Although the total value of merger and acquisitions announced has exploded in the past two years – more than $300 billion in 1999, compared to $85 billion in 1998 – the gap between the number of deals announced and those actually closed is far wider than in the US or Europe.
According to Richard Kelly, managing director, Chase JF Mergers & Acquisitions Asia Pacific, the growth trend is not likely to reverse. Addressing a Thomson Financial Market Insights luncheon yesterday, Kelly assured the gathering that the “rapid growth of the M&A business in Asia is both broad and deep; the current themes driving it are debt and competition, and … we predict that this will become a permanent part of corporate culture, as companies try to develop their business and prosper.”
As growth in the US tapers off – for the first time it looks as though there will be a higher volume of activity in Europe this year – in terms of either volume or number of deals, Asia still only represents between 6% and 5% respectively of the global market.
“If you view that in the context of GDP or stock market value, you will find that Asia is grossly misrepresented, or undervalued compared to US and Europe,” Kelly says.
“We think it is possible to double, triple, quadruple the level of activity in Asia – so strap on your seatbelts.”
He acknowledges it is harder to close deals in Asia, as “almost all Asian sellers are reluctant … no-one is going into deals voluntarily”.
As he sees it, while the Asia crisis precipitated the rise in M&A business, it was seen as a way to pay down, or extend debt - but debt is “only 10% of the issue”.
“Competition is what will drive the M&A business from now on, as companies must realign to not only survive, but also prosper in the new economy."
The big drivers of growth in the region are Australia, Japan, Hong Kong and Korea, but he considers Taiwan to be “probably the most exciting new story”. Less remarkable, but nonetheless growing, are Singapore, Malaysia and the Philippines.
“India is coming from a very low base, but the government is opening up the country to overseas investors. This year activity should double or triple, as there is a correlation between government policy and … the flow of direct portfolio capital.”
The industries to watch include tech and telcos, technology, power and financial institutions – bank consolidation in Japan alone accounts of 25% of the activity level in Asia. “The biggest gorilla is telco,” says Kelly. “On a global basis, last year it represented about half the investment banking activity in the world." "Power has been a steady performer, and with privatization starting to kick in, particularly in Korea … this will be a source of great activity," he adds.
The new economy is part of the change, as the traditional players embrace e-commerce and e-solutions, often by buying up new players in the market. "Most people think the real winners, outside of a handful of first-movers in the key markets, will be the legacy companies which do reinvent themselves,” Kelly says.
The size of the deals is starting to increase. “It is also not just a deal happening here or there, but truly transformational deals are happening; which are giving confidence to others to do similar deals."
A trend aligned with the activity is the lean towards private equity to finance M&As.
“Private equity has been … below the radar screen level in Asia. There hasn’t been the kind of activity around either in terms of numbers, participants, or number of deals in the geographic dispersion for a long time. But what’s happening is that companies are turning more to private sources for capital and strategic input.” He predicts the region will see its first $1 billion to $2 billion private equity deal in the near future, prompting others to consider that option.
There are still regulatory obstacles, legal framework, lack of transparency and accountability. A failure to consider cultural differences – between corporates and countries – is a major factor in the failure of M&A deals to close.
“M&A transactions flounder or succeed on the right strategy, the right new culture, not on the numbers. This element is frequently overlooked."
