Moderator: Welcome to another edition of Deloitte Insights, a production of Deloitte LLP. Deloitte Insights is an audio newsmagazine that looks at important business issues. Today’s program: "Putting a Price on Risk: How U.S. Investors Can Succeed in Emerging Markets."

Say that you’re shopping for a big ticket item like an automobile or a plasma TV and you find it at a bargain basement price. Your instinct is to snap it up but suppose that you’ve never been in the store before, you don’t recognize the brand and you don’t know how much trust to put in the sales staff. Maybe it’s not such a bargain after all. That’s the dilemma many U.S. investors confront as they contemplate investment and mergers and acquisitions in emerging markets.

Putting a value on a target company’s assets can be tricky at best, but it’s especially so in politically unstable countries with shaky economies and unpredictable legal systems. Companies might have to determine a target company’s cash flow, its tax liability and its contractual obligations based on incomplete or unreliable data. And while it’s hard enough to determine such intangibles as customer loyalty or a company’s business relationships in mature economies, it’s even more challenging to put a value on them in emerging markets.

Forget about traditional economic models that work well in developed countries; in these markets they’re of little use. Then you have to add to the mix the inevitable cultural divides and language barriers that arise in any foreign transaction. In spite of all these hurdles, though, for companies with the skills, resources and ability to assess the risks involved, emerging markets offer unprecedented opportunities for U.S. investors to expand their market share throughout the world and make the most of low cost manufacturing and services. Yes, in emerging markets you may get more than you bargained for, but you can also get a bargain that’s worth a lot more than you paid for it.

Here today to describe how U.S. investors can successfully navigate the uncertain terrain of emerging markets are Stamos Nicholas, principal and the national leader of the Business Valuation Service Line, and James Marshall, senior manager for Business Valuation, both of Deloitte Financial Advisory Services LLP. Welcome to Deloitte Insights.

James Marshall: Thanks, it’s good to be here.

Stamos Nicholas: Thank you very much.

Moderator: Just to get our definition straight, what constitutes an emerging market and why are we seeing such a wave of mergers and acquisitions by U.S. investors in these markets?

Stamos Nicholas: Emerging markets, I think, are somewhat defined in terms of their high growth rates with countries that have been less developed for a number of years and I think are now catching on to the economic global expansion. And they’re working their way through technological and innovation aspects that exist today in terms of high growth possibilities, developing also their per capita income of their people in terms of skills and labor force and ability to produce things. So they’re starting off in a kind of setback way for many years and now they’re able to somehow capture the economic growth in terms of what their potential assets are of the country, either natural resources or skills of people, in a way that’s able to capture more of the global growth.

James Marshall: I think I would add that different countries are experiencing different aspects of being an emerging market. It has to do with the complexity and sophistication of your legal system, of the infrastructure you have in place, your capital market systems, your financial systems, your interconnectivity to the industries in the developed countries around you. So each country is going to have its own set of factors that render it an emerging market depending on which of those elements of its infrastructure are underdeveloped or in their infancy.

Stamos Nicholas: That’s a good point, James. I think, clearly, that all emerging markets are in the same stage of development, some are closer to developed markets and other ones are much further behind. And it really is a function of all those things that James pointed out that are considerations as to how emerging is it and really what’s driving some of the growth in the marketplace, but clearly not all emerging markets are in the same [adjourn] in terms of their capabilities and potential.

James Marshall: Investors are expecting to see growth at the top line as well as cost sav[ings]. And in developed markets the opportunity to do that is more limited. There’s greater risk in growing into emerging markets, but the global growth story is the story for developed economies and for established companies in terms of how they expect to grow their businesses in the future.

Stamos Nicholas: I think there’s a – the view of investors at the emerging markets have a great potential for growth and that many of the investors feel that in the developed markets there’s growth still left. But in terms of the exponential growth, it’s probably more in the emerging markets in that it’s important to invest early in those markets in order to try to capture some of that fast growth that’s probably going to be expected over the next century.

James Marshall: I think that’s right. Most of the acquisitions we’ve seen have really been for the purposes of establishing a footprint. Whether that be in Latin America or whether that be in Southeast Asia, it’s really about establishing that footprint and grabbing that foothold in that marketplace because the emerging markets of today are the developed markets of tomorrow. And that untapped potential, whether it be in the development of the sort of consumer culture within India or the freeing up of markets in China; that first mover advantage is critical in establishing a foothold.

Moderator: What countries in emerging markets are U.S. investors most enthusiastic about and why?

Stamos Nicholas: From my perspective it looks like Asia is probably the one that’s the strongest growth, inclusive of India, Russia and Latin America, are probably the major areas with – they call them the “BRIC [or brick] countries,” primarily, which is Brazil, Russia, India and China as the major growth markets that are very large that [are perceived] to have the greatest potential in the near term at least.

James Marshall: I think that’s right. And even outside the brick countries you certainly see a lot of acquisitions being done in the smaller countries within Latin America. Certainly Eastern Europe is an area for hot growth, but the focus is certainly on the brick countries simply because of their vast, vast potential in terms of the number of people that live there and the opportunity that’s presented by those markets developing.

Moderator: With new requirements by the Financial Accounting Standards Board there’s now one single financial accounting definition of fair value. But determining fair value for companies in emerging markets is easier said than done. What makes a determination of fair value so difficult in these countries?

James Marshall: Well, I think the first obstacle is more of a practical one, which is availability of data. The vast majority of these fair value analyses when they’re performed require a lot of information, whether it be historical or projected financial information, customer specific information, tracking the attrition of customers over time, and that kind of information can be difficult to obtain in a developed economy setting. In an emerging market that data may not be available at all. It may be unreliable and it may not set the stage for the future. In other words, looking at historical attrition rates of customers in China may not be indicative of what those attrition rates will be for the next 10 years because the market is changing. So I would say that one of the first obstacles is on the availability of data itself.

But certainly there are other challenges including the fact that because these markets are changing, assessing risk can be difficult, assessing the timing of realizing the growth prospects can be difficult. Establishing a forecast in any kind of reliable way can be difficult. So it’s critical to work with managers at these companies and to sort of show them the end game, as it were, in terms of what we’re trying to do and work with them collaboratively in order to put together a set of forecasts and a set of information that makes sense.

Stamos Nicholas: I think there is somewhat of a culture shock in some regards for companies that are used to well established institutions and infrastructure that may not exist really in these types of countries yet and far from it still. So when you get into places that have strong regulatory or governmental oversight in areas, and China is one that obviously has strong oversight, it really is a very different type of business arrangement you have to consider as to how to maneuver in that kind of environment.

I think a lot of companies are finding it to be much more challenging than they expect in terms of normal business practice that they would expect in a developed country. You also have the banking infrastructure financial systems that are probably not really developed in any way, shape or form similar to us, so even getting money in and out of the country is not easy. Doing investments in those countries is not easy because you have this infrastructure that’s lacking in terms of typically tapping and a bank credit line is not something that you can easily do in some of these markets.

You also have the physical infrastructure. Roads are not really built well, so if you want to start manufacturing things and shipping them you have to consider how you’re going to actually do that. Again, a lot of that is almost second nature in developed markets that a lot of people take for granted.

Also communication systems are not really established well and you really have to consider how you would approach something in terms of even communications around the world and using alternate technologies like Internet and other means – just try to stay connected. So a lot of things that we’ve taken for granted.

The financial porting systems are not really as standard. As you pointed out there’s a definition of fair value. But I will tell you if you go to these countries they won’t know what you’re talking about when you say willing buyer/willing seller, open markets. They’re not open markets; they’re private markets. Their business practices are very different than we have here in the open markets with information somewhat flowing rather easily of transactions occurring that people can benchmark against. That’s not happening there. A lot of business practices that we would shun and even may be illegal in some countries would be common practice in some of these countries. So it really is a very different type of business environment out there that a lot of companies have to kind of grapple with.

To give you a real life example, I was helping a client value a broadcasting license that they acquired in a Middle Eastern country. There was a due diligence process that was looked at and one of the key drivers that became apparent in analyzing the value of that license was it was subject to the royal family’s decision whether you keep the license or not. So if you don’t have good relations with the royal family, you’ll probably lose that license. What kind of value place with that kind of restriction on it is something you’ve got to really consider very carefully ahead of time how much you want to invest in something like that. It was a major broadcasting license in the country. The market was growing very rapidly. The company wanted to broadcast their content and have control of the license similar to what they would normally do in the developed market but it was a very different environment that they had to consider if they had to make sure they had to keep the royal family happy.

Moderator: Valuations of companies must also be based on intangibles like client loyalty and business relationships in addition to hard assets. Why are traditional economic models used to make these determinations of limited use in emerging markets?

James Marshall: Well, I’ll go back to the example I was using before with customer attrition. We were analyzing a Chinese bank for historical customer attrition and trying to use that to predict what the customer attrition would look like in the future. When we looked at that historical information, the customer base had exhibited extremely low historical rates of attrition. And as you unfold the data what became clear is that those attrition rates were low, not because of anything necessarily that this bank was doing, but rather because competition had been so much limited during the historical period we were testing. So our normal models of simply looking at patterns and applying those to the future began to break down and instead what we were left to do is analyze what attrition rates look like in other markets in the region as they became more developed. So we’d look at Taiwan, we would look at Korea and we would look at India. We would look at other regional areas and other industries and look at how those patterns may have changed over time and try to establish what attrition rates might look like in the future for that Chinese bank.

Additionally to Stamos’ point, you deal with licenses or other regulatory assets that have been granted to companies and the ability that you have to control that asset, to renew that asset indefinitely or to use that asset the way that you want to use it without any sort of regulatory or political influence or interference becomes limited. And certainly those are risks that should find their way into an appraisal of that asset. If I’ve got one asset on one hand that’s a license to broadcast in the U.S., and on the other hand I’ve got the one from the Middle East that Stamos was mentioning, all other things being equal, the restrictions on my freedom to use that asset the way that I want to certainly impacts its value. And that’s where the traditional models we use start to break down in trying to quantify those risks.

Stamos Nicholas: Another example I would say is, I had a situation in a major developing country that was a country that had strong oversight by the government that was in transition of becoming more democratic. There was a major business newspaper that was going to be invested [in] by Western investors. In analyzing that newspaper in terms of understanding what their potential was and what their business was, it was a long established newspaper that had a lot of business in the commercial markets with a lot of business going on.

However, in looking at their financial statements; the financial statements that came to us were handwritten schedules of revenues and expenses that were in semi-English and that we had to understand what was really behind these numbers. In analyzing some of the numbers we found out that a lot of the revenues of this business newspaper was in barter trade. And when we tried to understand what barter trade was for this type of newspaper, which was a major newspaper in the country, a lot of the trade was coming in in chicken and eggs, literally, and other types of products and commodities, which they were using as currency in order to advertise in their newspapers. So we had to figure out the economic value of that in terms of what this newspaper was really worth. Again, that’s something far removed from what a traditional analysis would be in terms of coming up with a cash flow and seeing whether you have to factor in chicken and eggs in the forecast.

Moderator: As you’ve touched on, there are risks in making any investment decision. But in emerging markets there are certain types of risks that you don’t find in established markets. Could you discuss these special risks and what makes them different from the ones in developed countries?

Stamos Nicholas: I think the risks, the special risks typically for these types of markets are – there’s clearly increased risk in terms of political issues, instability that may occur, even terrorist possibilities in these countries that don’t have a strong infrastructure or security. So there are things that, again, are more taken for granted in the U.S. in terms of some basic type of features, that in these types of countries you clearly have risk that you may not even perceive as being there until it actually happens or occurs happening that you didn’t even realize when you were doing the analysis. So you do need to appreciate what’s going on in the country from a political standpoint, legal standpoint, economic standpoint.

Inflation is a very potential possibility. These countries, that flares up very quickly. And again, they’re not mature markets in terms of dealing with this and how to control it. So a lot of these things could wreak havoc on investors. And they are really difficult to quantify or predict very easily and even if they do predict how it’s controlled and how it’s, let’s say, put back in the bottle in terms of some kind of a normalcy or stability, is questionable.

So in terms of what investors should expect is a lot of changing dynamics very quickly, positive and negative over the long term is probably going to be positive but over the short term probably a lot of instability and negatives that need to be factored in to what the rate of return is that they should be expecting or demanding.

I think you’ve seen the recent market credit crisis where there’s a lot of problems with current market conditions in developed markets around the world and they’ve taken a hit. But if you actually compare to some of these developing markets that actually have less exposure they actually got a bigger hit in terms of their credit markets in terms of their stock market hits. Because they really are still dependent on the developed markets to a great extent and that they are really going to be at the mercy of really what’s going to happen to the developed markets. And they’re not really mature enough to be on their own, although they expect to be. So you really have to look at them, not only for their own internal potential but also they’re very tied to the rest of the world. And when the rest of the world has problems, they probably will be more impacted.

James Marshall: I think currency risks are a huge part of that. Inflationary affects in developed markets have sort of a whipsaw effect on the developing markets that rely on those. Particularly when you’re talking about, for instance, Latin American countries who have either pegged their currency to the dollar or actually used the dollar as their functional currency. Inflationary effects can trickle there quickly and more aggressively than they do at home.

The other thing that I would mention is that the political risks are very significant in these emerging market countries. I think we all like to think that this global growth engine is a machine that only drives forward. But I think there are a lot of instances around the globe where you can look and see that progress sometimes takes two steps forward and then one back. So there are always risks that when you dive into one of these markets that the embracing of open markets of capitalism or even of democracy can be rewound somewhat. So you end up putting assets at risk to be reclaimed by the government or at least restricted in the terms of the way that you would use it. And you can look at the countries that are being influenced in South America by the regime in Venezuela as good examples. There are a lot of developed country industries that have invested a lot of money in those countries and a lot of them are just having to abandon their projects because they’re being taken by the government.

So one real risk to consider is that political risk and the notion that we won’t always move directly towards development and there may be steps back along the way.

Moderator: So after determining the different types of risks of an investment in an emerging market sovereign, say, or currency or operational, how does an investor quantify them all to get the risk adjusted value?

James Marshall: I think the key is to ensure that first you identify the risks that are present. There aren’t a great deal of economic models in place that allow you to directly quantify every element of risk. In a developed market or in an emerging market. So the first thing to do, in my opinion, would be to lay out the risks, qualitatively, and then to reflect those risks in your valuation through any number of methods.

One method is through the discount rate that you use. You might apply a factor to a developed country discount rate to account for some of the risks that are present. You also might just affect the cash flows that you’re forecasting. Apply some variability to those cash flows. Scenario analyses, probability weighted analyses would allow you to forecast a number of different scenarios, again, based on this sort of qualitative risks that you’ve outlined and inventoried putting together a probability weighted analysis that takes into account these scenarios would be one way to account for those risks.

Stamos Nicholas: I think these risks are not mutually exclusive. They are clearly tied together in some fashion that you can’t isolate a risk factor for each one independently that government instability risk is clearly factored into the economic risk of the country as well as the infrastructure risk. Therefore a lot of these things are intermingled in terms of the risk patterns here. And I think what James has suggested in terms of understanding all the risk factors is very important and the volatility of those risk factors given past regimes or given kind of what other people’s experiences have been in terms of these marketplaces is important to understand. And then mulling out the scenarios or possibility of different types of scenarios on the conditions – stress testing kind of the models in terms of what possible answers may come out given certain conditions – is probably important at least to give you boundaries. And then from those boundaries you can decide where you are in terms of what you’re willing to accept in terms of some kind of return. I think this is one you have to monitor constantly in terms of what you have because information should be getting better or more clarity will be there once you’re in the middle of it all to monitor what’s going on.

But looking at it from afar is probably the most difficult. You have to have, really, people on the ground to understand what’s going on, to give you insights into all the dynamics that go on. And then once you make a decision that you want to be in there with understanding what kind of parameters may be realistic then understanding how you need to modify your models in terms of factoring the new [perceived] risk in the marketplace is important.

As these markets mature and develop I think they’ll be a lot easier and more traditional means, but clearly at this stage of the game for some of these markets it really is somewhat of the "Wild West" in terms of what you’re getting into and understanding how to be a cowboy is important.

Moderator: As you mentioned, emerging markets are changing so rapidly, often because of political instability or economic upheaval, that historical data about a target company may be irrelevant, inaccurate or simply unavailable. If you can’t get a hold of any useful data and the ground is constantly shifting under your feet, where should an investor look for guidance about the future of a particular market?

Stamos Nicholas: I think these markets are clearly under the microscope of many organizations, the IMF [International Monetary Fund] and other global organizations that monitor the development of these economies. So I think those are sources clearly you want to understand and read on and see what they’re saying and what’s going on in the marketplaces. That’s one dimension.

The next dimension also is talking to people that are there or that really have firsthand insight of what’s going on from a broad perspective, broad and narrow to the degree that you’re going to be looking at specific investments on there. So it really is probably a combination of making sure you do your research and from people that are monitoring it from several different vantage points from a global perspective and from a macro perspective of the country and a micro perspective of the investment is important. And make sure you stay close to those types of monitoring systems, let’s say, in order to make sure that you’re not going to get blindsided with something that you’re doing.

We had a situation going into, again, another Middle Eastern country where there was a joint venture that was being formed. The joint venture was formed and the way the joint venture could be formed for this type of investment is that your partner had to be the government. The government was considered a minority owner and the investor was going to be considered the majority owner. However, when you got into that investment you found out that even though you’re the majority owner the government was the controlling party. And the government basically was driving a lot of the key business decisions of that joint venture. And it was also the way the agreements were drafted and the way the economy was and the way the conditions of the marketplace was, you couldn’t get out easily either. You were a captive partner where even though you were majority control you really didn’t have much of a say in terms of how it was going to operate and what kind of returns you were going to get on your investment because of the government control minority party.

That was somewhat of a very disturbing situation to the investor and a lot of the investors that invested in that investor to go invest were very upset that they were stuck in a situation they couldn’t get out of and it was a very bad investment. It was becoming a very politically charged investment because it was a very high profile joint venture. They were getting caught in some very nasty politics. That was becoming very apparent on a global scene. So it actually mushroomed much bigger than they wanted [it] to. In the Western world they would have said this would have never happened. But that was again, what they had to be careful of going into these types of investments.

James Marshall: I think partnering and joint venturing can work the other way too. I think there are a lot of companies that try to mitigate those risks of really not knowing what it is that they’re getting by partnering. So if you are certain that you’ve got the right product and you are certain that this particular market you are entering into is the market you want to play in and it’s the footprint you want to obtain regardless of what’s been going on there historically, but you’ve got uncertainty around your supply chain, then perhaps you partner with someone who has a well established supply chain in that country but not all the products that they need to fill it. And there’s a lot of partnering and joint venturing that go on in situations like that to try to mitigate the uncertainties or maybe the weaknesses that each party sort of brings to their plans in developing emerging market investments.

Stamos Nicholas: Good example that is. I had another client that was an apparel manufacturer. They specifically were making bedding sheets. These bedding sheets were midprice bedding sheets, not fancy at all. However, an investor looking to buy this company that made these bedding sheets and apparel found out the margins were very high on this business, extremely high for a midprice bedding sheet manufacturer. When they looked into this further they found out a lot of this stuff was being made in Asia. And what they tried to understand is how are they getting it so cheaply in Asia by virtually what they were able to sell it. And when they finally understood what was going on in the due diligence process they found out there was a supply chain process that was created by the manufacturer that was basically handshake deals of various manufacturers throughout Southeast Asia. All this was based on just these handshake deals. And this handshake deal lasted for many, many years and so it was a question of, do you want to invest in this company, that’s creating all these high margins on these handshake deals.

Moderator: How important is local talent in helping U.S. investors to identify risks and assess the value of a company or market? And second, how should an investor go about finding the most reliable local talent?

James Marshall: I think local talent is absolutely critical in emerging markets for all of the reasons that we’ve been talking about. The nuance of the culture, of the political environment, of the environment in general in that country requires local presence, whether that be local presence of the buyer or the investor in terms of providing operational guidance, of providing leadership in terms of how to fit the global strategy of that investor or whether it be local talent that is chosen to advise you, whether those be your bankers or your consultants or other advisors. Finding people that have a local understanding of all of these nuances that we’ve been talking about today is absolutely critical because when it comes time to make your list of risks or when it comes time to evaluate your different strategies, these are the people that are going to help you make sure that your list is complete and that you’ve thought about all of the options that are available to you.

Stamos Nicholas: I agree that you definitely need to have local presence in terms of understanding how business is done in the markets and understanding who they need to know; who’s important, who’s not important. Again, it’s sometimes a very relationship-oriented business and it’s somewhat class-oriented depending on which economies you’re dealing with so you have to be mindful of class structures that may be much more apparent then we have here in developed markets. How business is operated is something that you have to be very mindful of. I think they need to have some oversight to some degree of a more Western style or Western practices in order to try to bridge the gap between what’s expected and what is reality. So there is some level of, I would say, consistency that needs to be applied in terms of getting the local economy and the local practitioners to be aware of certain practice that they need to follow in order to get back up to a level of more developed systems and practices. But clearly you cannot force that in these types of environments from just a Western view being brought to these types of economies. They’re not ready for that. You need to have that developed and nurtured and you’re best off doing that and developing people there locally in order to develop those practices and skills.

James Marshall: Certainly finding the talent is a key challenge for all of these businesses. There tends to be a bit of a brain drain phenomenon in emerging markets as talented individuals go off to other parts around the globe to train, for university or to start their careers. There’s a huge shortage of manager level talent already in China, in India and elsewhere. So finding that talent can be extremely difficult. The first place to look is in the company you’re acquiring and ensuring that you’re able to keep the best people from that team to keep things going.

Stamos Nicholas: And I think the other dimension is once you even find it retaining that talent is just as important, if not more important, in developing that person because the potential growth and opportunities that they probably will be confronted with will make it very appealing for them to move their careers maybe with other employers and other directions. So they could view that once they have these skills they could move on to the developed world as well. So there is probably a lot of challenges and opportunities for these people, but they’re seeing the potential is quite vast for them. And that in terms of making sure you get the best out of them they have to see that they are getting the best out of you in terms of what you can offer. That’s always the give and take in these types of economies where it’s not unusual for people to get raises every week. They need to be somehow given another level very quickly. Much more different than the more established Western style of career development, these people can see or hear stories of them getting promoted almost every month and getting pay raises every week.

Moderator: The most obvious differences in emerging markets involve languages and culture, both the culture of the country and the corporate culture. What can U.S. investors do to bridge these gaps and avoid the inevitable problems and misunderstandings that can arise in such ventures?

James Marshall: I think the first thing you can do is just make sure that you’re knowledgeable, that you brush up, that you don’t go in to an international business setting particularly in a developing market without any kind of an understanding of what the cultural expectations and the cultural norms may be. That’s the first line of defense.

And then secondly, it’s to always put yourself in the shoes of the people that you’re meeting with. As an example, we kicked off a project that was a reasonably routine exercise here in the U.S. involving fair value of intangibles. And the starting point of the meeting in the United States or any other developed country that has fair value standards, the starting point for the meeting would be listing the assets, assessing the scope of the project and that sort of thing. For this particular project we were in a developing market, which did not have a history of fair value accounting, so the starting point for this meeting was much, much more early stage. It was a description of what an intangible asset is. It was a description of why we’re valuing it. What’s the purpose of this exercise? And then, how do we actually go about valuing these assets, what are the methodologies we use to try and get people comfortable with why we’re there, what we’re doing, what are the processes we’re going to employ? So that they have an understanding of why we’re asking for all of this type of information or why a particular type of information they’re providing isn’t exactly what we’re looking for.

So I think it’s important to sort of empathize with the people that you’re dealing with there and put yourself in their shoes to ensure that you don’t go into a situation there unprepared for the level of understanding or preparedness for whatever your exercise is.

Stamos Nicholas: I’ll give you a good example of kind of different ways of approaching business. I was asked to help value a soft drink bottle manufacturer in a Latin American country. This was a major bottling manufacturer. The U.S. investors were very sophisticated business U.S. investors that really analyze things in a very businesslike way with forecasts, analysis, research and stuff that would be expected. The local investors – and the intent of this was that the U.S. investors wanted to buy out the local investors. We were hired to come up with what the value was of this investment so both parties could help negotiate a deal here. So I was kind of in the middle between the two parties but I was considered an objective provider of helping them decide what the value was.

So in sitting down with the U.S. investors they certainly walk you through their analysis in a very traditional businesslike way. When I went to the local investors they never showed me financial statements, they wined and dined me to no end. They wanted to get close to me. And it was very much a social business environment. Their main argument was, look at the potential of the marketplace, that’s how you should base the value, don’t worry about the numbers. He said, watch out for the Americans. But look at this, and they toured me throughout – it was basically a bottler for the whole country. They toured me around the country to show me the potential of what they could do with this business that they had on there as opposed to really just looking at the analysis that the Americans had.

So it was really something quite different that I had to make sure I balanced out the perspectives and views of what the local investors say who are very smart. They were also quite business savvy, but their style was more looking at the potential and understanding what the business could do and the value associated to that of the growth as opposed to what the Americans say, here’s what the past has been. Here’s what we think they can do. Here is the forecast. Here’s the financials. Here’s all this stuff. Very different style, very different way of analyzing something and trying to keep both sides fair in the process was something that we had to make sure was perceived as something that we had to maintain.

Moderator: There are a number of steps that companies can take when planning a global M&A [merger and acquisition] transaction so that they can get off to a strong start. Could you describe these steps and explain why they can improve the chances of a cross-border venture succeeding? 

James Marshall: I think the foundation of any good transaction, whether it be global or otherwise, is going to be due diligence, but the level of due diligence that you want to employ in an emerging market situation is significant. Again, going to all these different risks that we’ve been talking about that aren’t necessarily present – taking a broad look at the best and worst case scenarios is key. Unfortunately a lot of companies don’t have time or resources to go through the full due diligence process that they would want to because a lot of these transactions are auction situations or competitive bids. There just isn’t enough time to really dig into the numbers and to peel back the onion as far as you would want to on these companies. In which case the best thing that you can do in those circumstances is really prioritize the items that you’re uncertain about, the big ticket items, with respect to uncertainty. Those are all going to be different in each emerging market and with each company that you’re analyzing within those emerging markets. But the key is to assess the areas in which there could be major, major fluctuations in reality from what you’re projecting, and do your best to peel back as many layers of that onion as you can and really dig into those numbers and assess, again, how good could it be and how bad could it be and prioritize the elements of your due diligence process so that you can get as many of those items uncovered during what could be a very fast due diligence process so that you can get as many of those issues uncovered as quickly as possible even if you are forced to go through due diligence rather quickly.

Stamos Nicholas: I agree with James. The issue is understanding the drivers of the business in that marketplace and trying to understand those drivers very quickly in terms of what could go bad on those drivers as to what you really want to invest in. That is really something that you may not have a lot of information on. Ideally the best situation is knowing who you’re dealing with. But you may not have that luxury, as James said, in terms of these types of transactions, and then the next best thing is to understand what’s the drivers of that business and how stable are these drivers in terms of what you can count on and see how you can model something from those drivers. But if you really have the luxury it probably is most important understanding who the people are that you’re dealing with that are going to stay there, that you feel you’ll need to continue with. Because that’s really going to drive a lot of the answers at the end of the day because they’re going to be the ones that are going to be successful for you or not because they will be the ones on the ground that will be saying, here is what the reality is and here’s the potential, here’s what we can do. It’s something that you really have to be very careful of.

I know of several clients that when they go through these emerging market type of situations – they’re really more, not of a bidding situation, but they’re more of investors looking at making investments. They will do due diligence on individuals that they’re going to be negotiating with to make sure they understand their style of business, how they operate and their reputation, quite frankly. I know some companies will not even deal with situations that have a great potential but because of who they would be dealing with, the PR [public relations] exposure that could go bad on them is so significant that they don’t want to be associated, that they will back away. Even though the investment may have a lot of potential it’s because of the parties that they’re related to may not be really to the practices that they want to be associated with.

So there’s a lot of give and take here, and at the end of the day it really is due diligence as much as you can – in all ways.

Moderator: Thank you both for joining us today on Deloitte Insights.

James Marshall: Thanks. Thanks for having us.

Stamos Nicholas: Thank you. It was a pleasure.

Moderator: Visit Deloitte.com to find M&A Valuations in Emerging Markets: Check Your Assumptions at the Border, which served as the basis for today’s discussion, as well as articles, newsletters and other information of interest.

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