Asia - Dealmaking among emerging markets

HSBC Holdings plc's chief economist Stephen King this past summer forecast "turbocharged" growth in trade between Asia and Southern Hemisphere nations. King termed this economic surge "south-south," zipping along what he called a "new Silk Road."

"South-south" is a clever revision of that '80s expression of developing-nation solidarity. It harkens back to the days when China was just toying with capitalism, India was leading the Non-Aligned Movement alongside Yugoslavia and Cuba, and King's employer was still known as Hongkong and Shanghai Banking Corp. Ltd.

Predicting the mushrooming of economic ties between emerging markets is an easy call these days. King, however, circled his economist's chalk around what will almost certainly become one of the biggest M&A categories: dealmaking among emerging markets.

Emerging markets-related dealmaking in the past decade has become a central pillar of global transactions. American and European investors first pounced on Chinese and Indian investments. More recently, companies from China, India and other emerging countries began to counter with investments in the U.S. and Europe.

The next phase is already underway: deals that completely bypass developed markets, whether Chinese companies buying in Chile or Indian companies moving into Indonesia.

Emerging-markets investments will not completely supplant those in developed markets. Hanson Li, an investment banker with Beijing-based Hina Group, believes China has significantly underinvested in the U.S., in part because of political concerns and sensitivities. China holds about $1.15 trillion in U.S. Treasuries, which, as Li points out, isn't exactly the most optimal use of its money.

South-south investment is really a subset of what will be explosive growth in foreign direct investments by emerging markets. A recent report by the Rhodium Group LLC consultancy for the Asia Society predicts China alone will directly invest outside its boundaries $1 trillion to $2 trillion by 2020.

Part of this is simply catch-up. As recently as 2005, Indian and Chinese investment barely registered on the graphs of outbound foreign direct investment flows compiled by the United Nations.

Significant emerging-markets outbound dealflow is resource driven. That's especially true of China, whose companies are scouring the world for acquisitions that help ensure a continued supply of raw materials.

Important as well is the same rationale that spurs Western multinationals to invest in emerging markets over developed ones -- lopsided performance. Europe is desperately trying to remain afloat economically, and the U.S. is mired in less-than-robust growth.

Emerging economies, by contrast, may be forced to pare growth rates if the developed economies stall, but it's the difference between a 9% increase and 7%.

"The key drivers for the Indian companies are to secure raw-materials supplies, to penetrate other fast-growing markets and to globalize and compete better with international majors," says Akil Hirani, managing partner of the Mumbai-based law firm Majmudar & Co. Hirani could just as well be talking about Chinese and other emerging-markets companies.

Weakened developed economies spur emerging markets to look more toward each other for growth. Take Latin America, where some of this year's biggest deals involve regional reach.

Over the summer, Colombia's Grupo de Inversiones Suramericana SA won the auction for ING Groep NV's Latin American life insurance, investment management and pension fund operations with a €2.612 billion ($3.73 billion) bid, besting several American insurance powerhouses.

China remains aggressive in bidding for companies that provide needed raw materials. In a recent example, state-controlled Minmetals Resources Ltd. offered $1.28 billion for Anvil Mining Ltd., a Perth, Australia-listed enterprise whose copper mine is located in the Democratic Republic of the Congo. Last year, two Chinese companies alone spent a total of more than $10 billion on minerals acquisitions in Brazil and Argentina.

All this generates legitimate concerns about everything from human rights and environmental practices to exclusionary pricing.

However, Chinese acquisitions are broadening in scope. In August, Industrial and Commercial Bank of China Ltd. said it would pay $600 million for an 80% stake in the Argentinean operations of Standard Bank Group Ltd., while in Chile, China's Cofco Ltd. bought a winery.

Indian companies are in many ways at the forefront of nonresource-related south-south deals. Most of these are middle-market firms seeking smaller, focused acquisitions. Pharmaceutical company Ipca Laboratories Ltd., for example, announced publicly a few weeks back that it's on the hunt for an investment in Indonesia of up to $20 million.

There have been blockbusters as well. Last year, Bharti Airtel Ltd. completed its $10.7 billion acquisition of the extensive sub-Saharan Africa business of Mobile Telecommunications Co., known as Zain Group, based in Kuwait. That's about as pure a south-south deal as they come. It won't be the last one.

Matt Miller

The Deal

Business & Investment Opportunities

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