In the second in-depth interview related to our annual M&A survey, we talked to Nikhil Nath, head of M&A for Asia ex-Japan at Nomura about why he remains confident in the outlook for Asian M&A, given the shaky overall environment.
How has M&A activity been year-to-date?
The volume of deals year-to-date is up from last year. The environment overall remains robust and companies in key Asian countries such as China, India, Japan and Korea remain well-capitalised. For the right deals, acquisition finance, whether recourse or non-recourse, is still available. We also see continued growth in M&A from Japan, with inbound volumes of approximately $42 billion to Asia ex-Japan since 2005.
Are CEOs confident enough to do deals in the current environment of uncertainty and volatility?
If things continue to be shaky or get worse, we expect people will become more cautious and that could impact outbound activity. But there are still compelling reasons for Asian companies to continue to pursue deals. Firms which were earlier growing at between 15% and 20% per annum have in some instances seen their growth slow, and will continue to look at acquisitions to fuel that growth. Distressed opportunities available at cheap valuations could be attractive to CEOs. Finally, by value, the majority of outbound deals have been in natural resources and, as the strategic rationale for those deals remains, we expect them to continue.
What is your outlook for Asia inbound M&A?
It varies by country. In China, structural issues and regulations will continue to constrain deals. In Korea, domestic consolidation and restructuring situations will dominate M&A activity. In India, there will be deals in certain sectors such as pharmaceuticals. As regulatory hurdles ease, the telecom and retail sectors in India will also see some deals. In Southeast Asia, natural resource deals will dominate given the continuing competition for energy and resource security by China and India.
Do private equity firms operating in the region understand the realities of doing deals in Asia?
Absolutely. The global [financial] sponsors have been here for a while and have learnt from the deals they have done. They know that, with the exception of Korea and Australia, Asia is not going to yield the traditional buyout opportunities seen in Europe and North America. Having said that, private equity has not been a large component of volumes in our part of the world and I don’t expect that to change in the near term. However, private equity-related M&A volume will continue to grow — both with increased investment and PE exits.
Is financing more difficult now that credit has become tighter?
Again, it is country-specific. There is talk of market-based financing in China but it is still talk and not reality. Eventually, this will happen. In Japan, the government has declared it is supportive of the ambitions of local companies to grow through cross-border M&A and set up a fund to facilitate this. In India, financing is a mix of balance-sheet financing and non-recourse. I don’t expect a repeat of 2007, where Indian companies managed to finance leveraged-buyout style deals. That said, companies with strong balance sheets doing deals at reasonable multiples can raise leverage.
Despite all the hype surrounding M&A, the fees are still overall a fraction of the fees banks book from equities. Do you expect this to change?
Asia is still very much an emerging market in this respect and we continue to expect equities to be the largest product for some time. However, M&A fees are growing at a decent clip and will continue to do so. Also, if market volatility continues, the equities fee pool may see some compression, thereby increasing M&A’s share of the total pie. It should be noted that M&A revenues cannot be viewed in isolation. They add value as a strategic product that significantly enhances a bank’s client franchise, while driving other related revenue on transactions, including acquisition financing and risk solutions/hedging.
