Will outbound Asian M&A be affected positively by depressed valuations of targets or negatively by the more difficult credit environment?
Both lower valuations and tighter credit can be seen as positives for the M&A business, in my view. Lower valuations imply that the price of long-term growth is now more attractive for acquirers. With many buyers in Asia still well-capitalised, this means there are significant opportunities in the market. Credit tightening, although restrictive for buyers, is helping to create business on the sell-side in the region as companies that were highly leveraged now need to sell assets to improve liquidity. These themes, when combined with the general ongoing improvement in the use of M&A as an important corporate tool, provide a fairly positive regional outlook for 2009 versus the global one. Year-to-date M&A in emerging Asia is up roughly 15% year-on-year and continues to compare favourably to global figures.
Does the current uncertainty suggest negotiated deals or auctions will be preferred and why is that?
Within our region there are many acquirers who remain well-capitalised and thus well-positioned to take advantage of opportunities. We expect to see more cross-border activity within Asia as companies focus closer to home rather than on the Americas or Europe. We therefore expect sell-sides to increase next year in the region. The preference for negotiated deals or auctions depends largely on the client, not necessarily the prevailing economic environment. For example, during the 10 years I have been in Asia I have found it challenging to persuade owners and managers of businesses to part with assets, despite it clearly being within their best interests to do so. In such situations, M&A practitioners tend not to pursue auctions, and may opt to bring a potential buyer directly to the seller. This approach can often culminate in an auction process. Multinational companies typically employ the use of the auction format in their home markets, and it is a system that they are generally comfortable to replicate in Asia, especially given the number of buyers available in the region.
How has the cost of capital for Asian acquirers been impacted by the meltdown?
There is no doubt that the cost of capital has increased in Asia. And while the cost of equity has certainly jumped, for debt it is more of a question of how much you can actually obtain. The magnitude of the cost increase, however, depends largely on in which part of Asia you are based. In China, for example, many state-owned enterprises have not been impacted to the degree that you might expect. Conversely, in places such as India, Korea and Indonesia û traditionally more aggressive users of leverage û the shock has been more profound. However, all of this must be considered within a larger framework, namely that valuations are more attractive and that higher capital costs are not such a limiting factor in this type of environment. It is access to capital that is more of a limiting factor to some buyers.
What kind of leverage levels are Asian private equity deals getting transacted at? Will private equity as an asset class see a slowdown or a ramp-up in the region?
The degree of leverage that companies are assuming depends on a number of factors, including which market and which business sector you are looking at. Nevertheless, as a rule of thumb we have seen leverage roughly in the three times to four times [Ebitda] range recently. Given lower valuations, it goes without saying that we will see more private equity in the future, especially as the long-term outlook on growth within Asia remains quite favorable. More importantly, perhaps, we believe that the lack of credit will push corporations to sell assets, which should provide a large selection of mid-market opportunities for private equity investors.
Do you expect sovereign wealth funds (SWFs) to come back as large acquirers?
SWFs will definitely return as large acquirers û they have tremendous access to capital and a clear mandate to invest overseas. The current state of the credit market is a large opportunity for them as they are among the few that have access to significant capital and valuations are becoming very attractive. The current round of volatility certainly poses risks, but once that calms, perhaps in 2009, there is no question that they will return. In my view the current pause relates purely to a comfort factor û not an inability to complete deals.
Will SWFs continue to face political resistance?
We have seen a significant reduction of political concerns over the past 12 months. I think this stems from people now seeing that there are very few political consequences as a result of these investments. DonÆt forget that SWFs can participate in the M&A field in a number of different ways. One way involves the direct acquisition of stakes in target companies. A second way could also see SWFs use their funding to support the outbound initiatives of state-owned enterprises. This is something we have not seen much of so far, but one would expect to see more in the future.
Some recent Indian outbound acquirers have found it difficult to raise financing. Is outbound Indian M&A deals likely to take pause?
India has been quite aggressive in M&A in recent years; we have seen some of the largest and most ambitious deals come from there. Many of these deals have not been self-funded, and as a result Indian companies have been active users of the equity and debt markets. Given the current capital market conditions it is logical that we should expect a pause from companies that need capital to perform such transactions. At the same time, acquirers who do not have to borrow will continue to be able to execute transactions at lower valuations. Where buyers are well-capitalised, we can expect them to continue to be opportunistic.