Tag Archives: Turkey

A new direction for global M&A

Investment Conference
(Photo credit: Salmaan Taseer)

The geography of deal-making is changing fast. Over the last five years there have been more deal value flow from the largest high growth markets (HGM) to mature market economies than in the other direction. Between 2008 and 2012 HGM companies invested US$161 billion into mature market companies, outstripping the opposite flow of US$151 billion. In 2012 alone, HGM companies closed deals for mature market targets worth US$32.6 billion, almost three times the amount they invested in 2005.

In a recent report, PwC looks at how dealflows are changing and we also consider how new types of HGM investors are turning to M&A and the factors driving their investment choices. Large and mid-sized private companies have now joined the state-backed investors who were among
the first to acquire mature market targets. HGM investors’ scope is also widening, with HGM to mature market M&A activity ranging from energy, raw materials and engineering to media, retail and consumer goods companies.

The past is no guide to the future

In some regions, inflated valuation expectations are based on past deals. Some investors can be keen to dispel the notion that they are prepared to pay ‘over the odds’ and may be more recalcitrant about their price. This may have been a factor in Qatar National Bank’s bidding for Franco-Belgian owned Denizbank, which operates in Turkey. Denizbank’s parent, Dexia, also received a bid from Sberbank of Russia. Despite assumptions about Qatar’s readiness to spend, they did not increase their offer and Russia’s state-owned savings bank won the deal. Buyers from the Gulf Region typically do not like public transactions and, where this is unavoidable, will not want to be perceived as having paid more than fair market value. Some Gulf investors are able to deploy larger amounts of capital for longer periods of time but they expect the deal terms to reflect this, in their favour. However, ability and willingness to pay are very different and indeed, Chinese and Indian buyers are just as keen as their developed market counterparts to win deals on the most favourable terms they can achieve.


Deal-making is always a complex mix of strategy, economics and personalities. Cultural differences add another layer of complexity; competition for investment is also growing, as mature market companies are far from being the only targets HGM companies are considering. PwC suggests that HGM to mature market M&A has the potential to grow a very long way and we will see acceleration in this type of M&A over the coming years. A better understanding of the make or break areas – valuation mismatches; differing completion timeframes; the need to connect with decision makers; and process differences – can only improve the chances of a successful deal. The HGM buyers and mature market sellers best prepared for those differences may have a lot to gain.


Profitability risks after the acquisition of informal players

McKinsey has a nice example from Brazil, but not only – Russia also has similar examples – where formal supermarkets have found that they can’t profitably acquire informal players, because of the unearned cost advantage. Although supermarkets could increase the productivity of the acquired businesses, their net margin goes to zero once tax obligations are paid:

They also show that in Turkey dairy processors enjoy informality-related cost savings of almost 20%, so these companies survive despite their low pro-ductivity. Informal software companies in India appropriate innovations and copyrights without paying for them. If software piracy rates fell to US levels, the industry’s productivity and profitability would soar by nearly 90%.

Are tax amnesties a solution during crisis?

Tax (Photo credit: 401K)

Many governments in emerging markets mistakenly believe that they can reduce the level of informality by forgiving past tax debts of companies that come forward. Turkey, for instance, has had ten tax amnesties since 1963—one nearly every four years—and five social-security amnesties since 1983. Their provisions included the right to base the payment of past taxes on historical values of Turkey’s currency, the lira. Given the country’s high inflation rates, this approach greatly reduces the amount businesses have to pay. A McKinsey study shows that governments make ongoing enforcement more difficult with such measures, since companies wait for the next amnesty before coming clean.

In developed countries, the penalties are usually two to three times the amount of the evaded taxes, coupled with imprisonment if the evasion is persistent or involves more than a set amount. Tax evaders in emerging markets often get by with a slap on the wrist; in Turkey, for instance, the fine for VAT evasion is less than $20.

Probably corruption has also something to do with how evasion is considered in emerging economies. What do you think?