1. A.P. Moller – Maersk CFO
Trond Westlie talks
conglomerates, cost-
cutting and core assets
The perfect
blend
Getting to grips
with big data
The real estate debate
Investing in Turkey’s delights
Capital InsightsHelping businesses raise, invest, preserve and optimize capital
Q12014
3. www.capitalinsights.info | Issue 9 | Q1 2014 | 3
Danish philosopher Søren Kierkegaard once wrote: “Life can only
be understood backwards; but it must be lived forwards.” Businesses
should keep this in mind as the new year gets under way.
Fortunately, after the ups and downs of 2013, companies appear
to be looking forward to a more stable 2014. Among respondents to a
survey for EY’s latest Capital Confidence Barometer, 69% expect global
deal volume to rise in the next 12 months. In this issue of Capital Insights,
we explore how companies can combine the best traditional business
methods with innovative approaches to help shape their destinies.
Fast forward: as technology spreads into all aspects of business,
big data is becoming big news. On page 22, find out how corporates can
use it to their advantage. Meanwhile, on page 10, we examine the top 10
technology IPOs of the last five years and ask experts whether the boom
is set to continue. And on page 12, we discover why Turkey is attracting
substantial corporate investment.
Rewind: while striving to capitalize on the latest trends, corporates
should not forget the business tools that have served them well in the
past. Divestments are a tried and trusted approach when it comes to
raising capital, but companies need to tread carefully if they are to
get the right valuation (see page 34). On page 26, we investigate the
continued importance of robust negotiating skills in M&A. And in our
debate on page 30, some of the biggest players in the real estate sector
discuss the way forward for one of the world’s most established markets.
The exclusive Capital Insights in-depth interview on page 16 features
A.P. Moller — Maersk’s CFO Trond Westlie telling us how the shipping and
drilling conglomerate is mixing oil and water for a bright future.
In today’s world, corporates must have the vision to see how
the future will affect their capital agenda, while maintaining the
best practices from the past. To that end, we hope that this issue of
Capital Insights encourages you to look both forward and back as you
contemplate how to develop your business.
future
Back to the
For more insights, visit www.capitalinsights.info where you can find our latest
thought leadership, including our market-leading Capital Confidence Barometer.
Joachim Spill
Transaction Advisory Services Leader, EMEIA
(Europe, Middle East, India and Africa) at EY
If you have any feedback or questions, please email joachim@capitalinsights.info
5. www.capitalinsights.info | Issue 9 | Q1 2014 | 5
On the web or on the move?
Capital Insights is available online and on your mobile
device. To access extra content and download the app,
visit www.capitalinsights.info
Regulars
06 Headlines
The latest news and trends in the world
of capital, and what it could mean for
your business.
07 Deal dynamics
EY’s Pär-Ola Hansson discusses how
mid-market companies can put M&A
back on the agenda in the new year.
29 The PE perspective
EY’s Sachin Date looks at the prospects
and challenges for private equity as the
industry enters 2014.
38 Moeller’s corner
M&A Professor Scott Moeller reveals
the new high-growth economies that
corporates need to have on their radars.
39 Further insights
Find out about exclusive content and new
apps available on the Capital Insights
website (www.capitalinsights.info). Plus,
details on EY thought leadership reports
about the Eurozone, issues in the M&A
world from a CDO perspective and the
latest Capital Confidence Barometer.
30Real estate
Big data
22
GettyImages/AlexandreCaron
GettyImages/DimitriVervitsiotis
Divestments
34
Advertising feature
6. Capital Insights from the Transaction Advisory Services practice at EY
Headlines
Public gains
IPOs are back on the agenda in a big way
for corporates in Europe. EY’s Global IPO
Trends Q4 2013 report has shown that
2013 is the first year since 2010 where deal
numbers and values rose compared with
the previous year. Europe’s biggest deals of
2013 include Royal Mail’s privatization on
the London Stock Exchange, with a US$2.7b
offering size, and Luxembourg media
company RTL’s US$1.7b flotation on the
Boerse Frankfurt.
In addition, private equity (PE) IPOs are also
gaining traction. EY’s Private Equity, Public
Exits Q4 2013 edition shows that PE-backed
IPOs account for over 30% of global IPO value,
and 19% of volume. And the pipeline of PE IPOs
is looking very robust for 2014. For instance,
Charterhouse is looking to float UK greeting
cards retailer Card Factory, while KKR could
float the UK’s biggest pet retailer Pets at Home.
The activity has been buoyed by growing
investor confidence. EY’s Right team, right
At your disposal
Selling assets is becoming an increasingly
popular method for corporates to raise capital.
Mergermarket figures show that, in the year
to Q3 2013, companies divested 663 assets.
This is a 6% increase on the year to Q3 2012.
It is clear that divestments are becoming
an ever-more important tool for corporates
looking to raise capital. The year to Q3 2013
figure is 15% ahead of both equivalent periods
in 2011 and 2010, and 29% above 2009.
Corporates divested US$133.3b worth of
assets in the first nine months of 2013, up
on the US$110.7b figure for the same period
in 2012. Last year’s largest divestment saw
Pfizer spin off its animal health business
Zoetis to Pfizer shareholders, raising almost
US$12.5b. Corporates that are looking to
reallocate assets should unlock value through
divestments. For more on divestments, see
“Natural selection” on page 34.
Confidence fuels oil and gas
M&A activity in the oil and gas sector looks
set to surge in the coming year. More than
three-quarters of the corporates surveyed
for EY’s October 2013 Oil and Gas Capital
Confidence Barometer expect deal volume
to increase over the next year, and 39% expect
to pursue deals over the same time frame.
Meanwhile, more respondents have their
sights set on growth. A year earlier, just less
than half were focusing on this area, compared
with two-thirds in the latest survey. Last year’s
biggest deals in the sector — including Royal
Dutch Shell’s US$6.7b purchase of Repsol’s
LNG assets in Trinidad and Tobago, Spain and
Peru — highlighted this upturn. With a shift
of focus toward growth and acquisition,
corporates could be heading for a watershed
moment in the oil and gas industry. For more
insights on the oil and gas sector, visit
www.capitalinsights.info/oilandgas.
tlGettyImages/BloombergtrGettyImages/MichaelBlanncrGettyImages/AyhanAltunbrGettyImages/DimitriOtis
Estate of play
The real estate
sector is set for
a bumper 2014.
M&A figures from
Mergermarket
show that the
sector saw 303 deals in 2013, a 13.5%
rise year on year. Values have rocketed
too, with US$136.7b spent compared with
US$90b. And with industry confidence
rising, few would bet against the house in
the coming year. For more on real estate,
see page 30.
Turkey shoots up
Corporates are
getting wise to
Turkey’s potential
as an economic
hotspot. There
were 163 deals
targeting the country in 2013, 33%
up on the figure for 2012, according to
Mergermarket. With a young population
and a wide choice of methods to raise
finance, the gateway between Europe
and the Middle East is showing up
clearly on corporate radars. For more
on Turkey, see page 12.
Go big or go home
Companies are
upping their
game on big data.
Gartner’s 2013
Big Data survey
reveals that 64% of
large organizations have plans to invest in
big data technology, up from 58% in 2012.
And it’s not just high-tech industries that
are acting. Half of those in transportation
and 40% of insurance companies are more
inclined to invest in big data over the
coming two years, according to the survey.
For more on big data, see page 22.
Capital Insights from EY Transaction Advisory Services
story, right price survey from 2012 found that
82% of institutional investors have invested in
an IPO in last year previous, compared with 18%
during the past two to three years previous.
With confidence turning into results on
the public markets, companies raising capital
should strike while institutional investors
are keen on new offerings. For a look at the
top 10 IPOs of the past five years, both
globally and in the technology sector, see
“Transaction insights” on page 8.
8. Transaction
insightsKey facts and figures from the world of M&A.
This issue: the 10 largest global and tech IPOs since 2009
W
ith investor confidence returning, firms are
now finding more joy in the public markets
than they have in previous years. According
to EY’s Global IPO Trends Q4 2013 report,
2013 was the first year since 2010 where both IPO deal
volume and value have increased year on year. Q4 also saw
strong recovery in Europe, with IPOs doubling in that period
compared with Q3.
With public markets becoming increasingly accessible,
Capital Insights has taken a look at the top 10 IPOs by
capital raised since 2009 and spoken to some of the leading
executives involved in their IPO journey and beyond.
Companies have many reasons for going through
an IPO. For instance, insurance company BB Seguridade
Participacoes’s IPO in April 2013 was a secondary offering
in which Banco do Brasil sold its 33.75% stake in the
company. This was an opportunity to give better visibility
and to show to the fair market value of one of its most
important business units.
“One thing that helped our IPO was the low penetration
of insurance businesses in Brazil and within Banco do Brasil’s
customer base. This showed the huge potential for us to
grow,” says Marcelo Labuto, CEO of BB Seguridade. “At the
time, there were no big players in the Brazilian insurance
industry, in which investors could make an investment.”
Spending spree
For some, IPOs offer a means to generate
cash to fuel acquisitions. The most notable
example is Glencore, the commodities and
mining conglomerate, whose 2011 IPO was
undertaken as a way to acquire assets. “We
will get firepower and we can buy assets
when opportunities present themselves,”
said Glencore CEO Ivan Glasenberg in
an interview at the time. A year later,
the company announced its merger with
Xstrata, forming a business worth US$90b.
Facebook’s IPO was also driven by the
desire to invest. Indeed, since the listing in
May 2012, which raised over US$6.8b in
proceeds to the company and US$9.2b for
shareholders, Facebook and
its subsidiaries have bought
eight companies.
Listing year: 2009
Exchange: Shanghai
Capital raised: US$7.3b
Offer price: US$4.18
Price now: US$0.49
9
8Listing year: 2009
Exchange: New York;
Sao Paulo
Capital raised: US$7.5b
Offer price: US$23.50
Price now: US$5.41
6Listing year: 2011
Exchange: Hong Kong;
London
Capital raised: US$10.0b
Offer price: US$8.65
Price now: US$5.34
Capital Insights from EY Transaction Advisory Services
Glencore
International
7Listing year: 2012
Exchange: Tokyo
Capital raised:
US$8.5b
Offer price:
US$48.92
Price now:
US$50.98
Japan
Airlines
Banco
Santander
Brasil
CSCEC
Listing year: 2013
Exchange: Sao Paulo -
Novo Mercado
Capital raised: US$5.7b
Offer price: US$17.00
Price now: US$10.22
BB Seguridade
Participacoes
*Facebook’s IPO raised US$6.8b
for the company and US$9.2b for
shareholders. Source: Dealogic
9. Plan ahead
One major factor in the relative success of
these IPOs is proper preparation. “We began
laying the groundwork for a return to the
public markets shortly after emerging from
bankruptcy,” says Randy Arickx, Executive
Director of Investor Relations at General
Motors (GM), the US car firm. “[During the
middle of] 2009, we met banks and other
advisors to review ideas and strategies.
[Later in the year], we launched various
internal processes, setting up teams to work
on issues and capital planning, accounting,
legal, tax funding and cash management,
leading up to the IPO in late 2010.”
But the preparation stage also brings
a conflict in priorities that corporates must
carefully manage.
“There is a need to strike a balance
between arranging an offer that will be
attractive to new, long-term investors and
maximizing value for existing shareholders,”
adds Arickx. This is a particularly important
point — in EY’s Right team, right story, right
price survey of institutional investors, 91% of
respondents felt that attractive pricing was a
critical factor in an IPO’s success.
The right time
Another major factor is timing. Corporates
are quick to highlight its importance in
the process. “Timing is everything,” says
Arickx. “GM’s strategic goal, following our
emergence from bankruptcy, was to return
to the public markets as soon as possible,
to enhance customer confidence and repay
stakeholders. Tactical timing was driven
by the need to build positive investor
momentum and deliver results prior to an
IPO. Deciding the ideal timing was about
finding the best alignment between GM’s
business, the broader automotive industry
and equity capital market conditions.”
The journey begins
However, even with the right reasons,
preparation and timing, companies need to
have a vision of what they want to be in the
future. As Labuto stresses: “An IPO must be
aligned with a company’s strategic planning,
to direct all forces toward a common goal.”
In preparations for its IPO, insurance
group AIA laid out a road map for its future
strategy. “We launched a comprehensive
review of our strategic direction,” says Mark
Tucker, CEO of AIA Group. “This enabled
us to project ahead in a 10-year horizon.
We ended up with a compelling strategy
for sustainable value growth, as well as the
execution plans to deliver it.”
1
2
3
4
5
6
7
Listing year: 2010
Exchange: Tokyo
Capital raised: US$11.1b
Offer price: US$1,553.00
Price now: US$1,658.21
5
Learning
from listings
Use experience. “The operation must
be conducted by a dedicated group,
ideally working with professionals
with experience in investor relations in
capital markets.” Marcelo Labuto, BB
Seguridade Participacoes
Manage time. “Our major concern at
the time was finding enough hours each
day for all the meetings that are part
of a listing this size. We wished we had
another 20 hours a day to meet the
scheduling demands.” Mark Tucker, AIA
Be united. “Be prepared and completely
aligned across the firm for the task.”
Randy Arickx, GM
Strike fast. “Market timing is really
important, and windows in the capital
markets cannot be wasted. Quickness
in decision-making and execution are
essential.” Marcelo Labuto
Prepare well. “All decision levels within
the corporate governance structure must
be involved. And you must get the culture
of a public company established internally
well before the IPO.” Marcelo Labuto
Be concise. “Take time to craft a
targeted, concise thesis for investors.
GM’s management roadshow presentation
contained only 15 pages.” Randy Arickx
Press ahead. “It’s important to
have a clear strategy to take the
company forward. You must be able
to communicate that strategy to the
investment community to achieve
their buy-in.” Mark Tucker
3Listing year: 2010
Exchange: New York;
Toronto
Capital raised:
US$18.1b
Offer price: US$33.00
Price now: US$39.00
www.capitalinsights.info | Issue 9 | Q1 2014 | 9
Listing year: 2010
Exchange: Hong Kong;
Shanghai
Capital raised: US$22.1b
Offer price: US$0.42
Price now: US$0.45
1Agricultural
Bank of China
2Listing year: 2010
Exchange: Hong Kong
Capital raised:
US$20.5b
Offer price: US$2.54
Price now: US$5.00
AIA Group
General
Motors
Listing year: 2012
Exchange: NASDAQ
Capital raised:
US$16b*
Offer price:
US$38.00
Price now: US$57.19
4Facebook
Dai-ichi
Life Insurance
Top 10 IPOs by capital raised, 2009-2013
“Pricenow”correctasof17January2014
10. Listing year: 2009
Exchange: Nasdaq
Global Select Market
Offering size: US$1.0b
Offer price: US$12.50
Price now: US$4.31
8Shanda Games
Capital Insights from EY Transaction Advisory Services
Future flotations
Capital Insights explores the trend of tech IPOs, and reveals
the sector’s biggest public listings of the last five years
For over three years, technology has been
among the top sectors for IPOs worldwide.
And according to EY’s Right team, right
story, right price survey, international
institutional investors still have an appetite
for tech IPOs: indeed, 21% of investors rate
it as their top sector preference.
The reasons for listing are varied. For some
industry giants, such as social media network
Twitter, acquiring assets was the priority.
Outlined in its prospectus, Twitter’s growth
strategy is based partly on a “plan to continue
to build and acquire new technologies.”
IPOs can be a particularly important
source of funding for tech companies looking
to acquire talented staff and intellectual
property. “Through the IPO, we raised
capital from blue-chip institutional investors
to invest in our worldwide expansion and
to acquire complementary development
talent and intellectual property,” says Owen
Mahoney, CFO of free-to-play online game
company Nexon.
For Verisk Analytics, a firm founded
by the property and casualty industry and
majority owned by insurance firms, the listing
helped to give its stakeholders flexibility.
“Going public allowed Verisk’s Class B
shareholders to mark to market and, as
insurers, they write business against their
balance sheets,” says Scott Stephenson,
president and CEO of Verisk Analytics. “So
giving insurers the ability to fully mark their
assets was of value to them.”
Another key reason why tech companies are listing is to
increase their visibility. As Alexander Shulgin, the CFO of
Russian internet company Yandex, says: “For European
companies, listing increases your public profile globally.”
The increased scrutiny also provides positives. “Investor
feedback on the company strategy is valuable,” says Shulgin.
“They meet a lot of CEOs, see a lot of companies and discuss
a lot of strategies. Their perspective of what the company is
doing is very important.”
The listing location
However, the IPO location is not as varied. Six of the top 10
largest tech IPOs since 2009 were listed in the US — the other
four were spread across the globe, from Europe to Japan.
Why was New York so popular? According to Stephenson,
Verisk’s management “viewed NASDAQ as the home for
innovative, dynamic companies.”
For Shulgin, going to New York gave them access to
investors already used to the tech market. “NASDAQ was
chosen as it gave us access to a much a wider and deeper
investor base, with a focus on tech companies,” he says.
However, IPOs elsewhere have their advantages,
and it can pay to float at home. “We felt that listing in our
home market [Tokyo] was the best venue for our IPO, in
part because the Tokyo market is home to many of the
companies and developers we respect,” says Mahoney.
“The Tokyo Stock Exchange has a high level of liquidity,
with both foreign and domestic investors comfortable
trading shares listed there.”
This investor sentiment is a key factor when considering
where to list. Although 22% of investors said that where a
company’s peers list is an important factor, according to
EY’s Right team, right story, right price, picking a venue with
high standards of governance was held to be more important.
6Listing year: 2011
Exchange: Nasdaq
Global Select Market
Offering size: US$1.3b
Offer price: US$25.00
Price now: US$43.76
Yandex
9Listing year: 2011
Exchange: Nasdaq
Global Select Market
Offering size: US$1.0b
Offer price US$10.00
Price now: US$3.54
Zynga
Listing year: 2010
Exchange: London
Offering size: US$1.0b
Offer price US$27.70
Price now: US$42.90
Mail.ru Group
7Listing year: 2011
Exchange: Tokyo
Offering size: US$1.2b
Offer price: US$16.77
Price now: US$9.00
Nexon
11. www.capitalinsights.info | Issue 9 | Q1 2014 | 11
Unleashing potential
EY’s Martin Steinbach reveals why now could be the time for tech companies
to go public — but there are challenges to be overcome first
The coming year could be a watershed one for tech
firms listing on the public markets. The improving
investor sentiment in the public markets is one
factor. In our Right team, right story, right price
survey, 82% of institutional investors surveyed had
invested in IPOs in the past 12 months, compared
with 18% during the previous two to three years.
The key point for tech companies, however,
is that investors’ focus is on growth investments,
rather than value investments. The same survey
showed that, when looking at non-financial factors,
investors felt that management credibility and
experience (30%), market size and opportunity
(26%) and brand strength and market position
(20%) were the three key considerations. In
contrast, when looking at financial factors, the
dividend yield (6%) and net margin (4%) were
given little importance by respondents. This shows
that investors are more often than not looking at
potential rather than immediate value.
To capitalize on this, tech companies need to
position themselves properly to turn their growth
story into a strong investment case.
The first thing to do is prepare early. One of the
biggest challenges that a business going public
faces is the transformation from a private to
public company — systematically and culturally.
For this reason, considering if an IPO is right for
you should be done 12 to 24 months in advance.
And as a company begins targeting capital
markets, they will require greater corporate
governance, and will need to have board
members in place who can deal with it.
A crucial aspect of IPO preparation is getting
the right story in place. This is vital for tech
companies, whose focus is more on future growth
than current value. Companies need to map out
their IPO strategy: the firm’s unique selling points,
market leadership and the investment criteria that
potential suitors will be looking at.
The IPO window is open and, with investors
hungry for growth potential, tech companies
are in a great position to float. But only those
who prepare well, tell their story properly and
embrace the openness that being public brings
will reap the rewards.
Martin Steinbach
is IPO Leader, EMEIA, EY
Overcoming obstacles
During the IPO process, tech companies
are often under an intense spotlight. “Tech
IPOs tend to be watched more closely than
those in any other industry,” says Mahoney.
“However, the heightened attention can
be advantageous — it’s an opportunity to
leverage that spotlight and ensure your
company story is clearly heard.”
But a successful IPO is not the end of the
story. Companies then have to face the new
challenges that come with being a public
company. “Quarterly reporting increases
focus on short-term results,” says Shulgin. “So management
has to counterbalance this with internal strategic sessions to
understand what the company will be like in the longer term.”
In the final analysis, the transformation from private to
public is never easy. A major concern for tech companies
is maintaining their company culture, which can be diluted
through an IPO. “Have a firm grip on who you are, including
the company’s culture, operating principles and strategy,”
says Stephenson. “Adhere to those guide points before,
during and after the listing period. And never lose sight of the
fact that the best way to deliver value to your shareholders is
first to deliver value to your customers.”
2Listing year: 2009
Exchange: BM&FBovespa
Offering size: US$3.6b
Offer price: US$7.48
Price now: US$28.14
1Listing year: 2012
Exchange: Nasdaq Global
Select Market
Offering size: US$16.0b
Offer price: US$38.00
Price now: US$57.19
5Listing year: 2010
Exchange: Bolsa
de Madrid
Offering size: US$1.7b
Offer price: US$14.49
Price now: US$41.15
Amadeus IT
Group
4Listing year: 2013
Exchange: New York
Offering size: US$1.8b
Offer price: US$26.00
Price now: US$60.57
Twitter
3Listing year: 2009
Exchange: Nasdaq Global
Select Market
Offering size: US$1.9b
Offer price: US$22.00
Price now: US$64.12
Verisk Analytics
Cielo
Facebook
Top 10 technology sector IPOs
by offering size, 2009-2013
“Pricenow”correctasof17January2014
12. Capital Insights from EY Transaction Advisory Services
T
urkey is standing out with a robust
growth story that is propelling a
vibrant M&A market.
The number of FDI projects in
Turkey have more than doubled from 40 in
2007 to 95 in 2012, according to EY’s Turkey
Attractiveness Survey. Additionally, 2012
was a very active year for M&A. EY figures
reveal there were 315 transactions in Turkey,
with a combined disclosed deal value of
US$23b. Factoring in undisclosed deals, EY
estimates around US$30b of M&A activity,
which is a post-financial crisis-era record.
“In the first nine months of 2013,
we’ve seen a slight slowdown, but the
numbers are still robust and the market is
vibrant,” says Müşfik Cantekinler, Head of
Transaction Advisory Services at EY Turkey.
And despite recent political uncertainty and
a slowdown in growth (it is expected to be
3.9% at the end of 2013 according to the
October 2013 edition of EY’s Rapid Growth
Markets Forecast), corporate confidence is
on the up. Over 70% of the respondents to
EY’s 2013 Turkey Attractiveness Survey
felt that the country’s attractiveness
for investment had either improved or
significantly improved.
Solid foundations
Turkey’s strategic location (making it a
“bridge” between Europe and the Middle
In recent years, Turkey has emerged as a profitable
investment location. How can corporates take
advantage of the country’s potential?
delight
Turkish
East), solid economic growth and large domestic market
have made a compelling case for investment. And European
blue-chip companies have spotted the potential. For
example, Kingfisher, Europe’s largest home-improvement
retailer, has operated the Koçtaş brand since 2009, a 50/50
JV in Turkey with local conglomerate Koç Holding.
“People often have preconceptions about Turkey,” says
Ian Cheshire, Group Chief Executive at Kingfisher. “They don’t
think it’s that major. Until you come and see it, it’s hard to get
across the scale of it. It has a population of almost 76 million,
with 19 million households and a growing middle class.”
Last year’s biggest inbound announced deal, German
insurer Allianz’s purchase of Turkish insurer Yapi Kredi for
over ¤684m (US$944m), emphasizes Turkey’s growing
importance as an investment destination. “The acquisition
... is the biggest investment made in the Turkish insurance
sector, and it underlines Turkey’s position as one of our key
markets,” says Solmaz Altin, CEO of Allianz Turkey.
Financial clout
The Yapi Kredi acquisition highlights the growing
attractiveness of Turkey’s financial services (FS) sector:
the top three announced deals in 2013 have all been in FS.
Between 2002 and 2012, Turkey’s banking industry
posted a net growth rate of 10.5%, according to Mukim
Öztekin, President of Turkey’s Banking Regulation and
Supervision Agency. In recent years, the sector’s biggest
deal came in September 2012, with Russian group
Sberbank’s US$3.5b acquisition of a 99.85% stake in
DenizBank, the Turkish arm of Franco-Belgian lender Dexia.
“There’s continuing interest among FS players not
yet actively investing in Turkey to connect with Turkish
Key insights
• Turkey’s strategic
location makes
it a “bridge” between
developed and
new markets.
• A youthful and
increasingly wealthy
population has boosted
the consumer sector,
while the finance sector
is also booming.
• JVs, part-stake deals
and patience could help
to make the transition
into Turkey smoother.
• As half of all Turkey’s
businesses are family-
owned, corporates
need to be sensitive
to issues of succession
and control on top
of valuation.
46%of FDI projects into
Turkey come from
Western Europe. The
next highest is North
America with 14.7%
Source: EY’s Turkey
Attractiveness Survey
13. www.capitalinsights.info | Issue 9 | Q1 2014 | 13
banks, allowing both sides to access new
clients and new markets,” says Müge Öner,
Transaction Advisory Services Partner at
EY Turkey. “It’s also an opportunity for
banks to grow in the Turkish market as well
as create synergies with other groups.”
Pick and mix
However, Turkey’s investment profile goes
far beyond FS. “Transport and logistics
is receiving attention brought by the
privatization of airlines and ports,” says
Cantekinler. “But in terms of the number
of transactions, the IT, energy, and food
and beverage sectors dominate.”
Impressive growth in domestic
consumption is a pull for large retailers.
Over 200 shopping malls have been built in
Turkey in the last decade alone.
Structural changes have added to
the attractiveness of the retail sector.
Numerous corporates have taken a keen
interest in how the Turkish economy and
business environment are developing.
One such corporation is UK premium
drinks business Diageo. In August 2011,
it acquired Turkey’s leading spirit producer
and distributor Mey İçki. “In acquiring Mey
İçki, not only did we adopt a number of
strong local brands, but we also acquired
a great business that would accelerate the
growth of our global brands,” says Nick
Turkey
Population
75.6m (2013)
FDI
US$152.9b (2012)
GDP
US$794.5b (2012)
Source: Turkstat, CIA
World Factbook
istock/Pingebat
Blazquez, President Diageo Africa, Turkey, Russia, C&E
Europe, Global Sales. “Turkey’s growth story is remarkable,”
says Blazquez. “Over the past decade, it has become one
of the fastest-growing economies in Europe, driven by
increased FDI and consumer demand.
“The population, which is young and projected to grow
to 94 million by 2050, is also becoming more urbanized,
and disposable incomes are rising. These trends lend
themselves to Diageo’s broad brand portfolio.”
On top of these positive factors, Turkey’s large and
cost-competitive labor force is making it appealing as a
manufacturing destination. According to EY’s 2013 Turkey
Attractiveness Survey, the manufacturing sector accounted
for over a third (34.4%) of the total projects with FDI between
2007 and 2012 — second only to sales and marketing.
Among the many large manufacturers investing
heavily in the country is Japanese industrial giant Mitsui.
Getty Images/spreephoto.de
Top three completed inbound Turkish M&A deals, 2013
Completion Target Buyer Deal value
APR
2013 Enerjisa Enerji* E.ON (Germany) US$3.9b
MAY
2013
Dentas Ambalaj ve
Kagit Sanayi
Mosburger (Austria) US$207m
OCT
2013 Hedef Alliance**
Alliance Boots
(Switzerland)
US$160m
Source: Mergermarket *50% stake **20% stake
Investing
Raising
14. Capital Insights from EY Transaction Advisory Services
In September last year, the company stated it would invest
US$100m in new manufacturing operations in the country.
In a statement at the time, Mitsui Turkey Representative
Yuichi Aoki said: “Turkey stands out — with its transportation
sector, high growth rate and young population — among
other priority markets for Mitsui.”
Stake your claim
Turkey’s corporate landscape is still dominated by family
businesses — from large ones, such as conglomerate Koç,
to a whole raft of SMEs. According to Family business groups
around the world, a 2011 Australian Business School report,
half of all businesses in Turkey are family owned.
As with many family businesses, ongoing control and
succession is often as important as pricing when it comes
to deals. And with so many family-owned companies, much
M&A activity is going to be structured on a JV or stake
basis, rather than outright acquisitions.
JVs have distinct advantages, as Kingfisher’s Cheshire
explains: “For us, the partnership in Turkey is a model of the
type of deals we look to do. Kingfisher provides the retailing
expertise and the Koç Group provides Turkish operating
experience, market knowledge and sourcing opportunities.”
In the past few years, the JV model has been chosen by a
number of large organizations investing in
Turkey. For example, in 2007, American
multinational GE acquired a 50% stake in
Turkish power and water infrastructure
company Gama Enerji. And GE continues
to invest heavily in Turkey: in 2012, the
company announced it would invest
US$900m by 2015.
However, many strategic investors are
opting for majority control, according to
EY’s Cantekinler. “Manufacturing players
moving into Turkey tend to opt for majority
control, keeping a local shareholder as
minority partner for a period before they
can structure an ’earn-up’ mechanism.
This provides an incentive for the local
shareholder to stay on board for typically
a five-year period.”
One example of this came in September
2013, when Swiss technology group
ABB acquired a majority stake in Turkish
electronic components manufacturer Elbi
Elektrik. In a press statement, Tarak Mehta,
Head of ABB’s Low Voltage Products
On the web
For more on how to invest in Turkey, read EY’s Transactions in focus:
Spotlight on M&A in Turkey at www.capitalinsights.info/turkey
GettyImages/GeoffTompkinson
Turkey spreads its wings
While inbound M&A in Turkey continues to be robust, its
companies are also looking to gobble up assets further afield
Turkey’s pace of growth is making it a big
investor abroad, particularly in the Middle
East. In the decade to 2012, its investment
in the region rose sixfold to over US$30b.
Turkish airports operator TAV has been
investing in the MENA region since 2007.
In 2011, TAV signed a contract with the
Civil Aviation Authority of Saudi Arabia
to operate Medina Airport over a 25-year
period. “Because the MENA region is the
fastest-growing aviation market globally, it
represents an exciting opportunity for us to
grow, to further establish our international
credentials and generate attractive
returns for our shareholders,” says Dr.
Waleed Youssef, TAV Airports Middle East
Director. “The Middle East is also a natural
market for Turkish companies owing to
its commonalities in history and culture,
and similarities in passenger profile. This
enables us, in turn, to leverage both our
experience and expertise, while mitigating
investment and operational risks.”
The drivers behind TAV’s investment
are clear, says Youssef. “Ownership in
high-profile projects such as Medina gives
us a very strong say and enables us to
have a tremendous impact on the airports’
strategy and operations.”
Turkey’s corporates understand that,
in the future, they'll have to diversify
geographically and by industry for growth.
“We’re generalists,” says Ali Karamanoğlu,
M&A Manager at Esas, a Turkish
investment company founded in 2000.
“We don’t focus on one sector, but we are
always looking for growth and know-how.”
Among other things, looking at
the standard of corporate governance
is a key aspect of the acquisition strategy
of Esas, according to Karamanoğlu.
“We’re looking for growth potential,
strong corporate governance and
transparency in our targets,” he
explains. “The last of these is very
important: if you are acquiring a
company, you have to start managing
it from day one.”
15. www.capitalinsights.info | Issue 9 | Q1 2014 | 15
53
4
2
1
division said: “This acquisition is a step forward in our
growth strategy to expand in Turkey. We are securing the
next level of growth with this core business expansion. The
product ranges are complementary and will allow us to
reach more customers.”
Look before you leap
When investing in the country, foreign corporates must
navigate certain risks. For those looking to thrive, there
are five key steps to take:
Bridge the gap. There is still a price differential between
buyers and sellers, according to Özkan Yavaşal, Partner
at Istanbul-based N+1 Daruma Corporate Finance. “If the
multiples and valuation levels are not realistic then we have
to bring clients’ expectations to the level of the market,”
he says. When structuring M&A deals, it is often a challenge
to engineer a rational valuation method and get to a
realistic price tag.
“It can be difficult to do due diligence if the financial
statements are opaque and you can’t see the revenues
on [there],” says Yavaşal. He believes investors need
to be hard-headed, but also feels things are improving.
“Company owners are growing more sophisticated, and they
increasingly understand the need for external audits and
transparent financial statements.”
Take your partner. When looking for a company to
partner with, try to focus on finding one that complements
your strengths and weaknesses. “For us investing into
Turkey, we brought the retailing expertise,” says Cheshire.
“But they brought to the table a national perspective that
we didn’t have on property, logistics and operations. It’s
meant that we’re 50% of a great business rather than 100%
of a disaster.”
Be patient. Despite the accommodating investment
climate, Turkey is not necessarily a quick-win market. But
the long-term dynamics are favorable, and they will bring
substantive long-term rewards. “One factor that makes
Turkey so attractive is that half the population is below the
age of 29. It’s a young population with a lot of potential for
consumption,” says Öner.
Be prepared. Carefully plan the pre- and post-transaction
processes. “If you concentrate all your efforts on the
acquisition, without acting quickly afterward, it can affect
the overall success of the transaction. Building relationships
with the regulatory authorities is very important in this
regard,” says Cantekinler.
Open talks. “From the outset, be transparent with your Turkish partners,
and let them know exactly what you require from them. It will help you
to better construct a deal. You can confuse your targets if you express
enthusiasm at the beginning, but then add questions later on in the
process,” says Öner.
Whether or not Turkey continues its robust GDP growth, the country
looks well placed to sustain an active market. Investors are showing keen
interest, and domestic corporate players are becoming more confident.
It is up to patient and determined companies to take advantage of this.
For further insight, please email editor@capitalinsights.info
Sinan Ulgen of EDAM says Turkey’s
lower growth rate hides a healthy
corporate future for the country
A
fter a decade of almost uninterrupted high growth — excepting
2009 — Turkey is now entering a period of possibly protracted
lower growth. There has been a continuing slowdown of growth
in Turkey — with year-end 2013 expectations of between 3% and 3.5%
real GDP growth. However, over the next three decades, the OECD,
World Bank and IMF predict an average growth rate of 4.5—5%.
In relative terms, given how closely linked Turkey’s economy is with
the European economy, that rate is certainly commendable. But from a
purely domestic perspective, the growth rate is below what it needs to
be in order to decrease unemployment.
Given the demographic
bulge, Turkey’s economy
needs to grow at least 5%
in order to bring down
unemployment. So the
lower growth rates have
obvious political and social
consequences. It’s not low
growth such as in the rest
of Europe, but it is when
compared with what we have known in the past decade.
However, there is unlikely to be an economic crisis in Turkey. The
country’s economy has proved to be resilient, and the banking sector
is strong. There are few non-performing loans and toxic assets, and the
fiscal balance is still sound. Turkey has positive public debt dynamics, and
the deficit is almost non-existent. The population continues to grow. And
in the long term, I expect domestic demand to grow as well. These are
all positive indicators for the country’s economic potential. Nonetheless,
in the short term, there are certain macro challenges to be overcome.
Viewpoint
Sinan Ulgen is Chairman of EDAM — Center for Economic and Foreign
Policy Studies
The country’s economy
has proven resilient,
the banking sector is
strong and the fiscal
balance is sound
18. Capital Insights from EY Transaction Advisory Services
“When you come into a conglomerate,
it’s difficult because each business unit
has different starting points and different
returns,” says Westlie. “The key is to have
a long-term view, and that is why we also
focus on the ROIC.
“To get it right, you need a transparent
process of which everyone is aware. You need
to look at present performance, predict future
performance and look at the alternative ways
to allocate capital to achieve your goals. We
use many different levers and metrics when
allocating capital. The different business units
all have different value drivers.”
Figures for Q3 2013 show that the
strategy has, so far, been very successful.
Each of the core businesses had a ROIC of
above 10% for the quarter, with Maersk Oil
and APM Terminals posting ROIC of 12% and
14.2% respectively.
Optimizing performance
As part of the program to drive efficiency throughout the
business and to allow for capital allocation to growth areas,
the company has undertaken a rigorous process of cost-
cutting across the organization.
“While we have segregated business units running
more autonomously, there are only a few common services
where we can get cost savings across the business, such
as procurement, which we have centralized,” says Westlie.
“There is no ‘one size fits all’ when it comes to cost-efficiency.
Having said that, our container business has been very
successful in optimizing costs in the last few years.”
The company has been at the forefront of a number of
innovative cost-saving initiatives in the container business.
This has been particularly necessary in an industry that has
been plagued by overcapacity in recent years.
“We have been trying to optimize the network and the
efficiency of running a container business,“ says Westlie.
For example, Maersk has been at the forefront of slow-
steaming (ships traveling at much slower speeds to save
fuel costs). By lowering speeds from 22 knots to 16 knots,
fuel consumption is exponentially reduced. Not only does
this cut costs, but CO2
emissions are down as well. This
award-winning policy has saved the company an estimated
US$300m a year.
Alongside slow-steaming, the company has also
implemented other initiatives. These have included analyzing
the friction of boats in the water and repainting vessels
to reduce drag in the water, both of which save fuel and
therefore money. “You have to drive and acknowledge what
may seem like simple ideas for cost-efficiencies,” says the
CFO. “You don’t need to do much before you see significant
effects out of the savings.”
One example of a simple but effective measure that
has helped save costs is the monitoring of every vessel in
the fleet. Maersk benchmarked each ship against the other
and then put every ship on the internet. From there, ships’
1904 19691928 1972
Maersk Air is founded and begins
operations the following year
Maersk Line is established,
as well as a route between
the US and Asia
Maersk is founded by A. P. Moller and
his father Captain Peter Maersk Moller
Maersk Oil starts producing oil in the
North Sea, and Maersk Storm Drilling
Company is founded
Being CFO
Trond Westlie explains his
three-step approach to
being an effective CFO
Being a CFO of a conglomerate is
not that different to being a CFO in a
single-focus industry. However, the challenge is that you
need to know different industries and value drivers.
As for the role itself, it has expanded beyond finance
and reporting. First, I am more involved in performance
management, strategy and capital allocation. The role is
now very much being copilot to the CEO.
Second, I see the role as more of a service function
to the rest of the group. A key part of this is in a control
compliance function, to ensure that we uphold the
required level of reporting, timeliness and transparency.
And the final aspect of the CFO role is to really drive
performance for the group.
timelineimagesGettyImagesandMaersk
19. www.capitalinsights.info | Issue 9 | Q1 2014 | 1919
captains call their destination ports when
they leave dock. This way, they can find
out if they are able to dock at the time
allotted and, as a result, they can slow-
steam earlier if the arrival port is not
ready for them.
“We have calculated that the call from
every captain to every port reduced the cost
by about US$100m a year,” says Westlie.
Joint savings
In another attempt to reduce costs, Maersk
has recently brokered an alliance with rival
shipping companies Mediterranean Shipping
Company (MSC) and CMA CGM to share
routes on certain networks. While the three
companies remain rivals, it is hoped the deal
will cut costs for all concerned.
Maersk analyzed its container business
and found that the east-west routes were
most challenging on a return basis.
“We need to be more efficient in how
we drive the invested capital and assets we
have on east-west trades to get necessary
returns,” says Westlie. “We have made the
agreement with MSC and CMA CGM on the
use of ships: the commercial side is going
to be detached and held by each company.
We will have a shared infrastructure with a
common operations center.”
In addition, the company is not afraid
to invest in order to cut costs. In September
2013, Maersk took delivery of three Triple-E
container vessels. These are the biggest
ships in the world, costing US$185m each.
The company has a further 17 such ships on
order. In spite of the capital outlay, the ships
are seen as a key cost-saving
initiative, as they are 20% more
fuel efficient than the company’s
current largest vessels. And
with fuel costs around
US$300—US$400 cheaper
per container on a round trip
between Asia and Europe, this
investment could prove to have
major ramifications over the
long term.
Mastering the portfolio
Greater cost-efficiency and a realigning of
strategy to focus on oil and gas, drilling
and the non-shipping side of the business
have placed even more stress on portfolio
optimization within Maersk.
“While we are always optimizing our
portfolio, in the last seven years, we have
sold business or ships and assets for about
US$20b,” says Westlie. “Last year, we
started a program called Project FIT, which
is about examining the whole balance sheet.
This means that we are looking at smaller
parts in the portfolio. We are focusing on
what is non-core, when the optimum time is
to sell and whether we want to own the asset
or not.
“Then each unit reviews its businesses
and assets, and how they fit into their
portfolio. We decide whether the assets are
contributing or not, depending on the return
requirements we have.”
1994 2000 20011976
Maersk Drilling establishes Egyptian
Drilling company in partnership with
Egyptian General Petroleum Company
Maersk Oil enters
Kazakhstan, acquiring a 60%
stake in Temir Block
Maersk initiates oil
drilling in Qatar
Maersk buys Dutch salvage company
Wijsmuller — Maersk now operates the world’s
largest fleet of salvage and offshore vessels
The CFO
Trond Westlie
Age: 52
CFO at Maersk: Since 2010
Educated: Norwegian School of
Economics and Business Administration
Previous positions: Trond joined Maersk in
2010 from Telenor Group, where he served as
Executive Vice President (VP) and CFO. From
2002 until 2004 he was Group Executive VP
and CFO of Aker Kvaerner ASA, and Executive
VP and CFO of Aker Maritime ASA from 2000.
A.P. Moller–Maersk
Founded: 1904
Employees: 121,000
Countries: 130
Market capitalization: US$47.2b
(as of 7 January 2014)
Oil and drilling
in focus
Maersk Oil
Established: 1962
Oil and gas production*:
230,000 boepd (barrels of oil
equivalent per day)
Production goal by 2020:
400,000 boepd
Employees: 4,200+
Number of oil fields: 23
Profit*: US$790m
Invested capital*: US$6.16b
Maersk Drilling
Established: 1972
Number of rigs: 26
Countries: 11
Employees: 3,300+
Profit*: US$450m
Invested capital*: US$5.3b
* Up to Q3 2013
21. www.capitalinsights.info | Issue 9 | Q1 2014 | 21
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2
3
4
5
6
For example, in 2011, the company
announced that it would build and
operate a new container terminal at
the Mexican port of Lázaro Cárdenas.
The construction is expected to
be completed in 2015 at a cost of
US$500m. In addition, Maersk Oil
units are operating across many Latin
American countries, including Mexico,
Brazil and Venezuela.
And while these new frontiers
bring fresh opportunities for growth,
they are not without their challenges,
such as local tax laws and stakeholder
management. Westlie believes the key
to overcoming these challenges is to
get the right local partner and ensure
that the company’s role goes beyond
pure profits.
“We need to have partners that are
locally connected. We are looking for
partners that can contribute as a result
of being an infrastructure company on
terminals and containers, for example,
and that have close relations with local
communities,” he says. “Also, we have to
ensure that we contribute to the welfare
of the country. Our presence should
not only be about getting returns. The
products we deliver are also wealth
creators for the countries we’re in.”
This can be seen in Maersk’s policy
of working with local companies and
employees. This helps both Maersk and
the areas in which it invests.
“In the past, we had Danish people
traveling abroad as expats and working
for years overseas,” says Westlie.
“However, over the last decade, that has
changed. We are recruiting more local
employees and managers all around the
world. We are enhancing capabilities
as well as competence. We are good at
attracting talent from local communities
and recruiting skilled people who drive
performance in different business units.
“The trend for us is toward
local employees and a system that
can enhance local competence and
management capacity.”
Future perfect
With a clearly focused strategy,
increased returns, effective cost-cutting
and successful expansion into the BRICs
and beyond, the CFO is upbeat about
the future. However, he is well aware of
the challenges ahead.
“We need to continue the success
we have had lately on Maersk Line,
focus on cost-efficiency and hopefully
stabilize volatility on earnings and
rates,” he says. “Successful execution
of our many oil and gas projects will
drive our growth on the energy side.
But we have to ensure that we allocate
capital correctly and make the right
decisions to get the right return on the
different businesses.”
Maersk has weathered the stormy
seas well. And if it can keep its core
businesses balanced, the unlikely mix
of oil and water can continue to prove a
winning combination.
2011 20132012 2014
Maersk Line places 20 orders for the
world’s largest vessel, the Triple-E class
Maersk divests its 31.3% stake
in Danish shipping and logistics
company DFDS
Maersk’s ports arm, APM Terminals,
buys 37.5% stake in Russia’s Global
Ports for US$860m
Maersk agrees to sell a 49% stake in Dansk Supermarked and
19% stake in F. Salling for a combined sum of DKK14b (US$$3b)
Lessons learned
Trond Westlie outlines his rules
for success as CFO of Maersk
Use what’s already in the business, but improve
upon it. Even though you may have different views
on how things should be done, the business has
evolved over many years. You need to optimize
what is already in the business.
You have to make sure the processes that drive the
finance and performance management functions
are structured and transparent. Everyone in the
organization needs to know about them.
Get rid of budgets. They are a waste of time.
The world is changing so much, so the only thing
budgets are good for is cost control. And most
businesses know how many cars, offices and
people they need, so it shouldn’t be a problem.
Agility is key. For a company to react to changes in
any sector, you need the agility to understand and
address the circumstances that are hitting you.
Implement decision-making powers as far down in
the organization as you can. Of course, you should
have a clear chain of command when it comes to
decision-making, but the less that the business
depends on hierarchies, the better.
When you go into a partnership, particularly
overseas, it is vital that you are not only in sync with
those companies, but that you do business in a way
that is acceptable to local communities.
21
22. Capital Insights from EY Transaction Advisory Services
T
he rise of the digital economy
has led to a sharp increase in
the amount of data produced
(see “What is big data?” above).
And corporates are beginning to realize
the enormous potential big data (BD) has
for improving business performance. From
being a market worth US$3.2b in 2010,
it is set to grow to US$16.9b by 2015,
according to the IDC.
Data by technology research group
Gartner shows that 42% of corporates had
adopted BD technologies by the end of 2012.
But having the technologies and knowing
what to do with them are very different
things — the same research group found that
less than 15% of businesses currently have an
enterprise strategy around BD. This is despite
the fact that, by 2015, businesses using BD
will outperform competitors by about 20%.
Data with
Big data could be the future for business, but
corporates need to analyze it, understand it and
invest in it to reap the rewards
Key insights
• The opportunities for making use of
big data (BD) are almost limitless, but
corporates need to learn how to analyze
the data effectively.
• BD gives companies the ability to
forecast, plan more accurately
and gain valuable insights into the
behavior of suppliers and customers.
• Effective analysis of BD can also help
corporates improve their internal
systems to analyze employee behavior
and improve training and retention.
• BD can drive efficiencies and cost
savings in resource allocation, better
product flow and shared services.
• For corporates, BD can improve strategic
decision-making, as well as identify and
reduce risks such as fraud and bad debt.
What is big data?
According to the definition from
technology research group Gartner, big
data (BD) is high-volume, high-velocity
and high-variety information assets that
demand cost-effective and innovative
forms of information processing.
BD comes both from structured data
(for example, customer feedback,
insurance claims and relational databases)
and unstructured data (including emails,
tweets and other social media).
“We are used to measuring data
in megabytes and gigabytes,” says
John Hopes, Partner, Valuation and
Business Modeling at EY UK & Ireland.
“But with BD, we are talking about
terabytes and beyond.”
The volume of data being generated
is staggering. In September 2012, IT
intelligence provider International Data
Corporation (IDC) published The Digital
Universe in 2020, a report that predicted
the volume of data being generated
each year will end up reaching 40
zettabytes (ZB) — 21 zeroes — by 2020.
To put that into perspective, the entire
web is currently estimated at being
around 4ZB.
destiny
“The opportunities to make use of
unstructured data are almost endless,” says
John Burns, Partner, Transaction Advisory
Services at EY US. “But getting organizations
and people to be flexible and to understand
how to use these tools can be a challenge.”
Analyze this
Making sense of the huge volumes of data,
produced both by traditional business
activities and new sources, is one of the
biggest opportunities for businesses. “A lot of
BD analysis is about taking information from
different systems and putting it together,”
says Dr. Guy Bunker, Senior Vice President at
security vendor Clearswift. And the key is to
analyze that data as precisely as possible.
To do that, companies are getting
rid of standard database and warehouse
management tools. They are replacing them
23. www.capitalinsights.info | Issue 9 | Q1 2014 | 23
with new and more powerful technologies,
which they can use to find patterns in data
such as financial transactions, human
behavior and corporate acquisitions.
Major IT companies such as IBM, Oracle
and SAP have developed (and continue
to develop) these tools. In an interview in
Q3 2013’s Capital Insights, SAP CFO Werner
Brandt said that its HANA in-memory
database “was one of the key organic growth
drivers for SAP.”
“There are some real differences
between how we analyze data now and
how we used to analyze it,” says Hopes.
“Traditional methods, such as statistical
analysis and partner recognition, still need
to be applied. But there is now much more
data to work with, and it requires more
finely-tuned and targeted analysis, which
can obtain much more insight.”
One industry using analytics effectively
is insurance. “The sector is taking a mix of
structured and unstructured data to identify
fraudulent claims,” says Hopes. For example,
in May 2013, American insurance group
MetLife started to use a BD application
powered by data management firm
MongoDB. “MetLife is transforming the way it
operates, using state-of-the-art technologies
to drive business results and provide the
best possible experience for our customers,”
said Gary Hoberman, MetLife’s CIO and
Senior Vice President, Regional Application
Development, at the time. “Introducing
MongoDB to our development teams
empowered [them] to deliver work in months
that would have typically taken years.”
Customer service
This unprecedented amount of data gives
companies the ability to forecast and plan
more accurately. It also helps them to gain
valuable insights into their customers’
behavioral patterns — insights that help
companies make decisions that strengthen
their brands, drive revenue growth and build
customer satisfaction.
In RR Donnelley and Mergermarket’s Big
Data survey from 2013, 27% of respondents
felt that the ability to transform products and
services would be the greatest benefit of BD —
and that means being able to give customers
what they want, when they want it.
“BD can give you a real competitive
advantage by helping you make faster, better
decisions,” says Hopes. “Quicker decisions
can help you ‘capture’ the customer.”
According to Hopes, effective analysis
of BD is getting companies closer to the
Holy Grail of one-to-one marketing. “It can
allow the company to identify a change in
behavior that shows when customers are
ready to buy and the company can present
them with that offer,” he says.
One company that is doing this
effectively is consumer giant Unilever.
Speaking in 2013 at a mobile technology
conference, Unilever Chief Marketing Officer
Keith Weed said that the combination of BD
with mobile technology is changing business
and consumer behavior. “We can tell by a
person’s location whether they are walking
in a park. And then, if it is a hot day, we can
direct them to the nearest place to buy a
Magnum [ice cream], with a coupon. This is
the kind of stuff you can’t do on TV,”
said Weed.
Another company that is using BD to
create more efficient customer services is
the electronic payment giant Visa, which has
plenty of data to store and analyze — there
are 470 million Visa cards in Europe, and €1
(US$1.4) in every €6.75 (US$9.2) spent in
Europe is on a Visa card.
By analyzing BD efficiently, the credit
giant ensures that, instead of looking at
products, services or areas in isolation,
it uses the data as an integrated whole to
best serve its clients.
Kamran Ashraf, Head of Analytics
and Information Services at Visa Europe,
says: “By analyzing and using the data
for the benefit of merchants and member
banks, both are able to better understand
consumer preferences and to shape the
products they offer to better suit consumers.
This data also, importantly, enables us to
protect consumers by spotting fraud.”
As well as building customer loyalty,
analyzing BD can also help corporates to
improve both their internal staffing and
communications systems. For example,
companies can gain a better understanding
of staff motivations, the reasons for attrition
and the benefits of training or global mobility.
“Looking at analytics associated with
staff can help companies learn why they
leave,” says Hopes. “By using advanced
statistical analysis and structured data
relationships between variables, companies
can effectively reduce staff turnover.”
Efficiency drivers
BD can also allow companies to be more
efficient, create greater connectivity
through their whole organization and better
schedule resources to tasks.
“Analyzing BD can help companies cut
costs by deploying resources in a much
smarter way,” says Hopes. “For example,
when scheduling staff, the more data
you have, and the more up to date it is,
the faster and better you can direct your
workforce. And this can take out quite a lot
of redundancy in the process.”
GettyImages/SuriSun
Preserving
Investing
Optimizing
24. Capital Insights from EY Transaction Advisory Services
1
2.5 quintillion
That’s 2.5 x1018
bytes
of data created everyday
Source: IBM
4.4 million
The estimated
demand for
jobs in big data
by 2015
Source: Gartner
500
million
The number of
tweets every day
Source: Twitter
US$34b
Big data IT spend in 2013
Source: Gartner
90%
of the world’s data was created
in the last two years
Source: IBM
2 years
Data crunching
Big data
The phrase itself was named
the most confusing tech
term of the decade
Source: Global Language Monitor
?
For instance, the US Postal Service (USPS)
issued a five-year, US$16.7m contract to
FedCentric Technologies, in October 2013,
to expand USPS’ BD capabilities, with the aim
of improving the agency’s efficiency, fraud
detection and competitiveness. As Gerry
Kolosvary, President at FedCentric, said in
an interview at the time: “There is great
intelligence information coursing through
USPS systems. It will allow them to be more
competitive moving forward. We know what
is in the mail carrier’s bag the next day, and
that leads to all kinds of useful decisions, like
how many trucks to send out and how many
people are needed for a given day.”
Corporates can also use BD to evaluate
the impact of new technologies and
processes. For example, BT, the global
telecoms group, is examining ways to
combine technical data about its network
(such as warnings about network faults) with
data from media sources such as Twitter.
“If we can combine a cluster of social
media comments about phone problems
in a specific village with network data on a
cable fault from the same area, then it can
potentially allow the company to respond
faster to a service outage,” says Simon
Thompson, BT’s Head of Practice for Big
Data in BT Research. “Combining data helps
us to identify problem hot-spots and areas of
customer dissatisfaction more rapidly.”
Risk management
Another key offering from BD to businesses
is the ability to minimize risk. Indeed, in the
Big Data survey, 33% of respondents stated
that the greatest benefit of BD will be the
ability to improve strategic decision-making
while also reducing risks such as fraud.
“BD allows you to be much more targeted
and more focused in your analysis,” says
Hopes. “You can be more exploratory. You
don’t have to go in with a preconceived idea
of what the answer is. For instance, you can
identify fraud by analyzing millions of emails
in an in-depth way, looking for patterns that
might indicate something unusual.”
For example, analyzing data can help
financial services companies assess their
exposure to risks such as fraud and bad debt. Chris Nott,
UK Chief Technology Officer for Big Data and Analytics at
IBM, explains how the company used BD to help a large
multinational bank assess their exposure to other banks: “IBM
collected more than five years’ worth of external and internal
corporate and legal documents. It then used text analytics
and entity analysis techniques to reveal patterns between
individuals, entities, events and legal agreements. Information
about recent lending ... helped the bank understand where
it faced the most counterparty risk. It emerged that most of
the risk was through subsidiary agreements.”
Of course, with something as vast as BD, challenges
will emerge. And corporates need to create an information
strategy that aligns with their requirements to drive better
decisions and realize business objectives faster.
To get the best out of BD, companies need to overcome
four major hurdles:
Managing data. In the Big Data survey, 53% believed that
managing data in real time would be the biggest challenge to
those using BD. The key to tackling this could be a change in
corporate mindset.
“You need to transform how people think,” says Burns.
“Analytics traditionally have been very structured and
internal to organizations. Companies are learning to be more
flexible in their use of analytic tools.”
Not doing so could be costly. In a State Street and
Economist Intelligence Unit (EIU) survey from late 2013, 70%
of “data leaders” (companies using BD to get a competitive
edge) were confident they could generate forward-looking
insights from their data, compared with 43% of “data
laggards” (those struggling to exploit their data’s potential).
While there has to be an internal shift in managing
data, the solution could well come from outside the
organization. Indeed, in the Big Data survey, 93% of
respondents believed that the volume of M&A with
a BD element would increase over the next 12 months —
and 53% said it would increase significantly.
One corporate that has followed this strategy is
agricultural multinational Monsanto. In October 2013, the
company acquired Climate Corporation, which provides data
and insurance to farmers, in a US$930m deal. Monsanto saw
this as an opportunity to expand on Climate Corporation’s
leadership in the area of data science.
“Climate Corporation is focused on unlocking new
value for the farm through data science,” said Hugh Grant,
Chairman and CEO for Monsanto, in a press statement.
“The team brings leading expertise that will continue to
greatly benefit farmers and their bottom line, and we want to
expand upon this tremendous work.”
On the web
For more on BD, watch EY’s CFO: need to know: big data video
at www.capitalinsights.info/bigdata
EYandShutterstock/tovovan
25. www.capitalinsights.info | Issue 9 | Q1 2014 | 25
4
2
3
BT’s Simon Thompson explains how
his company has managed, utilized
and got to grips with big data
B
ig data (BD) is a chain of activities. You have to get the data, clean
it and analyze it before working out how to use it. We’re building
a central data repository for storing and analyzing a large portion
of it. Regulations mean we are not allowed to store all our information,
particularly customer information, in one place. Data protection always
applies; on the other hand, telemetry data from the devices in our network
is much less sensitive, so we can take advantage of the new opportunities
much more easily in that domain.
We’re taking small streams of data into our central store, which will
build into a large asset over time. The store currently has under a petabyte
(PB) of data. But we predict that, in future, it will have many PBs.
We use BD in several ways. For instance, our hardware switches data
across the web, manages and routes traffic, and encrypts or decrypts
traffic. Inevitably, some devices fail. Before we used BD, devices would
sometimes appear to be
working well, even if they had
faults. Now we can spot faults
at an earlier stage, helping us
improve the service.
With BD, you buy cheap
hardware, stack it high and
break down the data into
chunks. An issue is moving
large amounts of data, although this has got easier recently due to our
network pipes getting bigger. At the same time though, the data flows have
got larger too, so we still see this as an issue. BD lets us work on a range of
projects that previously were technically feasible, but were too expensive.
Viewpoint
Simon Thompson is Head of Practice for Big Data in BT Research
With BD, you can
buy cheap hardware,
stack it high and
break down data into
chunks for analysis
Staying safe. Security is a top priority for companies dealing
with data. In the Big Data survey, 20% said that securing
data was the biggest BD challenge.
“There is a risk that customers will lose trust in a
company if they believe that it invades their privacy and
abuses their personal data to create value,” says Viktor
Mayer-Schönberger, Professor of Internet Governance and
Regulation at Oxford University. “Companies wanting to use
BD will have to make sure that they use the data responsibly,
or they may scare customers away.”
Keeping data secure can also save companies money
as data breaches such as malicious attacks or system
glitches can be costly. In the year to March 2013,
the average total cost of a data breach in the US was
US$5.4m, according to the 2013 Cost of Data Breach
Study from the Ponemon Institute.
In order to keep data secure, Visa has a “cross-
divisional” committee. The committee checks that staff
members stick to data compliance policies and regulations,
and that data is not used in ways that would be against the
customers’ wishes.
The whole truth. “Of course, one of the biggest challenges
is to not overinterpret BD and read more meaning into the
results than they have,” says Mayer-Schönberger.
Historically, with existing structured analytics,
companies worked with a clean data set, meaning there was
validity from the outset. However, the size and unstructured
nature of BD means it doesn’t work that way.
“We don’t always know the veracity of BD,” says Burns.
“It is very raw data. Because it can be streaming and in
real time, by its nature, it often hasn’t been validated.” The
high level of concern about accuracy is shown in the State
Street and EIU report: the largest share of the institutional
investors surveyed, 37%, said that verifying the accuracy of
data was the biggest challenge in working with BD.
Getting the staff. One of the major hurdles that companies
will need to overcome is staffing. People who understand
business, human psychology and data analysis are in short
supply. According to a survey from IDG Research in 2012,
57% of IT professionals feel that they lack the skills and
experience to properly analyze data.
“The ability to mine BD and to come up with cutting edge
analytics takes a different skill set to that needed for just
looking at traditional structured datasets,” says Burns.
This means that businesses will need to build big teams
rather than focusing in on the skills of one or two individuals.
“Companies will need social scientists, people who study
social networking, employees who study unstructured data,
and computer scientists and staff who are trained in data mining, as well
as those with other types of analytic skills,” says Burns.
Look to the future
Returns on investment from BD have the potential to be vast however,
so far, they appear to be modest as companies sift through data, try to
analyze it and then work out how the data can help their business. “It is
not yet fully understood how to extract value from BD effectively,” says
Burns. “Our role is to help clients make better decisions and enhance
BD’s value to their organizations.”
Ignoring BD would be a huge mistake for corporates in all sectors.
As Mayer-Schönberger says: “Over the next 10 years, every aspect of
business and every sector will be affected and reshaped by BD.”
For further insight, please email editor@capitalinsights.info
26. Capital Insights from EY Transaction Advisory Services
M&A challenges
When asked in the
2013 M&A Outlook
report which stage of
the M&A process was
most difficult, corporates
replied as follows:
1. Due diligence 46%
2. Deal term negotiations
33%
3. Deal sourcing 7%
Source: M&A Outlook 2013,
Mergermarket and RR Donnelley
Negotiation is an art form, and doing it well can deliver
the right deal for all parties. Capital Insights explores the
techniques that can work for deal-makers
Key insights
• The success of a deal
can often depend on
keen negotiation skills.
• Preparation is all
important. Start early
and do your research.
• Price should not be
discussed in isolation.
• Multi-issue negotiations
can add value to a deal.
• Local involvement
in cross-border
negotiations is vital.
• Always have a BATNA —
best alternative to a
negotiated agreement.
Appetite
for
discussion
E
xecutive confidence in M&A is on the rise. EY’s
latest Capital Confidence Barometer (CCB) found
that 69% of respondents expect deal volumes to
rise in the next 12 months, and one in three intends
to pursue an acquisition. However, that confidence doesn’t
always translate to negotiations around the deal table.
The 2011 Middle-Market M&A Survey, from business
school Babson College, found that 72% of advisors responding
to the survey cited the slow and challenging negotiations
between buyers and sellers as a major challenge in the M&A
market. Little has changed since. In the 2013 Mergermarket
and RR Donnelly M&A Outlook, 33% of respondents saw
negotiating the deal’s terms as the hardest stage of M&A.
Skilful negotiation can make all the difference to any
deal — large or small. “The negotiation stage is all important,”
says Jeffrey Liu, Group Head of US Technology Lead Advisory
at EY US. “You need to think clearly about the processes and
have good judgment on what’s important and what’s not.”
A clear example of the value of successful negotiations
comes from 2013’s largest M&A deal: Vodafone’s sale of its
stake in the Verizon Wireless joint venture for US$130b.
The success of the deal was, in part, achieved by the
relationship between the two CEOs, Vodafone’s Vittorio
Colao and Verizon’s Lowell McAdam.
Both are experienced deal-makers. For example, in a
recent interview, Michel Combes, CEO of Alcatel-Lucent, said:
“Colao is a very good negotiator because he is very calm.”
While having a relationship with your counterpart is a
great starting point for any negotiation, brokering a successful
deal will require significantly more than solid rapport.
Be prepared
Knowledge is power — especially in negotiations. The
deal parties need to research the asset, the structure,
the value and their counterparts before entering
discussions. In addition, the buyers have to understand the
motivation of the vendor, including
employee and shareholder interests.
“Start early,” advises Ajay Arora, Leader
of the M&A team at EY India. “There has
to be a lot of real detail obtained from the
market research and market intelligence.”
This focus on starting early can be seen
in the recent deal by film studio Disney to
acquire LucasFilm. While the deal was not
announced until October 2012, informal
discussions between George Lucas, the
owner of Lucasfilm, and Bob Iger, Disney’s
CEO, began over a year earlier, in May 2011.
And, when planning, companies must
consider the widest possible implications
of a deal such as IT, HR and facilities. For
instance, EY’s IT as a driver of M&A success
report from 2012 found that only 21% of
corporate and 11% of private equity (PE)
respondents bring IT-related considerations
into transaction negotiations.
Oversights on areas such as IT and
retention can leave executives negotiating in
the dark over potential costs and synergies
of the critical assets involved in M&A.
Multiple factors
Price is fundamental to every deal, but it
should not be discussed in isolation — price
needs to be negotiated as part of the whole
deal. In James Sebenius’ paper Six habits
of merely effective negotiators (Harvard
Business Review), he highlights that:
“Negotiators who pay attention exclusively
to price turn potentially cooperative deals
into adversarial ones.”
Capital Insights from EY Transaction Advisory Services
27. www.capitalinsights.info | Issue 9 | Q1 2014 | 27
Behavioral psychologist Ben Lopez brings
the principles of the hostage negotiator
to the deal table
T
he bottom line in hostage negotiations is that kidnapping is a
business. If you remove the human element, you have two parties —
each with something the other wants. It’s then about coming to a
price and achieving delivery of the goods.
I find that, when speaking to high-level business executives, they
all think they are good at negotiating. But some are better than others.
Whether you are negotiating a business deal or a hostage release, the
principles are the same.
The only thing you can control is yourself. The best negotiators are
people who can manage their egos. Empathy is important. If you can’t
understand the interests of the other party, you can’t solve the problem.
Form a partnership to solve a problem. Know what you want to achieve.
The more specific you can be, the higher the chances of getting exactly
what you want. The seller might say they want the most money they can
get, but they might agree to take less now and more over the long term.
Always have a fallback position, not just for logistical reasons. This
can give you a certain amount of psychological freedom.
Viewpoint
Ben Lopez is author of The Negotiator: My life at the heart of the
hostage trade
& McKenzie’s 2013 Trends in cross-border M&A report found that
overcoming cultural barriers was the greatest challenge for cross-border
acquisitions over the previous five years.
Corporates need to know how to act with different parties in the deal.
For example, when doing deals in Brazil, Anna Mello, M&A Partner for
Brazilian law firm Trench Rossi e Watanabe Advogados, believes certain
companies’ negotiation tactics let them down. “It can take a long time
to get the government approvals you need to pursue your business
opportunity,” she explains. “We have to educate some foreign clients
that they can’t come here and dictate to authorities how a deal is
going to work. They cannot be arrogant, or they will not get the approvals
they need.”
When it comes to negotiations overseas, it is therefore vital to
have local knowledge. “Buyers must be sensitive to cultural issues. For
example, it is extremely important in India to be warm in the negotiations.
A lot of Indian entrepreneurs don’t want to be seen in the market as
sellers. Buyers need to treat them as equals, even if the buyer is a global
major,” says Arora.
A deal is only as good as the negotiators enable it to be. A positive
atmosphere of collaboration and rapprochement are more likely to be
successful than conflict and entrenchment. On the next page, Capital
Insights outlines eight further negotiation tactics that corporates need
to remember when they are around the deal table.
For further insight, please email editor@capitalinsights.info
Lessons learned
When asked in October 2013 what
they would do differently in deals,
corporates replied as follows:
1. Negotiate a better price
2. Use better advisors
3. More in-depth due diligence
Source: Evolution: Reigniting the Global Economy,
FT Remark and Hogan Lovells
The solution is to bring multiple issues into the deal. In his
Analyzing Complex Negotiations paper (Harvard Business
School), Michael Watkins believed that the move from
negotiating one issue, such as price, to multiple issues
allowed both parties to “create value” (increasing the
benefits to both parties through mutual agreement) as well
as “claim value” (getting the best deal for your side).
“As with single-issue negotiations, parties engaged in
multi-issue negotiations seek to learn and to shape each
others’ perceptions of bottom lines in order to claim value. But
they also seek to influence each others’ views of their interests
and the trade-offs they are willing to make across issues,”
Watkins says. “Value gets created in multi-issue negotiations
by identifying shared interests or complementary interests
that are the basis for mutually beneficial trades.”
Adding value
While price isn’t everything, the valuation gap that can
appear between buyer and seller is often a breaking point
in negotiations. And EY’s latest CCB found that nearly a
third of corporate executives expect that gap to widen
in the next year.
“There is a lot more skepticism from buyers about
valuations,” says Liu. “Sellers are often pressed to validate
their numbers — sometimes in quite oppressive ways.”
In order to create value for both sides, the two parties
should move toward a common understanding of the
opportunity for mutual benefit, according to Ed Brodow,
author of Negotiation Boot Camp.
“Value is the perception that a problem has been solved.
When you show to the other side that you are helping to solve
their problem — that is, providing what they need to achieve
in the negotiation, which is not necessarily what they want —
you create value and you have a satisfied business partner.”
Culture clashes
Cultural differences can be especially challenging for
deal-makers during cross-border negotiations. Baker
GettyImages/AndrewHolt
Investing
