Retail M&A Fever Expected to Infect Emerging Markets

The year 2010 began with several mega-mergers within the retail industry: Kraft Foods and Cadbury, Phillips-Van Heusen and Tommy Hilfiger and soon, Best Buy and RadioShack.

Hardly predatory in nature, these deals point to strong companies jointly making strategic moves in preparation for the next sustained economic upturn.

Drivers behind the M&A fever

I would count several factors behind this: healthier businesses, a relatively positive outlook and the need to reach out to new markets and to diversify the businesses.

The recession was fatal for lots of retailers, but the outcome for some strong survivors was probably very positive. During the downturn, companies were forced to make decisions to cut costs, trim expenses, rationalize their size and footprint, close under-performing units or stores, rethink their strategies and probably renegotiate terms and leases. The most sophisticated players did all of this and probably went a few steps further by getting rid of innate inefficiencies.

In addition, the market is not quite where it was a few years ago. People are now more risk averse in their outlook and conservative in their valuations. The thinking on the selling side is that it might be better to bank on a deal now, than hope for a better offer later. In such a climate, companies may be less resistant to selling parts of, or their entire business. It is in essence, a good time to buy high-performing company assets at softer prices.

Seeing well-known brands involved in acquisitions and partnerships builds the confidence of other players -- particularly when the economy appears to be picking up. Indicators from first quarter 2010 seem to show that the consumer and retail industry in general is picking up, across major markets.

Painkillers for M&As in emerging market

Industry players in mature markets, such as the United States and Europe, see hope for growth in the BRIC countries and other emerging markets. But there is a caveat. Penetrating these more varied and volatile markets is no easy task.

Take Russia, China and India for example. Modern retail chains are still weak in these countries and the vast majority of consumer goods are sold in traditional “mom-and-pop” shops. And the differences between markets can vary drastically. The retail market in Saint Petersburg, Russia, is very saturated and competitive, with about 60% to 70% of its turnover being dominated by retail chains while other regions, or even Moscow, have a more even spread between retail chains and stand-alone stores.

Entering these markets often means falling back on established and powerful distribution systems. Very few companies in the world have the ability to do it independently and are better off acquiring or partnering with local established brands. Foreign companies however, lack visibility to and knowledge about possible acquisition targets and local market conditions.

A few years back, due diligence centered on financials and long talks between the two parties involved. Acquisitions and partnerships between completely unknown parties were very rare.

These days, and especially in the emerging markets, companies need to act faster and require a lot more information before completing a deal. Furthermore, deals are done between companies that might know very little about each other and need to put it together in a few months. Financial and company records do not provide enough information in these cases.

It became critical to perform thorough commercial due diligence where the buyer can get visibility into numerous factors: the reputation the target has within its markets, its relationship with distribution channels, a sense for its implicit negotiation power with suppliers, distributors or retailers, the relationship it has with government bodies, opaque policies and regulations, and the list goes on.

The only way to obtain visibility into such factors is through primary research and talking to the market. So it is exceptionally helpful to work with a neutral third-party with the expertise, local knowledge and market connections, to help screen, match and introduce potential dealmakers, either on the buying or selling side, as well as to help conduct due diligence both at the pre- and post-deal stages.

What the doctor prescribed ...

There are several aspects that will make a significant difference to the advice you receive.

First, it is very important to assess the experience the firm advising you has in advising M&A deals in general. Have they had actual experience conducting commercial due diligence in the relevant countries? What other deals have they advised? Have they helped both the buying and the selling side?

Besides the experience in M&A deals, it is also important to work with people that understand the industry. Have they had hands-on experience in the industry, other than consulting? What other relevant industries have they had hands-on experience in and how can this be a benefit or a hindrance?

If the deal is international, it is important that your advisors have had international market exposure and that they understand and know how to handle all the ‘soft’ parameters that might affect the M&A deal, particularly the cultural differences.

Check their understanding of the strategic issues your company is facing. As an initial assessment, it helps to ask them to briefly provide implications of different scenarios resulting from different possible scenarios in order to gain an insight into their understanding of the “big picture.”

Angela Quintero is consulting director and head of Global Intelligence Alliance’s global Consumer & Retail practice, based in Hong Kong. Global Intelligence Alliance (GIA) is a strategic market intelligence and advisory group. The company was formed in 1995 when a team of market intelligence specialists, management consultants, industry analysts and technology experts came together to build a powerful suite of customized solutions ranging from outsourced market monitoring services and software, to strategic analysis and advisory.

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About Global Intelligence Alliance

Global Intelligence Alliance (GIA) is a strategic market intelligence and advisory group. GIA was formed in 1995 when a team of market intelligence specialists, management consultants, industry analysts and technology experts came together to build a powerful suite of customized solutions ranging from outsourced market monitoring services and software, to strategic analysis and advisory.

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