Companies in Emerging Markets Show Clout in Global Deal Game

Companies from emerging markets, armed with piles of cash from rising commodity prices and abundant financing, are snapping up targets in Europe and the U.S., a trend that could shift the global economic balance of power in some industries.

In the latest example, shareholders of ports operator Peninsular & Oriental Steam Navigation Co. are scheduled to meet today to vote on a $6.8 billion takeover by Dubai Ports World, a company backed by the government in Dubai, one of the seven emirates in the oil-rich United Arab Emirates.

The deal is expected to be approved, ending a three-month bidding war for P&O, one of Britain's oldest companies, between the Dubai company and one from Singapore. If shareholders sign off, the top three global ports operators will be based outside the U.S. and Europe.

Europe especially has been targeted by buyers from emerging markets recently. Last year, companies from the Middle East, Latin America, Asia and other regions spent more than $42 billion on deals there -- more than twice as much as in 2004.

So far this year, companies from emerging markets have announced deals valued at a total of $9.3 billion in Europe, which tops the total for all of 2003, according to research firm Dealogic.

In the U.S., companies from emerging markets spent more than $14 billion on 96 deals in 2005. That passed the previous record of about $10 billion, set in 2000. Among the better-known purchases here was the $1.25 billion acquisition by China's Lenovo Group Ltd. of the personal-computer division of International Business Machines Corp.

Bankers and executives say the latest wave is being driven by a host of new factors. One is an excess of cash, generated in part from the soaring price of oil and other commodities in recent months. Many buyers are backed by national governments that are looking to invest their newfound riches in other industries that will help diversify their economic base or provide new distribution outlets for their exports.

Economic conditions have changed, too. At the same time that once closed countries like China and India have opened up their economies, hedge funds are controlling ever-wider stakes of public companies in Europe and the U.S., and generally are neutral about who buys their holdings.

Moreover, companies from several emerging-markets economies have grown larger and more powerful than many outsiders had realized, said Peter Tague, head of European mergers and acquisitions at New York investment bank Citigroup Inc. "These guys have been consolidating their local markets without anyone paying much attention, and now they're aggressive players on the world stage," he said.

Last year, for instance, Egyptian billionaire Naguib Sawiris bought a controlling stake in Italian mobile and fixed-line phone operator Wind Telecommunicazioni from Italian utility Enel SpA. The deal, which valued Wind at more than $12 billion, was Mr. Sawiris's first foray into Europe after acquisitions across Asia and the Middle East. Mr. Sawiris received massive loans from European banks and sold a bond to finance the deal, while giving Enel a stake in his Egyptian mobile-phone business Orascom Telecom.

Even companies that haven't benefited from high energy prices have been buoyed by an influx of money into their local stock markets from western investors chasing better returns than they can get at home. Higher stock prices enable companies to more easily raise cash from shareholders and to persuade banks to lend to them at low interest rates.

India's benchmark index climbed around 50% in the past 12 months, for instance, so many Indian companies went shopping. During that period, auto-parts maker Bharat Forge Ltd. bought Imatra Kilsta AB of Sweden, petrochemical company Reliance Industries took control of Trevira GmbH in Germany and consumer-electronics concern the Videocon group snapped up the picture-tube business of France's Thomson SA.

In late December, after Indian technology company Wipro Ltd. purchased one company in Europe and one in the U.S., a senior Wipro executive told Dow Jones Newswires that the technology giant is looking to buy more software services businesses in the U.S., Europe and the Asia-Pacific region with its cash reserves of $718 million.

Just last week, Indian generics-drug maker Dr. Reddy's Laboratories Ltd. said it is bidding against local pharmaceutical rival Ranbaxy Laboratories Ltd. to acquire Betapharm Arzneimittel GmbH, a German drug maker.

To be sure, some bidders have run into unexpected obstacles, such as China's Cnooc Ltd., which withdrew its $18.5 billion offer for oil-and-gas producer Unocal Corp. last year in the face of stiff U.S. political opposition.

Moreover, the trend isn't entirely new, as some companies from emerging markets began expanding in the West long ago. Hong Kong conglomerate Hutchison Whampoa Group, for instance, not only is the world's biggest ports operator but also owns an oil company in Canada, a mobile-phone company in Europe and extensive property and retail holdings world-wide. Dickson Poon, a Hong Kong entrepreneur, has controlled famous United Kingdom department store Harvey Nichols since 1991. Malaysia's YTL Power, a unit of YTL Corp., purchased British utility Wessex Water for slightly more than £1.2 billion ($2.09 billion) in 2002.

In some ways, the acquisition trend is reminiscent of Japan's drive into the U.S. in the 1980s. Flush from industrial success exporting consumer appliances, electronics and machinery, Japanese buyers snapped up such well-known properties as Pebble Beach golf resort in California and Rockefeller Center in New York. Many of those deals eventually turned sour. The rich prices became too much of a burden once Japan's domestic economy foundered, sending company share prices and values down.

So far at least, companies from developing nations have tended to make purchases in basic industries that they know, rather than seek trophy properties. Cemex SA of Mexico, for instance, bought into the European cement-making business through its $4.1 billion purchase in 2004 of RMC Group PLC of the U.K.

Also in 2004, a consortium of Hong Kong companies led by Cheung Kong Infrastructure Holdings Ltd. purchased the north England gas-distribution network National Grid Transco PLC for $2.5 billion. Other purchases by Russia and other Asian nations include shopping centers, energy assets and construction companies.

One exception: Last year, state-backed Dubai International Capital LLC paid $1.6 billion for Tussauds Group Ltd. of the U.K., owner of the famous Madame Tussauds wax museum in London, among other attractions.

For now, bankers said, companies from developing nations are tending to focus on deals with a longer-term view to potential profits. Many don't have the same shareholder pressure to show quarterly profit growth as do publicly held companies in the U.S. and Europe.

"They take a much longer-term view of the returns from the assets they buy," said Mark Preston, managing director of investment banking at Deutsche Bank, who advised DP World on its P&O bid. DP World's winning bid for P&O was at a price almost 70% higher than P&O's share price before the bidding war began in November -- a sign of how the newcomers also are providing greater competition and pushing some prices higher.

So far, emerging-markets companies have been more active in Europe than in the U.S., because many European companies, such as P&O, are global businesses but still are considered reasonably affordable. Because the U.S. is itself such a large market, many companies here already are quite large by the time they become multinational companies, limiting the field of potential buyers.

As the deals mount up, some emerging-markets companies are creating business empires designed to rival big Western concerns. Eventually, that could put large parts of key industries in the hands of those companies.

For instance, Indian telecommunications giant Videsh Sanchar Nigam Ltd., which just a decade ago was part of a state-owned monopoly, has ambitions to create an international business to compete directly against the likes of AT&T Corp. and the U.K.'s Cable & Wireless PLC.

First came the acquisition of Tyco International Ltd.'s massive fiber-optic network, a state-of-the-art, 37,200-mile long fiber loop laid along ocean floors and into dozens of cities world-wide. The network cost more than $3 billion to build, but was bought by VSNL for $130 million in 2004. The company just completed the $240 million purchase of Teleglobe Inc., itself the former Canadian international-calling monopoly, which was valued at more than $7 billion in 2000.

VSNL has said it plans to use the two companies to better serve the surge of voice and data traffic coming in and out of call centers in India. But that is just the start, says Vinod Kumar, president of global converged services at VSNL International. "The mindset has changed," he said. "Indian companies can't just operate in the domestic arena. We have to compete in markets outside India, too."