20150706_CB M&A transactions_v03

Cross-Border M&A transactions in the North-East of Italy: An Empirical Analysis

SIMONE DORO

Padova 21, 2015

UNIVERSITA’ DEGLI STUDI DI PADOVA

DIPARTIMENTO DI SCIENZE ECONOMICHE E AZIENDALI “MARCO FANNO”

Relatore Ch.mo Prof Antonio Zotti

What do foreign buyers acquire in the North-East of Italy? Where do they come from?

Which North-East firms invest abroad and where do they acquire?

What can be done to improve the attractiveness of the regions and the internationalization of the firms?

1

Research questions

What are the reasons behind Cross-Border deals in the North-East of Italy?

2

3

4

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Aim of the dissertation and methodology

Outbound deals

To understand the internationalization of the firms -Target industries, - Target Countries - Type of buyer - Size of the acquirer

To understand the attractiveness of North-East firms -  Target Industries -  Foreign Countries -  Type of Foreign Buyer -  Size of the acquirer

Inbound deals

Type of deal -  Vertical -  Horizontal -  Financial

Motivations - Distribution control - Geographic expansions - New Technology and Know-how - Broadening Product’s portfolio

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1

2 To examine the motivations that drove the Cross-Border deals in the two top targeted industries

To analyze the recent trends in the Cross-Border acquisitions that involved the firms in the North-East of Italy

To examine the motivations that drove the Cross-Border deals in the two top targeted industries

1 To analyze the recent trends in the Cross-Border acquisitions that involved the firms in the North-East of Italy

2

M&A Deals (7267 deals in Italy)

Database S&P Capital IQ AIDA

Time Period 2008-2014

Regions North-East Italy (503 deals)

Sources Company websites Online newspapers

Industries Industrial Machinery Apparel & Fashion

105 deals Inbound Outbound

Method Compiled a database with the motivations

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Aim of the dissertation and methodology

Trend of Cross-Border deals in the North-East

48

27 25

19 26

62

30

37

48 45

34

42

0

10

20

30

40

50

60

70

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2008 2009 2010 2011 2012 2013 2014 N

umbe

r of

dea

ls

Valu

e of

dea

ls

Outbound value ($mm)

Inbound value ($mm)

Outbound volume

Inbound volume

Results

Title

High % Cross-Border deals in the N.E. • 26% of the total inbound deals took place in the N.E.

• 28% of the outbound (second only to Lombardy)

Increasing share of Cross-Border deals • + 4% share of CB deals vs domestic in 2014

Higher internationalization of N.E. firms • +36% outbound deals in 2013-14 •  – 12% for Italy in 2013-14 * 40% of the outbound deals discloses the transaction value,

37% of the inbound deals

Cross-Border M&As in the North-East of Italy Volumes and Transaction Value*

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+36%

Top Foreign countries in Cross-Border M&A

INBOUND (298) OUTBOUND (216)

Top countries for inbound and outbound by number of deals (in brackets), period 2008-2014

-  Large presence of European Countries (for closeness reasons and lower entry barriers) -  Few deals from and towards Emerging Countries (For outbound: Brazil 3% China 3%, India 2%) -  Correlation between target countries and Top countries for easiness of Doing Business

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Evolution of the geographic area

INBOUND (298)

70%

37%

18%

52%

7% 7% 1%

2008-10 2013-14

88 71

69% 47%

19% 47%

8% 3% 3%

2008-10 2013-14

Latin America and Caribbean Africa / Middle East Asia / Pacific

United States and Canada Europe

Total # deals 133

+28%

106

+34%

-  + 34% of outbound deals target the U.S thanks to the easiness of conducting business, the presence of a large consumer market and tax incentives for foreign companies

-  Delay in the entry in the Middle-East and Asia markets (obstacles for the internationalization) -  Low Share of Asian investors (3% inbound)

OUTBOUND (216)

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INBOUND (298) OUTBOUND (216)

Top target industries by number of deals, period 2008-2014

1Share of deals that target the North-East regions

# % %N.E1 %N.E1 # %

Top targeted industries

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Industrial Machinery is the top targeted industry for inbound and outbound deals (15,8% and 12,7%) with an growing trend

33% 17%

50% 50%

83% 67%

67%

100% 83%

50% 50%

17% 33%

2008 2009 2010 2011 2012 2013 2014

Foreign Buyer Domestic Buyer

9 5 6 6 6 4 3

Growing appeal of the Industrial Machinery and Apparel & Fashion for Foreign investors

To assess the attractiveness of the industries for Foreign buyers: Industrial Machinery •  +22,6% from 2008 to 2014 •  90% strategic buyers •  Increasing interest of U.S. and France Apparel & Fashion •  +34% from 2008 to 2014 •  Growing interest for the fashion firms •  75% acquisitions carried out by financial investors

X # of deals

Apparel & Fashion

Industrial Machinery Results

36% 44% 43% 50% 50% 50% 58%

64% 56% 57% 50% 50% 50% 42%

2008 2009 2010 2011 2012 2013 2014

Foreign Buyer Domestic Buyer # of deals

14 22 12 10 12 14 X

16

+22%

+34%

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Type of foreign buyer

76% 77% 81% 79% 80% 71% 74%

24% 23% 19% 21% 20% 29% 26%

2008 2009 2010 2011 2012 2013 2014

Strategic Buyer Financial Buyer

62 30 36 48 45 34 42

Total # Ø  Increasing share of Financial

investors •  29% share in 2013 and 26% in

2014 •  33% of the foreign financial

investors address the N.E. •  Top targeted industries: Apparel &

Fashion (14,5%) and Industrial Machinery (7,2%)

Ø  Reasons:

•  More industrial and medium-long term approach of Financial investors

•  To speed-up the internationalization process in the Emerging markets

+9%

Inbound Results Number of inbound deals by buyer’s type

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Horizontal, 84%

Vertical, 12%

No data, 4%

12%

28%

32%

36%

40%

40%

Supplier control

New-technology & Know-how

Efficiency-Seeking

Geographic expansion

Market-Share expansion

Broadening Products'portfolio

Horizontal, 70%

Vertical, 9%

Financial Buyer, 11%

No data, 11%

Industrial Machinery’s industry – Motivations

INBOUND

7%

10%

11%

19%

26%

27%

Supplier control


Efficiency-Seeking


New-technology & Know-how


47 deals OUTBOUND 25 deals

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17%

17%

25%

25%

50%

58%



Efficiency-Seeking

Supplier control


Distribution control

Apparel & Fashion’s industry - Motivations

16 deals

Financial Buyer, 75%

Vertical, 19%

Horizontal, 6%

INBOUND OUTBOUND

19%

19%

25%

25%

88%

Supplier control

Synergies with other businesses

Turnaround

New Management skills


Horizontal, 17%

Vertical, 83%

12 deals

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Conclusions

Results Obstacles Possible Improvements

Attractiveness of the North-East

Internationalization of North-East

North-East firms attractive for their idiosyncratic factors: -  High level of technology -  Value of the Italian

Fashion

-  Country Risk -  Slow and inefficient civil

justice system -  Cost of doing business

-  Lower set-up cost -  Improve legal system -  Improve local

administrations -  Presence of Metropolitan

area

-  Market-seeking -  Delay in the entry in

farther and high-growth countries

-  Large Companies go abroad

-  Cultural & Linguistic

-  Managerial

-  Financial

-  Increase intercultural skills

-  Financial investors for internationalization of SME

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Possible further research steps

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1 To analyze the performance of the North-East target and acquirer after the cross-border acquisition

2 To understand the potential interest of foreign financial buyers in North-East medium enterprises

To assess the impact of managerial skills in the international expansion 3

4 To measure the overall effect of foreign acquisitions in the Italian territory (Learning by supplying, overall created jobs, contribution to GDP)

Thank you for your attention

UNIVERSITA’ DEGLI STUDI DI PADOVA

DIPARTIMENTO DI SCIENZE ECONOMICHE E AZIENDALI “MARCO FANNO”

Appendix

Type of buyer

Theory The North-East Analysis

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Features

Market Attractiveness

Internationalization

Doing Business

Industrial Inbound

Industrial Outbound

Apparel Inbound

Apparel Outbound

Cross-Border M&A

Revenues-Inbound

FDI

The Italian M&A Market Revenues-Outbound

Cross-Border M&A and Value Creation

Motives 1.  Market seeking 2.  Resources seeking 3.  Efficiency seeking 4.  Strategic asset seeking Factors influencing CB activity -  Globally integrated markets -  Increasing competition -  Capital availability -  Recover large investments

Entry in new geographic market D Benefits -  Rapid execution -  Diversification of the product

portfolio -  Acquisition of new resources and

skills -  Rationalization of the structures -  Crossing entry barriers and political

risks -  Possible fiscal and financial benefits

Barriers -  Structural -  Managerial -  Information -  Cultural

M&A as mode of entry

From Dunning (1993)

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Type of investors

Strategic investors Financial investors

VS

-  Operating companies that provide products or services and are often competitors, suppliers or customers of the target firm

-  Time horizon: indefinitely -  Value creation: exploitation of

synergies

-  Focus on: target firm and corporate strategy

-  Private equity firms, venture capital firms, hedge funds, family investment offices and ultra high net worth individuals

-  Time horizon: 5-7 years -  Value creation: Financial

optimization and cash generating capabilities

-  Focus on: value of the stand alone firm, back office structures and industry

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Top 20 Economies: FDI outflows and inflows

Source: UNCTAD, World Investment Report 2014

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11th

20th

Best Countries for doing Business

Source: Bloomberg, January 2014

Italy ranks 26th, before Poland, China and Malaysia

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Trend of Cross-Border deals in Italy

Results Title

• Predominance of Inbound deals (61% of the total CB in the period)

Increasing Inbound deals • + 29% in 2014

Top involved country: • United States, • France • Germany • United Kingdom • Spain

Cross-Border M&As in Italy Volumes and Transaction Value*

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+36%

+29%

The North-East of Italy

Implications

DEF: Friuli-Venezia-Giulia, Veneto, Trentino-Alto Adige and Emilia-Romagna (ISTAT, first level NUTS)

-  To open up the capital structure for being more competitive

-  To acquire new managerial

skills for pursuing international expansion

-  Opportunities for Foreign Financial investors

Features

Main data -  23% of National GDP (2011), - 8% GDP

since 2007 -  Skilled workforce, low unemployment Corporate Governance: -  Mainly family-businesses -  Problems: managerial and financial resources Financial structure -  High leverage (+2,6% compared to North-

West firms) -  Multiple credit lines with different banks

Source: Bank of Italy, Fondazione NordEst

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Low ranking for Italy in the Doing Business indicators: - 20° in the Inbound Global FDI (2013) - 65° Doing Business Indicator

Source: Bank of Italy

Market attractiveness of the North-East

The attractiveness of the N.E. is strictly linked to the Italian

Italy attracts less foreign investments compared to countries that are similar for level of development

Context Factors

Obstacles -  The times and cost for launching a

business; -  Slow and inefficient civil-justice

system -  Country Risk (corruption,

political instability,)

Most important determinants: - quality of the institutions - efficiency in solving legal disputes

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- Increasing Internationalization

- 47% of N.E. firms are engaged in cross-border activities (+9% of the Italian avg)

- Export and greenfield are the preferred entry modes

- Lower outbound FDI –GDP ratio compared to EU average

Source: Fondazione NordEst, Becoming International

Features Motivations Obstacles

•  Cultural and linguistic

•  Geographic distance •  Lack of knowledge of the

target country

•  Protection of intellectual property

•  Small dimension of the firms

Market seeking (to enlarge the customer base) in all the geographic regions Efficiency seeking in Central Asia and in the South-East Strategic-asset seeking Mainly R&D in North-America

The North-East and the internationalization

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Source: Campagnolo, Becoming International Survey, 2013

The North-East and the internationalization

Obstacles Reasons

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Turnover of the involved firms - Inbound

INBOUND

Foreign Strategic Buyer

Foreign Financial Buyer

Average Target Revenues: $22 ml - $ 417 ml

Average Target Revenues: $97 ml – $ 1000 ml

North-East firm

Average Revenues: $2 bn – $25 bn

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Turnover of the involved firms - Outbound

OUTBOUND

Average Revenues per year, $USD ml

Mainly large North-East firm perform acquisitions abroad

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Examples Industrial Machinery - Inbound

Financial Buyer Develop international presence & management support

2011 Alpha Group

Financial Buyer, Market expansion in the US and East Europe Market + technologic development

2014

US Strategic Buyer Leveraging capabilities to gain competitive advantages in the global flexible packaging market

2014

Buyer Target

2012 Efficiency increase by exploiting SPX's global resources and market capabilities, supplier of disk centrifuge

To broaden product line and to exploit Chero’s strong reputation in European, Middle East and African Markets

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2014

Examples Industrial Machinery - Outbound

Buyer Target

-  Acquisition of the factory in France and China

-  Heating equipment -  Increase the production volumes

and competitiveness thanks to product and process synergies

-  Internationalization strategy through organic growth and external lines

-  To strengthen the position in the packaging industry

-  98% of the revenues abroad -  Acquisition of the American competitor -  FlexLink: leader in the production logistics -  Sirius Machinery: cosmetic packaging

-  IMA enters the freeze-dry market (rapid growth) in the US and China

-  To broaden product portfolio -  To exploit synergies with pharmaceutical

business

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2012 2009

2008

2008

Edwards Tianli Pharmaceutical System

Apparel & Fashion’s industry - Inbound

Buyer Target

- Chinese Financial investor - Geographic expansion in Middle-East

and in China - Turnaround procedure

- French Financial investor - Geographic expansion in Europe, U.S.

and emerging markets - Agreement with major brands - Improve distribution chain

- Korean Strategic Buyer - Multinational retailer - Broadening product portfolio - Geographic expansion in Asia

- Chinese Financial Investor - Geographic expansion in China - Sold a 35% minority stake

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2014

2013

2013

2012

Apparel & Fashion’s industry - Outbound

Buyer Target

To broaden Products’ portfolio To Develop distribution network in Australia and Mexico

Acquisition factory in Bulgaria because of lower costs and government incentives

Acquisitions of distributors in Greece and Austria

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Acquisition of distributors in Hong Kong

2011

2008 2011

2008 2014

2012

20150706_CB M&A transactions_v03

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