SOURCE: The Boston Consulting Group

January 25, 2008 11:37 ET

New BCG Survey-Based Report Highlights the Risks to Successful M&A in Rapidly Developing Economies -- and How to Overcome Them

Achieving Synergies With the Target Company "Not More Difficult" Than in Developed Countries, Survey Finds, But Can Create up to Twice as Much in Shareholder Value

BOSTON, MA--(Marketwire - January 25, 2008) - Companies making acquisitions in rapidly developing economies (RDEs) are twice as likely to generate superior shareholder returns -- at least initially -- as companies that make acquisitions in both developed and developing economies. But in order to succeed, companies need to be aware of four key risks before any transaction is completed, according to a new report by The Boston Consulting Group (BCG) -- "Eyes Wide Open: Managing the Risks of Acquisitions in Rapidly Developing Economies" -- which is based on a survey of executives with acquisitions experience in 30 RDEs.

These risks are a lack of information about the market and the target (cited as a significant challenge by 68 percent of executives in BCG's survey), regulatory pitfalls (63 percent), limited deal structure options (26 percent), and the complexities of dealing with the "softer" human and cultural issues in RDEs.

Contrary to popular belief, 69 percent of the executives BCG surveyed claimed that it is generally no more difficult to extract synergies from targets in RDEs, such as China and Brazil, than those in developed economies.

"There is no doubt that acquisitions in RDEs still offer significant opportunities to increase shareholder returns, provided the deals make strategic sense. But CEOs need to enter these markets with their eyes wide open to the risks, supported by a well-formulated plan to deal with these challenges," says Andrew Clark, a partner and managing director in BCG's Singapore office.

The report identifies five essential ingredients for success:

--  Securing Senior Management Commitment. "RDEs have large uncertainties,
    and unless senior management is convinced [that the risks and rewards are
    understood and can be managed], the chances are that a competitor will beat
    you to the winning post," said one executive involved in M&A in Central and
    Eastern Europe.
    
--  Developing Local Intelligence and Market Knowledge. Fifty-five percent
    of the executives surveyed cited in-depth and reliable knowledge about the
    market and the target as a fundamental building block to assessing and
    managing the risks. Establishing an experienced local deal team "on the
    ground" is an essential first step.
    
--  Fostering Relationships with Owners and Regulators. Acquirers should
    proactively reach out to owners and management to secure an exclusive deal
    -- an essential measure for reducing costs and risks. Fifty-five percent of
    the deals in BCG's survey were negotiated exclusively, with no competitive
    pressures. Educating regulators about the socioeconomic benefits of
    multinational investments is also critical.
    
--  Concentrating on Growth -- and Shedding the Western, Cost-Cutting
    Mentality. Seventy percent of the executives said their companies used M&A
    in RDEs to gain access to a new geographic market, while 30 percent stated
    that their company's goal was either to increase market share or to gain
    access to a new product market or segment. "It's essential that the
    postdeal merger team is not filled with people who have a cost-reduction
    mindset," advised one executive.
    
--  Focusing on the Human Dimension During Postmerger Integration.
    Acquirers must not assume that "the West knows best." Particular attention
    should be paid to cultural differences and retaining top local talent,
    especially because the demand for talent often outstrips supply in RDEs.
    

The "Eyes Wide Open" report is part of BCG's Global Advantage initiative and complements the firm's recent report, "The 2008 BCG 100 New Global Challengers: How Top Companies from Rapidly Developing Economies Are Changing the World."

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