Samuel S Kim, a 14-year veteran of Morgan Stanley in the US and Asia, has led the M&A group in the region since 2010. We talk to him about his outlook for the market.
He of course noted that in the first month of the new year Morgan Stanley has announced a number of important cross-border deals. In India, the firm announced Nippon Life’s acquisition of a 26% stake in Reliance Capital Asset Management (the first cross-border transaction of the year and also the largest M&A transaction in the asset management space in India). Morgan Stanley also handled NTT Communications Corp’s acquisition of India’s NetMagic Solutions (the largest inbound M&A transaction from Japan into India in the technology space). Also highlighting its cross-border advisory chops, the firm has just advised Germany’s Putzmeister, a global leader in concrete pump systems, on its sale to China’s Sany Heavy Industry, which represents the largest to date investment into Germany by a Chinese corporate and Sany’s first ever acquisition of scale.
What is the outlook for M&A in 2012?
It’s first worth noting that Asia-Pacific has shown resilience despite the global backdrop. Remember, 2010 M&A volumes almost returned to their 2007 peak, while last year they were down only 6%. Although headwinds from Europe’s sovereign debt crisis and general market volatility have moderated the pace of M&A, we expect strategic dialogue to remain active in 2012, and this is what we are already seeing.
Overall, we’re optimistic on the outlook for M&A. We believe activity will be driven by the extension of themes we have seen in the past, including the desire to secure natural resources and technology, the selective acquisition of global brands and the pursuit for top line growth in a low yield environment. In particular, we believe this will lead to significant cross border flows.
Additionally, we expect a number of opportunities to emerge from the market dislocations globally, particularly in the financial institutions sector.
Do you think China outbound M&A, specifically, will increase?
This has certainly been a major driver of cross border flows to date. Last year, China outbound volumes were $56 billion, up from $50 billion in 2010 and $37 billion in 2009. The preponderance of this has been concentrated in the oil & gas and natural resources sector — in the past couple of years, the Chinese oil majors have deployed more than $40 billion of capital in approximately 20 deals.
But we also expect to see increasing diversification of outbound deals into other sectors such as retail, financial services, autos and other industrials. As such, we expect outbound activity to remain robust and consistent with historical levels. The fundamental drivers and the strategic and industrial logic of this deal flow remain convincing, but the ultimate levels of activity will depend on many factors including the availability of quality assets overseas, market volatility, and the ability to bridge differences in valuation expectations.
A few Chinese companies, recognising that the equities markets were closed to them, chose M&A as a way to consolidate industry positions in 2011, do you think this will continue?
Yes, we do. There is no question that last year, as equity and credit markets remained challenged, access to capital became more difficult. As a result, in certain sectors M&A became an increasing alternative for companies to strengthen balance sheets, attract capital and reinforce their market positions.
For many this trend will continue, particularly where the strategic rationale remains compelling. But for others, the use of M&A as a capital structure solution will largely depend on the tone set by the equity and credit markets in the early part of the year.
Will China’s thirst for commodities continue to drive its M&A activities?
Yes. Demand for commodities will continue to be a significant driver of China activity given that the factors that support this trend remain relevant today.
Economic growth, which drives the need for resources, remains strong, especially on a relative basis. In addition, Chinese companies are increasingly comfortable transacting deals in the international arena, including in markets traditionally seen as more difficult — for example, in the US, where we have seen two JVs announced by Cnooc and Sinopec. There is also increased comfort and diversification into other resources such as gas, as we saw in the Daylight and Devon transactions.
All of these factors point to increased acquisition of assets in the commodities sectors. The demand and interest from acquisitive companies will be there. The challenges now will be finding the availability of actionable quality assets.
Japanese corporations, in search of growth, were active in 2011, do you expect that to continue?
There has been explosive growth of Japanese outbound M&A activity and this has been a major focus area for us. In 2011, outbound M&A volumes nearly doubled from 2010, with Japan becoming the third-biggest cross-border acquirer behind the US and UK. With international rivals weakened by the European bank and sovereign debt crisis, Japanese corporations, armed with significant liquidity, have become incredibly active investors on a global scale.
Within Asia, the Japanese have been seeking investments across markets in financial services, healthcare and consumer products. In particular, the Japan-India corridor has emerged as one of the most active cross border themes. Notable deals include Nippon Life’s investment in Reliance Life, the strategic partnership between Mitsui, Sanyo and Mahindra for Specialty Steel and NTT DoCoMo’s minority stake acquisition of Tata Teleservices.
We expect this to continue this year, driven by a confluence of catalysts, including Japan’s challenged demographics — where a mature and saturated domestic economy, aging and decreasing population, is necessitating growth from abroad.
But this is also driven by the continued appreciation of the yen, and readily available acquisition finance given the low interest rate environment and declining loan-to-deposit ratios of local banks. We’ve also seen strong government support with co-investments into deals by government-related organisations.
All of these factors will continue to drive Japanese outbound acquisitions.
What are the driving factors in Southeast Asia for M&A?
While each market is different, there have been some common themes.
We’ve seen strong multi-international interest in natural resource assets, especially in Indonesia. Palm oil, coal and metals are a frequent focus, and many of our recent dialogues revolve around partnerships. Foreign companies are seeking growth and access to untapped resource opportunities, while the local parties are often seeking capital infusion, monetization or new capabilities.
The global market volatility and challenging macroeconomic outlook has also helped shape some of the themes. Some companies have been forced to enhance focus by exiting from non-core businesses, while others have taken advantage of opportunities. Well-capitalised, best-in-class corporates have looked outward to seek inorganic growth and diversification; and there has been continued sovereign wealth fund portfolio activity by Temasek, GIC and Khazanah, in the context of a volatile and challenging global economy.
And, as noted before, inbound interest from Japan remains strong in consumer products, industrials and financial services. Finally, domestic consolidation across a variety of industries, particularly in Malaysia where we have seen notable deals in the industrial, financial services and resources sectors.