Valuation gap hits growth economies M&A 

M&A deals conducted in the growth markets are failing to move from external due diligence to completion, statistics show.


M&A deals conducted in the growth markets are failing to move from external due diligence to completion, statistics show.

M&A deals conducted in the growth markets are failing to move from external due diligence to completion, statistics show.

Research from Big Four accountancy firm PricewaterhouseCoopers (PwC) reveals that over 50 per cent of deals sampled are stumbling at this juncture as companies’ boards struggle with perceived ‘sky high’ valuations in growth markets.

While the report says that doing deals in growth markets is an important way for companies in developed countries to look to drive growth it finds that transactions there are ‘fraught with risk and costly when they go wrong’.

After deal completion the research finds that a large percentage of deals subsequently result in ‘significant difficulties’, with post-deal problems costing buyers on average 50 per cent of the original investment.

John Dwyer, global deals leader at PwC, comments: ‘Too many businesses are still failing to avoid the common pitfalls and apply the lessons learned from aborted or failed deals.

‘Doing deals in growth markets is a tough business – not least the challenge of modelling future growth potential in developing markets. Having people on the ground and good local knowledge, well in advance of responding at the first opportunity is vital, as is building the strategic rationale early for investment in the country and industry.’

Of factors which are found to affect deals in growth economies, the most common issues are transparency of financial information (16 per cent), justifying valuations (38 per cent), non-compliant business practice (16 per cent) and government interference (18 per cent).

In the post-deal completion problems including partnering conflicts (30 per cent), transparency (17 per cent) and government interference (18 per cent) lead the way.

Alastair Rimmer, global strategy leader at PwC, says: ‘How a company assesses opportunities in growth economies will be influenced from the outset by its size and risk appetite.

‘There are a number of difficult choices about how to approach deals in growth economies – such as how much weight to give to the long-term strategic option value of a deal. These choices largely reflect trade-offs between risk and reward, and do not have obvious answers, rather they reflect preferences specific to companies’ cultures and strategies.’

Hunter Ruthven

Bernard Williamson

Hunter was the Editor for GrowthBusiness.co.uk from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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