Corporate deal making in Asia is well placed to continue recovering in 2014 as asset price volatility eases, encouraging more chief executives to seek out new opportunities, and as more Japanese companies emerge from the shadows, keen to do business.
Thanks in part to the ambitions of fast-growing companies such as Thailand's CP Group, the volume of mergers and acquisitions (M&A) crept up to $491 billion in the year to October-end from $465 billion in the same period a year earlier, according to data provider Dealogic.
The recovery in M&A will likely gather pace next year as asset prices settle, say bankers who advise on such transactions.
For Thai tycoon Dhanin Chearavanont, who controls CP Group, asset prices are cheap right now, according to a person close to him.
This year CP acquired a $9.4 billion stake in China’s Ping An Insurance and bought cash-and-carry wholesaler Siam Makro for $6.6 billion. Charoen Pokphand Foods, also controlled by Dhanin, mulled bidding for Smithfield Foods but stepped aside for China’s Shuanghui International.
In anticipation of a further pickup in M&A activity, bankers are putting into place teams of derivatives experts to help companies finance potential acquisitions by leveraging existing assets.
Bankers are also preparing the ground for a possible pickup in Japanese M&A activity, albeit elsewhere other than in Japan. “Japan M&A is gradually coming back … Japan unfortunately has limited growth, so all the companies have to look outside,” said Kenji Kimura, global head of M&A at Nomura.
It's a theme echoed by HSBC’s head of M&A across Asia-Pacific, George Davidson, who is targeting more business from Japanese buyers of overseas assets. “Japan’s biggest companies are aiming for more growth from outside of Japan,” he said.
As such, Davidson said he didn't think HSBC needed a big presence on the ground and is instead considering working together with a Japanese bank to source and execute deals.
Besides having M&A advisers in the right place at the right time, bankers also have to decide whether to represent the buyer or seller.
Davidson said HSBC could play more to its strengths by advising potential buyers, since it could also provide ancillary financing such as foreign exchange hedging and take-out financing.
But he added that HSBC now used its balance sheet very sparingly, a big change from a few years ago. “We were a commercial bank and happy to lend — and stop there [rather than cross sell additional products],” he said.
Now, when HSBC looks at the potential returns, it looks at what it can make on the whole product suite further down the line, such as from a potential IPO or a bond deal. “It’s all part of the equation in deciding if this business makes sense,” he said.
Given the growing costs being borne by investment banks as regulation is tightened the focus on maximising fees is unsurprising, especially in Asia, the most competitive region globally. On average banks in Asia receive about half the M&A fees paid in the US and Europe. The fee pool in total is also small compared with other regions.
Despite its natural advantage in helping Japanese companies buy companies elsewhere in Asia, Japan's Nomura is also looking to capture more cross-border business between Asia and Europe and between Asia and the US. Nomura has hired about 10 senior investment bankers in the US during the past year.
Some banks are looking to advise on the more complex deals, where fees tend to be higher.
Rob Sivitilli head of Asia ex-Japan M&A at JP Morgan, said he was imposing greater fee discipline on his team and increasing the focus on potential deals that are cross-border and include complicated aspects such as hedging risk.
As part of this shift Sivitilli’s team managed to generate greater revenue by advising fewer but more complex deals this year. “We’ve doubled the minimum fee hurdle,” he said.
