We speak to Mike Netterfield, head of corporate finance for Asia for the Royal Bank of Scotland, about some of the findings of our recent M&A survey.
How is the year looking for cross-border M&A deals?
Total cross-border volumes are up on 2009 and 2010, and stand at the highest level they have seen since 2008. The best ever year in history for cross-border M&A deals was in 2007. Between January and September 2007, $1.4 trillion of cross-border M&A deals were recorded, while this year for the same period the corresponding figure is $700 billion. So, we’re some way off from 2007, but things are still looking quite good. In terms of target geographies Europe, the Middle East and Africa (Emea) is leading the pack at around 45% of volumes, followed by the Americas at 30% with Asia-Pacific accounting for the balance.
Which sectors have Asia-Pacific buyers been focusing on?
The majority of cross-border outbound activity between Asia-Pacific and the Americas has been natural resources deals. Two deals by one acquirer, Australian miner BHP Billiton, account for a substantial part of the volume. From Asia-Pacific to Emea, healthcare deals account for the largest portion followed by natural resources.
What’s the outlook for your business?
Raising capital from public equity markets is continuing to look challenging, so as a firm we are redeploying resources to M&A in the short term. We are optimistic that the M&A pipeline will continue to grow.
Are you focusing on any specific sectors?
Going forward, one of the sectors we expect to see activity in is financial institutions [FIs]. Some Asia-Pacific deals which were announced this year were driven by Western acquirers rationalising their portfolios but in the future we also expect to see Chinese FIs making more acquisitions in the US and Europe, driven by both the currency advantage and depressed valuations in target markets.
The financial industry is highly regulated worldwide. Will deals reach closure?
We expect acquirers to gain confidence to navigate the regulatory framework by starting with small deals and non-control stakes. These will lead to larger, control deals.
Will the prevailing economic situation make Asian buyers wary of striking deals?
Our experience thus far has been that buyers are willing to do deals even in this environment. The uncertainties are to some extent compensated for by the availability of targets at attractive prices. Another advantage for Asian acquirers wanting to do deals is the appreciation of Asian currencies especially vis-à-vis European currencies. The impediment will be the willingness of sellers to exit at valuations that have come off considerably.
Is the currency play really going to drive deal flow?
Currency is part of the equation but perhaps not a key driver. For example, the strength of the Australian dollar has not driven outbound deals in an obvious manner and, conversely, inbound deals have continued. For example, we were one of the advisers to brewer, SABMiller’s $12 billion acquisition of Australian beer company, Fosters, which was agreed in September [other advisers were J.P. Morgan, Moelis & Company and Morgan Stanley]. The strategic rationale for the deal drove the decision to buy Fosters for SABMiller.
Does China’s unclear regulatory framework deter buyers from pursuing deals there?
Execution risk is an issue in buying assets in China, for example we were an adviser to Coca Cola on its unsuccessful takeover attempt for Huiyuan Juice. Acquirers will have to be patient while pursuing deals in China because it is a critical market for most companies.
Are buy-side clients looking for banks that can also finance their deals?
The ability to arrange financing is always an advantage and as liquidity dries up in some markets that advantage is being accentuated. For most clients, the decision to appoint an adviser encompasses a number of factors, which could include financing but also includes the complexity of the deal, the jurisdiction and the value which the acquirer believes the M&A advisers will bring to the table.
