Capital Insights Edition 2

Helping businesses raise, invest,
preserve and optimize capital
Q1 2012
Insights
Man of steel
Tata CFO Koushik Chatterjee
on Europe, expansion and
emerging markets
Samsonite CFO
Kyle Gendreau talks IPOs in Asia
After the Arab Spring
What next for M&A in

the Eurozone?
www.capitalinsights.info | Issue 1 | Q4 2011 | 1

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Helping businesses raise, invest,
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Ernst & Young

Assurance | Tax | Transactions | Advisory
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Thomas Braune Koushik Chatterjee David Davies Nicolas Desombre of member firms of Ernst & Young Global
Limited, each of which is a separate legal
Head of Group Chief Financial Officer Group Chief Managing Director
entity. Ernst & Young Global Limited, a
Development Tata Steel Group Financial Officer Investment Banking UK company limited by guarantee, does
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About Ernst & Young’s Transaction

Advisory Services
How organizations manage their capital agenda
today will define their competitive position
tomorrow. We work with our clients to help
them make better and more informed decisions
about how they strategically manage capital
All data and currency conversion in Capital Insights is correct at 1 March 2012
and transactions in a changing world. Whether
you’re preserving, optimizing, raising or
investing capital, Ernst & Young’s Transaction
Advisory Services bring together a unique
combination of skills, insight and experience to
Marie Diron Kyle Gendreau François Masquelier Prof. Scott Moeller deliver tailored advice attuned to your needs
– helping you drive competitive advantage
Director of Macro Chief Financial Officer Deputy Chairman Director of the M&A and increased shareholder returns through
Forecasting Samsonite European Association Research Centre improved decision making across all aspects of
Oxford Economics of Corporate Treasurers Cass Business School your capital agenda.
© 2012 EYGM Limited. All Rights Reserved.
EYG no. DE0297
This publication contains information in summary

form and is therefore intended for general guidance
only. It is not intended to be a substitute for detailed
research or the exercise of professional judgment.
Neither EYGM Limited nor any other member of the
global Ernst & Young organization can accept any
responsibility for loss occasioned to any person acting
or refraining from action as a result of any material
in this publication. On any specific matter, reference
should be made to the appropriate advisor.
Prof. David Parker Savvas Savouri Paul Watters Sonja Zinner The opinions of third parties set out in this
publication are not necessarily the opinions of the
Emeritus Professor Chief Investment Head of European Director global Ernst & Young organization or its member
of Privatization and Officer Corporate Research Insurance Group firms. Moreover, they should be viewed in the
Regulation Cranfield Toscafund Standard & Poor’s Fitch Ratings context of the time they were expressed.
University
Capital Insights from the Transaction Advisory Services practice at Ernst & Young
The three Rs
As uncertainty continues in the Eurozone, Capital Insights looks at
the three Rs that should be at the forefront of companies’ capital
agendas — rapid-growth markets (RGM), risk and refinancing.
RGMs. With Eurozone growth predicted to fall by 0.5% in 2012, companies

may wish to look further afield for expansion opportunities. And as many
corporates have large amounts of cash on their balance sheets, we may
well see an upturn in M&A activity, particularly in RGMs. Ernst & Young’s
Rapid Growth Markets Forecast reports that emerging markets are
expected to grow collectively by 5.3% in 2012. As standards of living rise
and economies grow more business-friendly, the attraction of RGMs will
become stronger. One region demonstrating this trend is the Middle East
and North Africa (MENA), which is changing dramatically following the
Arab Spring. Turn to page 16 for our feature on investing capital in MENA.
Risk. In today’s uncertain climate, companies need a heightened
awareness of risk. In Smart moves, on page 7, we focus on three key
risks that businesses need to mitigate — financing limitations, fraud
potential and supply chain challenges.
Refinancing. And with US$8t of corporate debt to be refinanced by
2015, we investigate the options open to businesses that are looking to
raise capital in Getting the right mix on page 28.
We are also delighted to have insights from two leading CFOs.
Tata Steel’s Koushik Chatterjee tells us how the company is balancing
its European and Indian operations on page 22. Meanwhile, on page 34,
Samsonite CFO Kyle Gendreau talks us through his company’s recent IPO.
While the volatility of last year has, for the moment, moderated, we
believe business leaders still need to remain focused on their capital
agendas. I hope that Capital Insights will continue to help you raise,
invest, preserve and optimize capital as we move through these uncertain
times towards what many believe will be a brighter future.
Joachim Spill
Transaction Advisory Services Leader for Europe,
Middle East, India and Africa (EMEIA) at Ernst & Young
If you have any feedback or questions, please email joachim@capitalinsights.info
For more insights, visit www.capitalinsights.info where you can find our latest
thought leadership, including our market-leading Capital Confidence Barometer.

Insights
Regulars
06
16
Headlines
Global transactions news and how it affects you
Clive Sawyer PCL/SuperStock/Corbis

07
The real deal
Dave Murray reveals why effective risk
management is now more important than ever
08
Transaction insights
Key M&A facts and figures at your fingertips
15
The PE perspective
Sachin Date explains why private equity needs
to innovate and look to emerging markets
21
Moeller’s corner
Features
M&A Professor Scott Moeller gives his five steps
to efficient post-merger integration
43
Further insights 10 Eurozone: Time to be brave
More insights on how to raise, invest, In recent months, M&A activity has fallen
preserve and optimize your capital sharply in the Eurozone. Yet, for well-prepared
corporates, the opportunities for growth are
there, if they follow the right steps.
16 After the spring

The Arab Spring has been a watershed
moment for MENA. Capital Insights
explores why the region could provide great
opportunities for forward-thinking companies.
22 Man of steel
#1
Koushik Chatterjee, CFO of Tata Steel, tells
Ernst & Young - recognized by
mergermarket as top of the European
Capital Insights how the company is stabilizing
league tables for accountancy advice operations in Europe while expanding at home
on transactions in calendar year 2011* and in other emerging markets.
* As run on 11 January 2012
22 For further insights, visit
www.capitalinsights.info
or download our app
10 QxQ IMAGES/Datacraft/Getty
34
Michael Grecco Photography/Getty Images
28 Getting the right mix 36 Going private

With an estimated US$8t worth of corporate The Eurozone crisis means that privatization
debt set to mature by 2015, we investigate is firmly on the agenda of governments
the capital raising options open to companies. across Europe. We explore the issues for
Plus a look at cross-border IPOs. companies looking to acquire state assets.
34 The case for listing 40 Take cover

Kyle Gendreau, CFO of luggage giant The combination of investment losses, low
Samsonite, talks exclusively to Capital margins and Solvency II means that the future
Insights about the company’s recent cross- could be tough for insurers. So how is the
border IPO and its Asian expansion plans. sector meeting these daunting challenges?

Headlines
Gathering clouds Cash at an all-time high
Technology companies are looking to the Companies are sitting on record amounts
cloud. Oracle recently bought cloud-based of cash. Ernst & Young figures show that
software company Taleo for US$1.9b, corporates in the Eurozone alone are hold-
marking the tech giant’s second major ing an all-time high of €778b (US$1.02t).
purchase of a cloud-based company. The Yet despite regular headlines about this
Taleo deal follows closely behind another phenomenon, there seems to be no clear
cloud-focused purchase, with Germany’s consensus on what defines excess. While
SAP announcing at the end of 2011 that it shareholders might see cash-hoarding as
would buy SuccessFactors, a US cloud- Alternatives on the rise a reason to push for higher dividends or
based company, for US$3.3b. These and New figures show that corporates are attractive M&A opportunities, cautious on-
other cloud-based targets showcase the turning to alternative funding methods like lookers will argue that large cash cushions
sector’s rapid consolidation, which could asset-backed lending (ABL) as financing are necessary in an uncertain market. And
fuel competition and boost valuations for via traditional means such as bank loans it seems increasingly difficult to gauge how
such businesses in the coming year. becomes more difficult to access. Fourth shareholders will respond to M&A deals, as
quarter 2011 figures from the UK Asset mentioned in the G4S example below. Busi-
Based Finance Association (ABFA) reveal nesses now need to think ever more care-
that ABL has grown by 7% year-on-year, fully about how best to invest their capital
compared with a 3.7% contraction in wider in a market where the focus on companies’
lending. There have also been reports that balance sheets seems sharper than ever.
payment-in-kind (PIK) notes, last popular in
2007, are making something of a comeback.
Meanwhile, a number of well-known
cl Patrick Aventurier/Getty Images tc Chris Ratcliffe/Bloomberg via Getty Images cr Spencer Platt/Getty Images
companies such as TomTom and Nokia have

turned to forward start facilities to meet
their refinancing needs. For more on alter-
native funding sources, see page 31.
Transaction tax debate Public pressure on PE

In January, French President Nicolas Two public private equity (PE) groups, KKR
Sarkozy (pictured above) announced plans and Apollo, reported fourth-quarter profits
to introduce a financial transaction tax that were down on last year. Apollo, which
(FTT) in France from August 2012. This has listed on the NYSE in 2011, reported a No big deal
rekindled the debate about imposing the tax US$357m Q4 profit — a fall of 61%. KKR The end of 2011 saw a number of extremely
Europe-wide. The FTT, which would tax the announced a US$226m profit, a 68% drop. high-profile deals fail to complete. This was
exchange of shares and bonds at 0.1% and These declines have been exposed to public down to both regulatory hurdles and growing
derivative contracts at 0.01%, was view at a time when PE management fees investor activism. AT&T’s US$39b acquisition
proposed by the European Community (EC) and tax treatment are already topics of of T-Mobile USA and the US$12.3b merger
in September 2011 and has been criticized much debate. In the US and Europe, the of US-based NYSE Euronext (pictured above)
by some policy-makers. Specific points of classic “two and twenty” fee structure and Deutsche Börse both lapsed due to anti-
contention include taxes applied to transac- — whereby general partners collect a 2% trust concerns. Meanwhile, UK-based G4S
tions that are routinely used by non-finan- management fee on committed capital as terminated its US$8.2b acquisition of Danish
cial firms, including currency swaps utilized well as 20% of a fund’s profits — has been outsourcing company ISS in response to a
by importers and exporters, as taxing such widely criticized, causing some fund manag- backlash from shareholders and regulators.
dealings would raise the cost and reduce the ers to loosen their fee structures or reduce Given the steep financial penalties attached
flexibility of funding. The debate highlights management fees. Executive pay packages to lapsed deals, business has woken up to
the difficulty of imposing uniform policies at listed PE firms have also been made the importance of carefully mapping out
over vastly different business environments. public, raising the pressure PE firms face deal terms and communicating deal ration-
The FTT is likely to remain a contentious when operating as public entities. For more ale to investors in advance. For more on
issue over the next 12 to 24 months. on PE, see page 15. M&A in Europe, see page 10.
Dave Murray
The real deal
Smart
moves
Effective management of financing, fraud and supplier Tumultuous markets have put extra stress
on the weaker links in companies’ supplier
risk can help businesses navigate choppy economic seas bases. The risk of a key supplier failing is
often difficult to evaluate, and even harder
T
he ongoing financial crisis has led the market for corporate debt. They may to mitigate. This is illustrated by examples in
to turmoil in capital markets, the charge a premium, albeit with less onerous the renewable energy market such as Danish
advent of new regulations and covenants than traditional lenders. However, wind turbine suppliers Skykon and solar
increased challenges in supply borrowers need to tap the markets now — panel makers Solyndra as well as the recent
chains. The impact of these developments before the remaining liquidity dries up. announcement that electric car battery
has increased the importance of risk maker Ener1 had filed for bankruptcy in
management in M&A and capital raising. Fight fraud the US. Nowadays in a transaction, buyers
Managing risk has always been vital, The risk of fraud is hardly new. Many need to pay more attention to this area, and
but recent experience has shown us that companies employ sophisticated internal consider how their target would perform if its
there are now three areas worthy of greater audit processes to detect wrongdoing. main provider went out of business. Where a
attention: financing, fraud and suppliers. But the current crisis has exacerbated the particular issue is identified, options such as
challenges and there are numerous examples supplier financing or even vertical integration
Financing focus of creative accounting among management are worthy of consideration.
Raising finance is going to be an ongoing teams that are eager to meet targets — such Indeed, for stronger businesses, acquiring
challenge to all but the strongest businesses. as the recent case involving ING. a supplier in today’s climate can be used to
As mentioned in Getting the right mix, New regulations designed to minimize create value from the supply chain. For more
on page 28, around US$8t in corporate debt fraud have been introduced. The US Foreign on supply chains, see Viewpoint, page 11.
is due to be refinanced in 2012, and those Corrupt Practices Act (FCPA) and the UK
with weaker credit are already finding it Bribery Act are examples of government Risky business
harder to refinance. So, what other options responses. Such laws have implications When the markets are benign or thriving,
are available to those businesses without a not only for businesses in their everyday risk seems to melt away in the eyes of many
triple-A rating? If bonds and bank lending operations, but also for deals. The FCPA transactors. However, today, whether you
are unavailable, capital intensive businesses in particular makes a buyer liable for the are considering an acquisition, preparing a
may find that asset-based finance is feasible. illegal acts of an acquired business. Buyers business for sale, or focusing on optimizing
Here, “mortgage”-type facilities are taken should boost investment in corruption due invested capital, financing, fraud and
out on specific assets, such as machinery. diligence when making acquisitions in less supplier risks are worth a closer look.
An alternative option is financing from well-policed markets. Dave Murray is EMEIA Markets Leader,
non-bank lenders. Private equity firms such Transaction Advisory Services, Ernst & Young.
as AXA Private Equity as well as insurers Chain reaction For further insight, please email
like Legal & General are currently entering Supply chains are critical to every business. dave@capitalinsights.info

Netherlands
United Kingdom 149
434 US$14.1b
US$91.5b
France
Canada
191 177
US$33.8b US$41.4b
USA
Spain
607
US$161.4b 120
US$30.9b Switzerland
96
US$48.2b
Transaction
insights 144
US$43.3b
Brazil
Key facts and figures from the world of M&A
Breaking down barriers days for cross-border deals, against 64 for the larger
Globalization isn’t just a buzzword in the world of M&A. domestic M&A market (see Figure 1) and the ratio of lapsed
Completed cross-border deals rose by 9.3% to 4,547 to completed deals rose to 2.3% from 1.9% in the preceding
deals worth US$88.3b last year, bringing the share of year (see Figure 2). Acquirers even paid more, on average,
international transactions to 36% of global M&A — the with the median multiple for international takeovers coming
highest level in more than a decade (see Figure 4). On the in at 10.1x EBITDA, compared to 9.7x for the overall market
downside, these types of deals take longer to complete, are (see Figure 3).
costlier and are more likely to fail than domestic deals. Yet the share of cross-border M&A still hit a 10-year
And last year, deals between countries were, in general, high in 2011. Western companies, hard pressed to find
more difficult. The average deal completion time peaked at 70 growth at home, are using deals as a key route into rapid-
Fig 4. Completed cross-border deals as a percentage of global M&A (volume and value 2002—11)
Volume Value
32%
29%
2002 2003 2004 2005 2006
Investing
Fig 1. Public M&A completion times — median average
75
Sweden 70
113
Number of days
65
US$16.9b 60
55
Germany
308
50
45
US$29.2b 02 03 04 05 06 07 08 09 10 11
Year
Belgium China Fig 2. Deal failures as a % of completed transactions
83 236 5%
US$9.1b US$37.2b 4%
Percentage
3%
Italy
133 2%
US$24.4b 1%
0
02 03 04 05 06 07 08 09 10 11
Year
India Fig 3. Median transaction multiples

132 12.0
US$24.7b 11.0
Australia
x EBITDA
10.0
150 9.0
US$42.4b 8.0
Key
Top 5 cross-border target markets by volume (2011) 7.0
02 03 04 05 06 07 08 09 10 11
Volume of inbound deals (2011) Year
Value of inbound deals (2011)
Overall Cross-border
growth economies. And, conversely, cash-rich emerging market Hot spots

corporates have made a number of takeovers to acquire the The world’s largest economies overwhelmingly rank as the
technology and experience of their Western competitors. top M&A target markets, but there are still some surprises.
So, will international deals remain a popular option in 2012? While the US ranks first with 607 overseas deals worth
In times of uncertainty, corporate and private equity acquirers US$161.4b in 2011, inbound transactions accounted
generally avoid risk, particularly the sort that would have them for just 17% of US deals — a share far lower than the 45%
navigating the difficult terrain of unfamiliar cultural, legal, tax average for the other top 25 global target markets.
and regulatory complexities. But an intelligent corporate growth Elsewhere, among a handful of small economies
strategy cannot be limited to the narrow confines of national performing better than expected, Ireland leads with 72% of
boundaries in today’s globalized world of business. last year’s deals done by foreign acquirers.
40%
36%
2007 2008 2009 2010 2011

Timeto be
brave
M&A activity may have fallen sharply
in recent months as the Eurozone
crisis continued. However, the best-
prepared corporates are patiently
waiting for the right opportunities to
come along — and their chance could
come sooner than many expect
T
he level of M&A activity is often seen as an
indicator of the state of corporate health and
confidence in the economy. On some measures,
2011 wasn’t a bad year for M&A in the Eurozone.
Last year, 2,759 deals — worth a total of €345b (US$456b)
— were completed. Compared with 2010, that was an
increase of 9% in deal volumes (up from 2,520 deals) and
5% in value — up from €328b (US$433b).
However, M&A activity slowed considerably in the
fourth quarter — down 29% on the third quarter. You don’t
have to look far to see that the main cause has been the
resurgence of the Eurozone crisis. Renewed fears over
sovereign debt and the banking sector have badly damaged
economic and business confidence though liquidity may
now be returning.
“There is a battle on two fronts in the Eurozone,”
says Keith McGregor, Ernst & Young’s EMEIA Capital
Transformation and Restructuring Leader. “A battle for
growth in a near zero environment and a battle for capital
as the financial crises continue. This is having a real
impact on Eurozone M&A.”
Investing
Viewpoint
Ernst & Young’s Keith McGregor
examines supply-side risk and how
Marie Diron, a Senior Economic Advisor to
Ernst & Young, believes 2012 will be another difficult year.
companies can mitigate this
“There is a very large amount of debt to be refinanced by
both the public and the private sector,” she says. “Although
W
market conditions have improved this year, raising funds ith business operating models becoming more globalized,
may still prove difficult.” For example, according to ratings corporates have invested heavily over the last 10 to 15
agency Standard & Poor’s, there is US$4b of corporate debt years to make their supply chains as taut and efficient
set to mature in Europe alone between 2012 and 2015. as possible. Just-in-time manufacturing and the trend toward
There is additional strain on banks’ balance sheets concentrating on as few suppliers as possible for particular
as they restructure and try to raise the funds needed to components have removed huge amounts of cost and working
improve capital ratios. European Banking Authority figures, capital inefficiencies.
published at the end of 2011, showed Eurozone financial However, in today’s unsettled environment, implementing efficiencies
institutions will need to raise nearly €115b (US$151b) in may now present significant risks. For example, car manufacturer Ford
additional capital by the end of June 2012. used to have just one supplier of black paint. When that supplier’s capacity
The pressure on banks to raise this necessary capital will to deliver was removed by Japan’s Tohoku earthquake in 2011, Ford
inevitably mean that many companies will struggle to obtain had to stop the production of certain black cars. According to a study by
financing via traditional routes and will, instead, have to turn reinsurer Swiss Re, worldwide economic losses from natural disasters in
to increasingly skeptical capital markets. See Getting the 2010 totaled US$194b. In the supply chain, it seems even “acts of God”
right mix, page 28, for more on corporate refinancing. need to be anticipated.
However, this does not necessarily spell an end to M&A Multinational corporations should be taking a good, hard look at
activity: many corporates are cash rich. In the Eurozone their supply chain and the organizations within it. In a November
alone, an all-time high of €778b (US$1.02t) sits in the 2011 survey for the Zurich Financial Services Group and the UK
coffers of listed companies, according to research by Business Continuity
Ernst & Young using data from Bureau Van Dijk. Institute, 85% of companies
This has left many companies with no shortage of said they had suffered Defend your supply
liquidity. But while no one is forecasting a return to pre-2007 at least one supply chain chain by supporting
levels of M&A deal-making, Diron believes that there might disruption in 2011.
be opportunities for companies with healthy balance sheets. It is important to assess
the supplier
“Crisis is often an opportunity to restructure companies and supply chain risk in two financially or even
evolve sectors,” she says. critical dimensions — risk investing in it
At London-based hedge fund manager Toscafund, of failure, and opportunity
Chief Investment Officer and Chief Economist to replace. Clearly, where there is no opportunity to replace and a
Savvas Savouri believes that M&A activity is set for heightened risk of failure, defending the supply chain with financial
resurgence this year: “When demand starts to soften the support — either by reducing payment terms, injecting funding by way
top line, you start to address the possibility of looking at of loans or in the extreme making an equity investment — may be
ways to take out duplicated cost,” he says. “The best way the only viable option.
is to look for a target you can acquire.” But there are potential pitfalls. The law varies greatly from
There are three specific developments that may see country to country when it comes to giving financial support to near-
corporates evaluating M&A to address strategic plans: bankrupt companies. Corporations that put money into their suppliers
l Michael Grecco Photography/Getty Images
may find themselves inadvertently taking on liabilities they hadn’t

1 Distressed opportunities even imagined.
There is no doubt that distress is on the rise. According In addition to physical goods, corporates should assess the risks
to the UK Government’s Insolvency Service, the number associated with the supply and/or transfer of data and cash across
of liquidations of UK companies alone rose by 7.2% in the Eurozone.
Q4 2011, compared with Q4 2010.
However, whether a company is likely to be rescued —
and whether a turnaround is an opportunity or not — is very Keith McGregor is Ernst & Young’s EMEIA Capital Transformation
much down to the acquirer. and Restructuring Leader.
“It depends a lot on the profile of the buyer and whether For further insight, please email keith@capitalinsights.info
they have the necessary resources to revamp distressed

Privatization of state assets may provide an attractive opportunity for
buyers in the Eurozone. In addition, distressed businesses may be a potential
target if the acquirer has the necessary resources to drive a turnaround.
businesses,” says George Momferratos, Ernst & Young’s savings bank from Bank of Spain for €1 (US$1.32). BBVA
Transactions Advisory Services Leader for Greece. will receive protection for the €953m (US$1.25b) losses
One example of a company that had the necessary suffered by Unnim, which was itself a merger of three
finance and was well positioned to take advantage of a Catalonian cajas (small Spanish savings banks).
distressed opportunity in its own sector is Motts Leisure BBVA Chairman Francisco Gonzalez said: “This operation
Ltd. The UK-based firm completed a £99m (US$155m) is good for BBVA and Unnim and will help to strengthen the
acquisition of coach tour operator Crusader Holidays, which Spanish financial system.”
had filed for administration prior to the deal last December.
However, some companies may feel it is better to 2 Primed for privatizations
play the waiting game. Momferratos believes that a lot of Privatization of state-owned assets may also provide an
companies in Greece, for example, are currently refraining attractive route for buyers. Keith McGregor says there are
from acquiring their stricken rivals. “They may prefer to some 150 state-owned assets across Europe that have been
wait until the companies collapse or are taken over by their earmarked for restructuring or sell-off to plug fiscal gaps
creditor banks, which may soon lose appetite and seek to and that have been identified by his firm as being potentially
offload them.” attractive to buyers.
Sector consolidation could also be a key driver that Two recent examples that illustrate the interest among
compels companies to buy their rivals. In a survey of corporates looking to take control of government-owned
European deal-makers, released by fractional airplane businesses come from the Iberian Peninsula.
operator NetJets Europe in November 2011, 45% of Reports from Spain have stated that both LATAM — the
respondents cited consolidation as the main driver of company formed through the merger of Chile’s LAN and
M&A activity for 2012. Brazil’s TAM airlines — and the International Airlines Group
In Spain, for example, financial services sector are working on offers for the privatization of Portuguese
consolidation has been a key trend as firms attempt to airline TAP.
restructure and raise the funds needed to improve capital And, as we went to press, State Grid Corporation
ratios. This move toward consolidation is illustrated by of China and Oman Oil had both tabled offers for the
BBVA’s purchase of Unnim at the beginning of March. acquisition of Portuguese power grid operator REN.
BBVA, Spain’s second largest bank, bought the rescued “It is clear that these privatisations could provide an
opportunity to raise cash,” says McGregor. “However, it is
likely that to prepare these assets for market, there needs
M&A activity in the Eurozone from 2000-2011 (completed deals)
to be improvement programmes together with financial
3500 and political stability. Making the difficult announcement to
3250 voters that the ‘crown jewel’ assets may have to be sold will
3000 also need to be managed carefully.”
2750 See Going private, page 36, for more on privatization.
2500
2250 3 The buy-back option
2000 François Masquelier, Deputy Chairman of the European
Volume
1750
Association of Corporate Treasurers, notes that many
corporates are, indeed, cash rich. They could, he says,
1500
afford to enter privatization auctions or launch takeover
1250
bids, but he is not yet convinced that they are sufficiently
1000
confident to do so.
750 Meanwhile, the returns that companies can make
500 by investing their cash in financial assets are now so low
250 that “it’s not comparable to the profitability you can get
0 from your own operations,” he says. This is why he thinks
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
that share buy-backs are currently attractive to some
Year
Key companies with surplus cash.
Deal value represents Deal value represents Organizations such as Comcast, UK food retailer
US$237m US$904m Morrisons, and pharmaceuticals groups AstraZeneca and
Viewpoint
Ernst & Young’s Alexis Karklins-
Marchay explores how emerging
GlaxoSmithKline (GSK) have all announced share buy-back markets are dealing with the crisis
plans in the last year. Comcast, the US cable company, in the Eurozone
announced a US$6.5b share buy-back program in early
2012, accompanied by an increase in dividends.
T
GSK said it will target share repurchases of £1b–£2b he effect of the Eurozone crisis on rapid-growth markets
(US$1.6b-US$3.2b) in 2012. But ultimately, companies (RGMs) means their growth won’t, perhaps, be quite so rapid.
will need to be nimble, as is the aspiration of GSK, whose The slowdown in Europe will hit RGM exports while, in the other
capital allocation plans are to remain flexible enough to direction, the scaling back of foreign direct investment will also have an
account for possible bolt-on acquisitions. impact on RGM growth.
In a statement at the end of 2011, GSK announced For RGMs in Eastern Europe, the dominance in their financial systems
that it was committed to using free cash flow to support of crisis-struck European banks will add a third factor.
increasing dividends, undertake share repurchases or, Collectively, we expect the 25 RGM countries identified in our Rapid
where returns are more attractive, reinvest in the business Growth Markets Forecast January 2012 to grow by 5.3% in 2012. This
including bolt-on acquisitions. is down from our previous forecast of 5.9%.
While the environment remains so uncertain, there are So how will companies in the RGMs respond to the Eurozone crisis?
steps that corporates can take to reduce risk and better Despite its problems, the European Union remains the world’s largest
position themselves to seize corporate opportunities when economy, making it a very attractive market for businesses based in the
they arise. Here are four of the most important issues for RGMs. We can expect to see
1
corporates to consider: a continuation of the trend for
emerging market companies
Assess strategic and tactical opportunities to make acquisitions in Europe.
Consumer products
McGregor notes that acquisitions of distressed assets Consumer products sectors and financial
could be an opportunistic way to build market share or are particularly attractive — as services sectors will
take out weakened competitors. the £100m takeover of bakery
both be particularly
Alternatively, acquisitions could be part of plans that business Sara Lee in Spain
are more long term, which could also include restructuring. and Portugal by Grupo Bimbo attractive
David Davies, Group Chief Financial Officer of the Austrian of Mexico in November 2011
integrated oil and gas company OMV, is currently helping demonstrates. The same is true of industrial sectors, which will continue
to remodel his organization by disposing of downstream to see acquirers from emerging markets as the concept of “relocalization”
businesses — refineries and retail operations (i.e., gas drives them to have multiple manufacturing sites around the world.
stations) — while looking to expand and acquire upstream Financial services won’t be immune, either, as we saw in February
businesses in oil and gas acreage. this year with Russia’s Sberbank bid for Volksbank of Austria. And
“While the Eurozone crisis is a backdrop, this change privatizations — particularly in southern European countries where
of strategy is driven by a structural rather than cyclical governments are especially keen to raise cash — will offer tempting
shift in our business,” says Davies. targets for RGM companies that have the money and the ambition.
Acquisitions can also be a defensive move to protect When RGM-based companies go on the acquisition trail, they may
critical components in a supply chain. See Viewpoint, initially prefer to seek out joint ventures or take minority stakes. This is
page 11 and Smart moves, page 7 for more on managing a way of learning more about their target markets, but involves less risk
2
supply chain risk. and lower costs than taking full control.
Newcomers to the European corporate scene may well have to scale
Don’t rely on traditional policies in valuations a steep learning curve. From dealings with unions to environmental
The current low level of corporate activity makes it difficult matters and greater regulation, acquirers from RGMs may have to
to determine fair prices for corporate assets. “There simply traverse a landscape very different to their own. But don’t be in any
isn’t the deal volume to generate enough comparable doubt: a growing number of them are prepared to give it a try.
transactions,” says McGregor. “There are difficulties too
in fundamental valuations, as the cost of capital is proving
difficult to compute,” he says. This is driven not only by
uncertainty about the risk-free rate, due to sovereign Alexis Karklins-Marchay is Ernst & Young’s Emerging Markets Center Leader
instability, but also the risk premium, given the volatility For further insight, please email alexis@capitalinsights.info
in financial markets.

Corporates looking at M&A opportunities in the Eurozone need to take four key
actions: assess strategic opportunities; don’t rely on traditional valuation
policies; have a solid integration plan; have a good team in place.
Deal activity in the Eurozone by volume in 2011

(completed deals)
700
658
624
4
Make sure you have a good team in place
“The vision of the CEO and CFO is important,” says
Masquelier. “But also make sure that the team is working
together. Don’t just work with deal-makers. And the
treasury should be involved early on to make sure it
600 gives its help and support when it’s a question of
hedging, financing and maintaining
500 the credit rating.”
Usually, he adds, you have a
short period of time in which to Evaluate pricing with
Deal volume
400
access data when a deal is being
329
300 worked on, “so you need skilled
a measure of prudence
300 299
people ready to act quite rapidly. but recognize you’ve
got to pay the market
Netherlands
200 You don’t need an army, but a good

team. And be ready to give priority
value for the deal
Germany
to the acquisition.”
France
100
Spain
In April 2011, General Electric

Italy
0 saw growing opportunities in Latin America and announced

Country it was strengthening its M&A team in the region.
Source: mergermarket Masquelier’s final piece of advice is to be prepared to
manage your team’s sense of frustration if the deal doesn’t
At OMV, Davies is understandably cautious. “There is come off: “The investment banks are used to that because
just too much risk around,” he says. “But while you have they work on 10 files and they succeed on one. But at the
to evaluate any pricing with a measure of prudence and corporate level, when you enter into a deal, the expectation
conservative assumptions, you also have to recognize that is for success.”
you’ve got to pay the market value for the deal.”
“It’s all very well putting 1,001 conservative bids
together, but if it leads to 1,001 bids not being successful,
3
Deal activity (completed deals) in the Eurozone by value in
then it’s pointless doing it at all,” he says.
2011 (US$b)
Develop a solid integration plan before the deal 90

81.2
When mergers and acquisitions fail to meet management’s
80 77. 8
expectations, or even dilute shareholder value, the two
principal explanations seem to be that corporates pay 70
too high a price, or fail to implement an effective
integration plan. 60
52.9
That plan should be ready, but constantly revised
50
during the due diligence phase. McGregor says that
Deal value
the scale of “assumed synergies” in some deals he has 40 36.1

seen is “frightening.” In one case he was involved in,
synergies worth some 25% of forecast earnings were built 30
into expectations. Ten months in, realized savings had 20,6
amounted to just 2% — a significant variance. 20
Germany
To achieve a solid integration plan, corporates

Ireland
France
10
Spain
should be looking at five separate steps, as laid

Italy
out by Professor Scott Moeller of Cass Business 0

School in his feature on post-merger integration on Country
page 21. These are: leadership; maintaining skilled Source: mergermarket
advisors; strong communication; clear focus and

advanced planning. For further insight, please email editor@capitalinsights.info
Sachin Date
The PE perspective
new A
gameplan
Over the last decade, private equity has demonstrated

that it is robust. However, in order to progress, it will
need to innovate and look to new markets
P
rivate equity (PE) likes it when the for PE firms to take minority interests. indicated a desire to increase investment in
going gets tough. And PE often However, since the 2008 financial crisis, emerging Asia. Indeed, deals are increasing
finds success in difficult times. they have looked to acquire this type of in countries such as Indonesia and Malaysia.
Last year was no exception. Despite stake in growing companies. This trend Africa is another region drawing
ongoing fears of a Eurozone meltdown, the has always existed in emerging markets significant interest from PE investors.
European buyout market was resilient. The such as China and India. According to research firm Preqin, an
fact that completed deal values in 2011 While regulations have in part unprecedented US$3b in funds was raised
at €58.9b (US$78b) were higher than in driven this, it has been more a reticence for PE investment in Africa in 2011, with
2010 at €55.3b (US$73b) was testament by entrepreneurs to lose control of South Africa and Nigeria as the destinations
to PE’s tenacity. their companies that has resulted in that will see the majority of these funds.
Moving forward, however, PE firms minority investing. These markets offer PE firms many of
will have to evolve if they are to thrive. However, these entrepreneurs welcome the same dynamics that are currently at
Innovation and an entrepreneurial mindset more than just the capital PE can provide. play in more established emerging markets,
will be major factors that drive PE for the They value PE’s experience in operational but with less competition for high–quality
remainder of 2012. improvements and in implementing deal flow and with the opportunity to buy
new initiatives. companies at more attractive valuations.
New strategies To be successful in these turbulent
As traditional bank financing has become Beyond the BRICs times, PE firms need to be bold by seeking
harder to obtain, PE is seeking out The move toward innovation will also involve out different types of deals, new sources of
less obvious sources of debt finance to PE firms finding businesses outside the capital and identifying the most promising
complete its deals, including turning to traditional developed and BRIC countries. businesses in the sectors and geographies
the high-yield markets. In some cases, PE is no longer an infant industry in the that underpin global economic growth.
for truly high-quality assets, PE is even rapid-growth powerhouses of China and Those that strike the right balance between
willing to put in 100% equity — opting to India. In Latin America, and particularly recapturing the entrepreneurial spirit
delay debt financing. Brazil, PE is thriving. adopted by PE’s pioneers and managing
Another clear illustration of the Emerging Asia is one of the “frontier” their maturing firms effectively will be
industry’s desire to innovate is the different markets that PE is looking to for new tomorrow’s winners.
types of deals PE is undertaking, including opportunities. Almost half (48%) of
Sachin Date is the Private Equity Leader for EMEIA
minority investments and corporate respondents in Ernst & Young’s inaugural at Ernst & Young. For further insight, please email
partnerships. Traditionally, it has been rare Private Equity Capital Confidence Barometer sachin@capitalinsights.info

After the
spring Barriers to deal-making
still exist across
North Africa and the
Middle East. But in the
wake of the Arab Spring,
opportunities are arising
for those brave enough
to take them
T
he wave of popular uprisings that Africa (MENA) has not traditionally been
broke across the Arab world in perceived by foreign investors as a region
2011 is one of the most significant particularly prone to political risk.
events of this young century. In recent years, impressive strides have
While not all of the forces that the Arab been made to remove impediments to
Spring unleashed have been felt equally, investment. With massive infrastructure
or harnessed for growth, it is clear that needs, attractive demographics and, in
societies and economies across the region some areas, a surfeit of liquidity, MENA has
are changing rapidly. emerged as an enticing region for investing.
Prior to 2011, and despite a history “People were coming into the region on
of political strife, the Middle East & North the positive side because of the growth,”
Investing
l Flickr/Jialiang Gao/Getty Images

Viewpoint
Emad Ragheb tells Capital Insights
how stable government is improving
the business outlook in Egypt
E
gypt has been through numerous changes over the past year.
At the outset of the Arab Spring, with the daily demonstrations
in Tahrir Square, people were worried about their country’s future.
Most foreign investments were put on hold. But then, after the second
quarter of 2011, we started to see some acquisitions and requests for
due diligence. Things were picking up again as companies recognized that,
sometimes, the best time to invest is during a period of turmoil.
Serious obstacles remain. Instability is a key risk, with a number
of businessmen on trial in the aftermath of the ousting of President
Hosni Mubarak. People are still waiting to see what will happen on that
front. Some sectors have been badly affected by the insecurity. Tourism
is one; violent incidents frighten people away. But the biggest source of
uncertainty for investors is the inability to predict decisions. In particular,
this has affected developers who acquired land under the previous
government. In a few cases, they were penalized and had their licenses
withdrawn, and in a few other incidents, projects were put on hold.
A positive development over the last couple of months is that the
new interim government, headed by Prime Minister Kamal Al-Ganzouri,
has decided to settle land
disputes with most of the 17
developers that are affected. The key source
This is a highly encouraging of uncertainty
step, which has boosted
confidence among investors
for investors is
who are considering real the inability to
estate transactions in Egypt. predict decisions
Al-Ganzouri is a highly
capable individual, with
bags of experience. In just
a couple of months, he has achieved a great deal. Agreement with the
developers is key — and others are now approaching the government to
settle. Whatever the situation, it is clear that the government will not
renege on existing contractual agreements.
Further progress will hinge on political developments. A presidential
election is due to be held by the end of June. A smooth electoral process
says Phil Gandier, Head of Transaction Advisory Services should resolve much of the uncertainty that still afflicts business life in
at Ernst & Young MENA. “A lot of the mature markets were Egypt. Many investors are waiting until after the election before making
tapering off so, as a Western company, if you wanted to get investment decisions. And though there are concerns about the future
additional growth you had to have some of your portfolio in direction of policy under Islamist political parties, the main victors in the
a fast-growth market like China or the Middle East.” parliamentary elections will want to see things cool down.
This growth was exemplified by the rise in foreign direct We will have to wait and see, but, along with many others, I am
investment (FDI) inflows in the region, which stood at US$92b confident about Egypt’s future.
in 2008, according to HSBC Q4 2011 Global Economic
Forecast. The effect of instability in the region saw FDI fall to Emad Ragheb is Ernst & Young Egypt Country Managing Partner
US$30b in 2011. The report forecast that FDI would fall by For further insight, please email emad@capitalinsights.info
a further US$1b to US$29b in 2012.

Algeria
Libya Population ............. 35m
Population ............. 6.6m GDP ...................... US$183.4b
GDP ...................... US$74.23b Deals (Vol) ............. 1
Deals (Vol) ............. 3 Deals (Val) ............. US$68m
Deals (Val) ............. US$228m
Egypt Tunisia
Population ..............10.6m
Population ..............82m
GDP .......................US$48.9b
GDP .......................US$231.9b
Deals (Vol) ..............1
Deals (Vol) ..............9
Deals (Val) ..............US$517mc
Deals (Val) ..............US$1.19ba
Jordan
Population ..............6.5m
Facts and figures for key MENA countries
GDP .......................US$28.4b
Deals values and volumes from Jan 2011-Feb 2012
a) 2 deals undisclosed Deals (Vol) ..............1
b) 1 deal undisclosed Deals (Val) ..............US$187mb
c) 2 deals undisclosed
Sources: World Bank, CIA Factbook, mergermarket
Obstacles in the way poorly in measures such as export year’s political events. Greenfield investments
With this fall in FDI in mind, it would appear diversification or contribution of exports in Egypt also declined by 80% in the first
that events have impacted investor appetite. to economic growth. four months of 2011, compared with the
The relative lack of transparency and limited This is reflected in the region’s weak same period in 2010.
overseas shareholder control in certain export base. The most diversified economies A MIGA survey shows that the turmoil
areas further raises barriers to deal-making. in MENA export around 1,500 goods has had a significant impact on investment
Egypt aside, regulatory regimes present compared to nearly 4,000 in countries such intentions.
obstacles to majority ownership. There as Poland, Malaysia and Turkey. More than 20% of respondents said their
are legal and practical impediments that Another barrier to investment in the organization has placed investment plans on
prevent non-residents from holding region comes from limited transparency, hold or was reconsidering investments.
positions higher than 51% in companies, according to Gandier. “The regulations “A perfect storm has been created to
and economies can be impacted by are a bit opaque,” he says. ”Governments stop a lot of investment,” says Gandier.
substantial subsidy regimes, which distort could change laws quickly. You would have “We had a few months where there was real
economic decision-making and place a a broad kind of principle as a law, but growth in M&A activity. We saw an upturn
major drag on budgets. International detailed regulations weren’t there. It in business confidence, and then came the
Monetary Fund (IMF) estimates show that was up to the employees working at the Arab Spring. At the same time, you started
price subsidies in MENA countries amounted applicable regulatory body at the time to having a lot of nervousness about the US
to US$200b — equivalent to 7.8% of GDP in decide how they wanted to implement or going into a double-dip recession, and the
2010, with 15% of this amount reflecting interpret that law.” whole Eurozone crisis.”
the cost of food subsidies. Access to international markets has
Low job creation levels and sluggish The Arab Spring also deteriorated. According to the IMF
br Clive Sawyer PCL/SuperStock/Corbis
economic growth are direct indicators The heightened political risk brought MENA Economic Outlook, published in
of generally underperforming private about by the Arab Spring has added a new October 2011, international issuance of
sectors. Insufficient participation by dimension to the decision-making process bonds, equity and loans from MENA-based
private enterprise and businesses has for those looking to invest in the MENA companies declined by 40% during the
precluded some MENA economies from region. This is aggravated by investor first half of 2011. This compares with
undergoing an effective process of concern about how businesses will be an increase of almost 17% for emerging
economic diversification. According to a treated by the new elites that have risen markets companies as a whole.
2011 World Bank Multilateral Investment to power in the region. Such financial market trends could
Guarantee Agency (MIGA) report, this Inward FDI flows plummeted in the further endanger political progress and
has meant that MENA economies score countries that were directly affected by last erode investor confidence. Meanwhile,
political violence — especially civil disturbance — ranks as
the most concerning risk for foreign investors, according
to MIGA’s 2011 World Investment and Political Risk report.
The close identification of Egypt’s business class with
Viewpoint
the regime of ousted President Hosni Mubarak further
complicates the investment climate. Punitive measures
were handed out to prominent Egyptian corporates such as Ashar Nazim explores the role
Ezz Steel. This trend may also inhibit growth in Libya, where that Islamic finance can play in
Saif Gaddafi, son of the late leader Muammar, directed the
deposed regime’s reformist economic agenda. revitalizing the region
The consequences are already being felt across the
region. Hazem el-Beblawi, Egypt’s finance minister, warned
I
last November that lawsuits against foreign businesses were slamic finance is another area that may enjoy some uplift as a result
shaking market confidence in the country. Legal challenges of the Arab Spring. Industry forecasts suggest that global Islamic
to foreign developers have been based on alleged banking assets among commercial banks will reach US$1.1t in 2012,
profiteering and misappropriation of public funds under the whereas it stood at US$826b in 2010.
Mubarak government. As new geographies open up to Islamic banking, the MENA Islamic
banking industry is expected to more than double to US$990b by 2015.
Opportunities abound In a number of countries where there is a large Muslim population, the
Despite these barriers, the MENA region’s transformation regimes have been slow to introduce sharia (Muslim law) compliant Islamic
also throws up opportunities. banking. However, as a result of the uprisings, many of these governments
Infrastructure is especially crucial. According to are in listening mode. Some have initiated dialogue or even implemented
Abdulla Mohammed Al Awar, CEO of the Dubai Islamic banking reforms. For example, the Tunisian government is
International Financial Centre Authority, infrastructure considering the launch of a comprehensive framework to introduce Islamic
development is so vital because it is the foundation of banking to the country.
overall economic growth. “There is a lot to be done to Many markets see this
identify opportunities and manage investment risks in as a way to encourage a Islamic finance is
the region,” he told a seminar in January. more inclusive financial
Gandier agrees that much of the growth that follows system which will help
another area that
the Arab Spring will be around social infrastructure. broaden the formal economy may enjoy an uplift
“It is about improving the healthcare, education and by bringing in the previously as a result of the
housing facilities. A lot of these countries have big unbanked segments.
Arab Spring
housing programs on the go, to build affordable houses The MENA region’s
for the population,” he says. “Then you are going to move geographical proximity to
into building up the power and water utilities capacity for the Gulf region is another key driver of the prodigious growth of Islamic
these countries.” finance. Historically, the Gulf has been the source of both intellectual and
For those companies looking to make investments financial capital, which has helped the Islamic banking industry to grow.
or acquisitions in the region, there are four key areas Within the Gulf Cooperation Council (GCC), almost one-quarter of the
to consider: banking system has transferred to the Islamic model.
1
This is important because investors understand that if they want to
Appreciate the differences attract investments from the GCC, they need to structure their deals in
Investors should not treat the region as one bloc. a sharia-compliant way. They can then attract both conventional and
“In the very early days of the Arab Spring, people Islamic funding.
looked at the region and saw all sorts of trouble,” says
Ashar Nazim leads the Global Islamic Banking Excellence Centre
Gandier. “Now we’re seeing people differentiating between at Ernst & Young.
countries. People may be wary of what is happening in
For further insight, please email ashar@capitalinsights.info
countries such as Bahrain, Syria and Egypt, but much of

the region has been barely affected by the Arab Spring. government getting out of the way in areas where it’s
So they have to apportion the appropriate risk to the been the traditional monopoly.”
appropriate country.”
2
Beyond the unrest
Understand the demographics Many companies do not view the present unrest as posing
The region has a combined population of 450m people, a long-term barrier to doing business in the region. The
90m of whom are between the ages of 15 and 25. Over 2011 MIGA-EIU Political Risk Survey stated that 31% of
the medium- and longer-term, economic and demographic companies have not changed their investment plans in
factors will continue to attract market-seeking foreign MENA despite recent turmoil. And more optimistically,
investors, especially if governance is improved and less in the same survey, more than 50% said they would raise
cumbersome frameworks for doing business are implemented. investment in the region if there was greater stability under
This huge pool of workers, consumers and entrepreneurs democratic governments.
wants jobs and increased income to spend on themselves Strong economic growth looks set to continue in
and their families. MENA’s hydrocarbon exporting economies. The IMF
“Anything that leverages the demographic factors such forecasts that MENA oil exporters’ GDP growth will average
as consumer goods, healthcare, education, real estate and 4% in 2012.
even tourism offers huge opportunities,” says Gandier. For all the turmoil in Libya, for example, the country
A clear example of this is in the fast-moving consumer still has huge hydrocarbon wealth and untapped tourism
goods (FMCG) sector. In the largest FMCG deal in Middle potential. “From an investor’s standpoint, Libya has to
Eastern history, Coca-Cola recently paid US$980m for rebuild its infrastructure. A lot of money needs to be spent,
a half-share of Saudi beverage company Aujan Group, and the country will have money once it starts developing
in order to extend sales into Egypt and beyond. hydrocarbon and tourism industries,” says Gandier.
“The Middle East is a high-growth region with some of Indeed, hydrocarbons is seen as a major growth sector
the highest rates of non-alcoholic ready-to-drink per capita by overseas investors. In January 2012, Golden Crescent
consumption,” said Ahmet C. Bozer, President of the Investments, owned by Egyptian PE firm Citadel Capital,
Coca-Cola Eurasia and Africa Group. announced plans to sell 100% of its interest in National
3
Petroleum Company Egypt Limited to Sea Dragon Energy, a
Choose partners carefully Canadian exploration company, in a deal worth US$147m.
Companies have to give careful consideration to whom they Sea Dragon is currently engaged in the exploration
do business with. Some of their partners’ baggage may be and development of two concessions in Egypt.
related to old regimes, and that may have an impact on their Commenting on the acquisition transaction, Said Arrata,
future business. If they are new to the region, corporates Chairman and CEO of Sea Dragon, said: “This is a
could use cooperation agreements or move into a joint transformational transaction for the future of Sea Dragon
venture, rather than making outright acquisitions. and indicates the company’s commitment to grow in Egypt
One example of a recent venture in post-Arab Spring and elsewhere in the region.”
MENA is a major European investment in Egyptian textiles. At the end of February, the deal was yet to complete as
Czech-based Pegas is investing around €60m (US$79m) in it was subject to certain revisions around the terms of the
a textiles plant near Cairo, which is set to open in 2013. The share price agreement.
key to the deal is the sales agreement with a local customer,
who will buy textiles that the plant produces. M&A on the rise
4
The promise of a brighter future for MENA is feeding into
Understand political risk increased deal volumes. Ernst & Young’s MENA M&A Update
”There are strong economic growth opportunities for found total M&A volumes rose by 4% from 401 in 2010 to 416
investors who can supply the capital,” says Gandier, “but in 2011. And while full year values fell by 28%, fourth quarter
they need to be willing to take the time to identify and assess value saw a 64% rise on the third quarter to US$7.2b.
the risks that come with investing in developing markets.” The Arab Spring has yielded a new way of thinking among
While the risks are real, corporates need to see past people in the region. They are demanding better standards of
these to realize the benefits from the changes underway in living and greater employment opportunities. MENA’s
the region. And the road ahead may be bumpy. There are wealthier countries have expanded public spending plans as a
numerous examples of resistance to the removal and result. Saudi Arabia unveiled US$130b of additional spending
reduction of subsidies by lower income citizens in previous in 2011, while Qatar announced a US$8b handout in wages
years. Governments responded by raising subsidies. But and benefits for all public employees.
such actions may be a thing of the past. The political landscape must be watched closely, but as
“The governments we are talking to confirm the situation stabilizes, the opportunities for investors are
that they are no longer interested in funding 100% there — if they are brave and do their homework.
of the infrastructure programs that are necessary,”
says Gandier. “They also realize that the private sector
will probably create more jobs. You are going to see For further insight, please email editor@capitalinsights.info
Prof. Scott Moeller
Moeller’s corner
A fine
romance
Companies need to focus more on post-deal planning,
otherwise a great deal may become a poor business
with customers, employees and suppliers Most firms make the mistake of using only
Professor Scott Moeller is all benefiting as well. one medium.
Director of the M&A Research In short, it’s better to do a deal than Companies also need to maintain
Center at Cass Business School. not — but the key to great deal success is not focus. Competitors know that one of the
He also teaches Mergers & Acquisitions the buying strategy or the money involved. easiest times to steal business and the best
on the MBA and MSc programs. Success is principally determined by what employees is when a competitor is distracted
you do once you get past closing. by a deal. You need to ensure you have a
There are five key steps to post-deal strategy to retain clients and key staff.
success in the current environment. A great example is when Bank of New
York and Mellon merged in 2008. Their PMI
Steps to success mantra was “lose no clients.” Both firms
The first is leadership. Executives need had a clear communications strategy in
to lead from the front and focus on post- which every client-facing individual called
merger integration (PMI) success. One their clients on the morning of the deal
T
he ever-perceptive Anonymous mistake companies make is to determine announcement, so they would hear about
once said that: “Marriage is and announce key decisions about top the deal from their relationship manager
when a man and a woman management only after the deal is done. rather than from the media or a competitor.
become one. Trouble starts Best practice demands that the moment The most important aspect is to plan
when they try to decide which one.” you announce a deal, you reveal the first well in advance. UK-based retailer Timpson
Now apply this to M&A and you’ll see why level of the newly combined organization — did just that in 2009 when it bought photo-
concentrating on post-deal integration the people who report directly to the CEO. processing company Max Spielmann. It was
is more important than ever if you don’t After that, you should announce another a very successful acquisition, as Timpson
want a messy corporate divorce. management layer every month to six weeks. spent a large amount of time on the deal,
Alongside strong leaders, you need going as far as visiting every one of the Max
Is M&A still a good idea? skilled advisors. The core competency of Spielmann outlets, discussing how they
A new Cass Business School study most companies is not M&A. When you talk would eventually integrate each branch
entitled The Economic Impact of M&A to companies that do a lot of deals, they are within weeks of the deal closing.
shows that more deals fail than succeed. humble enough to admit that they need extra Remember: it may be the deal itself that
However, based on shareholder skills and resources. gets you the headlines but it’s the integration
returns, the deals that succeed did more Communication is vital. Different people work that follows that will determine whether
on the upside than the deals that failed will respond to different communication the deal fails or succeeds.
did on the downside. In fact, this study processes. Some may feel comfortable with
found that the average deal contributed email while others may prefer to receive For further insight, please email
£178m (US$279m) to the UK economy, information on paper or, indeed, in person. scott@capitalinsights.info

Advertising feature
Man
of
steel
Tata Steel’s CFO Koushik Chatterjee tells us how
the company is expanding capacity in India, while
working overtime to optimize European operations
Advertising feature
Optimizing
It’s never easy to integrate an acquired

business. You need to get the strategy
right. The objectives for growth must
be clear and those objectives need to
be translated into actions.
N
o development in Tata Steel’s 105-year history be 38% above those levels. In 2012, rapid-growth
is more significant than the moment in 2007 economies will account for 72% of world steel demand,
when it acquired the Anglo-Dutch steelmaker in contrast with 61% in 2007.
Corus (now known as Tata Steel Europe) — However, the EU still contributes 56% of Tata Steel’s
a company four times its size. The US$12b acquisition revenue, as opposed to 39% that comes from high-growth
instantly made the company the fifth-largest steelmaker markets in Asia. These figures have set the agenda
in the world, shooting up from 56th place. for Chatterjee. He is looking to optimize the European
At the time, the deal brought both huge advantages and operations and increase the share of revenue from
challenges. Along with the obvious synergies in operations, developing markets.
manufacturing and marketing, there were also concerns
over business integration, debt servicing and the cultural fit. Surviving amid volatility
“We did not have any examples to emulate — there According to Chatterjee, the market for steel has been
weren’t any multinational corporations from emerging uncertain for two reasons: raw material prices have been
markets,” says Koushik Chatterjee. volatile and buying behavior has been unstable. “For instance,
And while conditions in the Eurozone have meant that automobile producers are more careful about what kind of
it has been a challenge to maintain performance, Chatterjee exposures they take,” he says.
says the company is in a healthy financial position. In the Volatility makes things extremely difficult for the steel
past year, Tata Steel posted a net profit of INR89.83b industry. “If we are buying raw materials today, they’ll arrive
(US$1.8b). While this was down from INR123.5b (US$2.4b) at the plant in 45 days; it then takes us another 35 days to
in 2009, this was largely due to the European operations, produce the steel,” says Chatterjee. “So by the time we sell
where demand has taken a considerable hit. the steel, the price situation has changed completely.”
Globally, steel consumption is shifting toward emerging The uncertainty in the global markets leaves companies
markets. According to World Steel Association statistics, with little choice but to invest in new raw material sources
steel use in the developed world in 2012 will still be 14% and move to a product mix that has less exposure to price
below 2007 levels, whereas in developing economies, it will increases. “You need to manage your fixed costs by

So how does Tata Steel plan to grow in
such an uncertain global environment? The
company has embarked on a wide-ranging
series of management initiatives that seeks to
improve its competitiveness. “We are looking
insourcing and outsourcing, by consolidating sites and by to improve our supply chain management, and invest in
optimizing operations at each site,” he says. asset quality and the people we employ,” says the CFO.
More importantly, there are no overnight solutions to Tata Steel is undertaking the same measures across all
what is going on in the developed world. “It depends on how its markets including Australia, Thailand, Indonesia, Singapore
political decision-making will evolve,” says Chatterjee. and Malaysia — though these will be on a smaller scale than
Tata Steel has worked on a methodology to deal with at home in India and in Europe.
volatility in the global markets. Chatterjee’s team has been
conducting a “scenario analysis” every month, since 2007. Optimizing Europe
“The idea is to create ‘a memory for the future’ and It’s never easy to integrate an acquired business and Corus
look at all kinds of contingencies. After that, we look was a prime example. “There are several challenges,” says
at how we are geared up to deal with them,” he says. Chatterjee. “First, you need to get the strategy right. Second,
This exercise helps the company manage circumstances the objectives of growth should be clear. And finally, these
more effectively. “There are no textbooks to guide a objectives need to be translated into actions.”
global company on how to anticipate and manage global Even after five years, the restructuring at Tata Steel
risks,” he adds. Europe is far from complete. Tata Steel has had to take some
First Indian
Tata Steel company to grant The Tata personnel
Tata Steel acquires its profit sharing department, the first of its
is founded first colliery bonuses kind in India, is founded
1907 1908 1910 1911 1934 1936 1947

Plant becomes The first Tata blast furnace Sir Jehangir Gandhy becomes
functional begins operation first Indian general manager
from 80,000 to 40,000, under the
leadership of the managing director at that
time, Dr. J. J. Irani, and emerged as a cost-
effective steelmaker.
Improving earnings
Tata Steel Europe is undertaking several
measures to improve earnings. The key
strategy in this process is “variabilization”
of cost — a strategy that transforms fixed
costs into variable ones. The CFO is also
looking to optimize capital by tightening
up supply chains, focusing on high-end
products in Europe and looking at new
raw material sources.
Chatterjee feels that it is important
for European countries to start orienting
tough measures in Europe. These have themselves toward manufacturing. “We have
included cutting jobs; restructuring its steel heard, in various forums in the UK, that the Government
tubes business; suspending production at wants to start focusing again on manufacturing. This is
a hot strip mill in Llanwern, Wales; and also excellent news, but it will not happen overnight,” he says.
halting work at a blast furnace in Scunthorpe The focus on manufacturing is the starting point. “If
and at the Teeside Cast Product plant, both the economies rebalance themselves in terms of costs, the
in northern England. products can be quite competitive. They need to focus on
It has also announced a multi-year high-end products,” says Chatterjee, using the example of
efficiency driving plan for the Netherlands, Germany and how its high-cost economy is focusing on high-
aimed at making the business more end engineering and premium products.
competitive. “We are rightsizing in asset
configuration and we are investing capital Raw material supply
more effectively. These initiatives will take Tata Steel’s projects in Mozambique, Australia, Canada
24 to 36 months,” says Chatterjee. and Côte d’Ivoire are designed to serve European nations.
The CFO explains that undertaking these Securing raw material supplies is a crucial way to reduce
measures has not been easy, but “it helps to costs, since these account for nearly 70% of the total costs.
be transparent and open. This is an approach “Having your own source of raw material gives you
Tata Steel has always taken.” As an example, a natural hedge,” says Chatterjee. “We are also doing
he points to the 1990s, when Tata Steel some process innovation work to utilize diverse raw
(then known as TISCO) reduced its workforce material supplies.”
NatSteel in Singapore becomes

Achieves 3MT Tata’s first overseas acquisition.
capacity of steel Tata Steel acquires 40% stake in Tata Ryerson and HMPCL
production Millennium Steel in Thailand merge with Tata Steel
1955 1995 2004 2005 2007 2009

Tata Steel signs agreement Tata acquires The Indian Tata Steel’s centenary year
with Kaiser Engineers for 2MT Steel Wire Company in and acquires Corus
expansion program Jamshedpur
As consumption patterns and people’s habits change, the CFO is looking to
invest more capital at home in India. He also believes that Africa is the next
hub for demand but that risks on the continent need to be managed carefully.
The CFO
Koushik Chatterjee
Born: India, 1968
Appointed CFO at Tata Steel:
January 2008
Educated: Calcutta University, India
Previous positions: Group Chief Financial
Officer, Tata Steel Group, 2008-present.
Chief Financial Officer, Tata Steel, 2004-
2008. General Manager, Corporate
Finance, Tata Sons, 2002-2003.
Group Executive Officer, Tata Sons,
1998-2002. Corporate finance and
planning, Tata Steel 1995-1998
Tata Steel Chatterjee, India is in a unique position.

Unlike China, which created its
Founded: 1907 infrastructure first, India is a consumption-
Employees: 81,251 led economy. “This may mean double the
Countries: 50 growth for the steel industry in India.”
The company has invested around
Market capitalization:
INR430b (US$8b)
US$3.5b in expansion of capacity at the
Jamshedpur plant, which will produce
9.7MT of steel in 2012 (up from 6.8MT in
2011). Moreover, it has invested capital in
Capital execution the Kalinganagar project, in Orissa, at the
It’s been a two-speed world for some time now. cost of US$7.5b. This plant will produce 6MT
Many developed markets are in the negative to of steel by 2015–16.
2% GDP growth range, while a number of emerging Today, Tata Steel’s capacity is 28MT,
economies are growing at 5%–6%. out of which only 6.8MT comes from India.
“The developed world is used to making more with In another four years, the CFO wants Tata
more. But now, the consumption patterns and habits of Steel’s domestic capacity to increase to
people are changing,” he says. To that end, the CFO is 16MT and be equivalent to that of Europe.
looking to invest more capital at home in India. “This is an important structural shift
for us,” says Chatterjee.
Stepping up in India In 2005, Tata Steel signed a
Steel consumption in India is growing at a compound annual memorandum of understanding (MoU)
growth rate of 9.6% per year. In 2011, the Organization for with the Jharkhand Government to invest
Economic Co-operation and Development (OECD) reported INR420b (US$8.3b) to set up a 12MT per
that the demand for steel in India stood at 65.6 million tons year greenfield integrated steel plant in the
(MT). Per capita steel use in India increased from 35kg in Manoharpur and Chandil areas of the state.
2005 to 53kg in 2011. And demand is expected to grow at In the same year, it signed another MoU
around 10% per year until 2020, according to the OECD. with the Chhattisgarh Government to
More infrastructure projects in India mean that the establish a 5MT greenfield integrated steel
demand for steel is intensifying. In fact, according to plant in the state’s Bastar region. “We hope,
Abhijit Bhatlekar/Bloomberg via Getty Images
“There are challenges such as
political risk, execution risk and risks
in operating from a specific location.
All these will have to be managed
effectively before we enter Africa.”
Capital complexities
As of December 2011, Tata Steel’s
debt burden stood at US$9.5b.
This largely comes from the Corus
acquisition. A key issue for Tata
Steel is whether to reduce the debt
burden from this transaction, or
expand capacity in India and work
on increasing the top line.
“From a risk perspective, we
have been taking steps in the last
three years to ensure that debt
management is not only about short-
term repayments,” says the CFO.
As part of its strategy to de-risk
the capital structure and provide
more flexibility to the business, the
company has refinanced the entire
long-term debt of Tata Steel
Europe, deferring repayments by
four years and allowing deployment
of earnings for growth and
improvement initiatives.
“If we had not acquired Corus
and grown the greenfield projects in
India at the same time, then
servicing the debt would not have
eventually, to produce much more than been a problem. But we need these projects to ensure future
16MT in India,” says Chatterjee. growth,” says Chatterjee. Higher capacity in India could mean
higher earnings, and this would reduce the net debt-to-
Into Africa EBIDTA ratio (which indicates the company’s leverage). This
Tata Steel understands its home market. ratio has fallen from five in 2009–10 to three in 2010–11.
It has a strong distribution network, solid Does this mean that Tata Steel will not look at any further
relationships with original equipment acquisitions? The CFO sees the company concentrating on
manufacturers and a good performance organic growth for the next 12 months, but is upbeat about
improvement framework. All of this makes M&A activity in the longer term. “We may well look at future
India a very attractive proposition for the acquisitions. We want to have capacity near to raw materials
CFO. And, while Tata Steel is looking to or energy sources — or in an attractive market,” he says.
invest capital in other developing markets, As for his own future as CFO, Chatterjee sees the role
Chatterjee is aware of the risks. becoming a lot more complex. “CFOs are in the center of the
“If you look at Africa as a continent, it chaos,” he says. But they can’t afford to get ruffled. “You need
has a great future,” he says. “It is the next to be patient, but also proactive.” These are two traits that the
hub for demand. But you must manage the CFO will need when it comes to balancing the developed and
risk of capital investment in Africa carefully. developing markets in the volatile steel industry.

Global refinancing:
Top 4 sectors
Global non-financial refunding needs
by major sector (2011-2015).
426
Telecommunications
US$b
392
Utilities
A
reservoir of corporate debt has methods for refinancing, amending credit
built up over the last decade. agreements and raising equity capital
US$b As much of it matures in the though IPOs.
next few years, it is now close Moving from the corporate world to
to spilling over the edge. private equity (PE), where leverage has
275
Automotive
Standard & Poor’s (S&P) calculates been particularly important, a combination
that, from 2012 until the end of 2015, of weak financial performance and the
US$8t of corporate debt is set to mature economic slowdown, might make it awkward
US$b worldwide, with US$4t of that in Europe for PE investors to exit through a sale. This
alone. Fellow rating agency Moody’s notes means that innovative methods of capital
that telecommunications, utilities and raising are required.
206
Oil and gas
automotive companies have the greatest
amount of debt facilities expiring in the next Just refinance?
four years (see figure, left). The appropriate refinancing instruments
US$b So, given the potential for the market available to businesses at this time vary
to be flooded with maturing debt, borrowers greatly. Much will depend on the company’s
Source: Moody’s will need to consider appropriate alternative financial health and their capital structure.
Raising
Debt rating agency Standard &

Poor’s estimates that US$8t of
corporate debt is set to mature
by 2015. We examine the capital
raising options currently open to
companies, and explore whether
overseas initial public offerings are
an effective way of raising finance
Getting
mix
the right
Dougald Middleton, Ernst & Young Head of Capital and that are overleveraged, who don’t have a strong credit
Debt Advisory, says companies still have the power to decide story or, crucially, are the ones whose numbers don’t
their own refinancing fate — but finding cheap funding with stack up.”
loose covenants is currently challenging. Generally, it is only
available to highly rated corporates such as The Walt Disney Paying the price
Company. In February, the company tapped capital markets The good news is that replacement finance may be
for US$1.4b in a covenant-free deal including both 5- and available from a number of sources, spanning the range
10-year senior unsecured notes. The shorter dated debt from conventional lenders to corporate bonds aimed at
carries a coupon of 1.125%, while the longer was priced retail investors and alternative funding such as asset-
higher at 2.55% — both are impressively low rates. based lending. “There is plenty of money available
For those that aren’t so highly rated, Middleton outside the banking system,” says Oliver Hemsley, CEO
comments: “In terms of getting a mix of funding, at investment bank Numis Securities. He envisages
a well-organized borrower with a clearly developed immense growth in non-bank finance provided by retail
business plan, backed by proper diligence, who can and institutional investors.
present a compelling borrowing case, can attain a lot So in the absence of a liquid bank finance market,
of what they want to achieve.” He then adds a warning. what are the main capital raising options currently
“The companies that can’t influence things are those available to corporates?

Bonds
Bond issues Private placement
The Wall Street Journal has recently drawn attention to An alternative is the private placement (PP) market,
the traditional reliance of European companies on bank where securities are issued to a small number of private
lending to meet funding requirements. The reduced investors (such as banks and pension funds), rather than
availability of such lending has driven the shift toward a public issue.
issuance of corporate bonds, with around US$380b of There was considerable bond issuance in the PP market
debt being sold by companies in Europe during 2011, in the first two months of 2012. Up to the end of February,
according to data provider Dealogic. companies across the world had sourced US$9.4b from the
With investors looking for a decent yield in a low-interest PP market, almost double the amount raised in the same
rate environment, demand for new bond issues is certainly period last year, according to Barclays Capital.
there. By the end of February 2012, bond issuance is up on European companies are also increasingly turning to
the corresponding period last year: according to Thomson the PP market, in particular the US PP market, which is the
Reuters, European corporate debt issues increased 83% to largest. In January 2012 alone, European companies issued
US$75b, with US$48b of that figure raised in January 2012 a record US$4.6b of debt, more than twice the previous
alone. In the first three weeks of February, issuance was up record month where US$2.2b was issued in January 2005.
68% on the corresponding month last year. This PP market, in which companies can raise anything
Despite demand for new bond issues, the European from £100m (US$158m) upward, has remained incredibly
corporate bond market is liable to close to all but the highest- resilient — and is a potential source of long-term funding for
rated at the mere hint of increased risk, as the month-long corporates. “If you’re looking to borrow for five years plus,
closure in August 2011 proved. you can do that,” says Middleton. “You tend to be borrowing
Ernst & Young’s Middleton remains, however, more at a price that is comparable with or better than, the price
optimistic about the financing markets today than he in the bank market, and on covenants that are the same as
was just before late December, thanks to the two recent you’d get from banks. We’ve done a lot of work in that sector
interventions by the European Central Bank (ECB) to provide and it’s been very successful for our clients.”
unlimited liquidity to Eurozone banks. The ECB’s two long-
term refinancing operations (LTROs) allow banks to meet Issues further afield
most if not all of their short- to medium-term refinancing Due to problems in Europe last year, there have been
requirements at an interest cost of just 1% a year. a number of bond issues by European companies in
“That liquidity has effectively turned things around and markets further afield. One example is the industrial
I would hope to see market access for the banks begin gas producer Air Liquide which became the first French
to open up again,” he says. “I would expect that to wash company to issue renminbi-denominated bonds in
through to corporates in the bank and bond markets over September 2011.
the next few months — as you’re already seeing with the It refinanced €331m (US$437b) of bonds due to mature
reopening of the high-yield bond market.” in November 2012, paying a 6.125% coupon with a new
This optimism seems well-founded as European bond 10-year issue in Hong Kong paying a 3.889% coupon.
activity is showing signs of recovery, as demonstrated Meanwhile, in August, UK-based retailer Tesco raised
by the figures for corporate debt issues given above. RMB725m (US$114b) in Hong Kong’s fast-growing
In the February LTRO, banks accepted an offer of bond market.
€530b (US$462b) worth of three-year funds (at a 1% More multinational companies are expected to sell
interest rate) and, according to Reuters, “ECB officials hope such dim sum bonds in 2012, after China adjusted
banks will use the new money to buy higher-yielding bonds legislation late last year to allow foreign direct investment
more aggressively.” with yuan raised offshore.
Private placement could prove a decent alternative for corporates,

rather than a public issue. Companies may be able to borrow at a price
that is comparable to, or better than, the price in the bank market.
Alternative funding
For those companies that can’t access traditional funding interest margins balance with the advantages of other
such as straightforward bank loans, there are also a financing options.
number of alternative sources of debt such as mezzanine
or asset-backed loans (ABLs). Payment in kind
However, while these types of loans may prove Another alternative funding option is payment-in-kind
useful to companies in the short term, they are usually notes, or PIK notes, the popularity of which peaked
more highly priced and are generally unsuitable for in 2007 but have seldom been issued since the
longer-term financing. financial crisis began.
A speculative type of debt, PIK notes are typically
Asset-backed loans not repaid until they mature, so this allows a company to
In this form of lending, a company’s receivables, maintain its cash flow during the life of the PIK note.
inventory, or plant and equipment are used to secure PIK notes gained an unusually high public profile
the loan. thanks to the key role they played in helping to finance
The asset-backed approach to lending turns the Glazer family takeover of Manchester United Football
classic clearing bank lending on its head with its Club in May 2005. It has been reported in The Financial
emphasis on the value of security rather than cash Times that PIK notes may be on their way back. Polkomtel,
flow. With ABLs, financiers look at the assets first a Polish telecoms group sold a US$200m PIK that yielded
and profitability second. The loan can be backed by around 15%. Analysts say there have also been smaller,
a single asset or by a combination of items. They are private deals.
commonly used by companies with sizable accounts However, PIK notes are not usually suitable for
receivable and inventory and variable working mainstream longer-term financing as interest rates
capital needs. can quickly rise to very high levels.
ABLs on the rise Forward start facilities

Recent figures show that asset-based lending is growing. In Recently, there has also been a re-emergence in Europe
the US, a March 2012 report from the Commercial Finance of forward start facility (FSF) loans, a product that was last
Association (CFA) demonstrated a sharp rise in ABL. The prevalent in early 2009.
CFA members surveyed reported that new loans had risen FSF loans are used for the sole purpose of repaying
18% in Q4 2011 when compared with the same period in an existing loan facility. If some lenders within a syndicate
2010. And in the UK, the Asset-Based Finance Association will not grant a maturity extension, or a refinancing process
(ABFA) announced that total funding by ABFA members is deemed to have too high an execution risk at a point in
reached almost £16b (US$25b) during the fourth quarter time, an FSF allows borrowers to maintain their level of
of 2011, a rise of 7% on a year earlier. These figures are existing facilities through to maturity, while securing an
in stark contrast to wider net lending which contracted by amount of extended maturity funding.
3.7% in the same period. The key difference between an FSF and a “standard”
And a variety of financiers are banking on that growth maturity extension is that, with an FSF only some of the
continuing. Nikhil Srinivasan, Chief Investment Officer existing lenders have to agree whereas with an extension,
of UK insurance giant Allianz was quoted in the Boersen- all members have to give agreement.
Zeitung newspaper in February, as saying he hoped to A number of companies have taken advantage of
increase the volume of its ABL business in the next these. In April last year, TomTom, the world’s leading
three to five years. satnav provider, signed an FSF with an eight-bank
Asset-based financing has traditionally been used in syndicate. The deal comprised a €250m (US$330m) term
the automotive, manufacturing and other asset-intensive loan facility and a €150m (US$199m) revolving credit
industries. However, it appears that PE is also looking at facility that has extended the maturity of the company’s
ABLs as an alternative to more traditional deal financing. existing bank facilities.
Specialist finance provider GE Capital believes that Following this, in October 2011, UK property firm
asset-based lending deals will grow in 2012 after 2011 Grainger Plc arranged new £840m (US$1.32b) FSF,
saw financing facilities given to PE-backed mid-market signed with five relationship banks, while Finnish
companies increase to US$1.3b in 2011 from almost zero telecoms giant Nokia signed a €1.5b (US$1.99b)
the year before. FSF in November.
So it would appear asset-based financing is set for a The key advantage of these is that borrowers
boom in the coming year, however, companies need to have the certainty of availability of funds to refinance
consider if the combination of fees and higher existing loans.

F loating abroad
One way of raising capital is via an IPO. We focus
on those companies that are looking at cross-border
listings — particularly in Asia
D
espite the global IPO market losing impetus “They may want to strengthen visibility and use IPO
midway through 2011, close to US$170b of proceeds to build up sales infrastructure and production
new capital was raised from over 1,000 stock plants in those countries.”
market flotations around the world in 2011, However, most companies around the world would
according to Ernst & Young’s year-end Global IPO update. arguably lay claim to wanting to strengthen their position in
While this was down 45% on 2010, it was US$40b ahead fast-growing Asia. So, is an Asian listing a plausible option?
of 2009’s efforts — and many more companies are rumored Steinbach argues that although company directors have
to be planning to float this year. often chased the listing markets that promise the highest
As noted on page 34, Hong Kong has risen to become valuations, these aren’t always simple to access. Moreover,
the world’s number one destination for IPOs in recent there are many additional factors: the costs of going
years, as organizations look to float for a variety of reasons
public and staying public, strategic considerations such
including expansion, exits and refinancing. Examples include as marketing, infrastructure or production plans and the
Graff Diamonds and US handbag maker Coach. preferences of shareholders.
“There is always a balance,” he maintains. “On one side
Hong Kong-friendly companies you might have higher valuations, but on the other you
Those with luxury brand appeal have proved the most might have higher risks, differences in legal and corporate
successful on the back of the growth of China’s affluent governance issues, extra investor relations staff and the like.
middle classes. And these differences
In 2011, CLSA Asia- lead to ongoing
Pacific Markets, the In an overseas IPO, a great deal will additional expenses
independent brokerage in your company’s
and investment group, depend on your shareholders and finding infrastructure in the
forecast that, by 2020, a market that best fits your strategy mid to long term.”
Chinese consumers Indeed, a great
would be buying 44% of all luxury goods sold globally, deal will depend on the needs of shareholders and finding
up from 15% today. a capital market that best fits your company business
So, while Prada’s choice of Hong Kong as a listing venue and strategy.
may have been somewhat contentious at home in Italy,
the decision would have been an easy one given Chinese Be flexible
consumers’ increasing desire for luxury products. In the current climate, flexibility and timing are crucial for
Likewise, suitcase maker Samsonite’s decision to list companies eyeing an IPO. Steinbach advises directors to be
in Hong Kong is also part of a trend to raise brand IPO-ready as soon as the markets open up again.
awareness in China. “Typically, in the past, you had two IPO windows per
year. However, due to high volatility, there are many different
Wider considerations windows today. Sometimes you have one week when
Martin Steinbach, Ernst & Young IPO Leader EMEIA, everyone wants to go public and then the next week, the
believes that a cross-border listing gives the most benefit markets are closed,” says Steinbach.
for clients if the IPO supports a company’s core business “You need to be prepared for when these windows open
and combines it with corporate finance strategy. — flexibility is important when you have moving targets.
“If you look at these companies that went public Our recommendation to clients is to start early with an
abroad, they are typically brand names or consumer IPO-readiness assessment so you can analyze the gaps, and
products, and I think they have enough strategic business make sure you commit substantial resources to building the
arguments for choosing this IPO destination,” he says. right IPO team — internally and externally.”
Bank lending Viewpoint
Raising finance via the traditional banking route is more
challenging today as undercapitalized banks remain risk- Standard & Poor’s Paul Watters
averse. When they do agree to lend, they are keeping their gives his views on the increased
rates high, driving many companies — except large well-rated
ones — to look elsewhere. This is evidenced by the ECB
importance of ratings
January 2012 lending survey which stated that in the
fourth quarter of 2011, 35% of Eurozone banks tightened
loan terms to non-financial firms (up from 16% in the Why has it become more important recently to have a good rating?
preceding quarter). Ratings have become more important because of the greater reliance on
However, according to Middleton, this does not mean the bond markets as opposed to the loan markets for funding. This mainly
that banks do not have the capacity to lend. At present, reflects funding problems and capital constraints within the banking
corporates are repaying debts faster than they’re borrowing. arena. Basel III is also pushing in the same direction as it tilts the balance
The ECB reported a net decline of 5% in the demand for further toward unlevered providers of debt finance.
loans in the last quarter of 2011.
Middleton believes planning is key: “Companies need How have rating agencies generally adjusted their ratings
to go over the top in terms of providing banks with all the and their processes for calculating them in recent years?
details they need to make the credit assessment, and then We have studied the lessons of the recent financial crisis and taken
make sure it is watertight in terms of its integrity.” major steps to strengthen our ratings by reinforcing the integrity and
Recent examples of a large well-rated company obtaining independence of our ratings process, and increasing transparency. We
bank refinancing is Spanish media group Promotora de have also made important analytical changes that will make ratings more
Informaciones, which secured an agreement from its banks stable, more comparable and more
to refinance €2.92b (US$3.85b) of debt at the end of 2011. forward looking.
Middleton strikes a note of caution for those companies We have put a lot of effort
looking for finance in a challenging market, especially those into being clearer in explaining
Ratings have
whose core activity is under pressure. “It becomes very the basis of our forward looking become more
difficult if you’re in particular sectors,” he says. “If you’re a opinions. Two examples of this are important because
real estate developer, for example, the ability to raise finance the clearer guidance we provide on
of the reliance on
in the bank market is really constrained. You need to have what may lead to a change in our
a very good development that is already producing income ratings, and a more transparent the bond markets
and which has good asset cover.” and objective assessment of what
Encouragingly, according to Ernst & Young’s 2012 real we think constitutes adequate,
estate investment report As one door shuts, another opens, weak or strong liquidity.
sources other than traditional bank lenders, such as insurers, From a corporate perspective, one change might be the weight we
are opening up to real estate financing. place on coverage ratios when assessing financial risk. Inevitably, given
the low level of short-term interest rates that look likely to persist for a
The final word while, we look more to the level of sustainable cash flow generation in
The two key considerations for companies that are looking relation to adjusted debt.
to refinance in the current climate are speed and availability.
For investment-grade corporates, the markets are open and How do you see the bond market reacting to the wave of European
the banks are willing to lend. For non-investment grade, they debt refinancing due in the next few years, and what issues can you
need to consider alternatives such as ABLs, FSFs and PIKs see arising with ratings?
and move swiftly, as Dougald Middleton points out. In our view, for companies able to generate meaningful levels of cash
“Companies should take action as soon as possible,” flow over the economic cycle in relation to their outstanding debt,
Middleton urges. “Investment-grade corporates should the high-yield bond market will continue to grow as a viable route for
diversify their funding sources, transferring short-term to corporate and leveraged buy-out (LBO) refinancing. Companies with
long-term debt in the bond market. It is extremely cheap at stressed, overleveraged balance sheets may find that this avenue is not
the moment to borrow 10-year money.” so accessible, even on expensive terms. Many of these companies may
“Highly rated corporates have deleveraged and need to restructure before being able to refinance.
diversified their sources,” he adds. “That’s what all grades
of business should be looking to do at the moment.”
Paul Watters is Head of European Corporate Research at
Standard & Poor’s
For further insight, please email editor@capitalinsights.info

The
case for listing
Samsonite CFO Kyle Gendreau tells Capital Insights how
the luggage giant has overcome a series of industry
shocks and explains why the company chose to be listed
on the Hong Kong Stock Exchange
I
n recent years, Hong Kong has soared to the top of
global IPO markets. More than half of the US$36.1b
raised there in 2011 came from overseas IPOs,
according to data provider Dealogic. This figure puts
the New York Stock Exchange’s US$31.4b and London’s
The CFO US$18.3b in the shade.

Tapping into this market, Samsonite completed its IPO
on the Hong Kong Stock Exchange in June 2011, raising
Kyle Gendreau
US$1.25b in the process. CFO Kyle Gendreau believes
Born: USA, 1969 that Hong Kong was the “logical” listing venue for the
Appointed at Samsonite: June 2007 luggage giant for both fundraising and strategic reasons.
Educated: Stonehill College, Easton, “Asia is Samsonite’s biggest, fastest growing and most
Massachusetts. profitable region,” says Gendreau. “It’s also the region
with the best long-term growth prospects for us.”
Previous positions: CFO, Zoots
Corporation, 1999—2007. Director,
Financial Reporting, Specialty Catalog Corp,
Raising the stakes
1996—2001. Manager, Coopers & Lybrand, The background to the IPO comes from Samsonite’s
1991—1996. close links to the travel industry. Shocks such as the
9/11 attacks in 2001, the SARS epidemic in 2003 and
the global financial crisis in 2008 and 2009 put pressure
Samsonite on the travel industry, leaving the company under
significant financial stress. The need to raise capital
was of paramount importance.
Founded: 1910
“The effects of those events typically lasted up to six
Employees: 6,150 (as of 30 June 2011) months before the business recovered and returned to a
Countries: 100 growth trend. Before Samsonite’s restructuring of both
Market capitalization: HK$19.7b its operating model and debt in 2009, these unforeseen
(US$2.5b) crises put the company under pressure because of the
high leverage,” says Gendreau. “We utilized a portion of
our IPO proceeds and cash-in-hand to repay our debt so
tl QxQ IMAGES/Datacraft/Getty
the company now has a strong capital although the business itself continued sector stems from increased spending
structure in place. As such, we are today to perform in line with expectations. on travel and tourism, which arises
much better placed to weather any However, with the shares having made from the general upsurge in disposable
economic downturn.” a spirited charge back toward their IPO income in Asia.
The funds also allowed a partial exit level, in February they reached HK$14 Gendreau notes that, based on the
for its backers, enabling UK private equity (US$1.8) again. number of travelers, China currently
firm CVC Capital Partners — which bought has the largest tourism industry in the
the company in 2007 — and Royal Bank Expansion in Asia world. Retail sales of the Chinese luggage
of Scotland, to sell down their stakes from Raising capital was not the only motivation market are forecast to reach US$3.2b in
54.3% to 29.8%, and from 29.9% to for the flotation. According to the CFO, the 2015, according to the World Travel
15.8% respectively. move was strategically advantageous. & Tourism Council.
“The IPO was really the best “Listing on the Hong Kong Exchange “China is our largest market
refinancing option in that it enabled helped to significantly raise our profile in Asia and is characterized by its
the shareholders to achieve liquidity and that of our brands — especially in Asia, preference for premium or aspirational
while allowing them to retain significant which has yielded excellent operational products. Brand is very important to
exposure to Samsonite’s future growth,” benefits,” says Gendreau. “The expansion Chinese consumers,” says Gendreau.
says Gendreau. “A listing also opens an of our business in the region is a key focus “But we are not only focusing on China.
additional avenue for fundraising for for Samsonite, given our belief in the In terms of other emerging markets,
future expansion if we were to deem significant growth potential in this market we see many opportunities, including
this appropriate.” over the next five years plus.” Indonesia as one of our largest potential
However, he underlines Samsonite’s Prior to the IPO, Asia was already growth areas.”
asset-light and low fixed-cost business the group’s largest and most profitable
model, whereby most of its production market, representing 33% of the group’s Organic growth or acquisition?
is now outsourced to Asia and only some net sales. But Gendreau maintains that the As for the future, Samsonite’s CFO is very
manufacturing has been retained in-house, continent will become an even larger part focused on delivering organic growth but
minimizing capital needs. of the business in the future, as it drives doesn’t discount acquisitions entirely.
“The business itself is highly cash- the company’s growth. So a listing in the “Following the IPO, Samsonite is debt-free
generative, so we currently do not region was important. and cash-generative, giving us significant
envisage any need to access the capital “We wanted our valuation to fully capacity to look at opportunities as they
markets post-IPO to fund our operations.” reflect Samsonite’s superior growth arise and if they make sense for us,”
prospects because of our exposure to says Gendreau.
IPO ups and downs Asia, and, in particular, China,” says Consequently, the company is
The IPO has not been a completely Gendreau. “Hong Kong is at the doorstep continuing to invest in new technology,
smooth ride. The fundraising, although of China. The listing in Hong Kong helps to brands and its distribution network.
substantial, was short of the company’s increase Samsonite’s brand profile in China And Gendreau seems confident in this
US$1.5b target. What’s more, Samsonite and Asia overall.” approach. “We believe that this strategy
shares suffered some turbulence, falling leaves us well positioned to take the lion’s
sharply on their first day of trading and Key demographic share of the growth in the luggage market
in subsequent weeks — drifting from their One of the specific attractions of the in the next few years.”
HK$14.5 (US$1.9) initial price down to Asian market is its growing middle class.
HK$9.25 (US$1.19) by November as a The region is now home to 40% of the For further insight, please email
result of challenging market conditions, global luggage market. Growth in this editor@capitalinsights.info
In Samsonite’s case, raising capital was not the only motivation for its
Hong Kong IPO — strategic and operational goals came very much into play. The listing
helped to raise the company’s profile in Asia, its key growth market.

Advertising feature
Going
private To address debt positions and
liberalize economies, privatization is
rising up the agenda. Capital Insights
investigates the opportunities and
challenges surrounding the acquisition
of state assets by investors
W
hile the pace of privatization ahead with programs to sell state assets,
has slowed since the 1980s as they seek to align their economies with
and 1990s, governments those of Western Europe.
across Europe are continuing The continent may have nothing to
to transfer state assets to the private sector match the US$70b sale of Brazil’s energy
as a means of raising much-needed cash. giant Petrobras at the end of 2010, but
The momentum is beginning to build there is a significant amount of activity.
again, not least because of the Eurozone’s
ongoing fiscal crisis. Countries across the Key sectors
region are laying out timetables for asset According to Professor David Parker, who
disposal. But while the plans are in place, lectures at Cranfield University in the UK
the challenge in today’s difficult climate will and sits on the UK Government’s Regulatory
be to execute those plans on a timely basis. Policy Committee, the potential for investors
A Deutsche Bank report Revenue, remains huge. “There is a vast range of state
Competition, Growth published in December assets that could be sold,” he says.
2011 stated that the larger European There is plenty of scope for privatization
countries such as France, Italy and Spain had to take place in key strategic industries
state-owned companies or holdings worth such as public utilities and transport
around 5% of gross domestic product (GDP) infrastructure. Indeed, the past couple
that could be disposed of in the medium of years have seen the privatization of
Peter Dazeley/Photographers Choice/Getty Images
term. Among the peripheral Eurozone Ukrainian telecoms company Ukrtelecom —

countries, government plans suggest that 93% of which was acquired by Vienna-based
the privatization potential ranges between private equity (PE) house Epic — and IPOs
3% in Ireland and 6.5% in Greece. of Polish energy companies Polska Grupa
There is little doubt about how valuable Energetyczna and Tauron Polska Energia.
these sales could be to governments There has also been significant activity
struggling to reduce debt burdens. As in the banking sector, notably the Swedish
Eurozone leaders endeavor to reduce government reducing their stake in Nordea
debt and improve economic efficiency, in Sweden and privatizations of Russia’s
privatization is seen as an important VTB. Meanwhile, in Italy, the sale of a 29%
financial lever. Meanwhile, former stake in Enel Green Power raised €2.6b
Communist bloc countries are also pressing (US$4.1b) in an IPO.
Advertising feature
Investing
The hot spots process, Portugal has already reduced Barriers to privatization
In many respects, privatization opportunities its influence on the public sector. The Not all privatization pledges will come
are most attractive in the countries that are Government has relinquished its special to fruition for a variety of reasons
at the center of the sovereign debt crisis. rights, known as golden shares, held by e.g., political, pricing or a lack of popular
Sitting squarely in the middle, the Greek the state in companies such as Portugal support. As James Close, EMEIA Corporate
Government has set out a privatization Telecom. These shares gave the state veto Finance Leader for Government,
agenda that is due to run until 2015. The rights over other shareholders. Ernst & Young, points out, policy-makers
timetable is notable for its diversity, with Privatization activity is also buoyant who see denationalization as a good idea
privatizations ranging from the Hellenic in Eastern Europe. For instance, in July of today can take a different view at a later
Telecommunications Organization to Athens last year, the Romanian President Traian date. “That has been the case in Ireland,”
airport. Officials involved in the privatization Basescu announced plans to sell minority he says. “Its Government has decided that
process say that the sales should raise stakes in a number of state-controlled it makes more economic sense to hold on
around €5b (US$6.6b). energy companies, such as Nuclearelectrica, to assets.”
Portugal has also pledged to implement Hydroelectrica and Romgaz. The program Political realities also play a part.
an ambitious privatization program as a was, in part, a response to the country’s As David Parker notes, in many countries,
condition of a bailout package from the fiscal crisis. Romania has struggled to privatization is viewed negatively by voters,
European Union (EU), the European Central control its spending and recently negotiated and with a degree of wariness by politicians.
Bank (ECB) and International Monetary Fund a €20b (US$26b) bailout package with the Lack of appetite in the marketplace
(IMF). The program began in December IMF and the EU. can also throw privatization plans off
2011 with the sale of a US$3.5b (21%) stake It’s important to stress that not all course. Spain’s state lottery and airport
in power company Energias de Portugal to privatizing governments are acting in privatizations are good examples. The
China’s Three Gorges Corp., and the longer response to the fallout from the financial sale of a 30% stake in the lottery was
term plan is for the Portuguese Government crisis. Indeed, Russia is implementing one of expected to raise several billion euros but,
is to sell all of the company’s shares. the most significant privatization programs. last September, the plan was postponed
According to the Portuguese The Russian Government is planning as the deal on the table fell well short of
Government’s stability and growth program, to raise around US$50b by 2016 by selling expectations. The same is true for the
receipts anticipated from privatization stakes in oil company Rosneft, hydroelectric airport sales, which were expected to raise
activities will total €6.47b (US$8.9b) by power company RusHydro and the nation’s €6b (US$7.9b). And, according to Parker,
2013. To encourage the privatization largest bank Sberbank, among others. with privatization plans in full swing in

When it comes to acquiring state-owned assets, companies need to take a
close look at a country’s track record on regulation and understand the constraints
that corporates will operate under and the conditions imposed by the seller.
Europe, governments can find themselves in terms of ownership structure, and any identify prospects matching their strategic
appearing to be presiding over a fire sale. constraints that could prevent the acquirer objectives,” says Close.
Then there is the question of opposition from moving the business forward. Beyond The opportunities on offer vary
from the workforce and the public at that, potential buyers should also be looking significantly between nation states.
large. In some countries, the prospect at political and environmental risks. According to Privatization Barometer, the
of privatization can generate significant The regulatory framework is also crucial. official provider of privatization data to the
opposition. For instance, in Italy, vague “In the utilities sector, regulation drives Organization for Economic Co-operation
privatization pledges by Silvio Berlusconi’s value,” says Close. “So you have to examine and Development (OECD), the ratio of
Government and that of his successor, a country’s track record on regulation.” private sales to IPOs is usually two to one.
Mario Monti, have been sufficient to bring For instance, in 2010, the majority of
protestors out onto the street. The prospect Taking opportunities privatizations in France (currently Europe’s
of water company privatization proved Nevertheless, the scale and breadth of the most enthusiastic seller of state assets),
particularly contentious. Parker says this current round of privatization means that Britain and Germany were via private
kind of unrest is “more likely to occur in there are opportunities both for investors sales. In contrast, the bulk of Portugal’s
countries where privatization is seen to be — through IPOs — and strategic acquirers. privatization program was carried out
driven by the conditions imposed by outside “Governments have published privatization through IPOs. The same was true in Italy.
agencies, such as the IMF and the EU.” plans and there is now an opportunity Overall, in 2010 private sales amounted
Regulation has also played a small but for businesses to scan the horizon and to €21b (US$28b), compared with IPOs of
significant role in slowing down the pace of €11.3b (US$15b).
privatization. For example, while Poland’s There are a number of factors at play
privatization program between 2008 and here, not least the political intention. “If
2011 was largely successful, a plan to sell you are trying to create a broad share
84% of electricity company Energa failed to ownership base, then an IPO is ideal,” says
materialize due to anti-trust legislation. Latvia Close. “If you are looking for a strategic
All of this poses a danger that buyers
will enter the bidding process, only to find
the sale is cancelled. The prerequisite for Possible sales
successful acquisitions of state assets is a Latvian Mobilias Telefons
full understanding of the seller. “You need Telecomms Lattelecom
to consider whether the seller’s valuation Czech Republic
criteria match your own criteria as an
investor,” says Close.
That process includes taking into Possible sales
account the price the seller requires, the National airline CSA
conditions that are likely to be attached Ruzyne Airport
Romania
Russia
Possible sales Privatization
Possible sales
Federal grid company
Oil company Petrom
Power grid operator Transeletrica in Europe
Transneft Gas company Transgaz
The “baskets” show
Rosneft Hydroelectric power operator
Hidroelectrica possible sales in key
RusHydro
Nuclear power plant operator European countries over
Nuclearelectrica the next few years
investment, then a trade player becomes Opportunities in the privatization business practices. “Again, it is important
more attractive.” market are not limited to trade buyers. to understand the constraints that you will
Market risk also plays a part in Private equity acquirers are also looking operate under and the conditions imposed by
government thinking. For example, while in at state assets. For example, at the end of the seller,” says Close. “If you are operating
the 1980s, the sale of national utilities such last year, Clessidra, Italy’s largest PE fund, under license, you have to ensure the terms
as gas and water enabled the UK to conduct announced its intention to invest €1.2b of the license are clear.”
an unprecedented experiment in popular (US$1.6b) in buying local Italian utilities. Due to the fact that most privatizations
capitalism through share offerings to the PE houses have the expertise to turn are of public utilities, the constraints are
public, the purchase of potentially riskier sluggish or underperforming companies into either in terms of the license (for instance,
businesses such as train franchises is seen fast-growth enterprises. This can be hugely the delivery conditions that companies
as the preserve of trade buyers and private attractive to governments. must meet in order to maintain ownership
equity investors. The future development of a privatized of the service), or the ownership structure
Arguably, countries at the start of the company will be influenced in no small way (a minority stake can reduce the ability to
privatization process have a greater variety by the ownership structure. A trade buyer act, for example). Buyers need to be able
of assets and, therefore, more scope to use or PE house swallowing a state-owned to live with the criteria of the seller.
a range of tools to effect a transfer to the asset will have many more opportunities Acquirers must be aware of the risks.
private sector. Indeed, with former Soviet to implement the changes. “In contrast, They should seek assurances that the
bloc countries — where more businesses a sovereign wealth fund taking a minority ownership and governance structures
are in state hands — management buyouts stake is much more likely to be a passive created by the government provides
and workers’ co-operatives provide smaller investor,” says Parker. sufficient scope for new owners to
companies with a route to privatization. implement the changes that will be needed.
In Russia, around 90% of the current After the deal However, that said, the scale of
privatization program involves small and Post-privatization development will Europe’s privatization drive is creating new
medium-sized companies. Large companies, also be conditioned by the culture of opportunities for businesses to expand
which are of interest to international the country concerned and its internal by acquisition and buy into key strategic
investors, comprise only 10%, according to industries. With privatization plans either
the Head of Russia’s Ministry for Economic published or signaled by governments, now
Development, Alexei Uvarov. is a good time to identify and evaluate the
Strategic buyers will certainly be looking
for businesses that fit well with their existing
France opportunities and, when appropriate, begin
the work that could lead to an acquisition.
operations. “Strategic buyers should be able
to bring synergies to bear,” says Close. Possible sale
Nexter
Greece
Portugal
Possible sales
Hellenic Telecommunications
Possible sales Organization
National grid operator Redes Hellenic Horse Racing Corporation
Energeticas Nacionais Public Power Corporation
National airlines authority Athens airport
Transportes Aereos Portugueses Sports stadia
National airline TAP

John Humble/Stone/Getty Images
Take
cover Insurers are facing a tough year. We
explore how the sector is facing up to
the challenges and outline the lessons
that other corporates can learn
T
he sovereign debt crisis, low interest rates and they have also invested more heavily in property assets and
tighter regulation mean that the insurance sector inflation-linked corporate bonds.
is set to face some tough challenges globally in In addition to assessing investment mix, life insurers are
2012. This is particularly true in the Eurozone. looking at further product innovation as a way of mitigating
Meanwhile, high levels of exposure to catastrophes the impact of investment volatility on their capital positions.
— including the Japanese and New Zealand earthquakes — Such innovation includes a focus on products which pass a
have reduced capital levels and undermined profitability greater share of investment volatility onto policyholders,
for a number of players in the non-life sector, and have generally linked to giving policyholders greater ability to set
coincided with insurers struggling to generate strong their own tolerance to such risk.
investment returns. As life and general insurers struggle with strains on their
Challenging times present opportunities as well as capital bases and increased regulation, they are considering
risks, and those insurers which succeed in aligning their ways of accessing greater support from reinsurers, whose
businesses to take advantage of changing economic, capital positions are generally stronger than those of
market and regulatory conditions will emerge as relative primary insurers, according to Swiss Re.
winners. As part of this process many insurers are making
fundamental reassessments of their businesses, including Low interest rates
areas such as investment strategy, product mix and design, Catastrophe losses and falls in investment market values
geographical footprint, organizational structure and may be the more obvious factors affecting insurers’
operating model. capital positions, but the outlook for continued low
So what can insurers do to meet the challenges that interest rates and reduced investment yields is also of
they will face over the coming year? great concern to the industry. Interest rates will probably
stay low for another two years, especially in the Eurozone
Investment strategy and the States.
A number of insurers are reporting significant write- The US Federal Reserve said it anticipated economic
downs on their Greek holdings and other sovereign debt. recovery to be slow for some time, and expects interest rates
The value of investment portfolios is also adversely to remain in the range of 0%–0.25% until 2014. Low interest
affected by the knock-on effects of the sovereign debt rates put further pressure on insurers’ capital positions and
crisis. For example, equity holdings in other financial reduce ongoing profitability.
institutions have fallen in value due to those institutions’ Insurers face a dilemma. Many reduced their investment
own balance sheet exposures. exposure to high-risk corporate and government bonds,
Some insurers have chosen to mitigate risk by seeking moving toward safer, triple-A rated sovereign bonds.
to diversify into other investment classes. For example, This general de-risking of balance sheets was in reaction
Preserving
Preserving
Investing
Solvency II will lead to a greater emphasis on risk mitigation for insurers
and clients. Insurers will have to further limit their exposure to high-risk
investments and will need to be clearer about the cost of capital.
to global market volatility and in anticipation of ongoing reassessed. Consequently, clients are likely
regulatory change. But such actions will further reduce to find underwriters paying more attention
dwindling investment returns. to the specific risks they are covering, with
Annuity and with-profits product providers in the life premiums more closely attuned to these.
sector are particularly affected by low interest rates. Under Thomas Braune, Head of Group
some life insurance products, vendors have obligations that Development at reinsurer Munich Re,
are difficult to meet, given low interest rates and volatile explains: “At the same time, the new set
equity markets. Annuity providers normally use corporate of rules will enable insurers to be more
bonds to match their liabilities, but this creates balance precise in recording their risk exposure,
sheet problems as asset values have fallen more than to control risks better, and to gear capital
liability values. allocation more closely to their own safety
Compounding matters, those insurers that provide and return targets.
asset management services are facing pressures to “Risk-transfer solutions will have
reduce management fees charged to the customer, given to be geared even more than before to
ongoing low investment returns. If investment managers individual portfolios and balance-sheet
are providing marginal (or negative) returns, it is unlikely profiles and will need to be very flexible.
that customers will accept high management charges in As a result, traditional, substantially standard
today’s markets. reinsurance programmes will make way for
“If you are operating in a world that is affected by the solutions finely tailored to their risk profiles
Eurozone situation, while you are trying to de-risk your and balance sheets.“
business and deal with the expected impact of Solvency
II, then it is going to be extremely difficult to find ways to Ratings warning
enhance your investment returns,” says David Lambert, The rating agencies have reassessed a
Insurance Sector Leader in Transaction Advisory Services at number of insurers in the context of their
Ernst & Young. recent announcements on grading and
the outlook for European sovereigns and
Preparing for Solvency II financial institutions.
Insurers are reconsidering their exposure to risk, given “A number of insurers are facing the
the combined impact of investment losses, low margins risk of rating agency downgrades,” says
and the Solvency II regulations — the set of EU-wide capital David Lambert. “Protection of their rating
requirements and risk management standards for the is incredibly important for insurers. That
insurance industry — which are currently due to come into takes you again to de-risking. The credit
effect at the beginning of 2014. Solvency II will lead to a rating agencies’ views and Solvency II also
greater emphasis on risk mitigation, both for insurers and take you toward stronger management
corporate customers keen to minimize the cost of taking out focus on efficiency and cost as key levers
insurance. Insurers will have to further limit their exposure to to maintain profitability.”
high-risk investments and they will need to be clearer about Sonja Zinner, Director, Insurance Group
the cost of capital charged against each type of product to at Fitch Ratings, believes that Solvency II will
comply with new rules. have a substantial impact on the insurance
In order to improve returns, insurers will need to become industry. With a tougher capitalization
more imaginative in product design. Insurance products regime in place, insurers will need to ensure
that generate weak profits may need to be discontinued that they adopt the best possible risk
or repriced. Insurers will increasingly need to focus on management systems.
improving underwriting efficiency and the accurate pricing Zinner explains: “Solvency II is one
of risk, with the result that premiums may rise as risks are driver for the improved risk management

that Fitch is seeing across the European insurance
industry, particularly in some of the less-developed
markets. It is a factor in the widespread de-risking of
balance sheets that we have been seeing, and the shift
Viewpoint
toward capital-light products.”
For more on ratings, see Viewpoint, page 33.
Credit Suisse’s Nicolas Desombre
Deal drivers offers his insight into the forces
Pressures from Solvency II will favor larger, more diverse driving change in the insurance sector
insurance groups. Some smaller, less diverse insurers are
expected to struggle to survive, says Zinner.
A
Another impact of Solvency II on insurers is the s significant holders of European sovereign debt, the
additional imposed cost of regulation, at a time when insurance sector’s performance remains linked to
investment returns are weak. This will add to pressures developments in the Eurozone, with operating trends taking
on insurers to reduce overheads. Insurers will focus on a back seat. Given the apparent political commitment to the
stripping out costs and on considering opportunities to Eurozone, we believe an expansion of the European Central Bank
share back-office overheads through shared services balance sheet is likely. While this could push bond yields lower in the
arrangements and M&A. near term, we believe it would represent a net positive for the sector,
Once Solvency II is in place, insurers will be under given reduced economic and market tail risks.
pressure from analysts to prove that they have growth Other themes continue within the sector, including a continued
strategies. This is likely to accelerate moves toward hardening of property and casualty (P&C) pricing, weak growth,
consolidation. As a further driver of transactions, the regulatory change, and rising political risk from elections in 2012 such
changing capital requirements on insurers from Solvency II as the impact on the tax privileges of the European insurance sector.
and on banks from Basel III are pushing banks to dispose of In particular, while the P&C
their insurance operations. pricing cycle in Europe has
been turning for a while, this Corporates can
Equity acquirers has now broadened to include
PE firms are likely to be potential acquirers of the insurers most of the major markets. In
seek to minimize
that become available for purchase. Recent PE activity in addition, US commercial lines rising premiums
the insurance market includes European PE firm Cinven have also begun to return to by exploring
acquisition of the UK provider of life and pension products, positive territory, albeit with
Guardian Financial Services for £275m (US$363m) in recently reported rate moves
business insurance
November 2011. insufficient to fully offset claims packages
The PE model of consolidating underperforming sectors, inflation and the impact of
making efficiency improvements and selling on at enhanced lower investment yields.
prices may have substantial potential in insurance. The twin pressures of low interest rates and Solvency II will
continue to drive more disciplined non-life underwriting and a shift
The outlook in life product design from traditional guaranteed savings products
Current capital pressures, the outlook for low investment to capital-light unit-linked products, or more profitable risk products.
returns in a number of markets, and significant ongoing Corporates can seek to minimize rising premiums in a number of
regulatory change is driving a range of responses by insurers ways, including exploring business insurance packages.
seeking to emerge as winners. Ongoing uncertainty around Solvency II’s final form perpetuates
A number of the actions that insurers are planning are the lack of clarity around the true capital positions of European
also open to businesses in other sectors as a response to a insurers. This, along with the volatile macro picture, continues to have
period of major change: a focus on effective pricing, product a knock-on effect on longer-term management decisions and corporate
design, appropriate innovation, and on cost efficiency activity — even though the current depressed valuations and bank
as ways of protecting capital and profitability in shifting balance sheet deleveraging have triggered several opportunistic deals.
market conditions.
Nicolas Desombre is Managing Director in Credit Suisse’s
Financial Institutions Group
For further insight, please email editor@capitalinsights.info
Insurers will need to focus onstripping out costs and considering

opportunities to share back-office functions through M&A. Insurance companies will also
need to prove they have growth strategies which could lead to more consolidation.
Further insights
Building Crisis can be Rising in
confidence? averted, but the east
European real estate now is the time Trading places: the
assets investment for reform emergence of new
indicator 2012: as one patterns of international
door shuts, another Eurozone forecast: trade
opens Spring 2012
This thought leadership finds that global
This report reveals a varied, localized, Expect a mild contraction in economic trade has bounced back strongly, and the
real estate investment outlook, and activity, with steep declines in peripheral eastward shift is permanent.
presents insight and opinion on the members only partly offset by the more
financing of real estate transactions. resilient core countries. Pro-productivity
reforms are required to kick-start growth, Buyout
according to the report. market defies
Beat the
Eurozone
market with
Engines of doom and
M&A
growth gloom
Rise of the cross-border
transaction: the serial Rapid-growth markets Multiple: European
transactor advantage forecast: Spring 2012 buy-outs watch
M&A actually add value. This is a key The European buyout market was
conclusion of this latest piece of research resilient in 2011, despite ongoing fears
on M&A transactions. RGMs are an increasingly fertile source of meltdown in the Eurozone. This report
of global growth and trade flows, finds finds that France recorded the highest
this report. value, with Sweden strong, Germany flat
Inside the mind and the UK down.
of the CFO Make IT count

When the
A tale of two markets:
telling the story of
IT as a driver of going gets
M&A success
investment across developed and rapid- tough...
growth markets
Growing beyond:
This report explores how CFOs balance competing for growth
investments across markets and in difficult times
communicate with investors. This report helps you understand how
harnessing IT can improve dealmaking. Learn how high-performing companies
are dealing with the ‘new normal’ of
volatility, variation, cost-competitiveness
and stakeholder nervousness.
Capital Insights app available now via www.capitalinsights.info

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and regular updates from the website.
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or optimize working capital?
Or is growth your focus? Do you
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Helping businesses raise, invest,

preserve and optimize capital

After the Arab Spring

What next for M&A in

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st Marketing Director: Leor Franks

Capital Insights is published on behalf of

business leaders for their contribution to this issue www.mergermarket.com/remark

Ernst & Young

About Ernst & Young

Ernst & Young refers to the global organization

About Ernst & Young’s Transaction

© 2012 EYGM Limited. All Rights Reserved.

EYG no. DE0297

This publication contains information in summary

RGMs. With Eurozone growth predicted to fall by 0.5% in 2012, companies

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Clive Sawyer PCL/SuperStock/Corbis

16 After the spring

28 Getting the right mix 36 Going private

34 The case for listing 40 Take cover

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companies such as TomTom and Nokia have

Transaction tax debate Public pressure on PE

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Key facts and figures from the world of M&A

2002 2003 2004 2005 2006

Fig 1. Public M&A completion times — median average

Belgium China Fig 2. Deal failures as a % of completed transactions

India Fig 3. Median transaction multiples

growth economies. And, conversely, cash-rich emerging market Hot spots

2007 2008 2009 2010 2011

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may find themselves inadvertently taking on liabilities they hadn’t

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Deal activity in the Eurozone by volume in 2011

200 You don’t need an army, but a good

In April 2011, General Electric

0 saw growing opportunities in Latin America and announced

Develop a solid integration plan before the deal 90

the scale of “assumed synergies” in some deals he has 40 36.1

To achieve a solid integration plan, corporates

should be looking at five separate steps, as laid

out by Professor Scott Moeller of Cass Business 0

advisors; strong communication; clear focus and

Over the last decade, private equity has demonstrated

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l Flickr/Jialiang Gao/Getty Images

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It’s never easy to integrate an acquired

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1907 1908 1910 1911 1934 1936 1947

NatSteel in Singapore becomes

1955 1995 2004 2005 2007 2009

Tata Steel Chatterjee, India is in a unique position.

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Debt rating agency Standard &

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Private placement could prove a decent alternative for corporates,

ABLs on the rise Forward start facilities