Orders still bullish

ABN AMRO supremo, Richard Orders talks M&A.

Last year you predicted a substantial lift in the level of M&A activity in Asia, are you still bullish?
Yes, I think the restructuring story still has a lot of momentum. There's pressure on businesses to increase critical mass and market dominance through consolidation , and on conglomerates to focus on core competencies. So the difficult conditions of the last 12 months have helped the M&A business.

If equity capital markets come back in the first six months of the year, will that impact M&A?

Yes, it will. More financing avenues will be available through the equity capital markets. So we might see more cash deals. Last year, we saw a lot of paper transactions. A number of deals were done through share swaps.

In addition, what people forget is there are a number of companies in Asia that are still pretty cashed up.

The league tables point to the fact that M&A volumes were lower than the year before.

Yes, but if you allow for the sheer size of the PCCW/HKT deal and the China Mobile asset injection, you'll see a much greater number of deals US$250 million and above than in the previous year. There were high quality deals across many sectors and I'm sure if you talked to all the banks they'd say their M&A business was much better in revenue terms than in previous years.

Since 1997 there's been quite a lot of Asian M&A. How many of those deals have destroyed shareholder value in percentage terms?

Well, I'll give you a slightly wordy answer which is to say, in certain sectors a lot of value was destroyed initially. For example, the first wave of telecoms investment has been value destructive for investors, almost without exception. But now there is a second wave, which is being done on a much more solid basis and at more realistic valuations.

If you look at the banking sector as another example, it is too early to tell, since most of the deals have taken place in the last 12 months.

If you look around at some of the acquisitions and subsequent disposals that major international companies have made like Hutchison, I think, by and large they have been pretty good deals.
Generally speaking, people talk about M&A creating value or not creating value, but it's often very difficult to tell, because you don't know what would have happened to shareholder value in the absence of a transaction.

In 2000, PCCW dominated M&A in Asia, and in 2001 it was Singapore bank mergers. Do you have a sense of what will be the dominant trend this year?

More of the same: more bank deals, more telecoms, and China's going to emerge post-WTO. We will see companies prepare for the impact of WTO, and try and gain scale and critical mass. So M&A in China will be a key theme in the next two or three years.

For example, at the moment we're looking at a China company making a public takeover bid for a Hong Kong company. The interesting thing about that is that when you actually look at it from a regulatory perspective, it's not easy. The rules simply don't allow for such a thing.

I think that the big theme for the next two to three years is a whole range of things: domestic consolidation, China companies buying outside China, multinationals buying in China.

The other sector that will be big is consumer products.

Volume wise, will M&A be bigger this year out of Singapore or Korea?

Difficult call. There's another round of consolidation to happen in Singapore, for example, property and Singapore companies will continue to buy offshore. However, both markets are going to be quite active although closure risk in Korea is a big issue for some investors.

Last year was about $107 billion of deal activity. Will this year be up on last?

There is a very strong chance volumes could be up again. The trends in US and Europe show that people don't normally think that the current year can be as good as the previous year. However, eight years out of 10 you get even more growth, and I do think that restructuring in this part of the world has only just started.

Do you foresee consolidation among Hong Kong mobile phone operators?

Yes, that's a key area. Telecoms and banks in Hong Kong, I feel, could happen this year.

People have thought it was going to happen for many years.

As far as telecoms is concerned, I think the 3G process is now out of the way and the costs of that are known and there is less uncertainty in the marketplace. The market has reached saturation point. And the small operators realize they are going to be marginalized if they just stay in Hong Kong. Unless they merge and create critical mass, they are not going to be credible in other key markets such as China.

So I think telecoms is likely to happen this year. I think banks will happen too, because the emergence of DBS Dao Heng puts more pressure on the smaller players. Plus you will see more consolidation pressure around the region in banking and that will put more pressure on Hong Kong.

Do you think on the mobile phone front, that like in Singapore banking, one deal will trigger off other bids?

Yes, it's almost always how it works. Once someone does a deal, it acts as a trigger for everybody else. Everyone is looking at each other waiting for someone to do something. Once one moves, the rest normally follow.

Do you think it could happen before the Summer?

I think it could. I sense there is more momentum than there was previously. I suspect the competition policy in Hong Kong is more sympathetic to a small number of large operators in most sectors than a large number of small operators.

Coming back to banks, I think the squeeze on margins will continue which will put pressure on spreads. That will act as a catalyst. But I feel less certain about banks. If I was to choose between banks and telecoms, I suspect the latter will be more active in Hong Kong this year.

Are there still big face issues for the families that own banks and telcos in terms of selling?

The face issues are less in telecoms than in banks would be my reading.

Do you foresee more hostile takeovers?

Public hostility is not normally the Asian way. Much goes on behind closed doors and most companies have large controlling shareholding blocks. It would not be regarded as good manners for those companies to make a hostile public bid. Having said that, as shareholdings pass down generations, they become more diffuse and "control" becomes a much more questionable deliverable. I can think of several companies where there is a perception of family control but where, if an attractive cash bid was put on the table, that control would turn out to be more apparent than real. There is nothing that focuses the mind more than cash on the table.