As children and young adults totally immersed in a captivating game of Monopoly, we were often seduced by the desire to acquire more. Our experience in working with successful entrepreneurs has taught us that this desire to acquire is often driven by a need to expand markets, income and revenues, as well as by a need to be stimulated by pursuing a successful corporate strategy. Professional advisers in international transactions - both cross-border and multi-jurisdictional - are increasingly involved working beyond their borders as their clients seek new opportunities throughout the world. This presents additional challenges, which will undoubtedly increase in 2007 and beyond.
This paper reviews certain anticipated trends during 2007 in the area of international commercial transactions, particularly from a Canadian perspective, and focuses in large part on the four BRIC (Brazil, Russia, India and China) countries as jurisdictions within which and from which greater transactional activity can be anticipated. With their fast growing economies, the BRIC countries are already reshaping global commerce and have the potential to change it even more, not to mention that they represent 50% of the world's population.
Global M&A transactions in 2006 totalled slightly less than US$4,000 billion, approximately US$500 billion more than in 2000, and 2007 appears destined to be another record year, due in large part to the following factors:
- Global liquidity
- Availability of debt financing at attractive rates
- Significant buying power of private equity funds
- Desire of some countries to create "national champions" in specific industries, and of a few countries to create "global champions"
- Mergers and LBOs in certain countries where such activity was previously not the case
- Dispositions and spinoffs by companies seeking to focus on their core competencies
It is anticipated that the energy, utilities, healthcare, financial services, technology and telecommunications industries will likely be best positioned for significant M&A activity in 2007.
The significant increase in global M&A activity has resulted in a greater number of multi-jurisdictional and not only cross-border transactions. These transactions present their own unique challenges for the companies involved as well as their professional advisers. All of the BRIC countries, and especially China and India, are at or near the top of the list of those countries where M&A activity is certain to increase and where the challenges of doing business will continue to be a learning experience.
China and India
Comparisons between China and India abound, yet the corporate and political environments of these two nations are dramatically different, and appear on paper at least to favour India in numerous areas, including:
- Language : With English as the language of business in India, the ability to transact is greatly facilitated.
- Democracy : Business people feel more at ease with India's respect for democracy than is the case with China; many believe that the fact that India is the world's largest democracy will contribute significantly to its promising future.
- Developed Legal System : India's legal system is significantly more advanced than in China, where the legal system is relatively underdeveloped and less understood.
- Tradition of Entrepreneurship : As opposed to India, where private companies have a greater ability to pursue their strategic plans, bureaucrats are still the principal gatekeepers in China and state-owned enterprises (SOEs), which are virtually devoid of the tradition of entrepreneurship, have significant control over business activity.
- Management Expertise : India has been open to capital for almost half a century and has more highly developed management professionals and financial markets. (Hong Kong and Taiwan provide much of this expertise to China.)
And yet, in spite of India's more favourable environment, we currently see foreign direct investment in China - and China's economy generally - outpacing that of India at a record pace. The reasons for the foregoing are not difficult to understand: China is at least ten (10) years ahead of India in its efforts to attract foreign investment. It has become the world's factory, thanks to low cost and competitive quality. And more significantly from the international transaction perspective, China's economic boom is directly related to the foreign investment-dependent approach that China has pursued.
At the same time, some of China's biggest and most important SOEs are pursuing their commercial interests in many parts of the world principally to satisfy their domestic needs, particularly in the natural resources sector. While Canada and the U.S. have expressed concern regarding acquisition of their natural resources by certain foreign entities, we should expect to see the SOEs continuing to expand and to seek strategic acquisitions in many parts of the world, from Australia to the African continent to Latin America. Some have even suggested that China is more comfortable investing in and trading with Chile because of its high regard for the rule of law and legal certainty as compared with other Latin American countries; many Chinese groups are allegedly poised to invest in Chile and to increase trade with that country.
We should also look for foreign direct investment in India to increase in 2007, which is the result of greater encouragement for foreign investment by the Indian government as compared with what was previously the case during its earlier less welcoming policy. At the same time, it will not be surprising to see some of India's more successful domestic entrepreneurs playing their Monopoly cards to the fullest. In fact, over the past few years, we have seen the emergence of a number of private Indian companies that now compete internationally with the best that the U.S. and Europe have to offer. India's stronger infrastructure is more able to support private enterprise than is the case in China, the effects of which will continue to be felt to an increasing extent in international commercial transactions. Canadian companies can be expected to be included among the many companies with increased interest in India, particularly those companies focussed on the impressive technology industry that India has developed; however, Canadians have only recently discovered certain attractions of investing in India, so their involvement in India is likely to be relatively slow to develop.
It is likely to be a learning experience for many companies and their professional advisers as they transact with Indian companies. And those that expect a similar experience to what has been the case in China will be mistaken. Rather, they will discover significant differences principally as a result of the different culture, language, advanced legal system and more developed private enterprise sector, all of which will facilitate the ease and speed of concluding transactions.
At the same time, we should expect to see an increase in direct foreign investment in China, including by Canadian companies. In this regard, it is interesting to note some of the conclusions of a survey of Canadian companies that was conducted in September 2006 jointly by the Asia Pacific Foundation of Canada (APFC) and the Canadian Manufacturers & Exporters (CME) and released in December 2006. The companies surveyed were drawn from all sectors of Canada's manufacturing and exporting community from every province, and included the following findings:
- Nearly one-third have made investments in China;
- Just under two-thirds have been doing so for three years or less; only 8% have been doing business in China for more than ten years;
- The more business engagement Canadian companies have with China, the more likely they are to see China as an opportunity rather than a threat;
- More companies see China with great or very great potential if they are already engaged in business with China;
- Only 17% of the companies report that they have a formal China strategy; that percentage increases in various instances, including if the companies are already doing business with China;
- Companies with a China strategy tend to have a higher proportion of revenues earned from business with China, and these companies are more optimistic about their business outlook in the future.
All of the foregoing points to a greater flow of direct investment in China in 2007. China is presently the most mature outsourcing location for manufacturing and this will have a direct effect on the number of commercial transactions involving Canadian and other companies. And at the same time, given China's significant need for natural resources and other commodities, it is only reasonable to expect a greater two-way flow of business opportunities and related transactions.
This paper is not intended to deal with possible amendments to the Investment Canada Act as contemplated in the economic plan entitled Advantage Canada that was released by Canada's Department of Finance on November 23, 2006, and the reader should refer to the accompanying article on Foreign Investment Review by Richard Elliott for further information in this regard. Suffice to say that the extent to which the Canadian government proceeds with this economic plan as regards amendment to the Investment Canada Act could have an important negative effect on certain investments in Canada by Chinese SOEs and possibly even investments by Canadians in China.
Brazil and Russia
So much for China and India. The economy of Brazil is also impressive, having grown 2.3% in 2005, 2.76% in 2006 and being targeted to grow by 3.5% in 2007. Brazil had a record $46.08 billion trade surplus for 2006, with exports growing 16%.
Investment in Brazil has increased dramatically since 2003, and one can expect to see this trend continue in 2007. We have also seen major Brazilian companies, such as Companhia Siderugica Nacional (CSN) and Companhia Vale do Rio Doce (CVRD), appear on the world stage with significant acquisition initiatives, not to mention Embraer, the world's fourth largest manufacturer of civilian aircraft. While investment from Canada to Brazil will likely see a moderate increase, this level of activity should be surpassed by investment from other countries, and we have already seen an important increased flow of investment by China in Brazil, particularly in the oil and steel sectors. In fact, we can expect to see Latin America, generally, continuing to prosper as oil and mineral production drive their economic growth.
Both Brazil and Russia have significant land and resource bases, which give them unique advantages over European and other nations.
The transformation in Russia from a planned economy to a market economy led to the elimination of many obstacles to foreign direct investment, including the adoption of new laws (e.g. new constitution, new Civil Code provisions establishing principles for commercial relations, and new corporate legislation governing commercial activity). As a consequence, foreign direct investment into Russia increased to almost US$40 billion in 2006, with various parts of the Russian economy (banking, finance and retail, among others) presenting attractive opportunities to foreign investors.
At the same time as this increase of in-bound M&A activity into Russia, we are witnessing a similar wave of increased outbound activity by the rising ambitions and increased access to financing of Russian companies that are pursuing a larger slice of global business.
As a result of the foregoing, we can expect to see Russia joining China in seeking to acquire superpower status with money and natural resources, and with China likely to become Russia's principal market for oil. In the longer term, we can look to Brazil and Russia becoming dominant global suppliers of raw materials and to China and India becoming the dominant global suppliers of manufactured goods and services. At the same time, Brazil and Russia together form the logical commodity suppliers to India and China, thus forming a powerful economic bloc to drive many international commercial transactions. The flow of international transactions should be expected to reflect the foregoing commercial reality.
The world's stage for international commercial transactions continues to shrink and the number of players around the Monopoly board continues to increase. Barring a catastrophe, 2007 is likely to set another record for international commercial transactions. The challenge for the international players and their professional advisers in 2007 will be to further familiarize themselves and become comfortable with all the unique aspects and demands of representing companies from different parts of the world in their transactions in other countries. Each of the BRIC countries is a prime example of a jurisdiction with unique methods of doing business: culture, language, legal regimes, customs, negotiation practices and business ethics - the list goes on and on. It is folly to expect consistency in the way in which commercial transactions are carried out from country to country, and the successful participants in this ever-expanding area, particularly in multi-jurisdictional M&A transactions - will be those who are best able to understand and respect the business practices of their counterparts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.