US MARKET PENETRATION BY ACQUISITION in 2018

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Market Penetration by Acquisition

Mergers & Acquisitions – Buy Side

Corporations and private equity firms foresee an acceleration of merger and acquisition (M&A) activity in 2018, particularly in terms of the size of those transactions. From a sector perspective, technology and healthcare will drive M&A activity in North America because of the U.S.’s strength in tech innovation and the aging populations in advanced economies. Further consolidation within the energy and raw materials sectors should also continue to generate transactions in the coming years.

Companies involved in M&A have been most interested in acquiring relevant technologies. This in addition to expanding customer bases in existing markets, adding to product offerings and diversifying services rank as top three strategic imperatives. M&A also helps companies improve synergy, diversify, grow, expand their products and increase supply-chain pricing power and market share.

Some factors that have made foreign direct investors (FDIs) favor the U.S. for M&A deals include the recent slow international growth, political crises & ongoing wars in certain areas of the world, along with global economic uncertainty. Despite this uncertainty (listed as a key concern in Deloitte’s 2018 M&A Trends Report), M&A is rising to the forefront. FDIs can use M&A as a tool for both smaller, strategic, niche acquisitions as well as bold transformative deals.

In PwC’s Global CEO Survey, four out of 10 CEOs said their companies are targeting the U.S. for their growth prospects. That was reflected in the 6% rise in inbound deal volume through Q1 2017. A few months later, the pace picked up, with year-over-year volume up 10% through May. This could be a sign that overseas businesses are looking to the U.S. to compensate for uncertainties in markets such as China, South Korea and Russia, where economic prospects aren’t as stable. These survey findings are consistent with other analyses, such as a UNCTAD forecast that the U.S. will be the favorite investment destination of global business through 2018, followed by China and India.

As markets adjust to ongoing political and regulatory changes, the M&A market should be buoyed by strong fundamentals and the potential for pro-business policy changes. In particular, opportunities may emerge from potential new U.S. policies, such as cash repatriation, corporate tax reform and more modest regulation.

Fears of increasing protectionism in 2016 morphed into uncertainty about policy that could affect global trade. However, despite trade barrier speculation, cross-border M&A has already been a hallmark of deal making in 2017, with a resurgence of deals between the U.S. and Western Europe. Companies are looking everywhere for pockets of growth, although the main focus has shifted back to developed markets, according to the EY 16th Global Capital Confidence Barometer (CCB).

Sluggish economic growth slowly spread out throughout the world over the past six years has made it more difficult to find the right partner for accelerating business growth. Only 1 out of every 6 investments by venture capitalists in the U.S. delivers its projected return on investment.  With such dim prospects, how can FDIs take advantage of the M&A momentum, hasten their business growth, and overcome deal barriers?

Companies get the most out of their M&A deals with proper focus, preparation and execution. There is no substitute for a well-thought-out M&A strategy and a solid execution plan to improve prospects for the completion of a successful M&A deal.

COGNEGY can help FDIs every step of the way. COGNEGY has teamed with many foreign firms to identify the right target, engage in project discussions, perform both business and legal due diligence (with trusted partners), outline business valuation, craft deals, negotiate, integrate, and accelerate growth.

Please contact Phil Jafflin with any questions you might have: phil.jafflin@cognegy.com

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A great location…

Identifying the optimal location for a business’s first steps on the US market, is a crucial decision in the business development process.

Earlier blogs (read location…location…location) described how foreign direct investors should search for the right mix of elements. Take into account where customers and competition, but also vendors are located; what incentives and support are offered; what caliber of employees can be found, without forgetting about time zones, cost of living, legislation, climate and connectivity.

This made Renuka Rayasam’s article on Atlanta a great read, defining it as a great location to work and live. We can confirm. She also points to the recent influx of major companies who have recognized this by relocating to the Big Peach. Daimler-Benz’s recent announcement attracting most of the headlines. We are certain more are to follow.

Read the article here: http://www.bbc.com/capital/story/20150331-beyond-the-worlds-busiest-airport

U.S. gas export boom

It would be difficult to replicate U.S. shale boom, expert says

The shale boom will remain uniquely American for years to come, thanks to the combination of capital, talent, legal system, infrastructure and market that cannot be easily replicated, geopolitical strategist Peter Zeihan said. “This is not something that your average state-run thug can do.” He added.

I spent a full week attending the 2014 OTC Show (In Houston) early this month on behalf of a client distributing its offerings in the energy sectors. I have been quite impressed by the industry dynamics and how big is the boom. The past ten years has seen the global offshore industry bring on stream some of the largest and most complex projects ever attempted. (See more)

The International Energy Agency (IEA) and other expert sources expect oil to remain the fuel of choice up to at least 2035, with a 27% share (down from 33% today) whereas gas is expected be the only fossil fuel to increase its share. Global demand for natural gas is to grow by 64% by 2040. At the same time natural gas prices are to remain strong evidenced by a near term price increase, settling to $4.38/mmBtu in 2020, in the long term prices are expected to rise to $7.65 by 2040. Importantly, the US is projected to become a net exporter of LNG by 2016, spurring the development of new LNG terminals – currently 6 have been approved and 22 are under evaluation.

Whereas the market for Exploration and Production of fossil fuel is recognized to be very much an offshore operation, recent push towards both smaller and more remote fields have seen the growth of floating production systems: 154 new FPSO (Floating Production Storage and Offloading) ships have been identified as well as 5 FLNG (Floating Liquefied Natural Gas) projects that are fully financed.

Furthermore, LNG facilities that have been traditionally built onshore are moving offshore – under pressure of cost – with the increased use of Floating Storage and Regasification Units (FRSUs) located just offshore and connected by pipeline with the distribution facilities. This option is up to 50% cheaper than current onshore solutions.

It is important to note that the use of LNG has grown much faster outside of the US than it has domestically, therefore much of the research and development, design and testing activity has occurred in other countries. Consequently, the international standards applied to LNG operations – wherever they are located – have been heavily influenced by policies and regulations of countries such as Japan, South Korea and some European Nations. In the US LNG is regulated at a federal, state and local level, as well as by non-governmental regulators and standards organizations.

The market for the design and build of the FPSO and FLNG is dominated by a relatively small (but still …) number of players (KBR, TECHNIP, JGC, SBM Offshore, Modec, Bechtel, Teekay, Technip, Samsung, …) who are capable of delivering complex projects of this size, often operating as a consortium. Although often vertically integrated these FEED (Front End Engineering and Design) and EPIC (Engineering Procurement Installation Commissioning) capable companies rely on engineering specialist companies to actually deliver all the specific systems.

See you at OTC 2015!

Please contact me with any questions you might have,  phil.jafflin@cognegy.com

Competitive Manufacturing

Summary
How things change… A new BCG study released on April 25, 2014 throws away out-of-date perceptions on which countries have the lowest manufacturing costs. If China is still ranked #1 in terms of global competitiveness, its position is now under pressure with the United States a close second. The world is not divided anymore between “low cost” emerging countries and “expensive” advanced economies.
What does it mean for investors and decision makers? Where should your next production plant be located?

Manufacturing Cost Competitiveness (MCC)
BCG’s study tracked 25 major exporting countries, accounting for close to 90 percent of global exports of manufactured goods. Their MCC index is built on four pillars of manufacturing competitiveness: wages, productivity growth, energy costs and currency exchange rates. Adjustments were made to take into account other drivers influencing a nation’s competitive position, such as available infrastructure, security issues, ease of doing business, corruption level…

Ranking and evolution
Apart from China and the USA, the final Top Ten MCC ranking includes the U.K. (4), the Netherlands (6), Belgium (9) and France (10) but this “photo finish” doesn’t tell the full story. A clearer picture is offered when classifying the countries in four categories, reflecting the trend of their competitive position. Highlights:

   Under Pressure: Rapidly deteriorating competitiveness affects Brazil, Russia, China, Poland, Czech Republic…
   Losing Ground: High cost countries coping with rising energy costs, high wage costs and no productivity gains. Belgium, France, Italy, Sweden…
   Holding Steady: Countries maintaining their position relative to the global leaders: Netherlands, U.K., India, Indonesia.
   Rising Stars: Increased competitiveness with gains in all four index components: U.S.A., Mexico

Click here for the press release on the BCG study.

What are the implications for business leaders?
The first message is that decision makers need to keep track and adjust to dramatic and rapid changes. Old (as in ten-years-old) perceptions stand in the way of new realities. “Overall costs in the USA are 10 to 25 percent lower than those of the world’s ten leading goods-exporting nations other than China”, the report says, and on par with Eastern Europe.
Entrepreneurs do not move their production facilities based on the latest trend or hype. Such a move has huge implications, is very costly and requires an economic horizon of at least one, usually two decades. This is true for medium sized firms as much as for global corporations.
This is why managers and investors should base such a strategic decision on solid cost structure evidence and the analysis of long term trends. Just like when buying shares on the stock exchange, if you follow the mainstream opinion, your late move is likely to end up in painful losses.

Where should your production plant be located?
Whether looking at added capacity or transplanting production, the decision of where your new plant should be built is obviously the subject of a careful strategic analysis. You will make a first selection of countries where wages, energy costs, productivity and currency all point in the right direction, and where the other drivers (ease of doing business, infrastructure, stability, rule of law…) are consistently positive.
Each firm is however a unique case, only partially influenced by macroeconomics. After all, your first concern is with your market, your customers, your people and your identity. This is why you will also want to consider a broad range of company-specific criteria, such as:

  • Competitive sourcing and efficient supply chain
  • Location and dynamics (growth, innovation) of your main markets
  • Availability of skilled labor and qualified specialists
  • Ease of adjustment to the local culture
  • Global market prestige and local market access
  • Access to local funding.

Building a production plant in a distant, foreign country, is a major strategic decision, one that might ensure growth and profitability for decades to come, if done right. When deciding where to move, take a new look at today’s evidence and tomorrow’s evolution, not at yesterday’s performance.

It’s not the carpet, it’s the value proposition…

Successful entrepreneurs spend their scarce time developing a value proposition for their business, and are not mesmerized by the administrative side of bringing their business to the US.

The quagmire of administrative questions has bogged down numerous entrepreneurs with its lure of choosing: the nicest office building, the best CPA, the fastest internet connection and cheapest phone provider. Selecting the new phone system, printer and copier or even the first receptionist will not improve the odds of your business start in the US.

Instead you should spend your precious time finding out about your (potential) customers and their needs. Who are they, where are they, what do they buy today and why? What do they need that you can offer?

American businesses and consumers alike are very much into asking ’what’s in it for me?’ Why should I buy from you and not from my current vendor?

Have a crystal clear answer to that question, and do not get stuck with just thinking in product or service terms. Think total solution package (sales, customer support, technical support, price, marketing, supply chain,…) through the eyes of  the customer.

A sharp definition of what your business’s value proposition actually is, will set you not only apart from competition but on the right path towards US business success.

Then you will have plenty of time to select the carpet…

Is it a client or a customer…it is a ‘clustomer’!

A while ago I entered into a debate on the difference between a ‘customer’, a ‘client’ and a ‘consumer’… Was my debate partner selling to ‘clients’ or rather to ‘customers’?

Very quickly we agreed what a consumer was: the person at the end of the supply chain who actually consumed the product or the service…

It got a little trickier to define the difference between a client and a customer…

Webster says: ‘a client is a person who engages the professional advice or services of another’ and in the same breath confirms that ‘a customer is one that purchases a commodity or service’.

Well, that did not really help because my debate partner was actually selling marketing services to a niche market. It got even more confusing considering the fact – although they too offer a service – that doctors, dentists or psychiatrists do not have clients. They have patients. We quickly agreed that calling his clients/customers patients did not seem a good business idea.

We then decided to look at it from the perspective of the client/customer – would they have different expectations? Both buy a solution to their need and will become loyal if it fulfills or exceeds their expectations.

Again, this did not provide a differentiation, because both clients and customers tend to come back for more if they are happy. Although this is also dictated by the laws of offer and demand, because I cannot imagine Oliver Twist, whilst exclaiming ‘Please, sir, could I have some more…’ considered the food to exceed his expectations.

But we are digressing.

Clients, customers, consumers and patients alike will come back for more if you provide the right solution to their needs. So, have regular conversations with your clients, customers or consumers because their needs change, and find out how you are doing…

PS – we settled on calling my debate partner’s client/customers from now on ‘clustomers’. And he is still my client.

location…location…location…act 2

In this two-part article we are discussing the fact that many entrepreneurs do not use a logical process to decide where to locate their new business when arriving in the USA.

In the first act we looked at the importance of: time zones, customers and competition, vendors and transport, incentives and support, and the quality of employees.

Let’s move on to act 2 and discuss the second set of 5 elements in play…

6.    Cost of living

Can be very different from area to area, a nice suburb in a metro area with great schools will be much higher than a location 100 miles out in the country side. New York is on average double of Atlanta and Miami alike – play around with different calculators:

–       http://money.cnn.com/calculator/pf/cost-of-living/

–       http://www.bestplaces.net/col/

7.    Legislation

Employment laws and the impact of unions differ greatly from the North to the South. Many southern states have so-called ‘at will employment’ laws enabling employers to adjust their workforce quickly to new opportunities or an economic contraction.

8.    Climate

The North has winters with truly disruptive snow and ice, if road transport is important to you, it might not be the right location. Florida sees the odd hurricane that can actually close down an entire state, and the South can be very hot and humid in the summer… take your pick with a clear mind.

US climate

–       http://www.usclimatedata.com/

9.    Connectivity

Doing business in the US means flying. How easy is it to get to the airport? How often are flights delayed? How many direct flights to most (all) of your destinations are available from your airport of choice?

How is the commute to and from work – map it out for your team.

–       http://www.aci-na.org/content/airport-traffic-reports

10. Family – schools – education

As it is your decision where to settle, it is your responsibility to think through the impact of the relocation, for you and many more after you. It has been abundantly shown that if the other half of the couple is not happy with the relocation choice – be it employment, the schools, shopping, entertainment, sport, culture, neighborhood, friends, … it will become the venture’s highest hurdle.

Most importantly, know how to weigh, balance and interpret all these elements in play. Do not hesitate to define the unique mix that is important to your venture’s success. Developing a ‘weighted criteria decision matrix’ comparing all the options can be a very helpful tool to remain objective.

Also – do not underestimate the power of the southeast – read Phil’s latest article:

https://doing-business-in-usa.com/category/phils-posts