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  • Capex Projects in Developing Markets

    Capex Projects in Developing Markets

    Developing countries offer a wealth of attractive capital investment opportunities—and pitfalls for the unwary.

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    With a projected 9.7 percent annual average growth rate from 2010 to 2016, compared to the 4.2 percent rate of developed economies, developing nations are on the radar screens of most multinational companies.

    Much of the growth in developing nations is fueled by the emergence of a large middle class with purchasing power. The impact is already being seen in industries such as electricity and steel as sales of appliances and vehicles soar. Further, the A.T. Kearney Foreign Direct Investment (FDI) Confidence Index demonstrates the increasing dominance of developing nations as attractive locations for new capital projects. These countries often have low-cost labor and abundant raw materials—for example, 80 percent of aluminum reserves are located in developing countries. It is their lack of ability to extract them, however, that creates the need for foreign direct investment.

    While developing countries are attractive investment targets, they also present risks. Indeed, the majority of the projects undertaken by companies in A.T. Kearney's most recent Assessment of Excellence in Capital Projects (exCap) benchmarking study were either delayed or over budget.

    This paper offers a closer look at capex projects in developing countries. We discuss the five main risk factors in most developing countries, how to prepare for them, and the hidden threats that can hit hard and unexpectedly&mdas;affecting capex areas such as planning, project management strategy, capability building, and risk management. We outline capital expenditure management strategies adopted by best-practice companies and, finally, we highlight different investment approaches for different markets, including case studies to illustrate the challenges to expect and the strategies to resolve them.

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  • Secrets of a Successful Carve-Out

    Secrets of a Successful Carve-Out

    Capturing the advantages of carve-out transactions requires looking beyond the financials to understand the challenges associated with the transition.

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    Carve-out transactions—the divestiture or sale of a division or business unit—have to clear a higher hurdle for success than typical mergers and acquisitions because they are more complex. Yet, carve-outs are worth the extra effort. Carve-outs can lead to lower premiums and higher gains for buyers, and for sellers they increase the likelihood of successfully closing the deal. Capturing these advantages, however, requires looking beyond the financials to understand the challenges associated with the transition.

    Even in uncertain times, mergers and acquisitions (M&A) can be a source of value. In particular, carve-out deals, when strategically aligned, can unlock value for sellers and provide buyers with a platform for growth. As demonstrated by ING (online banking), Sara Lee (tea and coffee), Infineon (wireline communications), Dow (styrene manufacturing), and Caterpillar (third-party logistics), carve-outs are not limited to a single sector.

    Carve-outs are attractive for a number of reasons. For buyers, they promise greater returns on investment, while eliminating the need to acquire non-strategic assets and business lines in order to obtain the desired assets. Because carve-outs are typically the domain of strategic buyers, there is usually less competition with financial buyers. For sellers, carve-outs are a way to manage activities more effectively.

    The asymmetry that exists between the buyer and seller is the reason carve-outs work so well. Their differing needs and motives dovetail nicely, and both get exactly what they want. Strategic fit and value potential are greater for the buyer, while sellers can use the transaction to monetize underperforming assets—focusing resources more strategically on areas that generate higher returns (see figure 1). Although dealing with strategic buyers may limit the seller's ability to generate a competitive bid, it narrows the field to a set of viable buyers, which increases the probability of a successful deal.

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  • Rating Operative Performance of PE Portfolio Companies

    Rating Operative Performance of PE Portfolio Companies

    The private equity fund companies that have rebounded from the crisis have been decidedly hands-off—turning over more responsibilities to deal partners.

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    A.T. Kearney's latest study of the European PE industry finds that some PE fund companies are staging a post-recession comeback and outperforming their industry peers, primarily in slow-growth industries. Firms taking home the biggest prize are decidedly hands-off—turning over more and bigger responsibilities to their deal partners. And, perhaps most important, many of the strategies attributed to this PE comeback story will work for companies in other industries and geographies.

    A review of PE transactions in four core European markets—the United Kingdom, DACH (Germany, Austria, Switzerland), France, and the Nordic countries—illustrates the meteoric rise and fall of the PE industry during the recent past. Every indicator fell, from investment activity to exit levels and from fund-raising to fund returns. Buyout deal activity worldwide collapsed from $503 billion in 2007 to just $81 billion in 2009, according to Thomson Reuters. In Europe, activity plunged at a compound rate of 62 percent. By comparison, buyout deals fell 66 percent in North America and just 32 percent in Asia.

    After the decline, European PE firms were in unfamiliar territory. The industry was starved of new opportunities, forcing it to concentrate on existing portfolios. Although 2010 showed signs of a slow recovery, it was by no means a return to the glory days. Indeed, the PE mantra in 2010 was to continue to pursue value, not to hunt aggressively for new opportunities.

    This test for the European PE industry raised several questions:

    A.T. Kearney sought answers to these questions. A study team was formed whose members interviewed the major PE players and analyzed the recent financial performance of more than 100 European PE portfolio companies versus their public-industry peers in the four core region

    • How have PE-owned companies performed against public peers across European nations and industries?
    • What are the different PE business models and which have been most successful during the crisis?
    • Do common denominators of successful PE funds exist and can they be transferred to other companies?
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  • Private Equity Adapts to Darwinian Forces

    Private Equity Adapts to Darwinian Forces

    The private equity industry is in a new era—where hands-on ownership replaces deal-driven approaches.

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  • Due Diligence: Think Operational

    Due Diligence: Think Operational

    Companies pursuing M&A today must be certain that the target in their crosshairs can create value—and quickly.

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  • Creating New Jobs and Value With Private Equity

    Creating New Jobs and Value With Private Equity

    Private equity accelerates job growth and generates value, according to recent studies, and offers winning strategies for traditional companies.

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  • Manufacturers: Develop a Private Equity Mindset

    Manufacturers: Develop a Private Equity Mindset

    Manufacturers should stop pouring money into improving their long-term capabilities. Instead, think like PE firms and focus on cash flow.

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