Mergers & Acquisitions 2012: Volatile Market Situation Offers Challenges to Cross-Border Deals, Says Expert (EXCLUSIVE)

In today's volatile markets in order to embark of cross border deals, the due diligence capabilities have to extend beyond its traditional boundaries like financial and legal and aspects like culture, management depth, systems, regulatory and market would have to be looked at in depth according to an expert in the field.

In an exclusive interview with IBTimes, Nitin Kumar, who serves as Strategic Advisor to the Board for The Association of Due Diligence Professionals (ADDP) and was selected by Grant Thornton and the Alliance of Mergers & Acquisition Advisors (AM&AA) as one of the thought leaders of the year, for his contributions to the profession, said that most of Mergers & Acquisition (M&A) deals fail at the integration level and several precautions have to be taken in today's environment to integrate acquisitions. Specific emphasis has to be given on the extent of integration and then on speed. In case of banks, there are risky assets involved and integrating at very high speed without proper planning can be counterproductive and hence it might be wiser to understand and catalogue all risks even if integrated at moderate speed.

Excerpts from the third of a three-part interview are presented below:

Will China be a major player in M&A activities in 2012? Do you consider that investments from China in the U.S. will continue to grow this year? What could be the major sectors focused on by China?

China has become a significant player on the global economic stage and has now started to seek growth in large consumer-oriented markets like U.S. and the EU. A large number of Chinese companies are cash-rich and everyone was anticipating a phenomenal number of buyers from China seeking acquisitions in the U.S. and EU. However, the deals have been slow in showing up.

According to an article in the Chinese-language Beijing Times, Chinese purchases of North American companies amounted to 57 in 2011, compared with 52 in 2010. In Europe, there were about 25 purchases in 2010 but 44 in 2011. These numbers are at best modest in the grand scheme of things and we can easily conclude Chinese companies are in their infancy, in terms of making acquisitions in markets like the U.S. and the EU and are taking a very conservative approach even though the timing is good from a target valuation standpoint. This is likely to continue for a few years even beyond 2012. There are several reasons behind this conservative approach.

Firstly, Chinese business leaders lack the risk appetite of entering slow and lower-growth markets and dealing with a host of nuances both technical and cultural while managing a business outside their comfort zones. Secondly, obtaining legal approvals to go forward with a deal or to convert Renminbi into acceptable currency can be a very cumbersome and tedious process. Thirdly, Chinese companies have gained some notoriety in the deal-making community due to very long deal cycles or high number of abandoned deals giving the idea they are still not ready to play the big hunting game.

Making cross-border acquisitions is challenging for even very experienced acquirers and Chinese companies are very new at this. Attributed to all of the factors above, there is likely to be the same trend dragging into 2012 and perhaps a few more years until which we will see modest increases on modest number of transactions. Perhaps until precedence builds and a few success stories surface, China is unlikely to be a big aggressor towards the Western markets.

Are there any reforms the Euro or U.S. governments could introduce for encouraging M&A activities?

In the U.S., the Dodd-Frank Act is still under development and its implications will not be realized by banks for a few years but several players have started preparation in anticipation of the potential impact. One of the clear implications of the Dodd-Frank Act will be increased M&A activity in this sector. Although the Act doesn't explicitly outline parameters that will bolster M&A, there are several provisions in it that will add costs or reduce revenues thus making it very difficult for banks to grow organically. Predictions on the pace of M&A activity vary, and many factors - apart regulatory ones - will be at work, which is expected to kick start as early as 2012 even though Dodd Frank could be a few years away.

Larger banks face more restrictions, such as the Volcker Rule's limits on proprietary trading and hedge fund activities. In addition, the smaller banks are expected to have a relatively tougher time coping with the additional costs of the regulatory burden since they do not have the size or economies of scale of larger banks. These will negatively impacting their profitability and making them good acquisition targets. The potential sellers have certainly started to table the thoughts.

A real driver for M&A transactions in 2012 could be EU state aid requirements, which will force a number of banks to divest significant assets by the end of 2012. Banks have an urgent need to improve their capital positions and divesting quickly is a reasonable way to prove solvency and comply with regulations. Basel III requirements are driving greater urgency towards divesting non-core businesses.