Bargain hunting in a crisis: Benefiting
from the emerging market exit stampede
Those considering how to turn a crisis into a fortune, or simply to guide their companies out of the current mess, should look no further than the bold, contrarian thinking of the world’s third richest man. Carlos Slim Helu made his fortune by hoarding cash in the good economic times and acquiring distressed or abandoned assets when investors fled Mexico during times of crisis. Between 1981 and 1985, as foreign and domestic investors abandoned the country during its debt crisis, Grupo Carso, Slim’s holding company, purchased the Mexican affiliates of Reynolds Aluminum, General Tire, and the Sanborn’s chain of stores and cafeterias, as well as the Mexican interests of several large U.S. brands. By coolly laying a foundation amid a crisis, Slim’s fortune grew over the next quarter-century to peak in 2008 at over $60 billion.
Economies in Latin America and Eastern Europe, as well as parts of Asia, Africa, and the Middle East are characterized by a credit drought, foreign exchange volatility, and regulatory risk. They are also home to great up-side opportunities, thanks to the dynamics of the global crisis. When the financial meltdown kicked into gear in mid-September, 2008, New York and London investors scrambled to exit from risky positions and indiscriminately sold off their investments in emerging markets.
Hours later, joining this stampede were local emerging market investors who foresaw massive devaluations of their currencies against the American dollar, and therefore rushed to move their investments to United States Treasuries and other low-risk American assets. The result was that emerging market assets were doubly devalued, both in terms of domestic price and through the foreign exchange rate.
The same pattern is now playing out in the investment plans of strategic investors – companies that own subsidiaries and joint-ventures around the world. Multinationals that had made long term bets on emerging economies are now being forced to focus on proven areas of profitability and leave the markets which promise substantial future growth. RBS has been ordered by its new majority shareholder, the British Treasury, to shed assets and is in the middle of finding a buyer for its Asian assets. More broadly, the need for banks to increase capital levels, and regulatory complications arising from post-bailout American or British government part-ownership – Mexico, for example, bans foreign state-controlled firms from owning a bank in that country – have sparked several rumors of high-profile sales in the offing.
It is not just banks. Ryder Logistics grew aggressively in Brazil, Argentina, and Chile, and had announced its intention to enter the Colombian market months before the crisis hit. In December 2008, it said that it would discontinue operations in its large South American markets, which are still too immature to match the potential of ones in North America and Europe.
Multinationals were not alone in their heady enthusiasm for emerging market investment. Many domestic conglomerates grew too fast thanks to record low interest rates and strong currencies. In 2000, America Economía counted less than 150 multi-latinas – multinationals of Latin American origin – among its top 500 companies in the region. By 2006, the figure was over 350. In Latin America, though, over $60 billion of corporate debt will expire in 2009, some of it dollarized. Not only has the cost of debt ballooned, but corporate debt has grown scarce in emerging markets. Dozens of multi-latinas will struggle to roll over their debt, and may be forced to shed non-core assets quickly. Other emerging markets will see a similar story.
The mass exodus from emerging markets changes the acquisition process there dramatically. During a period of growth, purchases can be carefully planned and pass through multi-layered approval processes. Vendors, confident that their assets will only grow in value, are in no rush. Today sellers are often working against the clock to divest non-core assets. They need to raise cash to meet debt obligations or to close up shop ahead of a restructuring deadline.
Private equity, venture capital, and wealthy individuals look poised for a shopping spree for their streamlined structures afford them the advantage of speed. But they are not the only ones who can bottom feed. Some cash-rich multinationals are also ready to expand in a time of market retreat. A good example is Wal-Mart, which agreed in January 2009 to acquire Chilean retailer DyS for about $2.8 billion.
Discussions with opportunistic investors reveal some useful methods worth adopting:
- Execute a competitive intelligence program: Most companies agree that a crisis is the easiest point in the business cycle to expand market share in product categories where they already compete. An on-going competitive intelligence program that seeks to identify financially troubled competitors can jump start acquisition discussions with targets that are just coming to terms with the need to sell.
- Pre-authorize negotiation of an acquisition: Buying assets in a fire sale requires speed. The normal approval process of a typical multinational acquisition will prove too cumbersome and lengthy compared to those of nimble private equity buyers. Therefore, regional or country level managers must negotiate ahead of time with corporate headquarters the authority, funds, and conditions needed to facilitate a hasty acquisition. Conditions like due diligence red-flags and Price/EBITDA maximum thresholds can help ease the discomfort at headquarters over ceding such authority.
- Finance the acquisition with shares or cash: The biggest bottleneck today in the M&A game is lining up committed and price competitive external financing. Therefore, most time sensitive purchases are financed with cash, shares, or both.
It is essential for buyers to conduct preemptive due diligence. That requires that buyers identify their targets before the target comes to the market looking to sell. Only rigorous due diligence will reveal many flaws that can help lower the price or stop the deal before other transactional fees grow too large.
In emerging markets, thorough due diligence should utilize human intelligence sources. Normal sources of due diligence like tax records, credit bureaus and others are likely to be incomplete and may be erroneous. In a high stakes, time compressed acquisition, due diligence is an investment that pays huge dividends.
| Summary | Economic crises frequently lead investors to leave emerging markets, perceiving them as high risk. The current downturn is no exception. Cash-laden, risk tolerant investors can pick up excellent deals at fire sale prices, but the strategies for success differ from those in better times. |
| Advantages | Protection against unwelcome liabilities that are often disguised by a seller who is anxious to unload assets in a hurry. |
| Time frame to complete | The advantage of seizing the moment is obvious – to obtain assets at fire sale prices, assets that are to be abandoned, not because of any loss in intrinsic value but because their owners can no longer shoulder the burden of managing them. |
| Cost considerations | It may be the quickest offer, not the highest one, which wins the deal. Investors may have as little as 4 – 6 weeks from the time an acquisition target announces his need to sell and the closing of the deal. |
| Risks | Most risks of buying in a fire sale stem from not knowing enough about what you are paying for. |
John Price is a Managing Director based in Miami and can be contacted on +1 305 789 7100 or .
