M&A in frontier markets

Move over, BRICs – it’s the frontier markets’ turn. We hear from business leaders on what it takes to succeed in these up-and-coming markets and how to avoid the pitfalls of M&A there.

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IntercontinentalExchange (ICE), based in Atlanta, recently sealed a deal to acquire NYSE Euronext for US$8.2b. But Chairman and CEO Jeff Sprecher says using M&A to expand ICE’s footprint outside the US has had mixed results - good, bad and ugly.

In Brazil, ICE joined up with Eike Batista, whom Sprecher describes as that country’s richest man, to build a partnership that continues to be successful. But in China, after the company poured expertise and technology into a new venture, government officials complained it was not pulling its weight and suggested it sell down its stake.

Seeing the writing on the wall, “we waved the white flag and left,” Sprecher says.

Five years ago in India, things got really ugly for ICE, which owns global exchanges, markets and clearing houses covering commodities such as agricultural produce, energy and chemicals. It bought a stake in an established agricultural commodity exchange, but when wheat prices went up, the government banned wheat trading.

“So we owned a big stake in an exchange that was told it couldn’t do any business,” says Sprecher.

The Indian Government then decidedforeign investors should not own more than 5% of any exchange. “The next day, an Indian investor showed up and offered us pennies on the dollar to buy our stake,” laments Sprecher, who labels this his biggest business mistake.

His experiences underline the need to tread carefully on foreign soil.

M&A comes with risks when you get into unfamiliar turf.

 “The further away the business is from your home, and the more foreign [to you] the culture, the more complicated these kinds of M&A deals tend to be,” he says.

Steve Krouskos, EY’s Global and Americas Markets Leader, Transaction Advisory Services, agrees. “Obviously M&A is a tool to accelerate growth in new markets, but it comes with risks as well when you get into unfamiliar turf,” he says.

Staying optimistic

Despite the amplified vulnerability when doing business far from home, companies are still looking to expand overseas in search of potentially lucrative opportunities.

And, increasingly, their gaze goes beyond the BRIC countries. Among the “frontier economies” attracting attention are some markets ripe with opportunity, but less familiar to investors: Kenya, Colombia, Turkey, South Africa and Vietnam.

Adena Friedman, Managing Director and CFO at the Carlyle Group, a global asset manager, says a recent area of expansion for her company has been sub-Saharan Africa, which she calls “one of the fastest-growing markets in the world.”

The group’s approach there has been organic. “We chose to hire a [local] team and start from scratch,” Friedman says, partly to better manage the risk and partly to make the cultural assimilation into Carlyle much faster than through straight M&A.

James Mwangi is Group Managing Director of Kenya’s Equity Bank and the 2012 EY World Entrepreneur Of The Year®. He talks about the transformation of economies in sub- Saharan Africa, which has been accompanied by regulatory, political and governance reforms.

“Sub-Saharan Africa has produced seven of the ten fastest growing countries in the world,” he says.

In addition, economic integration between countries in East Africa has forged a market of 160 million people, which has helped create a favorable business environment.

Looking south

Charlie Sweat, CEO of Earthbound Farm, a grower and packager of organic produce, says he primarily looks to South America for opportunities. Peru, Chile and Argentina, in particular, are countries “where we can get organic food production done under the same standards as in the United States.”

Uncertain land ownership regulations in many emerging markets means Earthbound Farm relies instead on a network of partnerships with producers to create profit-sharing ventures.

Sweat says both sides have to be happy or there will be problems. “And that’s the hard part. The further you are away, the harder it is to deal with dissent. When disagreements start to occur … you’ve got to be there.”

Sweat also considers Mexico a great market and says his company has developed agricultural land there to grow produce for the US and for export around the world.

Xavier López Ancona is President of KidZania, which runs entertainment centers where children play adult roles in kid-sized towns. The Mexico-based company operates in nine countries and will expand into another fourteen over the next two years.

He sees tremendous potential for businesses coming into Mexico. “We are 150 million people, we’re a very young country, with the average age about 26, and we continue to grow at around 5%,” he says.

Colombia may be another South American country worth a hard look from American companies, says Yonatan Bursztyn, CEO of Nalsani, whose Totto backpacks are sold through 474 franchise stores in 22 countries.

He says a new free-trade agreement with the US has opened the door to even more opportunities, singling out the mining, energy and construction sectors as potential investment opportunities.

Turkey is another up-and-comin investment hot spot. Bülent Çelebi, Chairman and cofounder of AirTies Wireless Networks, says: “There’s a huge local market opportunity.”

He adds that Turkey is ideally located for access to Europe and is within easy reach of millions of people in neighboring emerging markets throughout the Middle East.

And then there’s Vietnam, home to more than 90 million people. Le Thi Thu Thuy, CEO of Vingroup, a publicly held US$3b real estate development company headquartered in Hanoi, sees potential in manufacturing and in meeting the “hidden demand” of Vietnam’s predominantly young population and growing middle class.

Sweat adds: “You’ve got this rising middle class in the Asia Pacific rim that’s going to become the biggest consumer base in the world geographically. They’re looking to buy more with their dollars than ever before.”