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Jul 20

M&A - Brazilian Bargain Hunt

Donald Grava July 20, 2016

 

M&A in Brazil - Bargain Hunt

M&A in Brazil Versailles Group

At this point in time, Brazil is providing M&A buyers with incredible opportunities for a number of reasons.  Despite a history of healthy economic growth, Brazil’s economy has recently lost momentum.  The country has officially been in a recession since the end of 2014, with no immediate recovery in sight.  Inflation is now over 10%, and unemployment reached 9% in 2015.  Additionally, the Brazilian stock market has plummeted along with its currency.  The chart below depicts the decrease in the value of the Brazilian real in comparison to the US dollar.

Brazil M&A - Versailles Group

Compounding the economic problems, Brazil is experiencing temporary political unrest due to a large corruption scandal.  There isn’t much hope for economic improvement in 2016; however, once the political turmoil settles, economists are optimistic about what 2017 will bring for the Brazilian economy.  Brazil boasts a large domestic market, with a variety of innovative industries and an abundance of natural resources.  The previous decade’s economic growth averaged around 4 to 5 percent per annum.  It is likely that the economy will start to grow at the tail end of this crisis, as the Brazilian government has plans to address the economic problems in the form of cutting public spending and implementing policies through the Central Bank.

What does this mean for foreign investors?  Brazilian companies are the cheapest they have been in years, and with a vast array of investment options.  In short, Brazil presents a unique opportunity.  This is echoed by the fact that foreign investors are flocking to the region, and are beginning to outpace local investors.  The chart below compares foreign investors to Brazilian investors.

M&A in Brazil - Versailles Group

M&A buyers that can look beyond two or three years will be able to achieve excellent returns.  The Brazilian economy has the capability for strong and consistent growth.  Over the years, the middle class in Brazil has grown, literacy rates have increased, and Brazil is the 8th or 9th largest economy in the world.

In conclusion, an M&A buyer can capitalize on the current domestic situation, which has resulted in slashed valuations and many opportunities where sellers have to sell.  Furthermore, foreign investors will also be able to capitalize on the strong US dollar as compared to the Brazilian Real, which make Brazilian acquisitions incredibly affordable and will enable investors or acquirers to earn a healthy return on their investment in the future.

Versailles Group is a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures.  Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million.  Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.  

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President

+617-449-3325

July 20, 2016

 
Jul 12

M&A Activity in Asia Grows, Led by China

Donald Grava July 12, 2016

M&A Activity in Asia Grows, Led by China

Versailles Group - China update

 

While global M&A activity in Q1 2016 was lower than the record-breaking deal volume witnessed in Q1 2015, one bright spot has emerged amid volatile markets and political uncertainty: China.  In Q1 2016, China claimed its largest quarterly share of global mergers and acquisitions on record.  According to Thomson Reuters, roughly US$110 billion in M&A deals, or 15 percent of global deal value, involved Chinese buyers. 

The chart below depicts deal value in China across the past five years, 2012 - 2016. The value of outbound Chinese deals in Q1 2016 ($110 billion) surpassed China’s previous annual record of $109 billion over the whole of 2015.

Versailles Group - China M&A Update

Overall, M&A activity in Q1 2016 throughout Asia increased by 9 percent compared to Q1 2015.  Last year, the region reached a deal value of US$275 billion, accounting for almost 40% of global deal value (US$699 billion).  When analyzing the activity by country, China played a significant role in M&A activity across the continent.  Mega deal activity, characterized by deals which have a value greater than $5 billion, contributed to China’s M&A prowess, as the top ten deals in Asia all had either a Chinese company as an acquirer or a seller.  The largest deal in Q1 2016 was China National Chemical Corp’s acquisition of the Swiss company Syngenta, which amounted to a $46 billion transaction and marked China’s biggest takeover of a foreign company. 

Recently, China has exhibited a strong appetite for foreign acquisitions, particularly in the U.S.  O’Melveny law firm’s 2016 investment study suggests that Chinese business owners’ investment in the U.S. will be higher in 2016 than in previous years.  The study mentioned the U.S. as a key target nation for Chinese acquirers, as Chinese buyers are looking for growth at a time where their home markets are facing a relative slowdown.  Overall, China’s cross border deal value has increased over the past year; including both inbound and outbound acquisitions.  Specifically, China’s cross border deal value totaled $95.1 billion in Q1 2016, representing an increase of 136 percent compared to Q1 2015.  

Chinese companies have emerged as a dynamic force in deal making in a number of sectors.  China’s increased M&A activity highlights its attempt to serve its growing consumer class, as the nation copes with sharp declines in its stock market and less domestic economic growth prospects.  According to Barclay’s Head of Americas M&A, Larry Hamdan, we should “expect China outbound M&A to continue as they seek to bring leading international brands and technologies to their home market and to drive growth by expanding into new geographies.”  Gilberto Pozzi, co-head of global M&A at Goldman Sachs, agrees that China is attempting to drive growth through cross border acquisitions, asserting that “robust Chinese M&A activity was primarily driven by a combination of decelerating growth in China, leading companies to diversify across geographies, and government support on foreign strategic acquisitions.” 

In the future, we can expect China’s remarkable amount of outbound M&A activity to continue. According to Pozzi, decelerating growth and the government’s encouragement of foreign acquisitions are both “strong tailwinds which direct towards continued outbound Chinese M&A activity for the rest of 2016 and beyond.”  As more Chinese buyers have recently begun to hire advisers very early in the deal making process, we have seen more and more successful transactions.

Versailles Group is a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures.  Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million.  Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.  

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President

+617-449-3325

July 12, 2016

 

 

Jul 06

Brexit - Middle Market M&A

Donald Grava July 6, 2016

Brexit Middle Market M&A

Versailles Group - Brexit

 

U.S. middle-market M&A is, for the most part, shielded from the Brexit volatility, according to Franklin Square’s senior economist, Lara Rhame.  In 2015, U.S. middle-market companies generated 87 percent of their revenues from domestic sales.  Of the 13 percent of the middle-market revenues generated outside the U.S., only 3 percent came from Europe.  Thus, M&A in the U.S. should not be drastically impacted by Britain’s exit from the EU, as U.S. companies have placed a greater emphasis on buying and selling both domestically and outside of Europe. 

Nevertheless, the post-referendum weakening of the British Pound relative to the U.S. dollar could potentially have significant implications for M&A activity between Britain and the U.S.  As the exchange rate between the Pound and the Dollar fluctuates, so do sales between the two countries – this phenomenon is known as the substitution effect.  As the Pound strengthens against the Dollar, Pound denominated goods and services become more expensive, meaning that Dollar denominated goods and services become more attractive.  Hence, U.S. sales to Britain increase, and British sales to the U.S. decrease.  In contrast, when the Pound weakens, Pound denominated goods and services become less expensive, resulting in Dollar denominated goods and services becoming less attractive.  Thus, U.S. sales to Britain decrease, and British sales to the U.S. increase. 

Ultimately, this substitution is rooted in the notion that as prices rise, consumers will replace more expensive items with less costly alternatives.  In recent years, the exchange rate of the British Pound to the U.S. Dollar has averaged about US$1.60.  This rate declined a bit throughout the start of 2016, and dropped to roughly US$1.36 immediately after the Brexit vote.  Overall, this low exchange rate puts the Pound near a multi-decade low relative to the U.S. Dollar.  One possible effect of this record-low exchange rate is substitution; in terms of M&A, this substitution could potentially lead to U.S. companies buying more companies in the U.K. 

Studies have repeatedly suggested that U.S. middle market companies should consider expanding outside the U.S.; these companies should either buy or sell overseas, or potentially establish overseas operations.  Hence, the decision to expand generally comes down to the choice of either building or buying.  In the most basic terms, a target company in the U.K. that is selling will cost about 15 percent lower in U.S. Dollar terms compared to two or three years ago.  This reduction is very beneficial for U.S. companies looking to buy British companies.  Consequently, some private equity firms have argued that the Brexit economic uncertainty will bring prices on potential U.K. acquisitions down to more reasonable levels, which could spur cross-border M&A activity.

A good M&A advisor with cross-border transaction experience should be able to assist in acquiring a company in the UK.  As always, it’s important to have several targets in mind so that the very best acquisition is completed.

Versailles Group is a 29-year-old Boston-based investment bank that specializes in international mergers, acquisitions, and divestitures.  Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues between US$2 million and US$250 million.  Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services, and has been completing cross-border transactions since its founding in 1987.  

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President

+617-449-3325

July 6, 2016