The first five months of 2005 have seen record levels of M&A from Asia Pacific, with announced volumes up 69% year-on-year to $179 billion according to JPMorgan. The bank says there have been a total of 20 deals exceeding $1 billion in size so far this year and believes 2005 will continue to break records.
"The first quarter of 2005 was one of the strongest quarters we've seen and was up materially from last year," says JPMorgan's head of investment banking and head of M&A, Todd Marin. "What we have seen is an M&A market in Asia-Pacific that is now close to 20% of the global M&A market."
These figures include Japan and Australia and Marin says that six of the top 10 deals in the period originated from Japan and two from Australia. The remaining two were respectively from Korea (StanChart's acquisition of Korea First Bank) and Indonesia (Philip Morris's acquisition of HM Sampoerna).
"Japan was the biggest M&A market," says Marin. "We think Japan and Australia comprises 50% of the M&A market and the rest of Asia the other 50%. But we think emerging Asia will grow to be more than 50%, especially as M&A from China expands.
"In the rest of 2005 we anticipate that the M&A market will continue to be quite active, driven by three events," he continues. "The first is the interest of Western companies in acquiring in the Asia-Pacific region, and in China in particular.
"Secondly there remains a tremendous amount of liquidity in the market. Corporates now have very strong balance sheets and private equity firms have had a lot of success raising funds. So there is a tremendous amount of liquidity in the market looking to make investments.
"The third point is that among the Asian economies and Asian companies, there's a lot of activity as they look to consolidate and try to grow their business - both in their local markets and as they look at regional strategies."
The numbers speak for themselves. In 2004 there was $234 billion of M&A from Asia-Pacific versus $179 billion for the year so far. The top M&A market has been Japan (61%) followed by Australia (16%), Korea (5%) China (5%) and Indonesia (4%).
By sectors financials was the largest component at 43% - largely driven by the $41 billion UFJ megadeal with Mitsubishi Tokyo Financial - and that was followed by diversified industries (43%), natural resources (12%), consumer/healthcare (11%) and TMT (5%).
Marin says what has impressed him is the diversity across sectors. "We're seeing much more balanced M&A across industries. The activity has been diverse and that speaks to the strength of the M&A market," he notes.
He adds that the FIG pipeline remains strong. "There remains an opportunity for consolidation in many banking markets around the region. It's hard to predict if it's going to happen in the next six months, 18 months or 24 months, but it is going to happen. Taiwan, for example, has more than 50 financial institutions and consolidation will happen there."
He also says the telecoms sector has bounced back and he sees a lot of potential M&A discussions in that area. "We are now seeing appetite for investing in the telecommunications side. The telecoms companies are throwing off a tremendous amount of cash and they're looking for ways to invest. So we think they will be active."
On the sectoral side he further adds, "Oil and gas and power have been active and will continue to be."
He says it is a good time to be a seller, as reflected in some very competitive auctions. "The amount of liquidity has already led to prices going up in the last 18 months," he points out.
When looking at the pipeline for the second half, he notes that certain countries could be very active. "India is a place where a lot of discussions are happening," he says.
Indeed, many private equity firms have already made public their intentions about India. Marin says this is not surprising, "Private equity firms face the challenge of having lots of capital and having to find good investments. I am not surprised they are spending time in India. Private equity firms like to be on the early side of a market, and getting into India early makes sense for them."
Obviously, private equity firms' erstwhile-favoured country was Korea, where Carlyle, Newbridge and JPMorgan Capital Partners all made stellar returns. Will Korea continue to be a key M&A market or are the best times over? Marin remains bullish: "Korea has had a lot of activity over the past few years, with a lot of that being private equity investments and then their exits. This year there has been a fair amount of activity and if I look at the pipeline it has a good outlook for the year. We believe Korea will be one of the better performing M&A markets this year and beyond."
Nor does he see any evidence of xenophobia or backlashes against foreigners blocking deals in Seoul. "We haven't seen a situation yet where a buyer - which has the best price on the table - has been stopped from buying an asset. Unless we see that happening in the near future, I don't see foreigners being put off."
More of a threat to foreign buyers in Korea could be the welter of domestic private equity money that has been raised. In addition to the hugely successful fundraisings of major foreign private equity firms this suggests there is a lot of capital chasing deals. And there is less low-hanging-fruit than existed in the wake of the financial crisis.
But does Marin think all this capital going into private equity suggest a bubble is underway? He thinks not.
"Every private equity firm is judged by the five or 10 investments they make each year," he says "They all talk about returns that average 30%, but really most of these firms have a few home runs and a few that are underperformers.
"I don't think we'll see a bubble. I think they'll continue to find good investments that drive their portfolio and they'll also have investments that don't work out. The one thing that is different now is there is a tremendous amount of liquidity; so the competition for assets will increase.
"The other thing is that between 1997 and 2002, strategic investors - both local and international companies - were very distracted. What's happened now is that most of those companies have cleaned up their balance sheets and are not distracted anymore and are looking at similar investment opportunities to the private equity firms and that is driving prices up."
A trend he sees being imported to Asia from the US is where private equity firms get together to delist major companies. "Many Asian companies are generating very good cashflows and the stockmarket has been moving sideways. This means many companies can be bought with the leverage it requires for private equity firms to take them private. I predict we'll see more of that activity while rates are low and equity markets are weak."
In total there have been 971 announced M&A transactions in the year to date in the Asia-Pacific. The US still represents 45% of the global M&A market, with Europe in second place with 31%.