Africa, Southeast Asia and Turkey — may get overlooked because buyers still have a lot of lingering doubt and concern over where to source deals.
Among the sectors most poised for growth: financial services, energy and consumer goods.
The problem, Krouskos adds, is that “companies are reluctant to make a mistake.” Today’s buyers are more risk-averse, he says, due to the “hangover” that is still being felt from the economic downturn in 2008.
However, many companies have adjusted their strategies, he adds.
“There’s a ton of opportunity, and confidence around growth is high,” Krouskos reports. According to the E&Y report, 70 percent of roughly 1,600 senior executives say they’ve changed their approaches to investing in emerging markets. Of that number, 45 percent say they will apply “further rigor.”
One bright spot, Krouskos and Engert say, is the middle market, which has seen the most uptick in growth, namely with private equity firms.
“They’re looking at great deals, but small deals,” Engert says.
While it was almost embarrassing to work on a deal that was under $500 million in a pre-2007 M&A market, these days the lower middle market is held in higher regard for the sheer volume of transactions, Krouskos adds.
“The way companies approach deals has changed,” he says.