Article

Asia discovers its M&A potential

As the region's share of global M&A deals continues to grow, there are four keys to success.

By Satish Shankar and Suvir Varma

Published on November 10, 2011
min read


Buoyed by powerful economic growth, strong corporate profits and government deregulation, M&A activity in Asia Pacific has staged a healthy recovery from the financial crisis. In 2010, the value of M&A deals in the region grew 20% and now accounts for 25% of all global M&A deals. While China remains the largest overall deal market, surging activity in India and Australia fueled Asia’s dramatic M&A recovery. This reflects Asia’s increasingly important position over the next two decades as a growth engine for the world. Asia Pacific’s share of global M&A deals will continue its upswing, despite the current uncertain economic environment and concerns from Western companies about inflated valuations of Asian acquisition targets. Among the most important developments in Asia’s M&A activity is the rapid rise in outbound deals. For many Asian companies with aggressive growth targets and global aspirations, outbound M&A offers a chance to enter new markets, with opportunities for increased distribution, market share, customer ties, and positioning as a low-cost alternative. Outbound deals can accelerate new product development at a lower cost by acquiring innovative technology. These deals can also enable a company to buy a brand with strong cachet that can’t be replicated, as China-based Zhejiang Geely achieved with its purchase of Volvo. But the odds of failure are daunting. For example, even in the best of times, Bain & Co. research shows that in the U.S. the stock price of 55% of companies failed to outperform their peer index one year after an M&A announcement. Setting an example In this environment, a few Asian companies are setting an example for how to improve their position for successful M&A. Delivering on an acquisition’s promise requires a clearly defined acquisition strategy and execution plan. Experience matters, too: Serial acquirers that have conquered a steep learning curve outperform companies that do deals infrequently. When we surveyed 243 companies, we found that 86% of successful deals were made by companies that had institutionalized an M&A capability. We’ve learned that M&A winners share four traits for success. The first is an M&A strategy linked to the company’s overarching growth strategy. Singapore-based Olam International has used acquisitions to grow itself into a leading global supply chain manager for food ingredients and agricultural products. In 2006 the company wasn’t making M&A deals, but only four years later its acquired companies were generating around 30% of its earnings. From 2007 to 2010, Olam completed no fewer than 17 deals, investing a total of $1.4 billion and achieving a 25% return on equity and a 14% return on invested capital from those acquisitions. What sets Olam apart? The company uses M&A to build leadership positions in its existing businesses, expand into adjacent businesses, overcome entry barriers in new markets, acquire new capabilities, and take advantage of favorably priced targets with high business overlap. Moreover, it has clear guidelines for deal frequency, size, timing, and level of ownership. For example, Olam favors the “string of pearls” approach: Instead of a few headline-making deals, it focuses on a series of small deals over a multiyear period, establishing a maximum deal size of 10% of its market cap and a maximum annual deal volume of 15% of its market cap. Godrej's strategy Similarly, Indian household and personal care products maker Godrej has used a well-honed acquisition strategy to grow its domestic leadership and international reach. Recognizing that M&A was critical to achieving its global goals, the company spent two years of disciplined preparation before setting foot in the M&A market. It assembled a strong M&A team and developed a playbook including a detailed integration manual and a rigorous screening process to identify the right acquisition candidates. Since January 2010, Godrej has done eight deals worth about $750 million in total. Godrej focuses on three categories (hair care, home care, and personal wash) and targets companies with leading positions. Recent acquisitions are market leaders: Megasari is Indonesia’s second-largest household insecticides player, Issue Group and Argencos are the hair color leaders in several Latin American markets, and Darling Group is the leader in hair extensions across 14 countries in sub-Saharan Africa. Thanks to this carefully executed M&A strategy, in 2010 the company’s global business accounted for more than 30% of revenue—largely fueled by its international acquisitions—and contributed $14 million in net earnings. The second trait for successful M&A is the institutionalization of M&A policy, process, and people to ensure discipline and focus. Olam has a six-member core M&A deal team that works hand-in-hand with business unit leaders through every stage of an acquisition, ensuring that each deal is aligned with the company’s M&A guidelines and corporate strategy. The team creates a detailed investment thesis and performs due diligence, asking and answering the big questions that will drive most of the business value—a step that dictates integration priorities. The third essential ingredient for M&A is a focus on value creation, tight process control, and quick resolution of people issues. Leaders plan early, integrate quickly where it matters most, prioritize culture, and maintain firepower in the core business. After Asia Retail Group, backed by Baring Private Equity Asia, bought control of Southeast Asia retailer Courts Asia in 2007, the new managers shut the most unprofitable retail operations and focused on two core markets, Singapore and Malaysia. Three years later, Courts’ enlarged brand portfolio, expanded distribution network, and more efficient operations and supply chain delivered an impressive turnaround—revenues grew by 15% a year, three times the market growth rate, and added 13 percentage points to the company’s margins in four years. Asia Retail is now hoping to sell Courts for 500 million Singapore dollars, Bloomberg News reported last month. Persistence pays The fourth characteristic of successful dealmakers in Asia is persistence. Serial acquirers do better than one-off acquirers. When it comes to M&A, experience counts—and the most successful acquirers make a point of learning from that experience. For example, to improve M&A capabilities, some companies refine the deal-making process by conducting postmortems and effectively codifying and documenting their M&A efforts. These four traits of maintaining a well-defined strategy, institutionalizing the M&A program, focusing integration where it matters most, and learning from experience will separate the companies that profit from Asia’s growing M&A marketplace from those that are left behind. Satish Shankar is a partner in Bain & Co.'s Singapore office and head of the firm's M&A practice in Asia. Suvir Varma, a Bain & Co. partner based in Singapore, heads the firm's Private Equity practice in Asia.

Buoyed by powerful economic growth, strong corporate profits and government deregulation, M&A activity in Asia Pacific has staged a healthy recovery from the financial crisis. In 2010, the value of M&A deals in the region grew 20% and now accounts for 25% of all global M&A deals. While China remains the largest overall deal market, surging activity in India and Australia fueled Asia’s dramatic M&A recovery. This reflects Asia’s increasingly important position over the next two decades as a growth engine for the world. Asia Pacific’s share of global M&A deals will continue its upswing, despite the current uncertain economic environment and concerns from Western companies about inflated valuations of Asian acquisition targets.

Among the most important developments in Asia’s M&A activity is the rapid rise in outbound deals. For many Asian companies with aggressive growth targets and global aspirations, outbound M&A offers a chance to enter new markets, with opportunities for increased distribution, market share, customer ties, and positioning as a low-cost alternative. Outbound deals can accelerate new product development at a lower cost by acquiring innovative technology. These deals can also enable a company to buy a brand with strong cachet that can’t be replicated, as China-based Zhejiang Geely achieved with its purchase of Volvo.

But the odds of failure are daunting. For example, even in the best of times, Bain & Co. research shows that in the U.S. the stock price of 55% of companies failed to outperform their peer index one year after an M&A announcement.

Setting an example

In this environment, a few Asian companies are setting an example for how to improve their position for successful M&A. Delivering on an acquisition’s promise requires a clearly defined acquisition strategy and execution plan. Experience matters, too: Serial acquirers that have conquered a steep learning curve outperform companies that do deals infrequently. When we surveyed 243 companies, we found that 86% of successful deals were made by companies that had institutionalized an M&A capability.

We’ve learned that M&A winners share four traits for success. The first is an M&A strategy linked to the company’s overarching growth strategy. Singapore-based Olam International has used acquisitions to grow itself into a leading global supply chain manager for food ingredients and agricultural products. In 2006 the company wasn’t making M&A deals, but only four years later its acquired companies were generating around 30% of its earnings. From 2007 to 2010, Olam completed no fewer than 17 deals, investing a total of $1.4 billion and achieving a 25% return on equity and a 14% return on invested capital from those acquisitions.

What sets Olam apart? The company uses M&A to build leadership positions in its existing businesses, expand into adjacent businesses, overcome entry barriers in new markets, acquire new capabilities, and take advantage of favorably priced targets with high business overlap. Moreover, it has clear guidelines for deal frequency, size, timing, and level of ownership. For example, Olam favors the “string of pearls” approach: Instead of a few headline-making deals, it focuses on a series of small deals over a multiyear period, establishing a maximum deal size of 10% of its market cap and a maximum annual deal volume of 15% of its market cap.

Godrej's strategy

Similarly, Indian household and personal care products maker Godrej has used a well-honed acquisition strategy to grow its domestic leadership and international reach. Recognizing that M&A was critical to achieving its global goals, the company spent two years of disciplined preparation before setting foot in the M&A market. It assembled a strong M&A team and developed a playbook including a detailed integration manual and a rigorous screening process to identify the right acquisition candidates. Since January 2010, Godrej has done eight deals worth about $750 million in total. Godrej focuses on three categories (hair care, home care, and personal wash) and targets companies with leading positions. Recent acquisitions are market leaders: Megasari is Indonesia’s second-largest household insecticides player, Issue Group and Argencos are the hair color leaders in several Latin American markets, and Darling Group is the leader in hair extensions across 14 countries in sub-Saharan Africa. Thanks to this carefully executed M&A strategy, in 2010 the company’s global business accounted for more than 30% of revenue—largely fueled by its international acquisitions—and contributed $14 million in net earnings.

The second trait for successful M&A is the institutionalization of M&A policy, process, and people to ensure discipline and focus. Olam has a six-member core M&A deal team that works hand-in-hand with business unit leaders through every stage of an acquisition, ensuring that each deal is aligned with the company’s M&A guidelines and corporate strategy. The team creates a detailed investment thesis and performs due diligence, asking and answering the big questions that will drive most of the business value—a step that dictates integration priorities.

The third essential ingredient for M&A is a focus on value creation, tight process control, and quick resolution of people issues. Leaders plan early, integrate quickly where it matters most, prioritize culture, and maintain firepower in the core business. After Asia Retail Group, backed by Baring Private Equity Asia, bought control of Southeast Asia retailer Courts Asia in 2007, the new managers shut the most unprofitable retail operations and focused on two core markets, Singapore and Malaysia. Three years later, Courts’ enlarged brand portfolio, expanded distribution network, and more efficient operations and supply chain delivered an impressive turnaround—revenues grew by 15% a year, three times the market growth rate, and added 13 percentage points to the company’s margins in four years. Asia Retail is now hoping to sell Courts for 500 million Singapore dollars, Bloomberg News reported last month.

Persistence pays

The fourth characteristic of successful dealmakers in Asia is persistence. Serial acquirers do better than one-off acquirers. When it comes to M&A, experience counts—and the most successful acquirers make a point of learning from that experience. For example, to improve M&A capabilities, some companies refine the deal-making process by conducting postmortems and effectively codifying and documenting their M&A efforts.

These four traits of maintaining a well-defined strategy, institutionalizing the M&A program, focusing integration where it matters most, and learning from experience will separate the companies that profit from Asia’s growing M&A marketplace from those that are left behind.

Satish Shankar is a partner in Bain & Co.'s Singapore office and head of the firm's M&A practice in Asia. Suvir Varma, a Bain & Co. partner based in Singapore, heads the firm's Private Equity practice in Asia.