But as with all things, it was too good to last. In the middle of the party û and the year as it happened û the US subprime situation threatened to cast a shadow so long that it could curtail festivities as far away as Asia.
It has now been a few weeks since the subprime saga gained momentum. Clifford Chance and FinanceAsia decided to assess how much the Asian M&A market has changed û because of the credit crisis and on account of factors independent of it.
Research agency Ipsos mailed an online survey to a list of target respondents provided by Clifford Chance and FinanceAsia. The survey was sent out at the end of September.
Responses were received from 237 people, including 57 corporate executives and 180 advisers. Corporate respondents were from a range of industries including insurance, property, telecommunications and manufacturing, to name a few. Among advisers, 37% were from investment banks, 18% were from fund-management companies and 16% were from legal/advisory firms. The balance was distributed between corporate banking, private equity funds, and alternative-investment funds including hedge funds.
The majority of respondents across both categories were in decision-making or senior roles in their firms. Around one-third were in the senior-most roles in their firms (chairman, managing director, country head, CEO, etc).Geographically, Hong Kong and Singapore accounted for 57% of the responses.
The first question was about the level of investment expected in the next two years, divided into inbound and outbound investments. The subprime situation seemed to colour the responses on inbound M&A into the region as only 45% expected an increase on the previous year with 56% expecting it to stay at similar or lower levels.
However, bullishness on the willingness and ability of Asian companies to acquire outside Asia was evident, as 58% of respondents expected an increase over the previous year, with advisers (62%) even more optimistic than corporate respondents (47%).
Buoyancy on intra-regional M&A was also high as 59% of respondents expected an increase, again with advisers (63%) more optimistic than corporate leaders (49%).
Mainland China is the place that 55% of respondents expect to see the most M&A investment in the next one-to-two years. (This result may have been skewed somewhat by the fact that Hong Kong respondents were in the majority.) This was followed by 13% of people predicting India, 11% predicting Australia & New Zealand, and 7% predicting Japan. The Australia and Japan answers also intuitively make sense as the ticket size of deals in both countries is higher, thus a few big deals could really add up.
Surprisingly, Malaysia, which has been an active M&A market over the past year, brought up the tail with no-one expecting it to continue to be a strong market for M&A. However, in aggregate, about three quarters (70%) of respondents selected countries in Southeast Asia (including India) as one of their top-two picks to be active M&A markets in the next two years, corroborating why all M&A advisers seem to be beefing up their coverage of the region.
Activity in the financial-services sector is expected to dominate M&A deals with 57% of respondents naming it as one of the three sectors that would garner strong M&A attention. Natural resources came in at number two. Advisers were more optimistic that financial-services players will continue to aggressively buy, with 61% of advisers putting their bets on this sector, compared to 47% of corporate executives. Other sectors expected to be active are manufacturing, property, technology and industrials. The retail and funds sectors are expected to be the least active.
In a sign that suggests many of the respondents felt the worst of the credit crisis is either behind us or unlikely to severely affect Asia, 49% said that the financing environment in Asia for M&A deals would not change or would improve over the next one-to-two years. But here advisers were more bearish with 55% saying financing could be slightly or even much more difficult compared to only 42% of corporate respondents taking that view.
Only 42% of the corporate respondents felt Asia-Pacific was a more difficult region to source and execute transactions compared to 58% of respondents who are advisers. This may reflect the fact that advisers, who are pursuing deals on behalf of multiple clients, are more attuned to the difficulties in crossing the finish line. Corporate leaders cited governance issues as specifically the biggest challenge while advisers cited regulatory and cultural issues.
An overwhelming majority, more than 85%, felt sovereign-wealth funds and government-investment funds would continue to be aggressive acquirers. But there was also consensus among more than two-thirds of respondents that these deals would face resistance on account of regulatory approvals and national protectionism. This category of acquirers is clearly going to show up more in auction situations û and so advisers are going to be devoting considerable time to working with their sovereign and government clients to ensure their bids are packaged and presented in a manner most likely to succeed.
Corporate executives seem to feel they have tightened their ships due to the increased activity by hedge funds and activist shareholders in the region with 68% saying there has been a change in the way companies are managed. Advisers mostly took the same view, but not as overwhelmingly, with 58% in agreement.
In a similar vein, 84% of corporate respondents felt standards of corporate governance have improved in the region during the last year. Advisers were more sceptical, with only 66% saying they had seen a positive change. Both categories of respondents attributed the change to demands from investors and the regulatory environment.
The corporate respondents were divided on whether the talent they need to effectively execute their M&A strategy is available, with 51% saying it is. But an overwhelming majority, 88%, of corporate respondents cited Asia-Pacific experience as the most important quality in potential hires. This corroborates the view of a number of seasoned Asia hands that local experience is the most critical to making a success of M&A deals.
Continuing the human resources theme, 63% of corporate respondents felt people issues are essential to executing a successful M&A strategy. Not surprisingly, integrating cultures was seen as the most important execution issue with 64% of respondents citing this.
In a positive sign for regional M&A bankers, 51% of advisers intend to increase the size of their M&A teams and 45% intend for them to stay the same. This suggests that only 4% of M&A bankers should expect to be given pink slips next year.
Advisers felt even more strongly (74%) that people-related issues were the most important to a successful M&A strategy. But advisers highlighted management of talent and retention of the best people as the human resources issues that are most critical for them.
All in all, respondents remain bullish on the prospects for M&A over the medium term. Indeed one person who answered the poll attributed the improvement in the outlook for M&A in the region to ôboth countries and companies coming of ageö. It seems that despite any global credit issues, the region and its players have achieved a stage of maturity that suggests M&A is set to grow.
This article first appeared as part of the M&A supplement with FinanceAsia October issue.
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