This is the year of the Asian corporation. Asia’s CEOs have access to finance, or are sitting on a reasonable cash stash, and they have an appetite for deals within Asia and opportunities outside the region. That sets them apart from their European counterparts, who are distracted by issues closer to home and it distinguishes them from their US colleagues because funding a commercially viable deal in Asia isn’t a huge hurdle.
That is not to say that a crazy fire sale is underway, with Asian CEOs leading the charge to swoop up all in sight. Rather, a sensible, buttoned-down approach, (grown up, if you will) seems to be the prevailing trend.
“The uncertain environment has injected a level of caution into many companies’ otherwise positive outlook,” said Roger Denny, head of M&A Asia-Pacific at Clifford Chance. “That said, there is certainly a lot of serious interest in the opportunities that are available.”
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More than half of the 239 respondents to our annual M&A survey, conducted in partnership with Clifford Chance, said they think outbound and intra-Asia M&A will increase (59% and 53%) this year, which is obviously positive. But here’s the caution: that number has been steadily dropping since 2010. The optimism is fading, no doubt due to global economic downturn fatigue.
“Asian companies are very strongly focused on Asian-Pacific markets,” said Denny. “That’s not to say they aren’t interested in opportunities in Europe. They are if they will give them a strategic step up or they see a bargain. Their main focus is Asia-Pacific though.”
That should be good news to Asian CEOs. While intra-Asia M&A is still culturally tricky, the differences within Asia that might endanger the success of a deal are fairly predictable. A Japanese company taking over a Chinese business might be strained by the political tensions bubbling up thanks to the dispute regarding the Diaoyu/Senkaku islands, or a Philippine consumer goods company CEO might have a different marketing view than an Indian one. If troubles brewed in such a marriage, the only surprise would be that it wasn’t managed before hand.
But cultural issues are still a real hurdle for Western companies that try to blaze into Asia and reinvent the wheel. If you’re going to wager on the long-term success of a deal (by that I mean after the bankers and lawyers get paid and go home and the new company tries to make a go of it), an intra-Asia one might have better odds.
That may be one of the reasons (along with the eurozone debt crisis) for why only a third of our respondents expect inbound M&A to increase.
“We do see European investors diverted by issues closer to home in Europe,” said Denny. “They have a strong interest in Asia but because of the immediate issues in their home countries, some are deferring for now. And one of the big issues for the US companies is that they are concerned about their ability to properly integrate acquisitions in Asia due to cultural differences.”
Given that caution, it would seem a seller should prefer a more committed Asian buyer. The chance of success — not just of closing the deal but of the marriage working — is higher.
Who, What, Where, When and Why?
The headline news is no surprise: Overwhelmingly our respondents said that China is home of the acquirers (65%), followed by the US (15%) and then Japan (8%). This is borne out by the facts — see the Dealogic charts on the left, which demonstrate that inbound M&A deals into China and India were led by the US and Japan.
Indeed, the rising importance of Japan in Asia M&A is likely here to stay for some time.
“The availability of domestic credit and a strong yen have spurred greater activity on the part of Japanese companies in the past year, acquiring assets from the US to Chile and from copper mines to manufacturing suppliers. We have been involved in several situations where Chinese buyers lost out to Japanese acquirers on valuation and structure. In general, Japanese firms have been more aggressive on pricing and more flexible on structuring. Chinese buyers are generally seeking control when Japanese buyers are more content with a minority stake,” said Xiuping Zhang, head of Asia M&A at Bank of America Merrill Lynch.
Our readers noted that all three countries are looking at distressed opportunities around the globe — from the eurozone to the US. But they are also looking at Africa and South America, which is evidenced by the resources deals that have taken place in 2012.
Most of our respondents (48%) expect the majority of deals to be in the $100 million to $500 million range, while 24% of the respondents expect the majority of deals to be in the $500 million to $1 billion range. Only 8% are expecting a sizeable number of $1 billion-plus deals. Interestingly, though, in the first three quarters of the year there were 57 $1 billion or bigger deals in Asia ex-Japan, as opposed to 51 similar jumbo-sized deals in the same period last year, according to data compiler SDC.
The sectors that stand out are once again oil and gas and mining, but if you aren’t also paying attention to the consumer goods opportunities you’re missing a beat. From Royal FrieslandCampina investing in the Philippines’ Alaska Milk to China’s Bright Food buying a controlling stake in Weetabix to Lotte Shopping snagging Hi-Mart, strategic consumer goods transactions have been hot as CEOs look to adopt global strategies and/or take advantage of depressed valuations.
Doing a deal
Traditional acquisition is the preferred deal structure by 40% of the respondents, which makes sense. “It’s not surprising that people want to control their own destiny,” said Denny.
But worth noting is that interest in joint ventures is on the rise (27%). That suggests that CEOs recognise the value of letting a successful management team lead the way.
“In terms of hedging risks, learning from JV partners about how the local market works makes sense,” said Denny. “JV’s with local partners are also helpful in the context of the rising concern about nationalism and protectionism issues. And there’s a financial reason for considering JVs — you can learn about the business you’ve bought into before fully committing to and valuing the whole package.”
The countries that top the shopping list of where to acquire companies not surprisingly include China, but if you add up all the interest in Southeast Asia, the region as a whole is more attractive than China alone.
“Strong economic growth, the abundance of raw materials and resources and the difficulties in penetrating the market organically are all key reasons for this,” said Ed King, head of M&A in Asia-Pacific for Barclays.
“Also, we notice in discussions with international companies that when they start to put people on the ground in Asia, they see the opportunities, beyond the obvious one’s of China and India,” added Clifford Chance’s Denny.
Bankers say the rise of Southeast Asia on the deal front is good news because from an advisory perspective the “quality” of the deals is solid. What bankers mean when they say that is that the Southeast Asian companies that are looking to do a deal are serious.
“They are ready to pull the trigger, they are not time wasters and they are focused,” said Citi’s head of Asia M&A Colin Banfield. “They know what they are looking for and what they are willing to pay.”
That is not to discount the importance of China. Citi has announced three China pharmaceutical deals in the third quarter alone — Minneapolis-based Medtronics’ proposed acquisition of China KangHui for $755 million, Sinopharm’s proposed $387 million purchase of Winteam and Shenzhen-based BGI announcement that it plans to acquire Complete Genomics for $118 million to expand in the US market for medical and research DNA testing.
What’s the downside risk?
Not surprisingly, the biggest perceived drag on M&A activity is related to the global economy and politics. History teaches us that when protectionism rears its ugly head, it is usually because politicians are trying to protect their home turf (or at least appear as if they are, even if the protectionism actually has the opposite effect as it may squelch business growth). Bankers say even the gaps in sellers’ price expectations and buyers bids are down to the economy: sellers think their businesses are worth more, buyers expect depressed prices to continue.
Despite the price-expectation gap, our respondents (77%) overwhelmingly say that the buyer is in control.
“It’s a buyer’s market given the limited number of buyers,” said Barclays’ King. “Companies that are forced to sell in these environments have fewer options.”
While there’s a bit of a concern about getting financing, it’s not as if the spigot is off. “Financing continues to be available for the right corporate doing the right deal,” said Citi’s Banfield. He said, particularly when it comes to outbound deals, the transaction has to be commercially viable and not something that appears to be a strategic government move backed by state funding. But if it fits those bills, financing can be found.
If you’re going to take the plunge, our respondents have some advice for you. Make sure you find a good team with local knowledge, do your due diligence and manage stakeholders' expectations.
Sounds simple. But of course, it’s not.