It’s been a good month for M&A bankers in Asia and we’re only halfway through November.
On Tuesday, SK Telecom announced it was buying Hynix Semiconductor for $3.1 billion, giving Hynix shareholders a long-awaited exit and marking a turning point for a number of failed attempts by Hynix. It is the biggest M&A deal for a Korean technology company in more than a decade and the second-biggest M&A deal in Korea this year. Credit Suisse, Woori Investment & Securities and Korea Development Bank advised Hynix. A source close to the deal said the “economics” were good and that Hynix paid a full fee. Macquarie worked on the buy-side with SK Telecom.
On Monday, Chinese telecom equipment maker Huawei Technologies said it would buy the 49% stake it does not own in its joint venture, Huawei Symantec Technologies. The Hong-Kong based joint venture provides customers with security, storage and systems management solutions. It was created in 2008. Huawei, which was advised by Morgan Stanley, will pay Symantec $530 million.
Last Friday, Caterpillar announced it would buy Era Mining Machinery, a Henan-based manufacturer of mine safety machinery. The deal, which will have a price tag of up to $886 million, is still pending approval of Chinese regulators. Caterpillar paid a premium over the current market price of Era, which raised some questions at a press conference it hosted in Hong Kong on Friday. “What [Era] had to offer in terms of underground coal mining technology is an excellent fit for Caterpillar,” said Steve Wunning, Caterpillar group president. Citi worked with Caterpillar, while the Blackstone Group advised Era.
And, earlier last week, regulators approved Yum Brands’ plan to buy Little Sheep Group, which operates 480 hot-pot restaurants in China. Yum first announced the $682 million deal in April, but it has been waiting since then for regulatory approvals, which have sometimes been a bit of a wildcard in China, notably in the case of Coke’s attempted takeover of Huiyuan Juice. Goldman Sachs is advising Kentucky-based Yum and Bank of America Merrill Lynch is advising Little Sheep.
Dealogic estimates that total M&A fees in Asia ex-Japan for the 10 months until November this year were around $1.2 billion of a total capital markets fee pool (across equity and debt capital markets, loans and M&A) of around $7 billion. Goldman Sachs is currently in pole position in M&A league tables, measured on both completed and announced deals, and the Wall Street investment bank has cornered around 9% of the total fee pool, translating to $108 million. This represents more than one-third of the $302 million that Dealogic estimates Goldman has earned across investment banking for the same period.
The actual fee numbers for M&A in particular are estimates, as M&A mandate letters are confidential. Dealogic calculates these based on a simple formula attributing a fee of 1% to all sell-side mandates and 2% to all buy-side mandates, though in practice clients do not agree to pay such simplistic numbers, especially on multi-billion dollar deals. Notwithstanding the fact that some of the inputs into Dealogic’s revenue calculations are guesstimates, bankers maintain that Dealogic numbers, while not accurate on an absolute basis, are generally “directionally correct”.
Volatility in capital markets is continuing to take a toll on the plans of issuers in the region to raise equity or debt.
“As we’ve said in the past [Goldman’s] opportunity set begins with the client’s decision to transact, a decision which has historically been correlated to a growing economic environment,” said David Viniar, chief financial officer of Goldman Sachs, while discussing the bank’s third-quarter earnings with analysts last month in a call posted on Seekingalpha. “Not surprisingly, the macro challenges in the quarter drove lower levels of client activity in investment banking.”
However, the current environment can also be perceived as an opportunity for M&A specialists. Goldman’s success in Asia this year bears testament to that. Companies based in the West such as Caterpillar and Yum are buying assets in Asia to cement their foothold in future growth markets, a point that Caterpillar’s Wunning repeatedly emphasised by stressing the importance of the China market to the company. On the flip side, Asian buyers see an opportunity to acquire assets at attractive prices, due to depressed valuations or because sellers want to cash out and refocus their businesses. And with capital becoming both more expensive and scarce, all banks are seeking to do more advisory business. M&A bankers in Hong Kong and Singapore could finally be in just the right place.