Asian M&A: The Days of Dealmaking are Back

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The composition of the top three is unchanged from last year but the order has changed; in 2008, financial services M&A was in pole position, followed by energy and natural resources. Technology, media and telecoms retains its third-place ranking. Our poll last year followed soon after Lehman Brothers declared bankruptcy and that event no doubt coloured the view of the future.

"As the financial markets continue to go through change, I am sure we will continue to see significant levels of financial institution M&A," said Denny. "Western financial institutions adversely affected by the downturn are considering disposing of assets and western and Asian financial institutions are looking at acquisitions to achieve strategic goals and consolidation benefits."

M&A activity during the next year may also take place in green energy, retail and consumer industries, according to some respondents.

In another change from last year, securing supplies of natural resources was cited by 40% of our respondents as the key reason driving the increased Asia outbound M&A activity. Last year, the factor named by most respondents as driving M&A was Asian companies going global in strategy.

Other reasons that some respondents singled out include: capital outflow from China; portfolio diversification; and saturated local markets.

The return of liquidity to the financial markets is in evidence as 70% of our respondents expect the financial environment for M&A deals to be either slightly, or much, easier during the next 18 months.

"More credit will be available as banks become less worried about their own balance sheets," said one respondent.

Private equity funds, sovereign wealth funds and corporate reserves are expected to be the primary sources of capital for M&A deals, followed by international banks and local banks.

"Asian private equity funds remain fairly liquid and have been disciplined about pursuing acquisitions," said Rynbeck. "Most of the large private equity funds will continue to lead deals."

"With funds to call on, less dependency on debt financing than in western markets and with markets with better growth prospects, many Asian private equity houses are in a good position to do deals, assuming sellers are realistic about pricing," agreed Denny.

Our respondents singled out the liquidity in China, with some specifically citing Chinese state-owned-enterprises, Chinese corporates and Chinese banks as sources of capital.

The optimism with regard to funding also makes our respondents believe that M&A deals will be easier to close.

The future challenges

Our respondents still expect regulatory issues to be a hurdle for deals, followed by governance issues.

"Foreign government approval is becoming a key consideration for China outbound deals, notably for control acquisitions into Australia," said Gu.

The factors the majority of our respondents predict will constrain Asian outbound M&A are concerns about global economic conditions, political pressures in target countries and lack of liquidity in international markets.

"The inability [of acquirers] to manage overseas businesses and lack of confidence in doing overseas M&A, especially as there is no clear template for success in Greater China," was cited by one respondent. Fear of managing distressed companies overseas, revival of equity markets and legal issues were other concerns singled out.

Two-thirds of our respondents agreed that the current environment provides opportunities for buyers to strike deals during a period of relative downturn and to create greater shareholder value. However, our respondents were fairly evenly divided on how the rising stock market has affected the deal environment. Around half felt it has created unrealistic price expectations among sellers.

Similarly, 46% felt improved equity markets have given buyers more confidence to proceed with acquisitions, while around 40% disagreed with this surmise.

"The stock market rise and the return of some degree of stability has certainly increased confidence," said Denny. "At the start of the year, acquirers were often looking at targets with little conviction."

There is still, sensibly, an element of caution. For almost 90% of our respondents, undertaking comprehensive due diligence on targets to ensure there are no surprises after acquisitions ranked as one of their top three factors to ensure Asian M&A deals are successful after the financial crisis.

"We've seen a noticeable increase on the part of buyers focusing on managing risk, including through due diligence," said Denny. "A rebalancing of power, away from the sell side, has also helped to facilitate this."

The single factor rated as the most important by respondents in ensuring success was managing expectations of stakeholders, especially the board and equity shareholders, with regard to growth and profitability in a more challenging operating environment.

Only 56% of our respondents agreed that protectionism is a significant concern for buyers suggesting the media hype may be overdone.

"Awareness of protectionism is certainly on the increase but there are relatively few tangible examples of protectionism throwing up obstacles and preventing deals," said Rynbeck. "It is also important to distinguish protectionism from other forms of regulatory reform such as consumer protection or anti-trust, which have a genuine commercial purpose."

"When issues are addressed early enough in the process, and properly managed, they often present significantly less of a hurdle than expected," added Denny.

All told, despite a bump or two in the road earlier this year, it seems there is enough cause for cheer among Asia's M&A bankers.

Anand is a writer at FinanceAsia.com.

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