Asia is on course for an exceptional year in terms of both ECM issuances and the M&A pipeline. Asian ECM deals (including those in Japan) have raised a total of $325 billion as of August 13, already reaching 71% of the volume recorded in the year 2020, according to data from Refinitiv.
The performance up until August 13 has also beaten the annual ECM volumes seen in the four years from 2016 to 2019 inclusive.
Concurrently, M&A is on a roll. M&A deal announcements involving Asian entities, measured by the valuation of targets, including net debt, touched $798 billion as of August 13. Out of this, $602.5 billion worth of potential M&A transactions were unveiled in the first half of 2021, which is nearly twice the total in the corresponding period a year earlier.
The simultaneous resurgence of ECM and M&A in the region runs contrary to the countercyclicality that has historically been observed between these two components of the market, noted Joshua Cole, law firm Ashurst's Asia head of corporate transactions.
“Ordinarily, you see some countercyclical trends between the equity capital markets (ECM) and M&A and usually one is up whilst the other is lagging behind or down,” Cole said.
“But what we're seeing now and have been for a while is that both the ECM and the M&A parts of our practice are busy,” he said.
An inverse relation can arise between the two because equity offerings tend to increase when financial conditions are good. On the other hand, M&A and restructuring opportunities are more frequent when there is higher stress in industries, which can trigger consolidation.
Pandemic impact
The overarching influence of the pandemic on financial markets is a key driver of activity on both the ECM and M&A sides. The volatility stemming from the event is creating openings for acquisitive firms to swoop in. At the same time, its impact on capital market areas where funds are needed has been more limited, according to Cole.
IPOs, a sub-set of ECM, received a leg-up from the abundant liquidity in financial system and the monetary loosening used to counter the adverse economic effects of the coronavirus.
The higher uptake of technology, as pandemic containment measures meant more people stayed indoors and worked remotely, also delivered a boost to the new economy, leading to a higher number of IPO candidates, according to the EY Global IPO Trends report for the quarter ended June 30.
“Both the IPO and M&A activities will not be going away. The level will fluctuate and it is just a matter of pricing, i.e. valuation,” EY Global IPO leader Paul Go told FA.
Decisions to buy or sell at a higher price, will be dictated by market sentiment, he said, adding that investor appetite will depend on a number of macro-economic variables, such as inflation, interest rates, oil and other commodity prices. Market participants must also keep a close eye on geopolitical shifts and changes in government regulations.
Go cited the example of Chinese ride hailing app Didi Chuxing, whose stock price plunged within a week of its June 30 listing on the New York Stock Exchange following the news that Chinese authorities had launched a probe into the company’s operations. In early July, Beijing halted new sign-ups to Didi’s portal, with the app becoming unavailable on local app stores thereafter.
The saga, which is still unfolding, could have a wide-reaching effect on whether and how cross-border listings by companies originating in China pan out. The country accounted for a 65.6% market share of ECM volumes in Asia as of August 13, with issuances totalling $213.2 billion, according to Refinitiv.
SPAC-tacular
However, the predominance of the new economy is no longer just a China story. New economy constituents in southeast Asia, for instance, are gaining critical mass. Innovation, evident in the reach and variety of tech services provided by these companies in developing countries in this corner of the world, has leapfrogged counterparts in Europe/US.
Enhanced access to cheap data has transformed the industry in south and southeast Asia, evident through the implementation of digital wallets and the popularity of e-commerce, which has become even more pronounced amid the pandemic.
Large tech companies in Asia are exploring novel routes to raise money, such as via the establishment of special purpose acquisition vehicles (SPACs) -- entities that do not have any commercial operations and are set-up solely to facilitate future M&A. One deal that is being watched with great anticipation is southeast Asian company Grab’s upcoming SPAC debut on Nasdaq.
Singapore-headquartered Grab, which calls itself a ‘super app’ and caters to consumer needs ranging from food delivery to transportation, is speculated to rake in up to $40 billion through the trade. The company plans to close the transaction by the fourth quarter.
SPACs “exploded” in 2021, with a record 274 new ones listed in the first quarter, a PwC note titled Global M&A Industry Trends: 2021 Mid-year Update, detailed. Proceeds emanating from SPAC related offerings in the first half alone, at $80 billion, have outstripped full year numbers posted in 2020, it noted.
“Hyperactive SPAC IPOs completed in last 18 months, together with the PIPE [private investment in public equity] monies (then available), are creating a very busy de-SPAC (or SPAC merger) landscape,” said EY’s Go.
The SPAC train is unlikely to stop anytime soon. Hong Kong and Singapore, the main financial hubs in the region, are testing the waters to introduce SPAC listings on their respective bourses.
The Singapore Exchange on March 31 launched a market consultation for the proposed framework to regulate SPACs. The Hong Kong stock exchange's listing newsletter detailed that it will begin consulting the market for feedback on the instruments sometime in the third quarter.
The ‘PIPE’-line
Another major theme that is shaping M&A and IPO outcomes in Asia is the active presence of private equity (PE) and venture capital players, Go said.
PE firms are sitting on $1.9 trillion of dry powder and fundraising has been vigorous, PwC analysts wrote in the mid-year update. This class of investors will be on the hunt for avenues to put that money to work, given the prevailing low-interest rate environment. The prospects for M&A look especially attractive, as a result.
The record levels of investable funds among PE companies have created a virtuous cycle, Go said. They are successfully offloading parts of their portfolio, feeding capital markets and the cash they receive as a result of these activities is, in turn, augmenting their capital base.
This directly ties into the SPAC motif, as PE funds, along with hedge funds and other private financial investors populate the PIPE network that provides financing for minority stakes in SPAC business combinations.
