More than half of growth market deals fail, PwC warns

Deals in growth markets are a high-risk, high-reward enterprise best managed by building the local machinery to get the deal done, according to a new PricewaterhouseCoopers report.

Between 50% and 60% of deals that enter external due diligence fail to complete, according to the report, “Getting on the Right Side of the Delta: A Deal-Maker’s Guide to Growth Economies,” which was released last week. For deals that did get completed, post-deal problems cost the investor, on average, 50% of the original investment.

Nonetheless, the report says access to high-growth economies with large populations, increasing wealth and the ability to innovate is essential for some companies.

PwC assessed more than 200 deals and interviewed 20 senior deal makers whose companies collectively have completed at least 140 acquisitions in growth markets. The report considers growth markets to be those outside of the United States, Western Europe, Japan, Canada, Australia and New Zealand.

Failure to complete deals can be costly because it can decrease investor confidence as well as waste time and resources. The report identifies four main reasons why deals fail. Mismatched valuation is the first, accounting for nearly 40% of failed deals. Intense competition for assets in growth markets and an uncertain magnitude for future growth contribute to valuation problems that torpedo deals.

The other three reasons account for half of failed deals, the report says. They are:

  • Failure to obtain approval from the government.

  • Less transparency of financial information, and different accounting practices, which make it difficult for buyers to get comfortable with a deal.

  • Noncompliant business practices such as corruption or failure to obey labour or tax regulations can destroy a deal.

The most common cause of post-deal problems is partnering, which can trip up even the most sophisticated investors, according to the report. Other post-deal difficulties mirror pre-deal problems, including government interference, lack of transparency of financial information, and noncompliant business practices.

In addition to identifying problems with deals in growth markets, the report makes recommendations to help generate success. They include:

  • Developing a strategic rationale for growth market deals early in the process. This can take one or two years, the report says.

  • Prioritising markets, particularly for small companies with scarce resources.

  • Travelling to the markets for on-the-ground due diligence the report says is essential.

  • Putting the right people in place. Creating a list of local advisers and a team of dedicated deal leaders is helpful.

Done properly, deals in growth markets can provide significant rewards, according to the report. It says growth markets provide an opportunity to tap into areas where productivity and growth are increasing. Deals also can provide multinationals with local capabilities, manufacturing bases and other resources.