US Welcomed at Davos as the New Emerging Market

The annual meeting of top businessmen, leading public officials, and a host of other VIPs in Davos usually sees emerging markets claim centre stage and draw attention to the marvels of their booming economies. Save for China, at this year’s Davos happening the world’s erstwhile movers and shakers are expected to tone down some.

Three of the five BRICS countries – Brazil, Russia, and odd-man-out South Africa – aren’t doing all too well. Brazil’s economic growth is petering out and forecasted to not exceed 1.2% in 2015. South Africa is doing a bit better, expecting its GDP to expand by 2.5% provided oil prices stay low, while Russia – beset by crippling sanctions – may, with some luck, only just avoid an economic contraction.

India is doing significantly better. According to estimates by the World Bank, the country will see its GDP grow by 6% or more this year, even as Prime-Minister Narendra Modi seeks to introduce sweeping reforms aimed at ushering in a golden age. Meanwhile, China is battling its own demons – a shaky real estate market and iffy banks – all the while maintaining an impressive, albeit slightly lower than usual, growth rate of at the very least 7.4% in 2015.

The one emerging market to command the undivided attention of the 2,633 invitees to the 45^th edition of the World Economic Forum is … the United States. “It is the safest and best harbour,” assures Manuel Falco, head of corporate and investment banking for Europe, Africa, and the Middle East at Citigroup.

“If you want to participate in innovation, you have to be in the US.”

– Karl-Ludwig Kley, CEO, Merck

The US is close to booming with its economy in Q3 2014 growing at an annualised rate of 5%. “The pendulum has shifted once again,” says Jacob Frenkel, chairperson of JPMorgan Chase & Co.’s international operations: “The US is now regaining its position in the world economy. It is the place where the recovery took hold in the most robust way.”

Martin Reitz, head of the German branch of the Rothschild investment bank, agrees and predicts that behind the scenes, much of the talk in Davos will concern the extraordinary resilience of the US economy and the ways in which companies may hitch a ride on the American bandwagon: “Companies not present or sub-scale in the US are busy thinking about how to address this.”

German pharmaceutical giant Merck jumped ahead of the pack and in September announced its takeover of St Louis-based life science and biotech company Sigma-Aldrich for $17bn. Shareholders approved the bid and just before Christmas, the US Federal Trade Commission gave its blessing to the proposed deal as well. “If you want to participate in innovation, you have to be in the US,” said Merck CEO Karl-Ludwig Kley: “No other country on earth is investing as much in innovation.”

Japanese distiller Suntory plopped down a cool $16bn for an irresistible piece of Americana as it acquired iconic bourbon producer Jim Bean, while the Canadian oil and natural gas producer and transporter Encana moved decisively into the Texas oil patch with its $5.9bn purchase of Athlon Energy.

The US acquisition scene is about to heat up and Davos is the place to take its temperature. Forecasters are dead-sure that last year’s $259bn in foreign takeovers of US businesses – already double the 2013 numbers and a level not seen since 2007 – may very well be outdone in 2015. Large cash reserves, halting growth in emerging markets, and the limited potential of organic growth have fuelled interest in mergers and acquisitions to such a point that suitable targets have become scarce.

“Finding assets that will generate returns to satisfy investors has proven difficult for corporations and private equity firms alike,” says Dan Tiemann, head of Transactions and Restructuring at KPMG in the US: “The economic fundamentals that drive M&A are back at pre-crisis levels, with corporations holding large cash reserves, interest rates remaining historically low, consumer confidence improving and the US dollar becoming stronger.”