Tuesday, April 6, 2010

EM FIRMS DO HAVE THE MONEY FOR LARGE, VISIBLE M & A'S: BUT AREN'T THEY PAYING TOO MUCH IN SOME CASES?

INTRODUCTION

Last week we already showed how two large Western firms were about to go from Western to Emerging Market ownership. Volvo will go to Chinese Geely and the sovereign wealth fund of Qatar felt that struggling French shipping company CMA (third largest in the world) w...ould be of interest to the Middle-Eastern country taking into account plans to make Doha a bigger shipping hub. The Gulf country is one of the world's largest gas exporters and it needs the extra capacity, so why not think about acquisition of a big provider now that world valuation levels are not exactly at their historical highs?
 

INTEREST IN KNOWLEDGE INTENSIVE VENTURES

But the interest of EM buyers is not limited to traditional sectors like Automotive and Shipping/Transport. Earlier evidence showed how their efforts were also important in Banking (e.g. the acquisition of a stake in Citibank by Arabs earlier, and the acquisition of a stake in Fortis by a Chinese insurer et cetera). We do however feel that Emerging Markets providers normally go to far in paying knowledge-related premiums when acquiring stakes in those kind of industries.

That was the first thought we had when reading the attached message. A Russian press agency announced that two Russian firms and a Chinese one were bidding for ICQ, the instant messenging / chat service that is now part of AOL

 

 Stephen Case (AOL); selling-off non-core assets after being sold of himself

AOL was an internet success story back in the 90s when Stephan Case made it an example for many other companies. The internet/technology-related exuberance did the rest with valuation levels going so high that AOL was able to buy such a stake of publisher Time Warner that it was almost like a reversed take over.


But times have changed: the new century started with a collapse of the internet-related exuberance. Time Warner spun of AOL last December and AOL is selling-off non-core assets, one of which is ICQ. ICQ itself, created by Mirabilis a company that was itself taken over by AOL in 1998 was once a fascinating growth story.

But now ICQ (I seek you) is just one of the many ways out there to expand your network. Yahoo, MSN are other well known names and Facebook and others added chat and instant messenger services to their offering as well.

AREN'T THEY PAYING TOO MUCH?

LMG Emerge was surprised to see the valuation level: USD 300 million bids for this messenger service and its technology seems to be a lot. Unfortunately none of the parties involved was available for comments. Sure, the buyers are from countries that do indeed have more time to do long-term investments but somehow our gut feeling is that there is still a somewhat large technology/exuberance premium in what firms from Emerging Markets want to pay for Western ventures allegedly associated with 'technology and knowledge'.

Part of the swift transition from Emerging into Developed seems to be that ownership of and/or domestic presence of 'technology' and 'knowledge' rich ventures is seen as an important element of going the right way. That is, of not only being a growth story due to cheap labor, commodity availability and/or expansion of the domestic middle class. We hope to be wrong, but will follow trends carefully over the next 3 years. In the mean time we will translate our skepticism into a relatively lower allocation to technology and knowledge rich ventures in Emerging and Frontier economies unless they are proven to be market leaders.

For the original press announcement from Russia click this link.

 

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