Asia enjoyed a surprisingly vibrant 2015 for M&A. Total announced deal flow for Asia ex-Japan was $827.6 billion as of November 27, around 18% of the global total. That was 55% higher than in the same period in 2014, according to Dealogic.
Unfortunately, M&A fees fell marginally to $1.1 billion over the same period. In Asia, advice did not pay well.
That was because almost a third of the region’s M&A activity comprised Chinese state-owned enterprise (SOE) and Korean chaebol restructurings, and the internal reorganisation of two of Hong Kong tycoon Li Ka-shing’s conglomerates. The first two offered relatively low fees; the last only included a few institutions.
The good news for 2016 is that several areas should be busy. All feature a heavy emphasis on China.
“There has been a real shift in mindset among Chinese companies in 2015,” John Hall, co-head of Asia Pacific M&A for JP Morgan, told FinanceAsia. “They are keen to acquire intellectual property and valued-added capabilities. These companies have capital and a will to expand.”
Beijing wants to drive more SOE restructuring to cut waste and build national champions. Its desire to do so was evidenced by such recent deals as the $60.6 billion merger of China North Railway Corporation and China South Railway Corporation.
“One of the most dominate themes in the next few years is China SOE restructuring,” said Stephen Gore, head of Asia Pacific M&A at Bank of America Merrill Lynch. “There are 115 SOEs today that are likely to end up slimming down to 30 to 40 in the years to come. Conceivably, they could end up conducting trillions of dollars of M&As.”
The deals are excellent for league table rankings but bankers admit they don’t pay very well – although a few claim to have earned $5 million to $10 million for advising on deals.
The second theme is outbound Chinese M&A. Outbound volumes from the country rose from $71.4 billion in 2014 to $80.99 billion in 2015, led by technology companies. Mainland SOEs and private companies are seeking technology and professional skills as the economy slows.
The acquisition of semiconductor companies is one example, including state-owned chipmaker Tsinghua Unigroup’s purchase of Hewlett Packard’s China networking equipment company, and its $3.8 billion investment into data storage firm Western Digital.
Banks like advising on outbound acquisitions because they can levy fees at international rates, meaning companies pay in double digits.
Chinese companies could look increasingly to Europe, attracted by well-known consumer brands and industrials, lower regulatory protection, and a weak euro. In the chemical space ChemChina acquired Italian tyre maker Pirelli, while Bohai Leasing’s mooted $7.6 billion takeover of Ireland’s Avolon is awaiting final approval.
Technology and e-commerce companies should remain active, in China and beyond. Targeted M&A into technology reached $150.26 billion in 2015, versus $78.18 billion in 2014.
Several businesses conducted all-stock mergers in 2015, such as review and booking sites Meituan and Dianping and online travel agents Ctrip.com International and Qunar Cayman Islands. Bankers believe such mergers could extend into other sectors.
“We could see big deals in other areas such as the real estate space and consumer areas,” Brian Gu, co-head of Asia Pacific M&A at JP Morgan, told FinanceAsia. “The industry logic is compelling: it is about cost savings, efficiency of scale and building champions.”
M&A on the move
Transportation also offers possibilities. The world’s shipping sector is consolidating as trade volumes decline.
Neptune Orient Lines of Singapore sold its stake in APL Logistics to Kintetsu of Japan in 2015 and in late November it began exclusive talks to be bought by France’s CMA CGM. Other shipping companies – particularly in China – are merger candidates.
In the airline sector passenger numbers are set to soar, particularly in China. That too could mean more consolidation. Beijing could merge its leading three airlines Air China, China Southern, and China Eastern, to build a national champion. And Hainan Airlines acquired 23.7% of Brazilian low cost carrier Azul Brazilian Airlines in late November.
The outlook for resources M&A is less appealing, with low commodity prices having crimped revenue and share valuations of many companies. However, some of China’s SOE metals and mining majors are selectively looking for bargains. “They are only interested in very large divestitures of high quality assets of scale,” said Samson Lo, head of Asia M&A at UBS.
Private equity companies are eager to acquire too, and have cash to burn. There’s just one problem: a lack of willing sellers.
The number of families or dominant shareholders willing to put their equity on the block remains relatively low, leading to fewer deals. From $598 million in all of 2014, financial sponsor-related investment banking revenues fell to $492 million as November 26, according to Dealogic.
Given this environment, PE companies are competing fiercely and becoming more willing to accept lower internal rates of return to secure deals, bankers said.
PE companies are also facing competition from corporate buyers. An M&A survey by JP Morgan revealed leading Asian corporations target an average return of 14.3% on acquisitions, and 40% will wait 10 years or more to get it. Those terms are unacceptable for most financial sponsors.
- For Part One of FinanceAsia's 2016 outlook, click here.
- Part Three looks at equity
- Part Four focuses on debt