Time to put cash back to work

Next year could be a game-changer for M&A in Asia as a number of trends come to fruition, according to our seventh annual M&A survey, conducted in partnership with global law firm Clifford Chance.

Chinese outbound deals are back on the agenda after the leadership change earlier this year, inbound deals continue to target the region’s growing consumerism and Asian tycoons continue to look for ways of unlocking value from their sprawling business empires.

“Overall, we see strong market activity based on current instructions from our clients,” said Roger Denny, head of Asia M&A at Clifford Chance. “There’s been a very marked change since summer. There is finally a serious desire of companies to put cash on their balance sheet to use and push ahead with opportunities.”

There have been landmark examples of each trend already this year. In May, China’s Shuanghui International paid $7.1 billion for Smithfield Foods in the US, marking a rare international outing for China’s private business sector. Numerous deals have targeted Asia’s growing middle class, including acquisitions of Siam Makro and Bank of Ayudhya, as well as a spate of insurance acquisitions from Japanese buyers.

Conglomerates are often worth less than their component parts, especially at the top of a stock market rally, and this fact has motivated some tycoons and their families to spin off bits of their businesses or to break them up completely. Singapore’s Fraser & Neave once spanned retail, real estate and food-and-beverages, and is now being split into its component parts.

Hong Kong’s Li Ka-shing is also keen to sell some of his assets, as demonstrated by his (failed) attempt to unload ParknShop for $4 billion. An initial public offering of AS Watson is on the calendar for 2014 instead but other tycoons may also look into the possibility of breaking up their holding companies, while retaining control.

Conditions outside the region should also encourage an uptick in deal activity. “Next year should be better,” said Mayooran Elalingam, head of Asia M&A at Deutsche Bank. “The macro environment is better, Japan and Korea are better, the US is okay. The big question is whether we get any new macro shocks.”

M&A as a product is also becoming more accepted among Asian companies.

“We’re getting a lot more enquiries about M&A,” said Elalingam. “The investment banking business model is changing. In the past, it’s basically been an ECM market in Asia and banks have been set up for that, but M&A is starting to contribute more. The Chinese SOEs [state-owned enterprises] continue to buy up natural resources, but it’s much more than that now. In particular, we’re seeing M&A taking off among private entrepreneurs who want to diversify away from their domestic market.”