Global Deal Making: It’s a Deal Economy: Do-or-Die…

Companies ended last year having announced more than 7,000 deals, at a value of $2.7 trillion, and this marked the first increase in M&A deal numbers and volumes since 2007, as well as a 23 percent increase over 2009 levels, which were the lowest since 2004.

In the article “Art of Deal-Making” by David Cogman and Carsten Buch Sivertsen, McKinsey write: Our analysis found that deals created more value overall than they did in any year since we began tracking them, in 1997—and that acquirers were more disciplined at capturing this value for their shareholders. Other trends in deals for the year included continued growth in cross-border M&A, an increase in the number of deals in Asia and Latin America, and modest growth in private-equity (PE) deal volumes.

Deal activity recovered in 2010 but remained well short of a deal frenzy. A rally in stock markets around the world drove growth in the total value of deals: global market capitalization rose to around 80 percent of the 2007 peak, up from around 65 percent in 2009. Deal activity for 2010 as a share of market capitalization was slightly below the long-term average of 7 to 8 percent. Despite the resurgence, Deal activity as a share of market capitalization was still considerably lower than it was in 1999, when volumes rose as high as 11 percent of global market cap.

Cross-border activity regained momentum. The long-term trend of increasing cross-border deals activity seemed to stall in 2009, with a significant drop to just 25 percent of global deal volumes, down from 40 percent in pre-crisis years. But cross-border activity returned to pre-crisis levels in 2010 as a result of both mega-deals and numerous smaller cross-border transactions.

Cogman and Sivertsen write: Private-equity activity recovered but remained concentrated in Organization for Economic Co-operation and Development (OECD) countries. For 2010, private-equity M&A, at a bit above $200 billion, accounted for 8 percent of deals by volume. Although nearly double the levels of 2009, this remains far from the $700 billion peak seen in 2006 and 2007. This rebound was, however, mostly a phenomenon of OECD countries. Non-OECD countries constitute around 30 percent of global M&A but only 10 percent of private-equity activity.

Stock markets have typically assessed the value of M&A to acquirers cautiously. Over the past decade, capital market reactions to deals, as gauged by share price reaction to deal announcements, suggested that investors perceived them as creating around 10 percent of their value for the seller and destroying around five and a half percent for the acquirer. This perception reversed sharply in 2010, however: for only the second time in the past decade, markets viewed the average deal as creating value for both acquirer and seller.

The return of market confidence in deal making during the latter half of the year was perhaps the most encouraging aspect of deals in 2010. Overall deal activity improved, and capital markets looked favorably upon the resulting value creation. Companies also once again seem willing to engage in more ambitious cross-border deals. Barring any major macroeconomic upsets in 2011, a positive trend seems to have begun.

In the article “2011 Ripe for Uptick in Deal Making if Confidence and Clarity Return” by Ernst & Young’s Transaction Advisory Services writes: “The past year was characterized by a two-speed recovery, with momentum building in emerging markets versus limited deal activity in developed markets,” says Richard Jeanneret, Ernst & Young.  Emerging markets witnessed a surge in deals activity in 2010 with inbound and outbound BRIC (Brazil, Russia, India and China) deal value reaching almost $372 billion, up more than 46% over 2009.

Private equity (PE) rebounded this year with acquisition activity recovering off of 2009 lows. PE firms have announced 1,778 deals valued at $196 billion. Improved credit conditions have fueled an increase in deal activity, evidenced by increasing buyouts of larger transaction sizes as 2010 unfolded. Banks are more willing to lend in this environment, and there appears to be a fairly robust market for new deal financings and re-financings. High yield debt is providing a viable financing alternative, as the market, particularly in the US, is at record issuance levels.

Fortune 1000 companies have $1.9 trillion in cash on hand, an increase of almost $600 billion since before the economic downturn three years ago. In an Ernst & Young survey, over half (58%) said credit/capital conditions were better now than six months ago. Access to capital to fund deals has also improved.

A third of respondents (36%) state that access to funding is not a problem for their companies, compared to 26% in April of last year. “Confidence has been the primary restraining factor in deal activity over the past year,” says Jeanneret. “Investors face uncertainty stemming from regulatory changes, austerity measures, unemployment, fears of inflation and European fiscal woes.

In the report “Global Negotiating and Deal Making” by Xalles Limited writes: Preparation is a key ingredient in any negotiation but in international negotiations it can make the difference between a good contract while building a solid long term relationship or a disastrous outcome. Understand the cultures. Understand the subtleties of the laws of the countries.

Understand how you work with gatekeepers and middlemen to accomplish your goals. Create an agenda, roadmap, and determine the positions for the negotiations… Look at all possible risks and develop migration strategies for the positions that the other parties might assume. Know the detours on your roadmap and how to use them if necessary.

Many large organizations utilize gatekeepers when entering negotiations with foreign parties. They have a multi-purpose job. They protect the key executives from getting into a situation where they might lose face. They also shield some of the negotiators from getting too close to the executives until the executive is ready to be more open. These gatekeepers also provide a wall around the ultimate negotiator and communicate their “fixed” position to your negotiator.

Often there are intermediaries who are staff of the principals and who will carry the key messages back and forth outside of the formal meetings. Unlike the gatekeepers, these middlemen are a positive influence on the deal making process. Through the middlemen is where the real negotiating takes place. This process is common in many cultures and allows the principals to save face and can often save many deals from being aborted. The intermediaries allow the opportunity for many “trial closes” to be executed, thus reducing the chance for an impasse…

In the article “Due Diligence for Global Deal Making The Definitive Guide to Cross Border Mergers and Acquisitions, Joint Ventures Financings, and Strategic Alliances” by Arthur Rosenbloom writes: Many global transactions fail to meet the parties’ expectations, and a primary culprit is inadequate due diligence. Expanding businesses must answer difficult questions, such as: Why (if at all) should we do this deal? What are the rules going in and what happens if things go wrong? Where are the tax, legal, financial, and operational traps and what are the opportunities?

Doing deals that create value for shareholders is harder than ever. It is even more difficult to do this in a multi-national environment. The issues of tax, accounting, securities laws and the regulatory differences add enormous complexities to the already huge challenges of just getting the strategy right and executing it!! Deals are made or broken in the due diligence phase…

In the article “Deal Making: The Art of Using Mergers & Acquisitions and Private Equity for Value Enhancement” writes: In a globalize world, deals are an essential mechanism for shareholder value enhancement. Deals can facilitate access to new markets, capacities and technologies, as well as enabling organizations to focus on core competencies. Well-planned and strategic deals are transforming a number of emerging corporations into global powerhouses and enabling leading US and European companies to metamorphose into international majors.

Private equity, with their wide network and vast experience, play a significant role in the internationalization of companies and is becoming increasingly popular in Asia as it provides shareholders and management with a number of interesting alternatives to enhance shareholder value. The capital facilitates growth of both emerging and mature companies…

In the blog “Deal-Making: What does the Future Hold? by Tom Gledhill writes:  Top executives must improve their negotiation and deal-making skills or risk financial ruin as big business and the recession make it harder for small-medium enterprise’s (SME’s) to get a foot in the door. Speaking at an event in London, Clive Rich, professional negotiator, told a packed group of SME founder/owners that it is vital that SME’s understand more about the deal making process or they will simply lose out.

He added, “in the wake of the global financial crisis and with the recession biting, SME’s are finding it harder and harder to get deals, whether for funding or with large customers and suppliers who are putting the squeeze on terms or slamming doors in their in face”.  Companies will only “win” at deal making if they learn to negotiate effectively.

This is becoming critical as China and India grow in negotiating strength, as emerging economies like Brazil become more powerful, as the demands of technology place an ever greater premium on effective international deal partnerships, and as the lingering effects of recession and the credit crunch continue to squeeze the availability of working capital for international expansion…

In the article “Confident Deal Makers Pulled Out Checkbooks in 2010” by Michael J. De La Merced and Jeffrey Cane write: Return of confidence is the most significant development in deals in 2010. The fickle state of mind encouraged the first annual gain in deal-making worldwide since the financial crisis. Still, deal activity is far off the peak of 2007, and no one expects a return to exuberant deal-making anytime soon. Reasons for the renewed optimism include continued cheap credit, huge piles of corporate cash and gains in the United States stock market.

“To be successful, deals must be strategic, earnings-growth positive and easily understood by shareholders,” said Jeffrey Kaplan, Global Head of Mergers and Acquisitions at Bank of America Merrill Lynch. “That’s one reason why we’re not seeing the velocity of deals that we saw in 2006 and 2007.” The United States accounts for 34 percent of global deal volume. But one of the biggest themes for deals in 2010 was the growth in emerging markets. In the Asia-Pacific region, deal volume jumped 43.5 percent, according to Thomson Reuters.

“This has clearly been an inflection point for East meets West”, said Paul Parker, head of global deals at Barclays Capital. “Emerging markets have surged and really accounted for growth in deals this year.”

In the article “Making Deals: The Business of Negotiating” by Marvin Gottlieb and William J. Healy writes: We are all deal-makers and we all make deals daily, whether you know it or not — no executive who sits down to cut a deal wants to stake the outcome on instinct, intuition, or the force of another’s personality and position. You need a plan. Your reputation, and maybe your career, depends on it.

Better deal-makers create a problem-solving, collaborative atmosphere that produces satisfying results for everyone. They turn deadlines and the timing of the deal to their advantage, and gather information that strengthens the deal… and know how to circumvent the power plays of others. And since you’ll inevitably go up against hard-nosed, positional bargainers from time to time, you’ll need to recognize and counter their “all’s fair in love and war” tactics. In the best deals both sides must win; it must be a win-win deal…

In the article “Final Meditations on the Wheel & Deal” by Douglas Glover writes:  Deals are the gears of exchange: they make things work, they propel the future… A good deal is a moment of clarity, of sudden understanding, of practical adjustment… Deals create their own hermeneutics, their own systems of definition, interpretation and appeal. They also create their own shadowy quasi-legal systems.

As the 2010 came to a close, the tailwinds were forming that will propel leading companies back into deals in 2011, realizing opportunities for game-changing strategic deals. The emerging winners will be those that drive long-term growth through innovation, globalization and an entrepreneurial mindset. “With record-breaking levels of cash on hand and confidence slowly returning to the markets, we expect to see deal activity continue to increase in 2011, albeit in a moderate, targeted way” says Krouskos.

Making good deals involves making good decisions throughout and beyond the process of doing the deal; and, finding deals that deliver anticipated values and benefits. The process begins with thinking that leads to the formulation of clear goals; and continues until the acquired company has been fully integrated and all anticipated economic benefits obtained with a minimum of surprises.

The thoughtful deal-maker preserves value by tending to relationships. The lifeblood of human endeavor is effective communication and keeps lines of communication open with all parties involved. A thoughtful deal-maker studies the numbers and the business decisions behind each and every line item, and knows the value of a potential purchase… cultivates a negotiating atmosphere that favors the desired outcome.

The thoughtful deal-maker is aware of the goal and is steadfastly focused. The perceived ability to satisfy needs is a source of power and influence. The thoughtful deal-maker sets the climate, direction, and content of negotiations… doesn’t ask the counsel what to do, but asks to be educated on the alternatives, opportunities, risks, and means to handle them to achieve a deal that delivers the goals.