The global financial assets are expected to grow by about $300 trillion between 2010 and 2020; this growing capital will spur more mergers and acquisitions (M&A) around the world.
The trend is already visible in South-East Asia (SEA), with the M&A activity picking pace. The appetite to acquire is at a two-year high in the region, reports a October 2014 EY Capital Confidence Barometer research, adding that one in two (surveyed) corporates said that they were pursuing an acquisition over the next 12 months while 72% have two or more deals in their pipeline.
In this situation, an investor should not stay on the sidelines, opined Francesco Cigala, partner, Bain & Company, adding that currently, the world has a lot of capital but not as many assets; making the situation ripe for mergers and acquisitions (M&A).
According to him, in this decade (2010-2020) the world will be awash with 10 times more capital, than its collective GDP. “There is a lot of capital looking for opportunities, to be used or to be deployed; and M&As will be one of the possibilities (for capital deployment),” he said, while addressing an International M&A Conference, last week.
“Investors and companies cannot be inactive, they will need to build or buy. Those involved in M&A activities will be better off than those who are not,” he said.
With the world’s total financial assets, estimated to touch $900 trillion mark, the collective financial holdings (which is the sum of stocks, bonds and other financial instruments) will hit $500 trillion mark in 2020, overshadowing the original estimate of $300 trillion asset base and $90 trillion for world GDP.
Under this environment, asset prices will be pushed up and investors will continue to look for growth areas, said Cigala. “25% of growth in capital will come from the increase in both the population and the per capita GDP. The next billion people will wear more, use more technology. There will be a lot of opportunities for the world to change,” he said while describing newer growth avenues, which investors can tap.
According to the research done by Bain & Co, the firms or businesses, which did larger deals, had better shareholder return than the ones with smaller deals. The research used shareholder return as a measure for the success of a M&A deal.
That said, the companies or investors that cut large deals with lesser frequency, have not done better than those with consistent smaller deals, Cigala informed,quoting the company research. “Strangely enough, scope deals, which add to the value chain, did better than scale deals, which we originally assumed, would do better,” he noted.
According to him, In M&A deals, the focus on the core business was key to a successful deal. “We found that if companies do acquisitions that are one- or two-step away from their core business, the chances of being successful was drastically reduced,” he said.
In another session, Institute of Mergers, Acquisitions and Alliances president, Prof Dr Christopher Kummer said a thorough due diligence exercise was one of the main factor for a successful M&A deal. “The popular saying is that 50% to 75% of all M&As fail. The failure is mainly due to a less-than-thorough due diligence process,” he said, advising companies to be prepared for higher investments in the due diligence exercise.
Cigala added that it was also important for companies to have a ‘plan B’ and a walk-away clause from a deal while doing the due diligence.