1. Cisco CFO Frank Calderoni talks
transformation, technology
and transactions
The big
switch
Oil and gas in focus:
how to extract value
Mexico: land of opportunity
The end of QE:
what it means for business
Capital InsightsHelping businesses raise, invest, preserve and optimize capital
Q42013

2. Helping businesses raise, invest,
preserve and optimize capital
Preserving Opti
m
izingRaisi
ng
Inve
sting
Capital Insights from the Transaction Advisory Services practice at EY
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www.capitalinsights.info
ContributorsCapital Insights would like to thank the following
business leaders for their contribution to this issue:
AlldatainCapitalInsightsiscorrectat1October2013unlessotherwisestated©PaulHeartfield
Pablo Coballasi
Managing
Director,
PC Capital
Neil Bearden
Associate
Professor,
INSEAD
Peter Harbula
Corporate
Finance Director,
Edenred
Fernando de
Ovando
Senior Partner,
Jones Day
Guy Stainer
IR Director,
GKN
José Zaga
CEO,
Vicky Form
Mike Reid
Managing
Partner,
Frog Capital
Paul Seabright
Professor,
Toulouse School
of Economics
Tony Cockerill
Economist,
University of
Cambridge
Ajay Bhalla
Professor,
Cass Business
School
Tony Del Pino
Partner, Latham
& Watkins
Frank Calderoni
CFO, Cisco
Tim Drayson
Head of
Economic Legal
Team, LGIM
Bernard Dumas
Professor of
Finance, INSEAD
Rupa
Duttagupta
Deputy Chief,
World Economic
Studies, IMF
Charles M. Elson
Professor of
Legal Studies,
University of
Delaware
Roderick
Branch
Partner, Latham
& Watkins
Kevin Forbes
Partner, Epi-V
James Grebey
Author,
Operations Due
Diligence
Evan Greenberg
Chairman and
CEO, ACE
Nick O'Neill
CEO,
Macquarie Bank
Lee Hopley
Chief Economist,
EEF
Richard Loh
Managing
Director,
Eurostop
Simon Jones
Director, OMERS
Private Equity
Fernando Solis
Soberón
Chairman,
Afore XXI
Banorte
Hung Tran
Executive
Managing
Director, IIF
Jonny Myers
Partner,
Clifford Chance
Ramin Nakisa
Asset Allocation
Strategist, UBS
Jack Neill-Hall
Communications
Manager,
Institute of
Family Business
Tania Ortiz
Mena
VP Business
Development,
IEnova
Diane Coyle
Author,
The economics
of enough
Nigel Bishop
Co-Chairman,
Bishop's Move

3. www.capitalinsights.info | Issue 8 | Q4 2013 | 3
For more insights, visit www.capitalinsights.info where you can find our latest
thought leadership, including our market-leading Capital Confidence Barometer.
Joachim Spill
Transaction Advisory Services Leader, EMEIA
(Europe, Middle East, India and Africa) at EY
If you have any feedback or questions, please email joachim@capitalinsights.info
In the 18th century, Jonathan Swift, the famed author of Gulliver's
Travels, said: “Vision is the art of seeing what is invisible to others.”
Centuries later, this still rings true — particularly for corporates
looking for growth in a changing world.
In 2013, deal-makers searching for success not only have to
see the big picture, but also have to focus on those details that others may
miss. Compared with last year, deal values have risen by 5.5%, according
to Mergermarket data. Deal-makers can take heart from this news, and for
those who have the vision to see the broader economic picture and the
ability to keep a keen eye on the specifics, the rewards can be plentiful.
In this issue of Capital Insights, we examine how companies can achieve
these rewards with both oversight and insight.
The big picture: with economic stability yet to return, we explore how
corporates receiving cogent macro- and microeconomic advice will have
the edge over their competitors (page 32). Meanwhile, on page 35, we
ask what the end of quantitative easing could mean for corporates that
are looking to raise capital. And, on page 20, we see how the oil and gas
sector is coping with the changing global picture.
Detail driven: when it comes to individual deals, corporates need
to be focused on the specifics. On page 24, we look at the importance
of an integrated approach to due diligence and reveal the areas
where corporates need to pay particular attention. In our regular
country focus on page 10, we discover how local knowledge is crucial
when investing in Mexico. Finally, in our exclusive interview on page
14, Cisco’s CFO Frank Calderoni discusses the broader questions
surrounding business transformation and acquisitions.
In today’s world, corporates face the twin challenges of having to
take a broad view of their entire capital agenda, while simultaneously
providing microscopic focus on each deal. With that in mind, this issue of
Capital Insights should be something of an eye-opener.
Seeing
clearly

4. 14Cisco
Features
10 Mexico: catching the wave
Reforms and investment are transforming
the Latin American giant, but how should
corporates deal in a country that brings
complexity along with opportunity?
14 Cover story: The big switch
Cisco CFO Frank Calderoni discusses the
company’s business transformation, its
portfolio and partnership strategies, and
reveals the key role finance is playing.
20 Fueling growth
The oil and gas sector may be buoyed by record
prices and demand, but a focus on strong
returns, innovations and partnerships are
needed to survive and thrive in this industry.
24 All the right elements
What factors and processes make up the due
diligence process, how can corporates get it
right, and how can companies make sure that
their transaction is the best that it can be?
28 The ties that bind
We look at the key traits behind successful
family businesses and the challenges
they face, as well as exploring what other
corporates can learn from them.
32 The big picture
With the world’s economy still uncertain,
Capital Insights looks at how incisive
macro- and microeconomic advice can give
companies the edge when investing capital.
35 Stop the press
What are the potential effects of the
unwinding of quantitative easing, and how
should corporates worldwide prepare?
10Mexico
WINNER 2012
EY is proud to be the Financial
Times/Mergermarket European
Accountancy Firm of The Year
#
1
EY — recognized by Mergermarket as
top of the European league tables for
accountancy advice on transactions
in calendar year 2012*
*As run on 7 January 2013
©iStock.com/SteveCole
©GaryParker
Corbis/IvanVdovin
Capital Insights from the Transaction Advisory Services practice at EY
Capital InsightsHelping businesses raise, invest, preserve and optimize capital
Q42013

5. On the web or on the move?
Capital Insights is available online and on your mobile
device. To access extra content and download the app,
visit www.capitalinsights.info
Regulars
06 Headlines
The latest news in the world of the
capital agenda, and what it could mean
for your business.
07 Deal dynamics
EY’s Pär-Ola Hansson explains why
megadeals are back and what corporates
can learn from this trend.
08 Transaction insights
Capital Insights explores the rising trend
in M&A auctions and talks to Simon
Jones of OMERS PE about a recent deal.
27 The PE perspective
EY’s Sachin Date discusses the
importance of IPOs as an exit strategy
for private equity houses.
38 Moeller’s corner
M&A Professor Scott Moeller reveals
what corporates need to know in order
to sell assets properly.
39 Further insights
Learn about Capital Insights’ web and
app features, plus a look at three new
EY thought leadership reports.
28Family business
Due diligence
24 Quantitative easing
35
BloombergviaGettyImages
©Corbis/MatthiasKulka
www.capitalinsights.info | Issue 8 | Q4 2013 | 5

6. Capital Insights from the Transaction Advisory Services practice at EYCapital Insights from the Transaction Advisory Services practice at EY
Headlines
Mexico investments boom
Mexico’s corporates are ready to begin a
US$27b investment program, according to
the country’s business council. The forecast,
announced by Claudio X. González, head of
the Mexican Businessmen’s Council (CMHN),
surpasses the US$22b invested by CMHN
member firms in 2012. Cash is also coming in
from foreign corporates looking to tap into this
emerging market. The biggest inbound deal
so far this year was in June, with US beverage
company Anheuser-Busch InBev completing
its US$20.1b acquisition of Grupo Modelo.
The increasing flow of money into the country,
both from home and abroad, will no doubt fuel
Mexico’s future corporate development. For
more on Mexico, see page 10.
Fresh hope for IPOs
Capital-raising corporates are looking to listings
for increased returns. EY’s latest Global IPO
Update has projected that 566 IPOs worldwide
between Q1—Q3 2013 will raise US$94.8b (up
from US$91.4b last year). These expectations
are fueled by strong performance in the US,
where 65 deals worth US$11.8b accounted for
33% of global deal numbers and 49% of total
capital raised. Europe is also looking healthier,
with the level of capital raised in 2013 up 204%
on the same period last year. And the future
seems bright, with several companies hoping
to list soon. For instance, Dutch financial group
ING is expected to list its insurance arm in 2014.
With confidence returning, corporates looking
to raise capital should consider going public.
Bidders battle it out
Competition for assets is growing in the M&A
market. Mergermarket figures show that
auction deals rose significantly in the first
three quarters of 2013, with 148 announced,
compared with 86 in the same period in 2012.
Notable examples of auctions this year include
Turkish company EnerjiSA Power Generation’s
acquisition of Toroslar Elektrik Dagitim for
US$1.7b, and Rhone Capital’s US$1.4b
purchase of CSM NV’s bakery supplies
business. Deal-makers need to keep on top
of the trend, especially as auctions can often
push up asset values. For more on auctions,
see “Transaction insights” on page 8 and
“Moeller’s corner”, page 38.
Technology deals surge
Technology transactions are helping to
revive the M&A market. Deals this year in the
technology, media and telecommunications
(TMT) sector were worth US$445.6b between
Q1—Q3 2013. This represents 22.7% of the
global M&A value, according to Mergermarket.
Indeed, seven of the top ten deals in the first
three quarters of this year were in the TMT
sector. Big deals that have boosted the sector
this year include Liberty Global’s buyout of
Virgin Media for US$24.9b, and the proposed
merger between advertising giants Publicis
and Omnicom. With large deals defining the
sector this year, corporates should take note
of how the industry is being transformed. For
more on transformational deals, see “Deal
dynamics”, page 7.
clBloombergviaGettyImagestcAFP/GettyImages/TORUYAMANAKAcrGettyImages/CarlosS.Pereyra
Commodities to fuel M&A
The metals and mining sector could be set for
a deal bonanza, should commodity prices rise.
EY’s Mergers, acquisitions and capital raising
in mining and metals 1H 2013 shows that deal
volume was down 30% on the same period one
year previously, with 350 deals recorded. Deal
value was up 41%, although, in the main, this
can be attributed to the US$37.8b Glencore
International and Xstrata merger. But, according
to EY’s Global Mining and Metals Transactions
Leader, Lee Downham, demand for assets could
jump if commodities gain in price. “A sign of
sustained improvement in commodity prices
may be needed to trigger an increase in
competitive buying activity of the many divested
assets coming to market,” he said in the report.
As the hunt for new opportunities continues,
corporates should take note of these trends.
Europe bonding well
Bank loans are becoming less popular with EU
companies. Fitch data has revealed that loan
markets represented just €238b (US$322b) of
the €495b (US$671b) of total new debt funding
for European companies in H1 2013, down 60%
year-on-year, and it is the first time European
firms have borrowed less than €500b (US$677b)
from syndicated loan markets in a decade. The
study, which analyzed the balance sheets of
201 rated European companies, also found that
bonds are becoming increasingly important for
raising capital. In the first half of this year, bond
financing accounted for 82% of the average
corporate debt structure, compared with 68% in
2008. Royal Dutch Shell’s US$3.75b issuance
in August is indicative of this trend. With bank
financing becoming more scarce, corporates
need to consider other options for raising capital.

7. Pär-Ola Hansson is Deputy Leader EMEIA
Transaction Advisory Services, EY.
For further insight, please email
par-ola@capitalinsights.info
7
Deal dynamics
Pär-Ola Hansson
A
fter the US$27.4b takeover of
Heinz by Berkshire Hathaway
(BH) and 3G in February, BH
CEO Warren Buffett said that
he was still ready to spend the company’s
cash to bag another “elephant of a deal.” And
the Sage of Omaha is not the only one — it
appears the megadeal is back in fashion.
While overall M&A deal value in Q1—Q3
2013 was up 5.5% compared with 2012,
megadeal (those above US$2b) values rose
44.1% in the same period, with Q3 2013
being the highest quarter since Q1 2009,
according to Mergermarket. For example,
in February, international cable company
Liberty Global announced a US$24.9b deal
for Virgin Media. And, two months later, in the
life sciences sector, Thermo Fisher Scientific
bought Life Technologies for US$13.6b.
There are three factors behind this
blockbuster boom: cash, confidence and
consolidation. At the end of Q2 2013, in
the US alone, non-financial companies were
sitting on US$1.27t in cash, according to
Standard & Poor’s. And investors are insisting
that corporates put this to work.
However, megadeals don’t get done
unless confidence is high. Fortunately, this
seems to be rising — in October’s EY Capital
Confidence Barometer, 65% of respondents
felt that the global economy was improving,
compared with 51% six months ago.
As corporates consolidate, megadeals
have often been concentrated in certain
sectors. This was true in 2009 in the
pharmaceutical industry, when the deals
between Pfizer and Wyeth, Roche and
Genentech, and Merck and Schering Plough
©PaulHeartfield
Transformational M&A is making the headlines once
again. But why are these deals on the rise and what
lessons can other corporates learn?
moves
are
had a collective value of US$155b. In 2013,
it’s the turn of telecommunications, media
and technology. For example, the deal
between Publicis and Omnicom, announced
in July 2013, would create the world’s largest
advertising and marketing service.
However, complexities such as greater
scrutiny, the fact that both bidder and target
are often listed entities, and the fear of
information leakages mean that corporates
must be more prepared than usual when
undertaking transformational deals.
Companies must create a close deal
team to prevent leaks that can destabilize
a megadeal. The April 2013 Intralinks M&A
Confidential report showed that, from 2010
to 2012, leaked deals had a lower completion
rate (80%) than non-leaked deals (88%).
The team must gather as much available
information on the target as it can and do the
due diligence well in advance — as once the
deal is announced, all eyes will be on it.
In addition, early discussion with the key
shareholders is vital. Corporates need to
be clear about the deal’s benefits and how it
will increase shareholder value.
Experts certainly feel that megadeals can
be influential on the market. In an interview
earlier this year, Paul Parker, Head of Global
Corporate Finance and M&A at Barclays,
said: “Big deals tend to be transformational
for industries. Second-order consequences
can be very meaningful — often requiring a
strategic offensive or defensive response.”
The blockbuster-deal wave may
prove that fortune favors the brave. And
corporates of all sizes should take note as
they hunt for growth.
Bold
back

8. Capital Insights from the Transaction Advisory Services practice at EY
M&A announced auctions volume and value 2009—13
Value of M&A auctions, 2009—13
182
242
101
151
148
2010
2009
2011
2012
2013* Q3
12
41
Q1
12
21
Q2
12
24
Q1
13
Q2
13
Q3
13
43
51
54
}
86
}
148
Total auctions Q1—Q3
2012
and
2013
Volum
e
of M
&A
auctions 2009—13
2010
US$82.3b
2009
US$53.4b
2011
US$43.4b
2012
US$56b
2013*
* Up to Q3
US$41.2b
Deal volumes may not be hitting the heights
of five years ago, but prize assets are
being fought over more keenly than ever.
Competition among bidders has increased
markedly in the last year — the first three
quarters of 2013 saw the announcement
of 148 auction deals — almost double the
86 announced in the same period in 2012.
Indeed, it is the highest number of M&A
auctions seen in the first three quarters of a
year since 2009.
The auction boom has also, it seems,
caught the eye of private equity (PE) and
buyout houses. There were 37 PE buyouts
in 2013 up to Q3 — already more than the
entire number of PE-won auctions in 2012.
The biggest so far this year was Rhone
Transaction
insightsKey facts and figures from the world of M&A. This issue: auctions
Capital’s US$1.4b purchase of consumer
food company CSM’s European and North
American bakery supplies business.
The average auction deal value so far this
year is US$332m, down on the US$430m
averaged last year. Of the 124 auctions that
disclosed a deal value so far this year, 72 are
valued at US$100m or less, indicating that
auctions are becoming a preferred option
for small to mid-cap companies. Indeed,
at 48.6%, the proportion of auction deals
under US$100m is the highest since 2009.
Auctions still represent a small slice of
M&A. But their growing popularity should be
noted by smaller firms looking to sell, as well
as acquisitive corporates. In the end, it is they
who will need to fight harder for their prize.
Source:Mergermarket

9. www.capitalinsights.info | Issue 8 | Q4 2013 | 9
Dealing with competition
Simon Jones, Director at OMERS Private Equity, contrasts competitive
auctions with bilateral deals
To a large degree, the rise
in the number of auctions
taking place is due in part to
two factors: confidence and
accountability. Auctions provide
a market-tested outcome for
value. In contrast, selling and
buying in off-market deals can
lead to challenges from both
parties over whether value
was really maximized or if the
asset was overpriced. However,
maintaining confidentiality is
more easily achieved through
bilateral deals.
In May, we acquired IT
systems and business process
services provider Civica for
£390m (US$625m) from PE
firm 3i. This deal was a hybrid
auction; appetite from a wide
number of parties was gauged
during pre-marketing, with
only half a dozen or so serious
bidders invited into the process
in earnest. Next to off-market
opportunities, these “limited”
auctions are a preferred
route for us, as we want to
understand the competitive
dynamics and have confidence
in our angles. Due to this, we
would struggle to get excited
about a truly open auction.
Simon Jones
is a Director at OMERS
Private Equity
The greatest difference
between an auction and a
bilateral deal is the access
to both management and
company information. With
multiple parties involved
in an auction, sell-side
advisors have to ration access
considerably. As a result of
this, we seek early meetings
with management and do
considerable amounts of
preparatory work before
entering a competitive process.
Assessing your ability to win is
important, because processes
are costly and time-consuming.
GettyImages/Photodisc
The top 10 countries (value of M&A auctions*), 2009—13**
* All values in US$ ** Up to Q3
Top five countries
by auction deal value
Other top countries
by auction deal value
France
$11.9b
Sweden
$8.5b
Germany
$17.4b
Turkey
$13.6b
Russia
$17.8b
China
$16.1b
US
$60.7b
Australia
$12.3b
UK
$28.3b
South Korea
$23.2b
Some activity has come from public sector bodies looking
to privatize assets in tough economic times: 8 of the top 25
deals by value so far in 2013 have been governments selling
to private corporates. This included the US$5b purchase
of Port Botany and Port Kembla from the New South Wales
Government in Australia by a consortium led by IFM and the
Abu Dhabi Investment Authority.
Countries putting companies under the hammer
Unsurprisingly, auctions are most popular by volume
in M&A’s biggest market: the US. This reflects the legal
pressures on boards to demonstrate shareholder value.
Excluding lapsed auctions, there have been 232 in the US
since 2009, far ahead of second-placed China, which saw
143 auctions over the same period.
istock/Pingebat

10. Capital Insights from the Transaction Advisory Services practice at EY
Catching
the wave
Mexico:
Economic reform, strong
demographics and investment-
focused corporates mean that Mexico
is a market on the move. But how
should you deal in a country that also
brings complexity?
Key insights
• The Mexican economy is set to become
the largest Latin American economy
within a decade, overtaking Brazil.
• This growth is partly down to Mexico’s
strong fundamentals, such as
demographics and political reform.
• Mexico’s consumer sector has seen
more deals this year than any other
industry in the country, in part thanks
to developing consumer credit firing
the sector’s growth.
• The country has also garnered a
reputation as being a key position in
corporates’ global supply chains.
• Mexico’s multinationals are making big
moves into developed markets, such as
Europe and the US.
B
razil might be a darling of investors,
but Mexico may soon eclipse it. The
country is on course to overtake
Brazil and become the region’s
largest economy within a decade, according
to research by investment bank Nomura.
“Mexico is now in the moment, as a result
of macro and micro factors and industrial
policies,” says Roberto Cuarón, Partner,
Valuation and Business Modelling, EY, Mexico.
“Other countries haven’t yet driven away the
effects of the 2008 crisis.”
A swelling middle class has made
investors take note as Mexico integrates into
the global supply chain. Mexico’s statistics
institute, INEGI, has shown that, from 2000
to 2010, the country’s middle class grew by
four percentage points to 39.2%.
The short-term outlook is also generally
positive. Although the International Monetary
Fund recently cut Mexico’s growth forecast to
1.8% for this year, it expects growth to return
to 3% in 2014 as ongoing structural reforms
bear fruit. Additionally, capital market
activity is thriving. Dealogic figures show that
Mexico’s equity capital market is having a
record year — raising US$10.4b in 2013.
Economic reform
A big factor behind the investment drive
is the progress of reforms, introduced by
President Enrique Peña Nieto since he took
office in December 2012. Key to this is
Nieto’s “Pact for Mexico”, a signed accord
that pushes cross-sector reforms that are
designed to boost annual economic growth
Corbis/Ivan Vdovin

11. www.capitalinsights.info | Issue 8 | Q4 2013 | 11
to 6% — a threefold increase on the average of 2% seen since
2000. The scale of the reforms encompasses labor, education,
banking, tax, telecoms and energy. For example, this year,
Congress has approved an overhaul of the country’s telecom
laws, opening up the sector to greater competition and to
allow more FDI.
“Pact for Mexico” reforms are creating opportunities in
sectors previously reserved for state monopolies. Investors
had tended to bypass Mexico’s hydrocarbon, mining, power
and telecoms sectors, seeing them as the preserve of
domestic firms. Since 1999, these sectors have accounted
for only 9% of the FDI flowing into Mexico. By contrast, they
account for 26% of FDI stock in Brazil, 35% in Argentina and
45% in Chile. The reforms are set to change the perception of
investors and encourage entry into these sectors.
Although the reforms can provide a boost, experts note
that solid foundations are the main drivers behind Mexico’s
recent wave of investor interest. “The reforms are very
welcome, but we shouldn’t lose sight of the fundamentals — the
changing demographic and robust economic management —
that will drive this country forward,” says Nick O’Neill, head of
fund manager Macquarie’s Mexican Infrastructure Investment
Fund. “And, if you overlay the reform program on top of this,
you have a very compelling investment story.”
The generally healthy macro indicators show that
Mexico’s economy is a good place to invest, says Tania Ortiz
Mena, Vice President of Business Development at Mexican
energy infrastructure company IEnova. The reforms are the
icing on the cake. “We have a new administration that has
proven that it can create a consensus with other politicians
to pass substantial reforms. There is the expectation that this
administration can achieve substantial change,” she says.
Mexico’s strategic location and growth potential means
that companies will continue to acquire Mexican assets, notes
Tony Del Pino, Partner at law firm Latham & Watkins, and
Co-chair of its Latin America Practice. “Recent big deals have
included Anheuser-Busch InBev acquiring Grupo Modelo
for US$20.1b in June. And the Swiss engineering company
Foster Wheeler completed its first Mexican acquisition in
April. This was a strategic move intended to grow their
upstream capabilities, and their geographic engineering and
construction footprint in Latin America,” he says.
Deal revival
Deal flow suggests that foreign firms have a strong appetite in
Mexico. According to Mergermarket, Mexico saw 30 deals up
to Q3 2013. This is the second-highest number in five years.
Mexico is receiving more attention than ever before
from both strategic and institutional buyers, according to
Del Pino. “Deal size has been on the rise, from the US$20.1b
acquisition of Grupo Modelo to the US$1.6b
acquisition of Spanish banking group BBVA’s
pension fund business by Mexican bank
Banorte. We’re also seeing local companies
take larger roles as buyers and investors, as
well as more competition for private equity
(PE) deals stemming from successful fund-
raising by Mexico- and region-focused funds.
As such, more deals are being carried out as
auctions, which is unusual in Mexico.”
The BBVA deal, completed in
November 2012, is an example of a Mexican
firm diversifying its revenue streams. “The
rationale of the purchase of the asset
management firm from BBVA was the
synergies due to economies of scale in this
business,” says Fernando Solis Soberón,
CEO of Long Term Investments at Banorte
and Chairman of Afore XXI Banorte.
“Additionally, it will also diversify the source
of income for the financial group, given the
increase in revenue from the commissions
obtained from managing the compulsory
retirement savings.”
The consumer segment in Mexico — Latin
America’s second largest — has emerged as a
more recent target for foreign investors. With
nine deals so far this year, it has seen more
activity than any other sector. The largest
announced deal is US beverage company
Constellation Brands’ US$2.9b acquisition of
Compania Cervecera de Coahuila in February.
Outright buys aren’t the only route to
market. In the late autumn of 2012, for
instance, global underwear retailer Triumph
International acquired a majority stake in
Mexican lingerie firm Vicky Form. Triumph
On the web
For more on entrepreneurship and growth in Mexico, read EY’s
The power of three at www.capitalinsights.info/mexico
Top three completed Mexican inbound deals, Oct 2012—13
Completion Target Buyer Deal value
JUN
2013 Grupo Modelo
Anheuser-Busch
InBev (Belgium)
US$20.1b
JUN
2013
Compania Cervecera
de Coahuila
Constellation Brands
(US)
US$2.9b
MAY
2013 ABA Seguros
ACE Limited
(Switzerland)
US$865m
Source: Mergermarket
30Number of inbound deals
in Mexico in 2013 up to
Q3 — the second-highest
number for five years
(Source: Mergermarket)
Investing
Raising

12. Capital Insights from the Transaction Advisory Services practice at EY
Mexico
Population
116.2m (2013)
FDI
US$12.7b (2012)
GDP
US$1.2t (2012)
Source: CIA World Factbook;
US Embassy in Mexico
istock/Pingebat
wanted to enter the Mexican market, and saw the local
leadership position of the Vicky Form brand as a platform for
its own. For Vicky Form, the deal offers the chance to expand
internationally. As Vicky Form’s CEO José Zaga says: “With
this JV, we gain access to some of the world’s top commercial
intimate apparel brands and the unique opportunity to expand
the business model beyond Mexico. The partnership maintains
its original plans of further developing Vicky Form in the
Mexican markets and the region.”
Building growth
The manufacturing sector boasts pedigree as an FDI magnet.
The Economic Commission for Latin America and the
Caribbean notes that, in 2012, the sector was the strongest
investment draw (absorbing 56% of the total). Among the
main deals was Brazilian steelmaker Gerdau’s US$600m
investment to build a new structural steel plant in October.
Alongside this, the automotive sector recorded a
75% jump in FDI, to US$2.4b in 2012. Developed-market
automakers have laid down roots as Mexican factories have
established themselves in regional and global supply chains.
For instance, last year, Audi announced plans to open a new
plant in Mexico, which should begin producing cars in 2016.
A spokesperson for Audi told Capital Insights that: “Mexico
is an ideal location, strategically offering a favorable sandwich
position between North and South America.”
The decision to locate in Mexico is aimed at safeguarding
the automaker’s competitive position on global markets,
lowering its costs and increasing profit margins. And, it should
provide a competitive advantage with consumers. As Mexico
is part of several free-trade agreements,
it will be able to ship its cars duty free to the
US, Latin America and Europe. If, instead,
it had opted to build a production plant in the
US, it would have had to contend with a tariff
burden of 10%. The Mexican economy will
profit by Audi’s decision to set up its San José
Chiapa, with the creation of about 3,800 new
jobs. This will create a further 20,000 jobs
for the periphery, the suppliers, logistics and
service providers.
M&A activity in Mexico is in line with the
long-term FDI trend. Pablo Coballasi, who
heads corporate finance house PC Capital,
says: “There’s a correlation between
international cross-border M&A and FDI. A lot
of international investors are looking at the
macro trends. The fundamentals have given
them the confidence to come and expand
by making current operations larger, or
expanding within the market through M&A.”
According to Olivier Hache, Managing
Partner for EY’s Transaction Advisory
Services in Mexico and Central America,
some of the deals are driven by Mexico’s
position in the global supply chain,
particularly in the automotive industry.
“If you’re an automaker, you might decide
to have a supplier situated near your factory.
If that’s in Mexico, then the parts supplier
Mexico’s movers: looking beyond their borders
According to Banco de México, Mexican
firms invested US$25.6b outside the
country in 2012, 111% more than in
2011. Brimming with confidence, these
firms are now eyeing US and European
opportunities. For example, in April 2012,
loan provider Grupo Elektra bought
Advance America, the largest US payday
lender, for US$780m.
So what are Mexican firms looking
at when acquiring abroad? “Once, it
was only very large Mexican firms with
the capacity for outbound acquisitions,
but last year, Mexico exported more
FDI than it received — the first time this
has happened in five years,” says Pablo
Coballasi. “This reflects the greater
availability of liquidity in local markets
and the balance sheet strength of
Mexican corporates. Price is another
factor. Asset prices in Europe and the US
are cheap compared with previous years.”
This has led to global market leaders
with Mexican roots. “Cemex was a very
large consolidator in the industry and has
grown to have operations pretty much
around the world,” says Coballasi. “The
same is true for other large corporates,
such as América Móvil (AM). It set out to
expand not just within Latin America, but
also in Europe.” In August, for instance,
AM bid US$9.6b for the 70% of Dutch
telecom group KPN it doesn’t already own.
GettyImages/MarkDCallanan

13. www.capitalinsights.info | Issue 8 | Q4 2013 | 13
Peter Harbula of prepaid services
provider Edenred discusses the
practicalities of investing in Mexico
T
he reason why Mexico is attractive to us is based on a number
of trends, but one key trend is the growing formalization of the
Mexican economy. The market has become more and more mature.
Compared with previous years, more companies are declaring their full
number of employees. As our services are meant for people on the official
payroll, this is a robust medium-term growth driver.
Mexico is a strong market that offers sustainable growth
opportunities, especially in light of its location and its close ties to the
US, and helped by its membership of the North American Free Trade
Agreement. There is good growth potential in the business-to-business
services sector, the area in which our company is active. Services are
growing very fast in Mexico.
We have been present in Mexico for 30 years. Investing in Mexico
is, in a way, not so different to more developed economies: the financial
and legal procedures are broadly similar, for instance. But there is a Latin
American touch in the importance given to personal contacts, face-to-face
meetings and establishing trust. Things agreed by handshake and verbal
agreements are matters that are regarded with high importance.
Mexico is one of our
top countries: our core
products in the country are
the food and meal vouchers,
as well as the expense
management solutions, for
corporate fleets. The meal
vouchers market is based
on a regulation under which
employers provide food and meal vouchers to their employees that exempt
both of them from taxes. Mexico contributes largely to our organic growth.
Viewpoint
Peter Harbula is Corporate Finance Director at Edenred
There is a Latin
American touch in
the importance given
to personal contacts
and establishing trust
has to be, too. This can sometimes be more about direct
investment than pure M&A,” says Hache.
The services sector has also sparked interest among
corporates. This year, Swiss insurer ACE Group completed a
deal for ABA Seguros, Mexico’s fourth-largest auto insurance
company, for US$865m. Mexico’s position as a bridge for the
wider Latin American market was a key factor here. After
the deal, Evan Greenberg, Chairman and Chief Executive
Officer of ACE Limited, said that ABA Seguros’ reputation
and creativity was something “that can be leveraged across
Mexico and the Latin America region.”
Overcoming the obstacles
M&A in Mexico still poses challenges, though. One is the lack
of institutionalization within family-owned firms. “Mexican
companies are used to running things in a ‘family way’ and
are, therefore, not accustomed to bringing in new money
or giving away a slice of their business,” says Fernando de
Ovando, Senior Partner at the Mexico office of international
law firm Jones Day.
Such ownership can make them less transparent, posing
a challenge to buyers seeking to make large investments and
implement strategic changes. “Diligence and control issues
are key questions. Partnering with excellent international and
local advisors is a prerequisite,” says Del Pino.
There has also been growth in PE funds that prefer to take
on significant minority or controlling stakes while keeping local
partners involved. PE investment in Mexico has grown rapidly
in the last few years, with US$14.9b in capital having been
committed to PE investments since 2000. “That’s a pretty
sizeable pool of capital, and PE is going to become more and
more important as family business owners get more educated
about the benefits of having a PE partner,” says Coballasi.
How to ride the wave
For corporates looking to thrive in Mexico, here are three key
factors to consider before investing:
Get local know-how. “Before you get into a deal, you need an
advisor who knows the market and can help you not only with
the general structure of the deal, but also the cultural aspects
of doing a deal in Mexico,” says de Ovando.
Embed roots. Investors need to be sure that key shareholders
are involved early in the M&A process. “Once a deal is closed,
you are going to need a local management team and local
ownership to help guide you through the first years of the
operation. It’s key for the buyers to get to know the market
with locals, so that they can become experts themselves as
time passes,” says de Ovando.
Understand the system. Deal-makers must keep a close eye
on the specific set of factors unique to Mexico, such as foreign
ownership restrictions on certain industries. Tax and labor laws are also
key. Roderick Branch, a partner at Latham & Watkins, says: “Tax matters,
particularly the availability of applicable tax treaties, are key. Traditionally,
labor laws have posed a particularly difficult set of challenges. Formal
requirements inherent to Mexico’s civil law system, such as notarization and
public filings, need special attention that can affect structuring.”
While challenges such as ownership restrictions and legal differences
exist, for those prepared to persevere and set up in a rapidly growing, yet
mature, economy, such obstacles are well worth overcoming.
For further insight, please email editor@capitalinsights.info

14. Capital Insights from the Transaction Advisory Services practice at EY
© Gary Parker

15. www.capitalinsights.info | Issue 8 | Q4 2013 | 15
The
bigCisco CFO Frank Calderoni explores the company’s
business transformation, discusses its portfolio and
partnership strategies, and reveals the key role of finance
T
ransformation is the name of the game for IT and
networking giant Cisco. While the company has
been a leader in the networking market for many
of its 29 years, the San Jose-based business is now
looking to become the world’s “number one IT company,”
according to CFO Frank Calderoni.
While this is certainly an ambitious target, Cisco has the
numbers to back it up. The company has had 10 consecutive
record quarters, and figures for Q2 2013 showed that order
growth was up across most sectors — for example, the US
enterprise (companies with over 1,000 employees) business
grew 9%, while commercial (smaller companies) rose by
12%. However, strong figures and ambitious targets do not
come easy — particularly in the ever-changing technology
sector. The company has had to evolve to meet the needs of
the marketplace and, since his succession to CFO in 2008,
Calderoni has been at the forefront of this transformation.
“First, we had to address how we’d continue to innovate
over the long term,” he says. “We needed to realign strategy
around core priorities — one of which was to prioritize our core
business of switching and routing. Another aspect was to look
at growth drivers for the next three to five years.”
The five growth areas that Cisco identified were data
center and cloud, mobility, security, software, and the services
market business. And in each of these, the predictions have
proved very much on the money. For example, technology
research group Gartner forecast that world security
technology and services would reach US$67.2b in 2013 —
up 8.7% year on year — while the cloud market would grow
by 19% to US$131b over the same period.
In recent years, in each of these five segments, Cisco
has posted strong figures. For example, in Q2, wireless
Preserving
Investing
Optimizing
Raising
mobility was up by 32%. And nowhere has the success of the
transformation strategy been more apparent than with cloud
computing. “In [this] space, we have been very successful in a
very short time. We have gone from no share to being number
two on the data center side in just a couple of years, and we
see that continuing,” says Calderoni.
Everything counts
However, the key for the company, he says, is “to bring it all
together around a solution for customers. We didn’t just want
individual products, but solutions built around a technological
framework that gives customers a full end-to-end experience.”
Cisco’s Internet of Everything (IoE) is the cornerstone
of this new strategy. The idea of the IoE is a networked
connection of people, processes, data and “things”, which is
being facilitated by technology transitions such as increased
mobility, cloud computing and the importance of big data.
“From a business perspective, connecting multiple devices
is the next stage of the opportunity for us,” says Calderoni.
The importance of the project cannot be overstated. A report
by Cisco’s IoE Value Index predicted that it would enable global
businesses to generate US$613b in profits in 2013.
When it came to assessing how to set Cisco’s priorities
within its new strategy, the CFO turned to the three key
stakeholders in the business.
“The number one priority was to understand the customer
and ensure we met [their] requirements from a technical point
of view,” Calderoni says. “Then, we needed to ensure we had
the right base of skills and talent within the company, from an
employee perspective. And the third crucial aspect was the
investors. We had to make sure we had the ability for them to
invest in Cisco and get the right returns.
switch

16. Leading by example
The finance function has been spearheading
the march to make Cisco “the number one
IT company”. When the company embarked
on the new strategy around three years ago,
Calderoni set up a new model that saw the
business emphasize profitability over rapid
revenue growth. The long-term revenue
model was reset to between 5% and 7%
compound annual growth rate — a shift from
the historic goals of 12% to 17% — while profit
targets were set at 7% to 9%.
To achieve this, the CFO had to alter
how finance worked within Cisco
so it was closely allied to the new
strategy. “We made a number of
changes within finance to help the
company be more successful in
the transformation,” he says.
“We invested heavily in our
financial data infrastructure
as the first step in our finance
transformation. Having a common
source of information is critical.
“The second part was to see how we could be more
effective in providing and driving value in the company to
partners that we want to work with inside Cisco. This meant
having a seat at the table to enable decisions to be made
based on the data available. A key part of this was trying
to uplevel the skills within the finance organization so they
gained a greater appreciation of the business as a whole.”
At the same time, the company also launched its
Accelerated Cisco Transformation (ACT) initiative — an
overarching framework encompassing a variety of cost
initiatives that looked at both product cost and operating
expense, and the ways that Cisco could be more efficient
when managing these within the company.
Portfolio polishing
One of the most imperative parts of the transformation
was ensuring that the business portfolio was aligned with
the new strategy. “We needed to understand the long-term
implications from a financial return perspective on certain
investments and divestments. We had to make significant
trade-offs,” says Calderoni.
As part of this approach, over the past three years, Cisco
has divested its consumer products, including, in January this
year, the sale of its Linksys brand of home routers to Belkin.
The “trade-offs” reduced Cisco’s annual run rate by US$1b
and were the catalyst that allowed the company to invest in
areas that focused more clearly on the new direction, as well
as giving a stronger return to shareholders.
When it comes to investing the company’s capital,
whether it is organic or inorganic, the first priority is always
innovation, according to Calderoni.
“We do this via both build and buy,” he says. “On the build
side, we have around 25,000 engineers helping to invest in
innovation for current and future products. We spend around
US$6b a year overall in research and development.
“On the buy side, we look at where there is a potential
acquisition that would help build the portfolio in certain areas.
1984 19901987 1 9 9 1
Cisco receives funding
from venture capital
firm Sequoia Capital
Cisco opens offices
in the UK and France.
Market capitalization
reaches US$1b
Cisco founded by two
computer scientists from
Stanford University
Cisco goes public in February on
the NASDAQ. Gains market
capitalization of US$224m
Being CFO
Frank Calderoni explains
the three-part approach to
being an effective CFO
First, there is the fiduciary side,
ensuring that the numbers
are recorded accurately and we meet regulatory
requirements. The second side is outreach, not only
externally but also to leaders in the company, so they
understand what motivates the investors. The third
is engaging with business leaders and customers in
understanding strategy, enabling us to execute and
provide insight from a financial perspective to help
inform that strategy, aligned to a financial set of goals.
lCiscocGettyImages/JohnMoorerUIGviaGettyImages/ViewPictures

17. 17
1992 1993 1995 1996
Cisco makes its first acquisition — Crescendo
Communications and its 100-Mbps Copper
Distributed Data Interface technology
Cisco opens offices in
Beijing and Amsterdam,
while making a further
seven acquisitions
Cisco opens offices
in Toronto and Tokyo
Cisco makes further acquisitions
in the form of Combinet, Internet
Junction, Grand Junction and
Network Translation
We have been fairly aggressive acquirers for a number of
years. Since our inception, we have done 165 acquisitions.”
In the last 12 months alone, Cisco has bought
13 companies, primarily in the software and services
space. These have included the announcements of deals
for UK-based specialist 3G provider Ubiquisys in March for
US$300m, and US cybersecurity company Sourcefire
for US$2.7b in July.
While the volume of acquisitions may be relatively high,
the criteria for choosing each business are still demanding,
according to the CFO. “Our acquisitions are made around the
business strategy and areas of growth. We ensure that we are
investing heavily in those areas that deliver innovation and the
right technology for our customers. And we also have to make
sure that these [businesses] will deliver appropriate returns to
our investors over a longer period of time.”
Sourcefire is a good example of an acquisition that meets
Cisco’s specifications. “First, it fits into one of our growth
areas — security. We have a comprehensive security portfolio
already, but we felt Sourcefire would give us an even stronger
platform to make available to our customers,” says Calderoni.
“There are a tremendous number of synergies between
Sourcefire and Cisco in the mobile and cloud environment,
and that is where you have the most exposure with security.”
Staying on target
From targeting to integrating a new business, Calderoni
reveals that the company follows a step-by-step acquisition
process that allows Cisco to really get to know its targets
before closing the deal. “If we identify a company that is in
line with our strategy, a business development team will start
an engagement to discuss whether there is a mutual interest,”
says Calderoni. “Then we have a formal CFO commit process:
a pre-commit, a commit and a post-commit.”
He explains that the pre-commit is the initial analysis
looking at specific areas of interest, allowing Cisco to make its
own evaluation as to the pros and cons of the target.
The commit process comes
when there is an agreement
within Cisco by the business
leader who has that
responsibility along with the
business development team.
This agreement is about the
financial objectives as the
company moves forward with
that acquisition. Then, Cisco
makes an agreement to that transaction.
Finally, it has post-acquisition reviews to
ensure it is meeting the expectations it
agreed to in the commit.
Joined-up thinking
Integrating a new business is tough at
the best of times — so integrating 13 over
12 months could present a serious challenge
to a company that is already going through
a transformation. Therefore, the integration
process has to start early and cover all the
bases. “We have a very formal integration
process. As part of the commit process, we
work with the business leader of the target,”
says the CFO. “This process lays everything
out in a very comprehensive plan over
weeks, months, even years, to ensure we
do all aspects of the integration process and
meet all requirements. As part of the post-
commit, we ensure that we are meeting those
requirements on a regular basis and we also
use it as a vehicle to identify if there are any
issues, to help solve them.”
One of the key elements that is built
into the process is culture. When it comes to
post-merger integration, companies will often
©GaryParker
lBloombergviaGettyImagesrBloombergviaGettyImages

18. focus on the financials and operations,
while culture is more of an afterthought.
Yet, incompatible business cultures can
rupture even the most secure of deals.
“We first evaluate culture in the
pre-commit process and determine
whether there is an alignment to Cisco
culture,” says Calderoni. “We ask whether
the target is focused on the customer,
whether they are innovative and if they
are flexible and agile. We need to do
a comprehensive review on cultural
alignment because this is potentially one
of the key areas of failure.”
Going global
As part of the investment and acquisition
strategy, the company is broadening its
reach across different countries. In the
past year, it has bought companies in
the Czech Republic (Cognitive Security),
Israel (Intucell) and Austria (SolveDirect),
among others. And Cisco is extremely
active across emerging markets (EMs),
in particular, India and China.
And, despite order growth slowing
down across these markets — from 13%
a quarter ago to 8% in Q4 FY 2013 — the
CFO feels that EMs still have a lot to offer.
“If you look at the last five years, we have
been investing more heavily in the EMs
and we will continue to do so,” he says.
Again, figures show that continued
investment in these regions is a wise
policy. According to the Cisco Visual
Networking Index, China’s internet
traffic is set to grow by 600% in the next
two years, while in India, global mobile
data traffic is likely to increase 13-fold
between 2012 and 2017.
When it comes to making moves in
developing markets, Cisco takes a mixed
approach to growth — buying, building
organically and creating partnerships.
“We invest on a case-by-case
basis. We have invested directly in
some countries by doing acquisitions
and created a number of successful
partnerships in EMs,” says the CFO. “The
key for a successful partnership is where
we can complement each other. And it
needs to work on both sides — where
joining forces is the most effective way
of meeting customers’ needs. For those
partners interested in working with Cisco,
we bring access to new customers and
new markets, and partners are able to
leverage the global scale that a company
like Cisco has.”
Recent EM partnership deals have
been announced, including a joint
venture with China Electronic Software
Information in December 2012, and, in
April this year, an investment was made
in an Indian company, Apalya, which is
a pioneer and leader in mobile TV and
video streaming.
A taxing issue
While Cisco is still making acquisitions
in the US, the company has stated it is
more hesitant about further purchases
on home soil until the US corporate tax
code is changed. Currently, the US has
1998 20042000 2006
Cisco becomes the world’s
most valuable company
in terms of market
capitalization (US$569b)
Cisco announces plans to invest
over US$265m in Saudi Arabia
and US$275m in Turkey over
the next five years
Cisco becomes the first company to achieve
market capitalization of US$100b in 14 years
and performs nine further acquisitions
1
7
2
3
4
5
6
Cisco invests US$32m in a Chinese research
and development center. The company
also pledges US$50m to help Korean SMEs
adopt and deploy networking technologies
Lessons learned
Frank Calderoni outlines the rules
that have defined Cisco’s success
Customers are all-important. You need to be
focused on customer needs and then deliver
on those needs.
You have to have an ongoing two-way dialogue
with shareholders. Find out what their interests
are and align them with what you are trying to do.
Ensure you have the right base of skills and
talent from an employment standpoint,
especially during times of transition and change.
To be successful, you need to understand the
pace of change not only in the technology
industry, but within the company.
Macro environments are always going to
change. We have a strategy that is
focused long-term and independent of
the macro environment.
Information is critical and having a common
source of information is vital. We have invested
heavily in our financial data infrastructure.
Finance needs to be integral to the business.
It is one responsibility to report numbers,
but a bigger responsibility is to be an effective
business partner internally to drive and build
value for the company.
GettyImages/JustinSullivan/Cisco

19. 19
the highest corporate tax
rate of all OECD nations
at 39.1% — and Calderoni
feels this has to change, not only for the good of Cisco, but for
the good of the US.
“The US tax code needs to be modified. It is important for
any US-based global company who wishes to be competitive
on a global scale to have a tax policy that helps support that,”
he says. “What we believe is there are three things that need
to be done. First, the tax rate needs to be lowered. Then
there needs to be a more globally competitive structure that
provides companies with flexibility for bringing in and moving
cash around, and, finally, the code needs to be simplified to
eliminate a lot of the tax preference items that currently exist.
“If we can do these, this could be a win-win for businesses
and for the US. A tax code like this could provide incentives
for employment and economic growth.”
However, government policy is not something that changes
overnight, even when there is a good business case for it.
Calderoni believes the key is communication. “We will help
where we can with knowledge we have gained on the global
landscape and the knowledge we have on tax,” he says. “We
need to work with members of the US Congress, as well as
within the administration and other forums that have looked
at tax reform, to make sure we are very visible in providing
information that is helpful in moving efforts forward.”
Investor interest
However, investing, whether at home or abroad, is very much
dependent on shareholder support. Mindful of this, as part of
Cisco’s capital allocation strategy, the CFO prioritized share
buybacks and increased dividends for investors. Since fiscal
year 2002, the company has returned approximately US$80b
through its buyback program. Equally impressively, in the
past two years, it has increased the dividend by around 180%.
Why did the CFO choose this course of action? “We listened to
investors and asked what they were looking for as a return,”
2008 2012 2013 2013
Cisco pays US$5b to acquire pay TV industry
software developer NDS Group
Cisco announces seven
acquisitions to date, including
cybersecurity company
Sourcefire for US$2.7b
Cisco announces AED5.8b
(US$1.6b) five-year ICT
investment plan for the
United Arab Emirates
Cisco launches its Internet of Everything (IoE)
Value Index Study, which predicts that US$14.4t
of value will be at stake over the next decade,
driven by connections through IoE
he says. “We decided that, on an annual
basis, a minimum of 50% of our free cash
flow would be returned through either a
buyback or dividend. And, by talking to
investors, we found that more preferred a
dividend to a buyback, so we rebalanced
more on the dividend but continued to
support the buyback.”
A bright future
A transformational strategy, targeted capital
allocation and clear communication with
key stakeholders have put Cisco in a strong
position to achieve its ambitious long-term
target. And the CFO is understandably
upbeat about the long-term future. “There is
a tremendous amount of opportunity in the
market, and I feel we are probably in the best
position to participate in that opportunity
going forward,” says Calderoni. “I hope our
continued significant investment will allow us
to become the number one IT provider in the
future and, at the same time, get the right
return for shareholders.”
The CFO
Frank Calderoni
Age: 56
CFO at Cisco: Since 2008
Educated: Fordham University,
New York; Pace University, New York
Previous positions: Frank joined Cisco in 2004
from QLogic, where he was the Senior Vice
President (SVP) and CFO. Prior to that, he was
SVP and CFO for SanDisk. Previously, he spent
21 years at IBM and was promoted to VP prior
to taking on two CFO roles.
Cisco
Founded: 1984
Employees: 75,049
Countries: 165
Market capitalization: US$123.4b
(as of 21 October 2013)

20. Capital Insights from the Transaction Advisory Services practice at EY
Key insights
• Increased demand,
high oil prices and
steady production
have increased sector
confidence, but
challenges lie ahead.
• Managing return on
capital invested is
a major issue for
the industry, despite
high prices and
rising demand.
• Corporates need
to keep focused on
upstream core assets
to increase returns.
• Partnerships,
investment in new
technology and a
focus on quality,
as well as scale of
production, are
fundamentals for
the future success of
the industry.
A
t first glance, oil and gas companies seem to be
doing better than ever. Production is running at
near record levels. According to the BP Statistical
Review of World Energy 2013, the world
produced 86.1b barrels of oil in 2012 — a 15% increase on total
production 10 years ago.
At the same time, oil prices have averaged a historically
high level of US$111 per barrel for the past two years,
according to the US Energy Information Administration (EIA).
A decade ago, oil was priced at just US$25 a barrel.
The high pricing is a result of growing demand. According
to BP, consumption increased to a record high of 89.7 billion
barrels last year, a 14% increase on the 78.4 billion barrels
consumed in 2002. Strong growth in emerging markets (EM)
has driven the increase, with a rise in consumption of 3.3%
in countries that are not members of the Organization for
Economic Co-operation and Development (OECD).
Oil and gas executives have taken heart from this
backdrop of increasing demand, high oil prices and steady
production. “For the bulk of the last decade, we have been
in an environment where oil prices were rising quite quickly
and gas prices were either flat or rising,” says Andy Brogan,
Global Oil & Gas Transactions Leader at EY. “Fields that
came on stream when prices were still low are economical at
those lower prices and are still producing. When the oil price
is trading above those levels, the energy
companies are making money, and that
underpins confidence.”
This is shown by EY’s latest Capital
Confidence Barometer, in which 58% of
respondents were focused on growth —
up from 41% in October 2012.
This underlying industry confidence
supported a record year for M&A in 2012.
According to EY’s Global Oil and Gas
Transactions Review 2012, deals worth
US$402b were closed in the oil & gas
sector last year, significantly higher than
the US$337b in 2011. There were 92
transactions exceeding US$1b in 2012,
compared with 71 in 2011, a further sign
of confidence as corporates demonstrated a
willingness to invest large sums in long-term
projects. Major deals include the acquisition
by CNOOC Ltd, a China National Offshore
Oil Corporation subsidiary, of offshore group
Nexen for US$15.1b.
Despite a falloff in M&A activity in
2013 (as there has been in many sectors
due to continued economic uncertainty —
The oil and gas sector is
changing. Capital Insights
explores how corporates
are seeking growth
by consolidating
and innovating
Fueling
growth

21. www.capitalinsights.info | Issue 8 | Q4 2013 | 21
Investing
Optimizing
Raising
for more, see “The big picture,” page 32) and a cautious
approach to additional investment by corporates, there
have still been substantial deals. These include US company
Freeport-McMoran Copper & Gold buying offshore driller
Plains Exploration and Production for US$10.8b in May,
while in April, US company Hess sold its Russian assets to the
country’s second-largest oil producer, Lukoil, for US$2b.
“The industry has been blessed with quite a long period
of relative stability with the commodity price at reasonably
strong levels,” says Jon Clark, UK Leader for Oil & Gas
Transaction Advisory Services at EY. “That has helped to
build balance sheets in larger companies, but it has also made
people feel more comfortable about making long-term capital
commitments and investment decisions.”
Capital constraints
However, despite the positives, the industry faces challenges.
Managing return on capital is one of the major issues
with which the industry has been confronted, even in an
environment where prices and demand have stayed high.
A May 2013 Citigroup study, Investing for Commodity
Uncertainty, found that the return on capital employed for
30 of the world’s largest oil companies fell to 9% in 2012.
Between 2005 and 2008, figures show that return on capital
averaged over 15%. That return could drop to 8% by 2015,
if Brent crude prices fall below the US$100-
per-barrel threshold.
“There is no doubt that it is more costly
to produce resources today than it was 20
years ago,” says Kevin Forbes, Partner at
specialist oil and gas technology investor
Epi-V. “There is a huge cost differential
between a relatively simple drilling operation
in Saudi Arabia and drilling under 10,000
feet of water in a deep-water project.”
Finding new sources
Discovering and producing reserves in more
hostile conditions has been one of the major
contributing factors to the pressure on return
on capital.
Government-backed national oil
companies (NOCs) now control the bulk of
the world’s oilfields — according to the BP
Statistical Review, countries outside of the
OECD now control 85% of the world’s proven
reserves. A recent example of the growing
strength of NOCs can be seen in China’s
CNPC acquiring a 20% stake in Offshore
Area 4 in Mozambique from Italy’s Eni for
1.1mbarrels per day is
the forecast global
demand growth for
2014, according to
the International
Energy Agency (IEA)
Getty Images/Arnulf Husmo

22. Capital Insights from the Transaction Advisory Services practice at EY
US$4.2b in July 2013. International oil
companies, which used to control more
than four-fifths of global reserves before
the rise of NOCs, have had to look to
difficult-to-access, deep-water assets and
unconventional sources of energy, such as
oil locked in shale and tar sands.
For example, in September this year, US
company Ensco took delivery of an ultra-
deep-water drilling ship, ENSCO-DS7, which
is set to become its fourth rig working in the
West Africa deep-water market.
A 2013 Goldman Sachs analysis of
Europe’s largest oil and gas companies
demonstrates how challenging it has been
for some groups to improve return on capital
when the sites are so difficult and technical.
The investment bank found that 18% of the
capital invested by Europe’s largest oil and
gas companies has gone on projects that
need the oil price to be US$80 or higher just
to break even.
Making the most of it
Even though unconventional and deep-
water oil and gas assets are pricier and
more challenging to develop, exploiting
these resources is essential if the world is to
continue meeting the mounting demand
for hydrocarbons.
According to the International Energy
Agency (IEA), the development of deep-
water reserves, oil sands and shale gas
is forecast to increase production from
outside OPEC to 53 million barrels a day
by 2015, up from fewer than 49 million
barrels a day in 2011. By
2035, the IEA forecasts
that unconventional gas will
account for half the increase in
global gas production.
Unconventional resources
have become key for oil
companies, as they provide
access to new reserves that are
not controlled by the dominant
NOCs. Many of these projects
can be operated profitably
thanks to improvements in
technology, and supplies are
plentiful. The EIA estimates that the world holds reserves of
345 billion barrels of technically recoverable shale oil and
7,299 trillion cubic feet of shale gas.
This is a significant source of new assets for international
oil companies, easing pressure to replace reserves.
“The shale plays have made a very significant
contribution to our business. These assets … provide
tremendous optionality for ConocoPhillips,” said Matt Fox,
Executive Vice President of Exploration and Production at
US oil group ConocoPhillips, in its 2012 annual report. “They
are resource rich, with years of scalable drilling inventory.”
Brogan adds that another advantage of unconventional
resources is that they provide oil companies with greater
capital flexibility than plays in deep-water or traditional wells.
“If you are in huge offshore assets operated by a
consortium, [this] usually means that you are in assets that
have very long lead times and very little flexibility about the
capital you deploy once you have made the decision to go.
Unconventionals are a good alternative to that, because you
can scale those up and down quickly,” says Brogan.
The only way is upstream
The focus on return on
capital among the oil
companies, coupled
with moves to make
plays for deep-water and
unconventional assets, have
been the major drivers of
oil and gas M&A recently.
These priorities mean
that the largest growth in investment is in upstream assets
(operations involving exploration and production stages),
where deal value increased by 68% to US$284b, according
to EY’s Global Oil and Gas Transactions Review 2012.
Upstream deals have continued to dominate deal activity in
On the web
For further insights watch our exclusive video on the oil and gas
industry at www.capitalinsights.info/oilandgas
Top three completed oil and gas M&A deals, October 2012—13
Completion Target Buyer Deal value
MAR
2013
TNK-BP Holdings
(50% stake)*
Rosneft Oil Company OAO US$31.1b
MAR
2013
TNK-BP Holdings
(50% stake)**
Rosneft Oil Company OAO US$28b
FEB
2013 Nexen Inc CNOOC Ltd US$15.1b
Source: Mergermarket *BP stake **AAR Consortium stake
Advantage now
comes from exceptional
capability, rather than
exceptional scale
Carl Henric-Svanberg, Chairman, BP

23. www.capitalinsights.info | Issue 8 | Q4 2013 | 23
2
3
4
5
1
2013, with Royal Dutch Shell’s US$6.7b buyout of Repsol’s
liquefied natural gas (LNG) assets one of the standout deals
of the year. Activity in the downstream market (operations
that take place after production through to retail), by
contrast, has been slower, with downstream deal volumes
falling 6% to 162 deals in 2012, and deal values staying flat
at around US$42b.
Oil companies have been eager to sell off downstream
operations and focus on potentially more lucrative upstream
plays. Examples from 2012 include Exxon Mobil selling its
Japanese retail, refining and storage division, TonenGeneral
Sekiyu, for US$3.9b, Statoil selling a 54% stake in its road-
transport fuel retailer to Alimentation Couche-Tard, and BP
selling its Carson refinery and Southern California refining
and marketing business to Tesoro Corporation. Meanwhile,
in September 2013, US oil company Chevron agreed to sell
its downstream assets in Pakistan.
“Downstream assets tend to have a lower unlevered
return than upstream assets, so you have seen companies
selling those assets or, at the most extreme end, completely
splitting downstream and upstream,” says Brogan.
The road ahead
In a changing world, corporates in the oil and gas sector need
to bear in mind the following factors when trying to compete:
Return on capital. Although the oil price is trading at near-
record highs and demand is increasing, return on capital is still
a key area of focus as resources become more difficult and
expensive to produce.
“As the rocks that companies are producing oil from
become progressively harder to get at or are more remote,
and the focus on health, safety and environmental concerns
becomes even greater, then the cost of developing them
increases. Processes have become more technical and
difficult. Deep-water is more expensive than shallow-water,
and unconventional resources are more expensive than
conventional,” says Brogan.
Partner up. Partnerships have always played a large part in
the industry, but the fact that many oil and gas fields have
become more technically challenging to operate and require
large capital investment has prompted an increase in joint
ventures (JV) and strategic alliances between oil and gas
companies to mitigate risk.
“We are now entering a third era, where cooperation
between partners is the key to unlocking the resources found
in the most challenging locations,” said BP Chairman Carl-
Henric Svanberg in the company’s latest annual report.
A recent example of this is the JV deal announced in June
2013, between Pangean Energy and PetroTech Oil and Gas,
which saw the companies enter a contract to buy mineral
rights in the huge Bakken shale oil reserves in North Dakota.
Upstream deals. The record M&A level in 2012 — particularly
in upstream activity — demonstrates the importance of using
acquisitions as a tool for breaking into new geographies and
taking control of unconventional resources such as shale or
deep-water. And, while 2013 has been quieter for M&A, there
is reason for optimism. The second quarter of 2013 saw an
improvement in upstream deals — although it was a modest
one. According to Derrick Petroleum Services, volumes rose
from 117 deals in Q1 to 141 in Q2, with value also rising from
US$20.9b to US$24.9b. The indication is that the sector is
still focusing on its core activities.
Upstream deals are extremely key to positioning oil
companies to achieve the best return on capital. “In an
environment where capital is more constrained than in the
past, companies have rightly focused on where they can get
the best returns on that capital. Traditionally, the upstream
segment of the market is where bigger returns on capital are
possible,” says Clark.
Invest in technology. Advances in technology have been the
key enabler for companies developing difficult-to-reach assets.
Without technological developments, production on many
assets operating today would be impossible. This is set to be
an ongoing theme — investing in technology, either internally
or through acquisitions, will allow companies to produce with
greater efficiency and open up new resources in the future.
“Oil companies are making returns on capital on difficult
assets, which they could never have made economical
20 years ago,” says Forbes. “Given the recent technological
breakthroughs, there is every chance the industry can
continue to open up hard-to-access reserves in the future.”
Quality not quantity. Producing as much as possible used
to be the main focus for international oil companies. Now,
with the focus on return on capital, quality, as well as scale
of production, is the priority. “For BP, advantage now comes
from exceptional capability rather than exceptional scale.
Our future is about high-margin, high-quality production, not
simply volume,” said BP’s Svanberg in the annual report.
Indeed, technical ability and high margins are likely to
remain crucial, as oil companies rely more on deep-water and
unconventional reserves to replace oil stocks and meet the
world’s ever-increasing energy needs.
For further insight, please email editor@capitalinsights.info
Oil and gas in numbers
405.6b
Cubic meters of natural
gas imported into
Western Europe in
2012, a fall of 2.2%
year-on-year.
Source: Opec
1.8%
The growth in
global primary
oil consumption
in 2012.
Source: BP Statistical
Review
1m
Barrels a day
growth in US oil
production, the
largest in the world,
in 2012.
Source: BP Statistical Review
23.9%
Natural gas’s share of global
primary energy consumption in 2012.
Source: BP
Statistical
Review
10.2m
Barrels a day
produced by
Saudi Arabia in
August — the highest
on IEA record.
Source: IEA
EY/Shutterstock/istock

24. Capital Insights from the Transaction Advisory Services practice at EY
All the
right
elements
What does it take to get due
diligence right and make sure your
deal is the best it can be?
C
hief executives received a severe warning this
year about the risk inherent in M&A activity.
In January, mining giant Rio Tinto revealed
multibillion dollar writedowns on its 2011 purchase
of Mozambique coal explorer Riversdale Mining. This had
been put down to a lack of infrastructure oversight. Indeed,
even Rio itself admitted to overestimating the challenges.
“In Mozambique, the development of infrastructure to
support the coal assets [was] more challenging than Rio Tinto
originally anticipated,” it said in a statement at the time.
This type of situation highlights the often unseen variables
during and after a deal. Mindful of this, a thorough and
integrated due diligence (DD) process is more vital than ever
in today’s volatile economic environment, whether corporates
are doing deals in developed or emerging markets (EM).
“You need to have an investigative mindset and be
clear on the investment thesis,” says Steve Ivermee,
EMEIA Transaction Support Leader at EY. “You need to
be professionally skeptical without being negative. You
have to be able to identify and quantify risk; few profitable
opportunities come at zero risk.”
It’s all about value
The fastest-growing corporates will be those that focus on
the opportunities for creating value through acquisitions. And
that means putting value creation right at the heart of DD.
“Companies such as GE and Cisco, which do a lot of
acquisitions, have a value creation approach built into their
mentality,” says William Gole, co-author of Due Diligence:
an M&A Value Creation Approach. “One of the most difficult
problems encountered when evaluating acquisitions is
estimating potential value-creating synergies.”
Key insights
• Value creation needs
to be at the heart of
the due diligence (DD)
process and corporates
need to explore the
potential synergies
early in the process.
• A fully-integrated
approach to DD is
vital. Areas such as
human resources
(HR) and information
technology (IT), where
relevant, should not be
overlooked as they can
enhance value creation.
• Taking a co-ordinated
approach can ensure
that important aspects
of the process are
not overlooked.
• DD differs markedly in
emerging markets —
an even greater focus
on areas such as tax
and legal compliance
is needed in order to
successfully complete
a transaction.
• DD should be ongoing.
Governance must not
stop on signing.
For instance, nearly half of respondents in
EY’s 2012 Global M&A tax survey and trends
report said one of the main factors affecting
the delivery of post-deal tax synergies was
that the tax function wasn’t brought into the
deal early enough. As such, they are denied
the chance to identify these synergies.
This is particularly salient in markets
where growth is scarce.“Given the low-growth
environment in many mature markets,” says
Ivermee, “deal-makers need to be clear about
how synergies and operational efficiencies
are going to be delivered.”
Getting integrated
The key to completing DD that identifies
these opportunities, and then seizes them,
is to approach the process in an integrated
fashion. While corporates must always delve
deeply into the financial and operational side
DD (for five key steps, see “Covering your
bases,” p26), a more integrated method
allows other key areas to be analyzed. This
means performing DD, where relevant, on
the target’s culture, regulatory environment,
intellectual property, HR, management,
IT infrastructure and corporate social
responsibility record.
For example, the importance of HR
issues should not be overlooked. A 2012
report, Human Capital Risk in Mergers and
Acquisitions, produced for the Canadian

25. www.capitalinsights.info | Issue 8 | Q4 2013 | 25
Financial Executives Research Foundation, found that 87% of
those companies that were very successful or fairly successful
in M&A activity identified key talent to retain during the DD
process (87% and 85%, respectively) while only 58% of less
successful companies did this.
IT is another area in which many corporates can improve
in the DD process. EY’s 2011 IT as a driver of M&A success
report showed that just half of respondents conduct separate
IT DD on deals, while only 21% of corporates consider
IT-related issues during the valuation process.
The issue with many deals is that these areas don’t get
probed thoroughly enough because the DD operation either
hasn’t been set up properly or the vendor does not allow the
buyer to investigate these issues to an optimum level. If the
latter is the case, the buyer needs to have a three-point plan.
First, they should focus on issues that need to be properly
understood and evidenced. Second, the buyer must be clear
on what is non-negotiable about its DD needs, and finally, they
can take calculated risks on certain topics.
For those in the former camp, they could do worse
than take lessons from one FTSE 250 company, with
which Ivermee has worked closely, that has performed
several successful acquisitions. The business starts its DD
by bringing together all the key players from its operating
divisions and cross-corporate functional units, such as HR,
tax and accounting, as well as its CEO and CFO. Alongside
external advisors, they spend a day discussing the potential
acquisition. The meeting achieves many objectives, according
to Ivermee, who has taken part as an advisor.
“You get everyone on the same page as to what’s on
the CEO’s and CFO’s minds,” he says. “Everyone is clear
about the corporate risk appetite and investment thesis and
what that means for their areas of focus in the DD process
that ensues. During the meeting, we also find the linkages
between the workstreams that need to take place during
DD. The whole process starts off with good communication
between everyone involved. It’s better than having separate
DD activities reporting into a central point and relying on that
central point to spot the connections between the different
streams, which they don’t always do.”
Creativity is the cure
A creative and co-ordinated DD process can overcome the
‘box-ticking’ that often leads to important aspects being
overlooked. “Typically, if there is malfeasance within the
business, it’s going to be designed to avoid the normal means
of detection,” says Charles M. Elson, Director of the John L.
Weinberg Center for Corporate Governance at the University
of Delaware. “That’s why the checklist mentality is a problem.
If you’re creative, you think around the checklist and you’re
more likely to come up with issues.”
In addition, this approach also makes it easier to cope
with collating and analyzing the volume of information the
DD team uncovers. “The cure for this problem is clarity of
scope for the DD,” says Jonny Myers, a Partner at the law
firm Clifford Chance. “You must create a detailed scope and
a timetable, and set up reporting lines with a point person
co-ordinating the work.”
And DD should not just be about looking backwards. James
Grebey, author of Operations Due Diligence, feels that it’s vital
to explore the target’s potential. “Good operations DD should be
a full enterprise-wide assessment, not just past performance.
It should explore issues such as personnel, production
capability, and infrastructure management,” he says.
This can be seen in eBay’s purchase of PayPal in 2002
for US$1.5b. At the time, eBay CEO Meg Whitman spoke of
the potential synergies. “Together, we can improve the user
experience and make online trading more compelling,” she
said. “We can also capture greater value from the e-commerce
opportunities occurring both on and off our site.” Eleven years
later, PayPal’s Q2 2013 revenues are US$1.6b, growing over
a fifth year on year, and represented 42% of eBay’s entire
revenues for that period.
Preserving
Investing
of respondents noted themselves
as effective at handling DD.
This figure was just 17% in the US.
47%
17% (Source: Clifford Chance, Cross-border
M&A: Perspectives on a changing world)
©iStock.com/Steve Cole

26. Capital Insights from the Transaction Advisory Services practice at EY
Emerging issues
When it comes to DD in EM deals, an even
more thorough approach must be taken.
A 2013 survey by Mergermarket and
Merrill DataSite entitled The future of M&A
in the Americas, found that nearly 40%
of respondents felt that DD in EMs would
become more difficult in the coming 12
months. The Asia-Pacific and Middle East
and North Africa regions were picked out as
the regions where DD would require more
attention than usual.
In EMs, it is widely acknowledged that
both corporates and private equity (PE)
buyers need to conduct weightier DD into tax,
financial and legal areas. However, according
to the aforementioned Mergermarket survey,
these can be the most challenging aspects
of the DD process. Seventy percent of
respondents expected legal compliance to
be the most significant challenge for buyers,
with the availability of relevant financial and
operating data coming second (58%).
Covering your bases
EY’s Charles Honnywill outlines five vital steps that
corporates need to take when carrying out financial
and operational due diligence
This highlights the need for companies to rely on advisers
with local expertise to provide them with a knowledgeable,
on-the-ground assessment of the risks.
“You don’t know how the market will develop, and you
may not have comparable companies against which your
deals should be judged,” says Konstanze Nardi, Partner at
EY’s German member firm. “Everything is new, you must be
alert and focus on what is critical for the investment thesis to
get the value out of the deal.”
Although financial and tax DD are paramount, acquirers
still need to take a detailed and integrated approach. This will
give them a better understanding of the target, including its
reputation, political connections and how it deals with issues
such as corruption.
Whether an acquisition is happening in a developed or
an emerging market, DD is a vital part of the M&A process.
It can open up new avenues for growth, but it must be an
ongoing process. As Ivermee says: “The best transactions
are the ones in which a company is constantly reassessing
why they’re doing the deal, and doing that at frequent stages
throughout the DD.”
For further insight, please email editor@capitalinsights.info
On the web
For more on due diligence, watch our exclusive video with EY professionals
at www.capitalinsights.info/duediligence
Charles Honnywill
is European Head
of Sell Side Services,
Transaction Advisory
Services, EY
The equity case. Focus on the return on
equity that the acquisition is expected to
generate. The equity case leads to a series
of key issues that should drive the scope
and focus of the DD. In practice, too many
corporates arrange the DD around the
people that are involved in the process
(and the particular issues that they
see from their areas of responsibility).
Corporates need to investigate the
issues that will determine whether the
acquisition meets the equity case.
Make sense of cash flows. Corporates
often focus on profit, less on cashflow.
Remember that profit is the result of
accounting policies and practices, so
it is often subjective. Cash is not an
accountant’s “construct.” When the DD is
done, can you articulate how cash flows
through the business and correlates to the
claimed profit levels?
Focus on the top line. Corporates often
focus on costs and balance sheet risks
in the business, but many DD processes
fail to fully evidence the reasons for, and
drivers of, revenue and margins. Detail at a
product and customer level is critical.
Test the deal “structures.” There are five
questions that need attention during DD:
What are the key commercial agreements?
How will the acquisition fit operationally?
What is the financial structure and what are
the implications for “day one” financing,
completion accounts and ongoing working
capital? What is the tax plan and the
legal structure to deliver it? What are the
regulatory constructs that the deal may
need to meet for oversight bodies?
Govern well. Governance over the DD
process must not stop on signing. From
then until completion, value continues to be
at risk or available to the alert buyer. Well-
drilled sellers will catch out the buyer that
loses focus.

27. www.capitalinsights.info | Issue 8 | Q4 2013 | 27
© Paul Heartfield
After a tough few years, it seems the IPO window has reopened. This is
good news for some of the largest private equity-backed companies
A
s the macroeconomic backdrop
slowly improves, so the window
for initial public offerings (IPOs)
has reopened, with Europe in
particular seeing a warming of investor
sentiment toward new offerings after a big
chill. The first half of this year saw 306 IPOs
globally, raising US$57.8b, according to EY’s
quarterly publication, Private equity, public
exits. The EMEA region witnessed 66 IPOs
in H1 2013, raising US$11.5b — a near 70%
increase on the first half of 2012.
Increasing confidence in public markets
is having a positive effect on private equity
(PE)’s ability to take portfolio companies
public. PE-backed deals accounted for
more than one-third of the total proceeds
raised by all global IPOs in H1 2013. The
second quarter had a particularly strong
showing, with 43 PE-backed IPOs raising
US$13.6b, an increase of 70% over Q1,
when US$8b was raised. And, on top of this,
there are currently more than 50 PE-backed
companies in the IPO pipeline, with the
potential to raise more than US$13.7b, our
research shows.
This development is important for PE,
as it provides a boost to the exit prospects
of large portfolio companies. Our study
of 2012 exits from European PE portfolios,
Myths and challenges, which tracks
PE-backed businesses with an entry
enterprise value (EV) of €150m (US$198m)
and above, found there were just three
public exits in 2012.
This is one factor contributing to the
increase in holding periods of PE portfolios.
The average in our sample is now 4.7 years,
up from 3.5 years in 2006. Our research
also shows that there are around 100
companies in Europe’s PE portfolio with
an entry EV of €1b (US$1.3b) and above.
For a number of these, an IPO is one of
the few viable exit options, particularly as
many corporate buyers continue to remain
circumspect about making acquisitions.
Big IPO exits in Europe this year include
CVC Capital Partners’ offering of Belgian
postal services business bpost, which raised
more than US$1b, and insurer esure, backed
by Penta Capital Partners and Electra
Partners, which also raised over US$1b.
In the pipeline, among others, are Carlyle,
Cinven and Altice-backed cable company
Numericable, and theme park operator Merlin
Entertainments, backed by Blackstone Group
and CVC. Appetite among investors appears
to stretch across all sectors.
If the IPO drought really is ending, the
after-market performance of PE-backed
companies will help to get other new issues
away. In the first half of this year, our
research shows 75% of PE-backed IPOs
were priced within or above their expected
ranges, with an average 11.2% increase over
their offer price through to the end of June.
Indeed, EY’s research into technology
sector PE-backed IPOs, Right team, right
story, right price, found that attractive
pricing ranked highest as a requirement for
new issues for institutional investors, cited
by more than 90% of respondents. There
is no doubt that getting the initial pricing
right is key in today’s market — investors
need to be confident there is still an upside
in new issues. Successful IPO candidates
also need other attributes to attract high
levels of interest. Ranking second was a
compelling equity story (65%) that includes
growth prospects, and third, confidence in
management (57%).
The outlook is good for PE-backed IPOs.
There is a strong pipeline and investors
appear to be welcoming high-quality new
issues in the market, as long as they are
priced attractively. And, for some of PE’s
largest companies, this may be the only
exit route. But, as long as the IPO window
remains open, it looks as if this wave of new
PE issues will continue.
Sachin Date is the Private Equity Leader for EMEIA
at EY. For further insight, please email
sachin@capitalinsights.info
The IPO
agenda
The PE perspective
Sachin Date

28. Capital Insights from the Transaction Advisory Services practice at EY
From large corporates to
small retailers, each family
business is unique. But the
best often share common
characteristics. We explore
how they grow, the key
challenges they face and
what others can learn
Key insights
• Long-term management and clear
succession plans have helped family
businesses grow.
• Family businesses often eschew
short-term goals that help preserve
the business in the long run.
• A focus on innovation helped family
businesses come through the recession.
• Family businesses are growing not only
through M&A, but also via third-party
companies and franchises, in order to
maintain control of the main brand.
• When it comes to raising capital, family
businesses need to weigh up the need for
capital against the dilution of ownership:
private equity or alternative financing
could be the solution.
ties
The
that
bind
I
n the age of the exit-focused
entrepreneur and the shareholder-
controlled public company, it’s easy
to forget the importance of family
businesses to the global economy.
In its June 2012 report on the sector,
Built to last, EY noted that family-owned
businesses account for around 60% of all
companies in Europe and the US, and about
half of employment. Elsewhere in the world,
family businesses are just as prevalent. For
instance, the Credit Suisse Asian Family
Business report from 2011 found that
across the 10 Asian countries covered, they
accounted for 32% of market capitalization.
And they have proved resilient in the face
of difficult economic conditions. EY’s Built to
last survey found that 60% of respondents
had grown by 5% or more in the year to June
2012, while a sixth reported growth of 15%
or more. Yet, despite these stellar figures,
family companies face real challenges.
Succession is a perennial issue, as is
the dilution of ownership or influence when
finance is raised. And lately, businesses in
developed markets have been facing fierce
competition from emerging market peers.
But these businesses have shown that a
long-term focus, investment in innovation
and smart capital-raising methods can
help overcome these obstacles. And other
corporates need to take note.
Playing the long game
Peter Englisch, Global Leader of EY’s Family
Business Center of Excellence, says the sector
tlGettyImages/HultonArchive/StringerclGettyImages/E.O.HoppeblBishop’sMovetrBloombergviaGettyImagescrGettyImages/SeanGallupbrBishop’sMove

29. www.capitalinsights.info | Issue 8 | Q4 2013 | 29
Family businesses
that are focusing
expansion plans on
new products and
services, according to
EY’s Built to last survey
Proportion of listed companies belonging to family business groups – by country
Sri Lanka
66.7%
Indonesia
29.7%
Turkey
50%
Greece
20%
Colombia
48.2%
India
29.3%
Philippines
46%
Mexico
26.2%
Chile
46.2%
Belgium
24.4%
Source: Masulis, Pham, Zein: Family Business Groups around the World:
Financing Advantages, Control Motivations and Organizational Choices (2011)
is characterized by a dynastic will. “What we see in family
businesses are plans to ensure that ownership of the company
will be passed down to the next generation,” he says. This
is borne out in EY’s Built to last report, where over half
of respondents said that a long-term management
perspective was one of the most important factors for
ongoing business success.
Sometimes, this can be achieved over many generations.
A case in point is Bishop’s Move, the UK’s largest private
removals group, now in its sixth generation of family
ownership. Five years ago, the company took on its first
outside CEO, Alistair Bingle, with family members Nigel and
Roger Bishop as Joint Chairmen. “As new generations enter,
many move out of the business and seek other professional
situations. We bring family members onto the board when
they show a clear intent that they want to be involved,” says
Nigel Bishop, who is also the company’s Franchise Director.
Family firms’ long-term view can be seen in their
response to the recession, says Englisch. “Family-owned
companies didn’t respond by downsizing. Instead, they
used the downturn to invest in people,” he says. “And, when
economic conditions improved, they re-emerged as full, highly
motivated workforces.”
Motivating workers appears to be embedded in the DNA
of family-owned companies. According to a June 2013 study
by the UK’s Institute of Family Business Research Foundation,
Family Business People Capital, people working in family-
owned companies scored higher across several indicators
(including sense of achievement and scope to use initiative)
than those working in other types of business. Seventy-eight
percent of respondents described themselves as loyal to the
business, compared with 74% in the non-family sector.
It’s a picture recognized by Bishop: “Within our company,
we ensure staff feel that they are being looked after,” he says.
“One of the benefits is that we succeed in retaining people for
a considerable length of time, and they are loyal staff.”
Growth patterns
When it comes to investing, family businesses are focusing on
innovation and traditional M&A, as well as alternative growth
models, such as franchising and third-party investment.
In terms of innovation, the Institute of Small Business
Research in Germany found that, at the height of the
Eurozone crisis, nearly half of German family-run companies
turning over more than €50m (US$67.6m) were investing
more in their business and focusing on innovation. And,
according to Germany’s Federal Ministry of Economics and
Technology, 54% of the country’s Mittelstand businesses —
overwhelmingly family-owned and managed — introduced new
products between 2008 and 2010.
In an interview last year, Hartmut Jenner,
Chief Executive of Kärcher, a family-owned
German cleaning equipment company, saw
innovation as key to the company’s growth.
“We have 600 development engineers and
now sell 3,000 products, which is 50% more
than five years ago,” he said. “I think this
provides a good base for the next few years.”
In addition, the most dynamic of family
firms can also be enthusiastically acquisitive.
India’s Tata is a case in point. The company
has acquired businesses and stakes across
a diverse commercial landscape, including
telecommunication company BT’s Mosaic
business in 2010, potash development
firm EPM Mining (30.6% stake in 2011)
and consultancy Alti in July this year.
According to Ajay Bhalla, Professor
of Global Innovation Management at Cass
Business School, Asian firms’ expansion
and diversification are tied to the family
logic of the owners. “Buying up companies
and diversifying offers a way to provide a
new generation the opportunity to gain
experience outside the core business and stay
united under the family umbrella,” he says.
There are also alternative growth
models to consider. For instance, Bishop’s
Move has expanded by signing up franchise
partners that operate under the brand, while
On the web
For more on family businesses, read the EY Built to last report at
www.capitalinsights.info/familybusiness
Investing
Optimizing
Raising
50%
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