After years of using cross-border deals to acquire strategic and natural resources, multinational companies headquartered in emerging markets are increasingly looking to penetrate new markets—just like multinationals in developed markets do.
Growth in such deals over the 14-year period from 2000 to 2013 reached double digits on an annual basis, and by 2013, deal activity accounted for about 37 percent of the world market for cross-border deals. Moreover, when we analyzed more than 1,000 cross-border acquisitions1 by emerging-market companies and categorized them by the most common reasons companies pursue acquisitions, we found that the main reason emerging-market companies reach across borders has been to fill capability gaps caused by limited access to strategic resources, such as technology, management capabilities, or other intangible assets in their home markets. (Exhibit 1).2 Over the longer term, only about a third of cross-border M&A deals by emerging-market companies have been made to enter new markets, acquire natural resources, or improve efficiency—deal types that are more common among developed-market buyers.
That pattern, however, is changing. As emerging-market companies have developed and matured, they’ve completed fewer deals in pursuit of strategic resources and more deals to tap into new markets, often located in other emerging countries (Exhibit 2).3 Companies that followed this rationale include Latam Airlines Group, which merged its Chilean LAN Airlines with TAM Airlines of Brazil in 2012, and the Philippine food and beverage company San Miguel Corporation, which acquired Australia’s National Foods in 2005. In general, market seekers are mostly from nondurable consumer-goods industries or wholesale and retail.
Around every fifth dollar spent for cross-border M&A by emerging-market companies has been in pursuit of natural resources—though the scarcity of certain resources, such as rare earths, has not led to proportionately more deals to secure access to them since 2010. Well-known landmark transactions of this type include the acquisition of Canadian mining company Inco by Brazilian metals and mining company Vale in 2006 and the takeover of Udmurtneft, a large Russian oil asset, by Chinese oil and gas company Sinopec that same year. These companies tend to generate most of their revenues in the domestic market and are disproportionately large. Often, natural-resource seekers are state-owned enterprises, such as Sinopec or Russian gas giant Gazprom.
The least common reason for emerging-market companies to acquire abroad is in pursuit of efficiency. Motivated by low labor costs or specific government policies related to import barriers or investment incentives, acquirers move manufacturing capacity to foreign markets by acquiring production-related companies abroad. The small but admittedly growing portion of efficiency-seeking M&A by emerging-market bidders mainly flows into other emerging countries, where production factors are comparatively cheap. Notable examples of such deals are the acquisition of Malaysia’s Titan Chemical Corporation by South Korea’s Honam Petrochemical in 2010, or Singapore-based Biosensors International Group’s takeover of Chinese JW Medical Systems in 2011.