FinanceAsia and Clifford Chance recently collaborated on an M&A survey. Roger Denny, head of Asia-Pacific M&A for the law firm, discusses the survey findings in detail.
How is the prevailing environment affecting outbound M&A deals?
The market uncertainty is clearly creating an unsettled environment and if that continues it will affect some deal activity. However, companies in the Asia-Pacific region also see the environment as an opportunity for strategic transactions and to take advantage of depressed valuations and we are optimistic that will continue to drive outbound activity. The rationale for companies in the region to secure supplies of natural resources, acquire new platforms for growth, and reposition their businesses remains unchanged.
What is your expectation for inbound M&A?
One of the biggest challenges for inbound M&A by companies based in the west is getting comfortable with targets. Western acquirers’ enthusiasm could also be influenced adversely by their concerns about their home markets. Notwithstanding the volatility, we are still seeing a number of serious buyers and sellers. But on a relative basis we expect Asia outbound M&A and intra-Asian M&A to be stronger than inbound in the short- to medium-term.
Is the confidence of CEOs in the region high enough for them to spend time on M&A?
Yes, many CEOs in the region are reasonably confident about their businesses long term and in some cases, for example, Japanese companies, there are good reasons for them to seek growth outside the home market. The opportunity to acquire assets which might otherwise not be available will drive them, despite uncertainties regarding some target markets. If strong markets come back, the difficulties in securing these assets will also return.
Has the tighter liquidity situation affected deals?
Tightening in the availability of funding will have an adverse effect on some buyers. However, and somewhat surprisingly, funding is not one of the biggest concerns for acquirers [according to survey respondents]. That could reflect the fact that navigating various other hurdles in cross-border M&A deals in Asia continues to be challenging before they even reach the issue of funding. These challenges include understanding and navigating the legal and regulatory environment, especially for foreigners, reliable due diligence, and negotiating good structures and protections.
Will private-equity firms continue to pursue investments in Asia?
Yes, on the right terms. I’d observe that many of our PE clients are reasonably mature in Asian markets and have made numerous investments. What could impede further deals is the gap in value expectations between buyers and sellers, which tends to widen in periods of uncertainty. Bridging that gap can be done with certain structures but it’s an added challenge.
Which sectors are you bullish on?
The strong response in the survey for natural resources and consumer goods and retail reflects our experience — particularly through our new offices in Australia, where we continue to see strong demand from both international and domestic investors in the resources sector. We are also seeing considerable levels of activity in the financial institution sector. It is very broad based, involving bank, insurance, asset management, wealth management and securities businesses. There are various drivers for this, notably strategic refocusing or repositioning, the desire to acquire platforms in new markets for future growth and a reaction to changes in the regulatory landscape.
What other trends have you noticed with respect to outbound M&A?
With respect to China specifically I’d note that in the past buyers were pursuing more majority, control stake transactions. They are now treading more cautiously, often considering teaming up with local partners and looking at a step-by-step approach, which also often attracts less regulatory and political attention. This is a common approach for MNCs entering new markets and indicates in some respects the maturing of Asian and specifically Chinese acquirers. It could also be beneficial in the prevailing volatility. In difficult environments, doing minority stake deals obviously lessens the immediate exposure whilst potentially securing the right to increase the stake later.