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Asia Pacific players assess the M&A environment
Deal bonanza, differing prospects?
Post the credit crunch in the West, investors and advisors across the region are waiting for the consequences to work out in Asia Pacific markets. The implications for M&A – whether strategically or financially driven – are being monitored, discussed, and predicted. With several major analyses of the regional M&A climate just aired, AVCJ looked at the state of the overall corporate and investment M&A market.
Regional activity and macroeconomics
Despite the credit crunch, there are few signs yet of any slowdown in the regional M&A volume – except for certain niches, such as top-end buyout transactions. Indeed, Asia Pacific is currently the global favorite in corporate M&A.
AVCJ Research’s own Asian Mergers and Acquisitions Review 2008 found that Overall transactions by value rose more than five times from $132.2 billion in 2003 to $680 billion in 2007.” A recent Marsh/Mercer/Kroll/EIU joint survey of 670 multinational executives worldwide1 concluded that, “M&A money is headed for the rapidly developing economies of China, India and Southeast Asia,” with this area commanding interest from around 57% of the total poll, the highest figure for any region. (Interestingly, the same survey found that Australia, Japan, and Korea came second only to Africa at the bottom of the poll, with only 25% of respondents rating Asia Pacific’s developed economies as areas of concern for the next 18 months.) In a recent PricewaterhouseCoopers survey of Asia Pacific M&A through 2007, Chao Choon Ong, Asia Pacific Transactions Leader, likewise noted that “the volume of M&A in Asia Pacific hit an all-time high.”
This optimism is typified by Asia Pacific businesses. Maurice Hoo, Partner in the Corporate Department at Paul, Hastings, Janofsky & Walker, finds the region’s corporates to be ready to acquire after several years of good business. “We see a lot of interest from the Asian corporates, many of whom are flush with cash and looking for strategic opportunities.” However, not all corporates are ready to look beyond their home ground. The Marsh/Mercer/Kroll/EIU survey found that, “the preference is to invest in the home region first. This is true for both developed and developing markets.”
Furthermore, many authorities report little anxiety over potential knock-on effects of a possible US recession. In a recent report2, Peter J. Morgan, Chief Economist for Asia Pacific at HSBC, noted that Asia Pacific economic growth had held up well through two US recessions in 1990-91 and 2001-02, with China in particular consistently achieving 8-12% year-on-year growth over the past 18 years. Ho likewise reported that, “I have not heard clients say that they are concerned over a US slowdown.” Furthermore, Morgan saw exports to other regions, particularly intra-Asian, holding up well even as US-bound exports slowed – amid signs of a genuine decoupling over the past four years with export volume less and less related to US GDP fluctuations. HSBC’s forecasts for 2009 see almost no Asian economy slowing its GDP growth rate by more than one percentage point.
Crunch-related opportunities
If anything, most M&A practitioners report that the credit crunch has thrown up more opportunities for both corporate and financial buyers. Some of the opportunities are immediately available; others are expected to become available over the next few months.
Christopher Kelly, Partner and Head of Private Equity for Asia with Linklaters LLP in Hong Kong, reports a “hiatus” in deal activity while valuation expectations come down. In some markets, such as Taiwan, the delay in pricing has been geared to a specific local event (the general election). More generally, Hoo believes, “the volatility in the market has made things very difficult to price, both for the buyer and seller. Deals sometimes get postponed because neither know how to price.”
Nonetheless, the credit crisis has produced various opportunities across regional economies. Kelly sees Australia as one of the area’s few reservoirs of genuinely crunch-related distressed assets, in keeping with its character as a Western-style economy. The PwC report singles out RAMS Home Loans, Centro Properties, and MFS Group as typical of the property-related assets that are now in play “due to a tightening in the credit markets.”
Hoo also sees PRC businesses, often in real estate, that may be forced to turn to private equity in the wake of an abortive listing. “Take the number of companies that want to go public before the Olympics,” he notes. “Some of them have done various pre-IPO financings that are not sustainable ... Very soon some of them are going to have to face reality.”
Another area of opportunity is the Japan REITs hit by market downturn after the credit crunch, which Kelly describes as mostly “under water.” These trusts, and similar platforms, are now trading in some cases at below their asset value, and Kelly says financial investors are going over them to find ways to enable exit at a price that allows both parties to realize value.
Market hotspots
The regional breakdown for M&A activity shows some clear leaders. “For domestic deals as well as inbound deals, the mature and developed markets of Australia ($115.3 billion) and Japan ($89.5 billion) come out first and second with 23.7% and 18.4% of the total Asian market share,” notes the AVCJ Research survey.
Hoo sees the greatest domestic appetite for M&A in “China, Korea, the Philippines. In quite a few Asian countries the strategic investors are very actively looking.” But Stephen Scott, co-head of the Shanghai office at Alvarez & Marsal finds “a continuing challenge for financial investors looking to do deals in China. The large-cap funds continue to have difficulty identifying deals, especially control deals, and most especially those that enable them to deploy a sufficiently large amount of capital to make the deal attractive.”
Australia won its leading place in regional M&A thanks to a number of factors. One is domestic capital looking for outlets. “In outbound deals, the vast pools of savings accumulated by the super-pension funds of Australia have been quite active, as such sums of money exceed what can be gainfully absorbed in the domestic market itself,” the AVCJ Research report finds. Another is the impact of the global commodities boom, itself driven by demand from China and India’s growth economies. The ambitious BHP Billiton bid for Rio Tinto is only the biggest of many mining and resources transactions riding on this opportunity. Also, Australia’s banks, with relatively low levels of subprime exposure, were able to fund buyouts from financial and strategic buyers throughout the year.
Japan owed its strong M&A year chiefly to financial services, which produced $56.1 billion of deals, leading with Citi’s $12.4 billion acquisition of Japan’s Nikko Cordial Corp. Permira’s c. $2.2 billion acquisition of Arysta LifeScience from Olympus Capital Holdings in October 2007 “has excited Japan’s relatively inactive private equity market,” in the words of the PwC report, but has not triggered any large visible transformation in the local private equity scene, at least as yet. Korea also has seen an uptick in activity, especially outbound. “In Korea, there’s a certain pent-up demand, because under the last administration they didn’t do much outbound acquisition,” says Hoo. “With the new administration, Korean companies are becoming more bold, and they are also cashed up and in a strong position.”
The Chindia phenomenon
China and India, however, continue to command the greatest mindshare amongst international M&A practitioners – an interesting finding when compared with the risk analysis section of the Marsh/Mercer/Kroll/EIU report. In short, “the risk profile of this region exceeds that of much of the developing world across a range of measures.” The latter finds that China, India, and Southeast Asia rate near top of the perceived risk index for almost all areas of political, legal, social, and economic risk, but none of this seems to have deterred the M&A community. Kelly conjectures that international risk metrics may need to be readjusted in the aftermath of the credit crunch, with its impact on Western markets, but there is no doubt that perceived risk remains high in Chindia.
Indian M&A volume is now substantial enough to justify any level of interest, at over $70 billion in 2007, according to the AVCJ Research figures, up from a mere $5.4 billion in 2003. Vijay Sambamurthi, a founding partner at Indian M&A advisory law firm Lexygen , predicts an even higher level soon, as liberalization of FDI caps in certain sectors takes hold – the cap on non-scheduled airlines will increase to a 79% holding, with 49% for scheduled airlines – a holding level also to be extended to the oil and gas sector. Outbound deals in particular grew by 21x since 2003, the AVCJ Research report notes, typifying the new confidence of Indian firms as outbound acquirers, with Tata Steel’s $16.6 billion acquisition of Corus Group setting the tone.
Private equity contributed a respectable $17 billion of the total 2007 deals in India, with real estate, infrastructure, and financial services benefiting especially. Sambamurthi cautions, however, that private equity in India still has to work around many unique restrictions in the local market, such as the mandated minimum entry pricing on unlisted company deals and the “no objection” certificate where the fund has previous or existing investments in the same field. And as he notes, traditionally structured LBOs “are currently not possible” in India, mostly due to government restrictions on bank borrowing for inbound or outbound acquisitions.
The PRC is more problematic, at least for incoming deals. The Greater China region as a whole produced $170 billion of M&A activity in 2007 – a respectable figure, but remarkable when considering that it includes Taiwan, and the huge disparity in population and economic importance between the PRC and Australia, which managed $117 billion on its own. Furthermore, China is in fact well supplied with capital, and much of it, as with the China Investment Corporation’s c. $60 billion that must be deployed overseas, is destined for outbound transactions.
Scott notes that even the larger buyout firms are beginning to compete with the top end of the venture capital community in PRC private equity. “They all seem to merge around $100 million. There’s convergence among all the financial players in terms of deal size, and that’s just driven by local market reality. That is of course driving up prices, and the expectations of the sellers are out of all proportion.” And Hoo believes that many Chinese corporates are already far enough developed to have the ambitions, if not the skills, for major cross-border acquisitions. “If you can become Number One in China, you’re already doing a very good business.”
Asia Pacific corporates and private equity
Private equity has definitely been a major driver in the region’s record M&A volumes. The AVCJ Research data shows that for 2007 it accounted for 17.9% of total Asia Pacific M&A, or $87.3 billion of transactions. Said Ong, “private equities once again made their presence felt in the region.” And though strategic acquirers may definitely have won auctions in competition with private equity houses, opinions differ as to how far the two sides compete, rather than cooperate.
Partly this is a function of certain markets. In China, for example, Scott notes that the larger buyout funds are “all competing with each other and GE. GE has said it wants to put $2 billion to work in China over the next few years.” But Hoo sees the two areas as too divergent to be serious competitors. “There is always some competition, but they always approach things from a slightly different angle,” he notes. “We see private equity funds still being very active. They’re motivated by very different things.”
Scott especially sees the potential for private equity firms to help PRC firms on the outbound acquisition trail. “Going forward, the language may be ‘investing with China.’” And Kelly feels that no professional services organization can afford to ignore the big four or five global buyout firms now operating in Asia Pacific, whatever the short-term fluctuations in the market. Deal flow should also continue because Asia Pacific banks are still in good shape, and ready to lend to support transactions. “The local banks also have pretty strong balance sheets. Although a lot of the local banks are not experienced in putting together a traditional leverage syndicate package, we do see quite a few stepping up and providing the funds to get deals done,” remarks Hoo.
Paradoxically, despite the record numbers, “across most parts of Asia, the level of M&A is relatively low,” according to Ong – an average of 4% of GDP versus 11% in the US. Logically, there should be enough growth potential to leave room for everybody. - PSM
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