It’s been a bumper year for mergers and acquisitions -- and that’s with only three quarters of the calendar year behind us. China’s state-owned enterprises have continued their quest to globalise, striking mega deals, mostly in the natural resources sector, but in other select industries as well. Indian companies are back on the acquisition trail after taking a hiatus last year when financing markets tightened and some observers sounded a death knell for India outbound M&A. But it’s not just the world’s two most populous countries that have been active -- M&A deals have been keeping advisers busy across Asia.
And if the 250 respondents to our fourth annual M&A survey are in the know (and we think they are), 2011 will bring more of the same.
“On the assumption that the global economy continues to rebound from the crisis, I would expect the M&A market [in 2011] to be more active than 2010,” said Mark Florance, head of investment banking for Southeast Asia at Rothschild. Some of the factors Florance cites are: stagnant growth in the US and Europe, resulting in greater Western interest in positioning their businesses in the region; well-capitalised private equity buyers seeking investments; Asian companies realising they need to grow beyond their borders; and cheap money.
Nearly half of those who completed our survey are employed directly in the financial services industry. The majority of our respondents are in decision-making roles in their organisations, thus can reasonably be expected to have the inside track. And, as in previous years, Asia’s financial centres, Hong Kong and Singapore, are home to the largest number of our respondents.
“Outbound [M&A] has been very active during the past few months with Asian companies trying to take advantage of relatively depressed market conditions and valuations in the Western economies while supported by strong and favourable exchange rates,” said Colin Banfield, head of M&A for Asia-Pacific at Citi.
And our respondents believe this trend will continue. More than 70% expect cross-border outbound M&A from strategic acquirers based in the Asia-Pacific region, as well as intra-regional M&A, to show an increase over the next 12 to 18 months versus the past year. Even those who are not as bullish expect deal volumes to stay at the same level, with only 2% predicting cross-border outbound M&A will decrease year-on-year and only 1% expecting intra-Asia-Pacific M&A to drop compared with the past year.
Respondents are not as unanimous with regard to cross-border inbound M&A from non-Asian strategic acquirers, with only 50% suggesting it will rise and 16% expecting it to decrease.
“There is uncertainty in the global economy -- this is no doubt holding back Western investors,” said Florance. “In addition, the focus on Asia as the growth engine of the world has meant some attractive Asian businesses have unrealistic valuation expectations.”
Deals will continue to be mostly in the $100 million to $1 billion range, according to 63% of our respondents. “Deal sizes have doubled over the past decade and we expect to see some activity in the larger deal space. In general, it is the less than $2 billion to $3 billion space which has been active, not only in Asia but across the rest of the world as well,” said Jason Rynbeck, vice-chairman of M&A for Asia-Pacific at Barclays Capital. “But we do expect a few jumbo deals greater than $5 billion, such as Bharti’s $10.7 billion takeover of Zain Telecom’s African assets earlier this year.”
Mirroring the activity to date, most of our respondents expect China to be home to the most buy-side activity: 62% of our respondents named China as the country that will produce the largest number of investors and acquirers in the next 12 to 18 months, and a whopping 85% named China in their top three.
“We’ve seen strong levels of outbound M&A activity from China and I would expect that to continue,” said Banfield.
Other countries or regions expected to be home to companies on the prowl for acquisitions are the US, India, Europe and Japan.
In terms of inbound M&A activity, China, followed by India, topped the list, with Indonesia, Australia & New Zealand, and Vietnam rounding out the top five.
“Indonesia is very high on the radar screen for our clients in the natural resources, financial services and consumer industries,” said Roger Denny, head of M&A for Asia at Clifford Chance, commenting on the specific countries cited. “As for Vietnam, the situation has changed dramatically from a few years ago when it was perceived to be a challenging place to do deals. Now, there is a sense that the opportunities outweigh the efforts, certainly in industries like financial services and for some manufacturers.” But Denny is candid that despite the environment in these countries being more conducive to M&A, emerging market risks still remain and need to be addressed by those seeking to strike acquisitions.
Deals in the natural resources sector are expected to continue to grab the headlines and consequently this sector tops our charts for the second year running. Two-thirds of our respondents named the industry as either their first, second or third pick as the priority sector for M&A investment in the next 12 to 18 months. Following natural resources was financial services, with 44% of respondents saying it is one of their three picks for a sector that will witness activity in the next year.
“We expect there will be a decent level of activity in the financial services sector as most players re-assess their strategy,” said Denny. “Forced sales are probably behind us, but there will still be strategy-driven sales and exits,” he added, citing the sale of ING’s private banking business to Singapore-based Oversea-Chinese Banking Corporation (OCBC) for $1.46 billion earlier this year as an example.
Deals such as the takeover of Shenzhen Development Bank by China’s second-largest insurance company, Ping An, and HSBC’s attempt to gain control of South Africa’s Nedbank suggest financial services is still a sector where acquirers will pursue deals based on a rationale of strategic growth.
“We’re seeing reasonable levels of activity in financial services where Chinese financial institutions look to invest in overseas markets so that they can tap Chinese trade flows and capture inbound investments from China into the target markets,” said Citi’s Banfield.
But there have also been three high-profile failures in financial services M&A this year, specifically in the insurance sector. The largest of these was British insurer Prudential’s $35.5 billion bid to buy AIA Group, the Asian life insurance unit of American International Group (AIG), which could not secure the backing of Prudential’s shareholders. AIG has had trouble hawking other assets in its Asian portfolio as well.
In August, Taiwanese regulators blocked the sale of AIG’s Taiwanese life insurance business, Nan Shan Life Insurance, to a consortium led by private equity investor Primus Financial. The deal was announced in October 2009 and the buy- and sell-side tried hard to negotiate with regulators on various aspects, including the involvement of mainland Chinese money in the bid.
Most recently the Australian Competition and Consumer Commission rejected a A$13.3 billion ($12.2 billion) proposal by National Australia Bank to acquire Axa Asia Pacific, the regional assets of French insurance major Axa.
“There have been some headwinds to grapple with,” agreed Denny. “The insurance sector world over is highly regulated and we expect the focus by the sell-side on the buyers’ ability to execute to increase even further.”
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