Merrill bullish on M&A

Kalpana Desai, Asian M&A head at Merrill Lynch, talks about AsiaƆs M&A prospects.

Are you less active now than you were this time last year?

Not in terms of volume. Last year was perhaps a bit of an anomaly with deals like PCCW/ HKT, which skewed the total deal size. The value of deals this year is clearly a lot lower on an aggregate basis. But in terms of numbers of deals, we are probably up on last year.

We are continuing to see a trend of an increasing number of $1 billion plus deals in Asia. And that is a good thing. 

What would the M&A market look like this year if we stripped out Singapore?

On a full year basis I don’t think stripping out Singapore will make a huge difference. Deal activity continues to be focused on North Asia, particularly in Korea, Taiwan and Hong Kong, as well as Singapore. So while a number of deals have been announced from Singapore in the first half, I think the spread will be more balanced on a full year basis.

Do you think Singapore will continue to be an aggressive buyer?

Yes. Singapore companies are some of the most transparent that you have in Asia and are world class from a management perspective. It’s very clear that having succeeded in their own domestic market, they are now actively looking at expanding internationally and see that need from a growth perspective and to diversify risk. So that trend will continue.

They are focused on shareholder value and so the analysis and approach they take to a bid is comparable to the best. That is a good thing because so many deals fail to deliver shareholder value because there wasn’t enough analysis undertaken upfront about the synergies that could be extracted. Singapore companies are very focused on EVA analysis.

Is execution risk a big issue for Asian M&A?

No more so than for Western companies. And in some respects Singapore and Hong Kong companies initiate M&A on a much more considered basis. 

Last year, the most high profile deal -- PCCW-HKT -- has also been the greatest destroyer of shareholder value.

If you track PCCW’s share price to other comparable Internet companies in the US, for example, you’d see a similar percentage fall. And shares in some telephone companies have also fallen between 50-80%. The whole sector has been re-rated.

Are there a lot of telecom M&As still to be done in Asia?

Yes, there’s still consolidation that will occur across Asia. That’s down to the fact that this industry is global. So even though valuations are down, everyone’s valuations are down by more or less an equivalent amount. So once people at the CEO level and the controlling shareholder level get comfortable, it shouldn’t matter. There’s a great psychology issue here. At the moment there is a lack of confidence in the sector. When that returns, you will see more consolidation.

Are you going to be heavily involved in Chinese aviation M&A?
It’s a good thing. It will lay the foundation for creating world-class airlines out of China. That is the goal. Perhaps more than one, that compete on an international scale. China’s domestic economy is projected to grow very strongly and that will clearly have a strong impact on air-traffic volumes. 

You think the best thing would be to consolidate to two or three dominant airlines?

There is still a significant amount of infrastructure investment that is required to build out the full domestic network, and also to have a fleet and management quality that can compete amongst the best in the world. The chances are greater of achieving that with three competitors than 10, especially if they are competing in the external capital markets, or for external management expertise. And if you look at it statistically, three is traditionally the number where you do have real competition.

Do you get the impression the Japanese are interested in coming back into Asia as buyers?

On a selective basis. Japan faces some domestic economic issues, and most Japanese companies are very focused on solving those issues and in domestic consolidation. But I should qualify that by saying that China remains a core market and for the globally competitive Japanese companies, China is still important.

Is Asian M&A still on a rising trend?

Very much so. That is part of the wider trends of globalization, and an increasing willingness to part with underperforming assets.

What do you think has been the most significant M&A deal of the year so far?

I think that it is probably the DBS/ Dao Heng transaction, simply because there has been so much talk about consolidation in the Hong Kong bank sector. And I see this as a catalyst for greater consolidation in that sector.

 

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