It's all about pain, says Anderson

CSFB''s head of M&A, David Anderson gives his views on Japan and the rest of Asia.

What's your assessment of the M&A scene in Tokyo in recent months? Has it become much quieter?

Anderson: In terms of announced deals it has been much less active than in previous years. And it has to be said that in the Japanese market there's a tendency to announce deals before there is really a sufficiently full agreement to guarantee completion.

So league tables of completed transactions are a much more useful way to look at Japanese M&A?

When you look at any market, if you really want to assess the activity, it makes more sense to look at completed transactions.

Why is M&A less active this year in Japan?

Let me make one caveat: M&A in Japan is never as active as in the Western world. In the US, depending on the market cycle, historically 12% to18% of the equity market capitalization changes hands by means of an M&A transaction in any given year. In Europe, those numbers have been 8% to 15%. Japan is around 2%. It is not on the same page as the rest of the world in terms of how much it uses M&A activity as a tool or corporate strategy. In 1999-2000, it jumped up to 4% because of deals like the formation of Mizuho ($70 billion). The general trend is 2% and gently rising.

In 2002, Japan, like the rest of the world, is affected by financial, economic, and geopolitical uncertainties. One is not inclined to make big changes when there is a lot of uncertainty.

Will we see more outward M&A from Japan as we did in the past?

I don't think that's the imminent trend. Right now Japan M&A is very inward and based on a lot of restructuring. M&A in Japan will be driven by pain. The electronics and financial sectors, both of which are very important to Japan, are facing a lot of difficulties and will have to take actions out of necessity.

You've used the word 'pain' quite a lot. So do you think Japan is near the bottom yet?

I have two views of Japan. I believe Japan is near the bottom in terms of cyclical recovery. But Japan has underlying structural issues that are going to cause it significant problems in the next 10 years. The ability to deal with these problems is limited by Japan's political structure and insolvent banking system.

You are about to move to Hong Kong as Asian head of M&A. Will you be dropping Japan?

I am moving out of Japan, but I am not dropping Japan. I have other Asian countries added to my responsibility. We are trying to integrate Japan and Asia a lot more.

Have there been any significant deals in Japan this year?

It was very significant that Roche bought effective control of Chugai. The formation of the holding company with NKK and Kawasaki Steel is also very significant because steel is so important to Japan and is a longer term way of integrating the steel business in Japan.

What's your view on the Asian M&A market? It seems to have been rather dismal over the past six months?

Many of us have this attitude now, more because of where we were in the last couple of years, than because M&A activity is so dismal in Asia. Now we are kind of back to 1997 levels. There is a lot of interesting M&A activity going on in the region and I am optimistic.

Even in the case of PCCW selling its stake in CSL, no advisers were used. That seems an irony given that PCCW has historically been the biggest fee payer of all?

Outside of the US and Europe, it's much more common for companies to do things without advisers. There's a long business history in Asia of doing transactions without formal investment banking advice รป instead companies use close family advisers, whom they trust on critical issues.

Ideally, an investment banking advisor can give not just financial advice, but also other kinds of strategic advice that will clearly add value to the M&A process, but some clients don't yet expect that from investment banks. The liability structures that exist in Asia relative to the US are not the same, so the exposure that an officer of a company or director has if things go badly, just isn't the same. At the same time, there is also a shorter history of using investment advisers in this market, and the companies don't have the data to contrast the outcomes of deals where they have used financial advisers and where they have not. But, the use of advisers has increased dramatically, thanks to the experience of using 'good' advisers.

Do you have a sense of what the next trend will be in Asian M&A? a particular sector?

The financial services sector is going to continue to be restructured. There's more to do in Hong Kong, Taiwan, Singapore and Korea. That will be a very important area of activity for everyone in the next 18 months.

I don't know of anything else that is going to be industry transforming in the next 18 months. There has been a lot of activity in the energy sector. That will continue, but I don't see anything that will be industry transforming. However, every part of Asia will be active, and that is a bit unusual.

Are you bullish on China M&A or do you think it will take a while to develop?

It will take longer than a lot of people expect. China is huge and is becoming more and more a part of the world economy, and there will be inbound and outbound M&A. But it will take longer to develop than some people think. China does have the potential to surprise everyone with a mega-transaction. But overall the activity will grow reasonably well, but it will take longer than people expect.

Do you see things happening in Malaysia?

We actually have quite a bit of activity going on there. It's not going to be one of the biggest markets in Asia in terms of M&A, but there is a lot of activity going on, and we think it's an interesting market.

Your two strongest markets in Asia are Korea and Indonesia. Are they two markets where you think there will be a lot of activity?

We are very actively involved and both continue to be very important for us. Our market share has been very good, particularly in Indonesia.

Is the M&A in Korea going to be mostly internal, or do you see more foreign acquisitions?

There'll be both. There is a lot of restructuring that still needs to be done, and there needs to be consolidation in financial services.

The big industrial groups have gone through significant restructuring and a number of them are in pretty good shape financially and are ready to go out and expand their businesses a bit more regionally and globally. I'd expect some of those bigger names to be fairly aggressive in looking at things outside of Korea.

Will we see a couple of bank mergers in Korea by the end of the year?

Yes, probably. There are some wild cards but there is no reason why two deals shouldn't happen this year.

Korea seems to be moving towards a core of universal banks. How many of these does an economy Korea's size require?

It's probably four or five. That's not the entire financial services sector. But five universal banks is not a bad number to think about.

Would five be the right number for Taiwan too?

Yes. If I were responsible for policing competition I start to get less comfortable at four banks, and six is too many. So five seems about right.