As billions of people worldwide celebrate the 40 day festival of the Chinese Lunar Year, Martin looks to the Far East and gives his views on the challenges - and opportunities - in China for professional services firms, networks and their clients.
Recent figures from the Chinese culture ministry suggest that revellers in almost 120 countries worldwide will host festivities to mark the Chinese Lunar New Year, which began on 19 February. The bright colours and bold patterns of the celebrations so far have provided stark contrast to the gloomy outlook reported through recent headlines of global business newspapers. With the country in the mass-media spotlight, I would like to share a few of my own thoughts on the challenges and opportunities for doing business in China – particularly for our profession.
Having spent a significant amount of time in the country over a number of years, I’ve seen vast changes as China experienced a boom, surpassing the United States as the world’s biggest economy. However, latest data tells a different story, with economic growth at its slowest pace since the depths of the global financial crisis - industrial overcapacity, rising debt levels, political tension and a slump in the property sector being cited as reasons for the slowdown. In fact, economists at the World Bank and the International Monetary Fund have suggested that within a year or two, India’s economy might be growing more quickly than that of China. As a result, investors and businesses are being increasingly cautious when looking to China for investment and growth.
Against this backdrop of slowing growth and falling productivity in China, the country nonetheless remains a hotbed for M&A activity. BDO’s latest quarterly Horizons report, which gives a comprehensive analysis of global M&A activity, showed an unprecedented level of deal activity in the market in 2014. In fact, by the end of the third quarter, deal volumes and values in 2014 had surpassed that of the previous year, and certainly offer continued optimism for the markets going forward.
In terms of the implications for professional services firms there are, in my view, two key factors to achieving success in China in 2015:
The first is that doing business in China fruitfully must be underpinned by a clear understanding of the country’s unique etiquette and ceremonies. This can be quite overwhelming when you consider that China is made up of 23 provinces and 56 ethnic populations. So, in order to anticipate and respond to client’s needs, firms need to have skilled staff with in-depth knowledge and experience of operating in this market. The ability to deal with the nuances and complexities of local ways of working is imperative. According to my opinion, many businesses fail in China because they take a standard approach that isn’t tailored to the needs of clients nor the local ways of working. It sounds simple, but too few companies get it right. That’s why at BDO we give our people the freedom and the flexibility to ensure that client service is right for their clients.
The second – and arguably, most important - factor is that such local knowledge needs to be supported by a strong expertise across key service lines and industry sectors. This approach will enable firms to match clients’ changing demands and in turn, capitalise on growth opportunities. For example in China we are focusing on and expanding our TMT sector, an industry which played a starring role in the first half of last year, as China’s diversified technology giants continued to expand their operations into areas such as mobile phone manufacturing, logistics, entertainment and mobile apps development.
In order to get both extensive expertise and in-depth local knowledge right, it is important to have a significant presence in the market. This might take the form of establishing an in-market presence through organic growth or it might be achieved through mergers or acquisitions. BDO Li Xin’s merger with a big part of PKF China in 2013 certainly strengthened our position as the market leader in serving state-owned enterprises and in the last 2 years BDO China has completed a further four mergers, putting the firm in a good position to take advantage of Chinese economic reform. This is why BDO was able, late last year, to announce that our revenues in China were up 16%, leading to a CICPA ranking of 4, ahead of EY and KPMG.
Through a relentless focus on delivering exceptional client service, underpinned by in-depth local knowledge, strong sector and service expertise and an efficient global infrastructure, we have been able to accelerate our own growth and take advantage of the opportunities created by our clients’ global expansion in the Asia Pacific region, particularly in China. I’m looking forward to seeing this continue throughout 2015 and beyond.
In this latest guest post on the CEO Insights Blog, BDO’s Global Head of Natural Resources, Charles Dewhurst discusses how plummeting oil prices are impacting companies in the oil sector. What are the factors determining future outlooks and how should organisations prepare for the future?
Who will pay the price?
This week I’m attending BDO’s International Natural Resources Conference, which will be held in Africa, within our EMEA region, for the first time. As we find ourselves in an unprecedented period of plummeting oil prices, I’m keen to hear first-hand from colleagues around the world about the impact on businesses in their market. From a global standpoint, although we are facing uncertainty, I believe that the current oil and gas landscape is very interesting and for some there is cause for optimism.
Throughout 2010 until towards the end of last year, oil prices were more or less steady: other commodities had been hit by the stalling Chinese demand over the last 18 months, but oil managed to hold up. Such stability seems a time ago now, as prices have more than halved in the past six months. Those of us working within the sector are now facing the question: is this the result of structural change, or is simply a case of boom and bust? On one hand we have plentiful supply of energy thanks to new discoveries of shale and on the other the global economy is struggling to pick up the pace and we are seeing dwindling demand. From my conversations with colleagues, clients and peers, it seems many people would be happy if the price point makes it back up to $80 a barrel. As a result, I believe we are seeing an important change in the oil and gas sector and I’m not convinced the price has bottomed out.
Producers large and small are being buffeted by a combination of surging US production, slow economic growth in many markets – and, of course, the fact that OPEC is not slowing down supply, rather believing that lower prices will stimulate demand. But, as prices continue to fall steeply, producers must attempt to navigate an ever more uncertain environment.
What are the future-determining factors for oil and gas companies?
The first is size: in this situation, size matters because it provides room for insulation from financial risk. For example, at the end of last year BP announced plans to restructure, including the loss of hundreds of back office jobs, many of them in the US and UK. Royal Dutch Shell has also said it will cut $15bn from its global investments – no doubt impacting the likes of jobs and exportation in new territories. For smaller companies, there is far less scope or capacity to accommodate such cost-saving moves to rebalance the books in the face of falling prices.
The second factor is efficiency- or more importantly, the lack of it. As the cost per barrel reaches new lows, lifting costs are under scrutiny and the priciest extraction techniques are set to suffer. This is particularly relevant in the North Sea where high production costs are draining what little profits are possible at this time. In some markets shale might be the answer. For example, in the UK, Prime Minister David Cameron has been supportive of exploring the shale option and, given issues around security of supply, Poland and Ukraine might also be tempted to investigate. In addition, Russia may well be investigating shale further because, with or without shale, the country faces a difficult balancing act. Russia loses around $2bn worth of revenue every time a dollar is shed from the oil price but is at the same time refusing to cut production in a bid to shore up prices. The worry is that such a reduction in production would see Russia lose its foothold with importers.
Looking elsewhere, Canada and Venezuela are among other markets being hugely impacted by the current situation. Although the Canadian oil sands are not the most efficient, they have been well managed and so far successful, because Canadian crude supply to the US has resulted in a squeezing of the Saudi supply. But now there’s a risk that the oil sands could be victims of their own success and are in danger of being priced out by a sustained period of low prices. Against this background, the debate in US Congress over whether or not to approve the Keystone XL pipeline from Alberta down to the US continues, with both environmental and economic concerns at the heart of the debate.
Looking further South in the Americas, Venezuela’s Ministry of Petroleum and Mining reported in January that prices had halved from their June 2014 peak. This is decimating the Venezuelan economy and inflation is over 63%, and as a result China has had to pledge $20bn in financing.
What might the coming months hold?
I think it’s safe to assume that we aren’t going to see a rise in oil prices any time soon. With producers and their suppliers under mounting pressure, companies need to take action now to get themselves fit for the immediate and long term future. Small and mid-sized companies in particular must prepare: without the insulation that scale provides, many may need to consider debt financing, mergers and acquisitions to survive. However it’s not all doom and gloom. Yes, the world in which we operate is fundamentally changing, but there are also tremendous opportunities for ambitious businesses operating in the natural resources sector around the world. Demand for efficiency, for resources, for improved access to credit and technological innovation is fuelling growth opportunities, particularly for those focused on non-conventional resources – whether harnessing the power of technology for responsible shale fracking or capitalising on the potential of liquefied natural gas to answer energy needs. Midstream and exploration are two areas in particular where we’ve seen opportunistic companies capitalising. In particular, mid-caps and majors with the financial resources and infrastructure, are increasingly entering joint ventures in a bid to expand their portfolios. In fact, I’m already starting to see our teams around the world increasingly being called on to help facilitate these partnerships or deals, whether making the introductions or undertaking the necessary due diligence. I predict it’s something we’ll only see continue as more companies look to capitalise on the current climate.
By Julian Frost, leader of BDO's Global Technology Team
In this latest blog post, leader of BDO's Global Technology Team ,Julian Frost discusses the impact of Alibaba’s mega float on the global technology sector.
In the days and weeks leading up to the Alibaba flotation, the sector held its collective breath, waiting to see how the market would react. This meant something of a pause on deal activity, but now the dust has settled on the deal, has the way been laid open for a rush of listings, mergers and acquisitions?
BDO’s latest TECHtalk report examines the health of the tech sector in the months after the float. It provides the most comprehensive analysis to date of the Alibaba Effect; its impact on the markets in Q4 2014 and what it means for the global tech playing field in early 2015.
The IPO floodgates failed to open
Immediately following the flotation the market cooled as companies delayed their listings for fear of interest being detracted by the megadeal, and also to see how the market would react. This has meant IPO activity is currently down 25% year-on-year. With the dust having settled on the Alibaba deal and it being deemed a success, many expected a resurgence in tech IPOs – many of which didn’t materialize because of macroeconomic uncertainty, volatility in the markets and political instability.
However, it’s not all doom and gloom. We’ve seen a much-needed festive flurry of deals lined up in December and we predict the year end figure will only show a 14% slide compared to 2013. This pre-Christmas pipeline of activity looks promising, and will hopefully stem the December drought we’ve seen so far, with only 20 IPOs announced this month, compared with 28 in December 2013.
Has the ripple effect brought any benefits?
Despite this constrained deal activity, we have seen some evidence of an Alibaba boost in some tech subsectors – in particular in application software. There have been 56 IPOs in this subsector already over the course of the year – and, given there were 61 in total in 2013, we expect this total to be surpassed within the closing weeks of 2014.
2015 should be a more positive year for IPOs as a whole, as a number of companies, which delayed their 2014 flotations against a backdrop of market volatility, look to make a means in the New Year. The highest profile of these is cloud storage vendor The Box - due to float in October, it has now delayed until 2015 – certainly one I’ll be watching with interest.
Tide of M&A growth also held back… but not for long
In a similar story to IPOs, a combination of macroeconomic uncertainty and Alibaba-induced caution has meant that 2014 has been a poor year for numbers of tech M&As. With investors’ eyes on how Alibaba would perform, Chinese venture capital fundraising plummeted to $403million in Q3, a fraction of the $3.78billion raised in Q2.
As of mid-December, 1910 deals have been completed this year, compared to 2139 in 2013. Although numbers of deals are down, the value of the M&As hit $2.66bn for the first three quarters of 2014 – a 60% increase on the same period in 2013.
Looking ahead to next year, we predict that tech M&As will have a brighter 2015. Individual subsector hot spots have been prominent in driving M&As in Q4 and we expect this to continue into Q1 2015. Chief amongst these in the final quarter of the year has been FinTech – the tech payments sector is coming to the fore with Apple launching Apple Pay in November. In addition, Proxama acquired Aconite Technology Ltd, an EMV enablement and smart product management software provider which is likely to kick-start a number of similar acquisitions.
Riding the wave: The watch-out for tech firms
As we reach the end of the year, it’s clear that the Alibaba Effect hasn’t been as positive as many hoped in sparking new tech deals. In fact, many companies have found themselves in unchartered waters with caution sweeping the markets and macroeconomic uncertainty compounding uneasiness. A successful flotation in the Alibaba aftermath hasn’t been as easy as saying ‘open sesame’.
Many factors come into play here but it’s clear there’s been a lag in the wake of the mega-flotation as some firms have either held back their deals or preferred to secure new backing to remain private. At BDO, we are hopeful for a more positive 2015, but while the overall outlook remains unclear, careful consideration is as important as ever.
Against the backdrop of BDO’s recently announced 2013 – 2014 results, Martin explains why he is extending his tenure for three more years and how this past twelve months provides a new platform for growth.
In my previous blog post I briefly mentioned that the BDO Global Board had asked me to extend my tenure as CEO of BDO for three more years. To expand a little on this, suffice to say that I was extremely pleased to accept the offer. The reason for this is simple – I really enjoy the role and my job. Right now there is a tremendous spirit in the network. All our firms are pulling together to achieve joint goals and this, combined with our continuing investment in a series of successful mergers and acquisitions, is creating real momentum. It’s this momentum which makes me confident that in the years to come we will be not just the leader, but the one true powerhouse in the mid-tier of our profession.
This confidence is borne out by our annual results, that were announced last week. For those who have not seen them, let me quickly recap:
We announced a total combined fee income for the year ended 30 September 2014 of US$ 7.02bn / €5.17bn – an 8.81% increase year on year in US dollars.
The BDO network now comprises 110 member firms. Including our firms’ exclusive alliances, BDO has 1,328 offices in 151 territories and just under 60,000 partners and staff worldwide. Our people numbers represent an increase of 5.4% compared to 2013.
It’s been a very good year, these results will, I believe, ensure our future success because the stronger we are, the more power we have to grow further. Here is some context on our successful last twelve months - as I see it, BDO’s growth can largely be attributed to three factors:
1. The scale and breadth of our ongoing merger programme, designed to ensure the network leads the consolidation of the mid-tier
2. Organic growth across the board - best exemplified in the US and China
3. New firms joining BDO in Fiji, Réunion Island, Bangladesh, Papua New Guinea and Sierra Leone, and a number of firms enlarging their territories, adding Laos (Malaysia), Afghanistan (Pakistan) and the Maldives (Sri Lanka)
I’d like to take this opportunity to highlight some of our most significant mergers from the past year.
Our US firm completed four acquisitions, including the key addition of Top 100 firm Alpern Rosenthal in Pittsburgh and two additions in the important Texas market. BDO Canada undertook six mergers, bringing more than CAD 20 million to the firm, and it expects to remain active on the merger front into 2015 and beyond.
In Asia Pacific, the four mergers realised by BDO China in the past year puts the firm in a good position to take advantage of Chinese economic reform and build on this year’s 16% revenue growth.
In Europe, the acquisition of seven firms in Norway added another €10 million to the firm’s annual turnover, strengthening its position as a firm in the same bracket as the country’s big four. BDO Turkey acquired IK, headquartered in Ankara and with strategic access to the public sector market.
In South Africa, mergers with leading firm CAP Chartered Accountants and restructuring firm UNLEASH were realised and 1 January 2015 will see the conclusion of the firm’s merger with RW Irish-Alliott Inc, providing a full suite of business support services. Meanwhile in the Middle East, BDO Jordan is now one of the five largest firms in the country as a result of their merger with Abbasi & Co.
Other firm successes worth noting included the former RSM correspondent firm joining BDO in Bangladesh, adding 100 partners and staff in a key export market in which BDO is one of only two of the large six networks represented across all service lines. The UK firm, meanwhile, showed a 27% increase in turnover in its first full year since their merger with PKF.
All this positive activity means that we were absolutely correct with our original analysis that accountancy’s mid-tier is on a consolidation course. The large firm accounting market has been consolidating for some years, driven by the requirements of midsize and large global clients – and the mid-tier of our profession is evidently now on a parallel path. Mid-market companies pursuing growth markets are not always best served by the biggest networks, which focus on the very largest companies – and as I said in a number of press interviews last week, it’s becoming increasingly clear that the best fit for such entities are mid-tier advisers with a truly global footprint, an efficient infrastructure and proven capabilities.
Consolidation is inevitable. BDO’s sustained growth gives us the momentum and power to lead the consolidation of the mid-tier and continue our cycle of expansion.
With another three years as CEO to look forward to, can I say where will we be in 2018? I believe so - I predict that by that time, only two or three substantial mid-tier networks with a global presence will be left standing. And I, for one, am looking forward to continuing our impressive journey of growth.