Bank revenues from mergers and acquisitions in Asia have long lagged behind those in Europe and the US and there is perhaps little reason to believe that this year will be any different.
Notwithstanding this, JP Morgan views its M&A franchise in Asia as an important piece of its overall business due to the increasingly global complexion of acquisitions.
“For me, probably the most strategic business globally is Asia, not because it is going to outstrip North America or Europe in terms of size in the near future, but in terms of being relevant to our clients globally,” Hernan Cristerna, co-head of M&A at JP Morgan said in an interview held at the bank's Chater House office in Hong Kong.
"For example, having an understanding of how a Chinese or Thai company thinks about returns and valuations, and how the decision making process works, is valuable when we advise US or European clients,” he said.
Increasingly, banks are focused on pursuing cross-border M&A activity that offers more lucrative returns. To capture a bigger share of this global deal flow, JP Morgan last year re-organised its M&A business, appointing Cristerna and Chris Ventresca co-heads of the global M&A business. Previously, the US bank’s M&A franchise was run regionally.
The bank’s strategy is to focus on identifying companies that might have the appetite to undertake acquisitions in years to come. Cristerna, who typically visits Asia twice each quarter with Beijing, Shanghai, Singapore and Hong Kong among his pitstops, cites Chinese oil giant Cnooc as one example of a company that has grown to become more acquisitive over time.
“Identifying Asian companies that are going to be large caps in the next five to 10 years and having relationships with their CFOs and CEOs may not be where the absolute dollar is today but for us, strategically, it’s a critical part of the business,” Cristerna said.
Whereas the US firm's M&A business used to be run opportunistically, these days the bank is focused on leveraging off other parts of the business. Its banking platform now acts as an internal "weather vane" for companies that are rising up the ranks and on the cusp of making the leap to acquire overseas.
“Five years ago M&A was very investment banking driven,” said Rob Sivitilli, JP Morgan’s head of M&A for Asia ex Japan. "But now we are focused on bringing in other parts of the platform. If there are going to be clients moving up in size, we might feel it first in corporate banking or private banking," he said.
The strategy of leveraging off other parts of the bank is one employed by many banks. UBS for instance, has effectively leveraged off its private banking relationships, winning deals with Thai tycoon Dhanin Chearavanont. Commercial lenders such as HSBC have also used their lending relationships to make a push into the traditional advisory business so long dominated by the likes of Morgan Stanley and Goldman Sachs.
JP Morgan has typically lent selectively to back clients in acquisitions. It has also tended to advise sellers, including Dutch financial services group ING when it sold its asset management business and GSK on its sale of Lucozade and Ribena to Suntory. “Our lending tends to be focused on situations. When it comes to M&A our lending tends to be focused on backing a company on an acquisition,” said Sivitilli.
Much of Asia's M&A volumes have historically been driven by China and early indications are that this year is unlikely to be any different. "Within Asia we are seeing more activity around China which is outperforming from a pipeline perspective," said Sivitilli.
JP Morgan is cautious on hiring and might first shift resources from other parts of the business to China M&A . It plans to boost its M&A head count this year in anticipation of the greater deal flow, but only on a selective basis, Sivitilli said.
Outbound M&A from Japan is expected to be another feature this year as Japanese companies faced with sluggish growth at home turn their attentions overseas. Outbound acquisitions by Japanese companies intensified towards the end of last year as many were less than optimistic that Japanese Prime Minister Shinzo Abe’s efforts to boost the Japanese economy would be successful.
“I don’t feel that corporate Japan has a lot of confidence that the local economy is going to grow in a meaningful way," said Cristerna. "Therefore, we expect to see more corporate M&As out of Japan,” said Cristerna.
Recent outbound activity includes BTMU's $5.6 billion purchase of a majority stake in Bank of Ayudhya last year and Suntory’s $16 billion acquisition of Beam’s whiskey business this month.
