Accenture on Emerging Market M&A

Date: 16-05-2008
Source: Investor Business Daily

When it comes to stitching two companies together, Ravi Chanmugam knows the M&A process.

Chanmugam is a lead partner in Accenture's corporate mergers and acquisitions consulting practice. He says global business is being reshaped in a new kind of "multipolar" world in which emerging economies in China, India and elsewhere will challenge the long-held dominance of the U.S., Europe and Japan.

Accenture is the world's largest consulting and tech services firm, with 178,000 employees in 49 countries and $21.4 billion in sales last year. Even at its large size, Accenture has posted double-digit year-over-year sales growth for the last six quarters.

Chanmugam joined the firm in 2001, after stints at McKinsey and Goldman Sachs (GS) . He recently spoke with IBD about the multipolar world.

IBD: How is the global market shifting into, as you call it, a multipolar world?

Chanmugam: Our analysis suggests that the conventional way to look at globalization has been through a Western prism. But the world is changing, so we need to view it through a multipolar prism. We can no longer view the world only through the prism of London or New York.

We believe five main dimensions will define this new world.

First, a whole new set of consumers in emerging markets are creating a vast amount of purchasing power at a scale never seen before.

The second is a new map of innovation. Innovation has historically been thought of as coming from labs in just a few countries.

Now innovation is coming from unexpected places around the world.

IBD: Can you give an example?

Chanmugam: (Procter & Gamble (PG) ) had an electric toothbrush which sold for $50 in the U.S. They wanted to sell that toothbrush to people in emerging countries, so they had local engineers develop a version for just $4 that was 80% as good.

Then they turned around and sold that toothbrush as a disposable product in developed markets. It's the $9 disposable version you see in drugstores. That innovation came from engineers who set out to build one for $4.

IBD: What other aspects make up the multipolar world?

Chanmugam: The third dimension is winning talent. The old view was that we'll have the best brains in our headquarters developing new products, which we'll sell in other countries.

Now the view is we need to win the battle for talent around the world because the best programmers or engineers are not always in our home country.

Consider that South Korea is expected to graduate the same number of engineers as the U.S. in 2008. Whether or not you sell or do business in South Korea, you don't want to ignore that talent pool.

The fourth dimension is the battle for resources and sustainability. As the multipolar world grows, there's an increasing fight for natural resources -- for oil, gas, iron ore and precious metals, agricultural lands and even forests for carbon credits. That battle is playing out around the world as companies from China and the Middle East are seeking to secure more natural resources.

The last dimension is the flow of capital as it's tied to M&A. In the past, the flow of capital was seen as coming out of the U.S. or Western Europe or Japan, and people were investing in emerging markets. Now the flow of capital is going both ways, with foreign direct investment as well as through M&A. For the first time, the amount of M&A going from emerging countries into developed countries equals the amount going from developed into emerging.

IBD: Last month, Tata Motors (TTM) of India said it would buy the Jaguar and Land Rover brands from Ford (F) for $2.3 billion. Isn't that a bit like a cobra swallowing a real jaguar?

Chanmugam: There's a useful statistic about the six big emerging countries -- Brazil, Russia, India, China, South Korea and Mexico. In the M&A wave in the '90s, those countries accounted for just 5.5% of all M&A deal value worldwide. In 2007, that amount had doubled to 11%.

A decade ago, there were only 20 companies in the Global 500 from these six countries. Now there are 70 in the Global 500 from these emerging markets.

IBD: Do you have any mottos or rules that guide your life and work?

Chanmugam: Seek to listen more and talk less.

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