Given the current sluggish economies of the U.S. and Europe, cash-rich companies have been scouring the globe looking for growth.
With nearly $3.4 billion on its balance sheet, Maplewood-based 3M Co. has been one of the more aggressive, making 20 acquisitions over the past 20 months, with 12 of those acquisitions outside of the U.S. About half of the nearly $3 billion spent over that period has been foreign companies.
“We look at the markets where there’s the strongest growth and biggest markets,” explained Mark Copman, vice president of corporate development and mergers and acquisitions, speaking at a daylong conference on mergers and acquisitions sponsored by the Minneapolis law firm Faegre & Benson.
“We always want to grow in excess of gross domestic product” in target countries, Copman told the audience of several hundred corporate and financial professionals meeting in Minneapolis this week.
While those deals have involved companies in France, Switzerland, Korea, Taiwan, China, Israel, the Czech Republic, Canada, Brazil, Japan and the U.K., Copman said he is focused on China, India and Brazil as “key markets for us” in future M&A activity.
M&A activity can be thought of as the economy’s natural process of reshuffling the deck, where some companies pare back non-core businesses while others double down on future potential growth markets, add technology or build bench strength. And the segment of the market where distressed companies are restructured and resold can serve as the equivalent of putting a company on a disabled list while it tries to regain its health.
Copman recounted a recent meeting in Shanghai where 3M was one of a dozen Western companies sharing war stories about the difficulties of making acquisitions in that part of the world. “It’s a challenge in Asia — we have to turn over a lot more rocks.”
Among the challenges he described are “problematic” HR practices (“We just treat our employees different than entrepreneurs treat their employees”), inconsistent and incomplete financial records, imperfect controls systems and invoicing practices, and underinvestment in environmental controls and mitigation.
He described “a real challenge to us in emerging economies” as dealing with different business cultures in an acquired company and bringing it into compliance with U.S. regulations. “The way business is being done will … almost automatically violate the Foreign Corrupt Practices Act,” he warned.
Uncovering and reporting problematic practices that had occurred prior to the acquisition in a timely manner presents “a real challenge,” he said. All of those factors can add to the cost when doing deals in China, he added.
Another speaker, Sima Griffith, managing principal and founder of Aethlon Capital, a Minneapolis-based private investment bank, said domestic M&A activity this year started out strong. With corporate balance sheets flush with cash and organic growth tough to come by, companies were on the prowl for acquisitions, Griffith told the audience.
But as political wrangling over the U.S. debt ceiling and economic uncertainty in the Euro zone worsened in the third quarter, the M&A market experienced what Griffiths described as a “mini-crash.” Even so, she predicted 2011 would end at about the same level as 2010.
The booming Bakken oil patch in western North Dakota and eastern Montana “has spawned a lot of M&A activity in the oil and gas space,” Griffith said. She also pointed to financials, data storage, social media, consumer and manufacturing companies as busy sectors for M&A activity.
While cash-rich China has been investing broadly outside of its own borders, with a few exceptions, it has avoided the U.S., according to Matt Miller, editor of a trade publication, The Deal. “One of the biggest issues we face as nation is we are underinvested” in terms of capital from China, he said.
“I think that the Chinese would love to” invest in the North Dakota oil fields, he observed. But he said the current political environment in Washington is keeping them out, pointing to pending legislation that would sanction China for manipulating its exchange rate. “They will not [invest] until the tenor of Washington changes,” he predicted.