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M&A investment in China, India and South-East Asia productive but risky

New survey commissioned by Marsh, Mercer and Kroll has revealed that multinational companies consider investing in China, India and South East Asia almost as risky as investing in Africa.

Despite the perceived risks, China, India and South East Asia were identified as the most attractive destinations globally for merger and acquisition (M&A) activities over the next 18 months, with 57% of deal makers surveyed describing potential interest as significant or very significant.

The issues identified as the most risky in the China, India and South East Asia region were questionable business practices, environment, intellectual property protection, and insufficient financial recourse.

For North America, the figure was 43%, western Europe 41%, eastern Europe 31%, Latin America 29%, Middle East 27%, Australia, Japan and Korea 25% and Africa 19%.

Litigation culture in North America is a significant caveat to the relatively lower M&A deal making risks in the region. Seen as particularly worrisome in the US, litigation risk has substantial implications for the current and future liabilities deal makers should consider when evaluating North American opportunities. North America was also seen as having a protectionist sentiment, similar to that of western Europe.

Surveyed earlier this year about their attitudes to cross-border deals, executives at multinationals based around the world gave China, India and South East Asia an average risk rating of 5.3 out of a maximum eight for a range of business-critical risks.

The average rating for Africa was 5.5, Latin America 3.8, the Middle East 3.5, eastern Europe 2.8, North America 2.1 and western Europe 1.9. The Australia, Japan and Korea region was considered the least risky place to invest, with an average risk rating of just 1.6.

While intellectual property risks, especially in China, are widely acknowledged, the report makes clear that the opening up of the economy in other sectors raises new concerns, especially around the environment.

The Chinese government has introduced a raft of measures designed to improve environmental quality. While the degree of environmental litigation and statutory enforcement in China still lags well behind North America and Europe, companies need to be aware of the increased regulatory scrutiny of their operations and the stricter enforcement of environmental legislation.

In Japan, M&A activity has jumped after the government further eased regulation of foreign investment. In so-called triangular mergers, the law now makes it possible for foreign-owned companies to invest in Japanese companies by means of stock-for-stock exchanges with the Japanese subsidiaries of those companies.

Coupled with the country’s low interest rates, a favorable financing condition has ensued, attracting more foreign investors. In western Europe, 44% of respondents had either significant or very significant appetites for investment into eastern Europe.

Karen Torborg, global head of Mars’s private equity and M&A practice, said: Despite the perceived risks of investing in this region, the level of M&A activity in recent years suggests that the expected reward is much stronger.

We are witnessing a fundamental shift of the global business landscape, with companies all around the world eyeing the potential of these countries and ramping up their investment and presence, accordingly. Having a thorough understanding of the risks will help lead to a more successful investment.