HDFC

Image: Bloomberg

M&A activity across Asia has been down on 2021’s bumper year, but there are pockets of resilience. Kimberley Long explores how the new industries and changing market focus has kept the region’s deal flows buoyant. 

Merger and acquisition (M&A) activity saw record highs globally in 2021, prompting forecasters to predict record deal flows into 2022, buoyed by the end of Covid-19 restrictions. Yet, with the impact of geopolitics and rising inflation rates, this has not come to pass. 

In its ‘Global M&A Industry Trends: 2022 Mid-Year Update’ report, PwC found Asia-Pacific deal volumes had fallen to 7779 during the first half of 2022. The number was down 31.3% on the 11,322 deals seen in the second half of 2021, with a slightly lower drop compared to the 9814 for the first half of 2021. 

The report cited the decline as being down to the “macroeconomic headwinds and recent pandemic-related restrictions imposed across several major cities in China”. Among these headwinds is the war in Ukraine and the resulting impact on commodities. This uncertainty has hit investor confidence. 

Initial forecasts for the year suggested Asia was set for strong results in M&A for 2022. S&P Global Market Intelligence data found M&A in the region’s financial sector was up 21% year on year in 2021, at 702, marking a three-year high. Mainland China and Hong Kong were the most active markets for deals, with Australia and India following. 

Despite the subsequent decline, it is important to remember the context of 2021. Kerwin Clayton, co-head of M&A for Asia-Pacific at JPMorgan, says: “By historic standards, 2022 has been an active year for completed transactions. This is primarily due to the large number of deals that were signed last year coming through this year, and a continued strong level of signed deals to start the year. Context-wise, it is important to remember we are coming off a record year for M&A in 2021.” 

Aurojyoti Bose, lead analyst at GlobalData, says month on month M&A activity in Asia has been inconsistent across several key markets during 2022, with some cases of months of growth being followed by months of decline. 

“However, when compared to other regions, such as North America and Europe, Asia-Pacific has fared relatively well,” Mr Bose says. “For instance, Asia-Pacific witnessed 28.3% decline in M&A deal volume [recorded in GlobalData's Financial Deals Database] in August 2022 compared to January 2022, which is relatively lesser compared to North America and Europe, which witnessed 38.4% and 41.8% decline, respectively.” 

Tzu-Chung Liang, south-east Asia financial services strategy and transaction leader at EY, says the levels remained robust and the nature of the deals has changed. “Outbound deals from Asia-Pacific have fallen, but domestic deals within the region have actually increased, underscoring the increased focus on Asia-Pacific. Asia-Pacific companies are leveraging M&A as a vehicle to transform their businesses, acquire digital capabilities and build scale.” 

Market pressures 

In addition to the effects of geopolitics, there is the impact of market pressures, with rising inflation, and higher volatility and adjustments in market valuations making an impact

Raghu Narain, head of investment banking for Asia-Pacific at Natixis Corporate and Investment Banking, says this is creating a big delta between the buyers and the sellers as the cost of funds rises.  

“We have seen a downward trend in rates for about 20 years, but now it is turning up,” he notes. “Liquidity is perhaps going to be sparser than it was. If you’re buying or selling, you need to be prepared to wait or to look for measures to bridge the financial gap.” 

Changes in appetite following a year of record M&A deals in 2021 is also driving change. Mr Clayton says: “Some companies were already in digestion mode even before market activity slowed, as they had bought a lot in recent years. But then there are companies and funds who see this market as a more attractive time for M&A because there may be less competition or the valuations are more attractive.”

Further, there are some who will view these perceived issues as an opportunity. “We are seeing higher financing costs impact valuations in areas,” Mr Clayton adds. “For strategic investors with meaningful cash, this may present some attractive opportunities and perhaps less competition for assets. As well, by historic standards, valuations have been high in recent years. A pullback in valuation levels could lead to increased dialogue.” 

Mr Clayton also points to the “unprecedented” levels of private capital that is seeking investment opportunities as supporting what could otherwise be seen as a challenging market. 

China deals 

One market showing signs of dampened activity is China. The country’s prolonged Covid-19 restrictions have hit multiple areas of the economy and M&A is no exception. In a midyear report, PwC noted the country’s M&A activity had fallen to its lowest levels since 2014 during the first half of 2022. There were 6173 deals recorded, with a total value of $236.7bn. There were only 22 deals valued at more than $1bn — less than half the number recorded during the previous six months. 

Some predicted the country was holding off on deals until after the Communist Party Congress, held mid-October, when it had been hoped there would be a move away from the strict zero-Covid policy. 

The reduction has also come from greater intervention from the government to exercise control over the deals being agreed. Danny Martin, industry analyst at IBISWorld, says: “The more rapid development of legislation and supervision regulations in China has hindered M&A volume relative to other economies in the current year.” 

In addition to rules around data management and environmental, social and governance hitting M&A, the country’s Anti-Monopoly Law was revised in July this year. This requires declarations to be made to the anti-monopoly enforcement agency of the state council, which will assess the proposed deal before it can be completed. Deals that do not comply will be stopped, while those that have been completed without being properly declared can be ordered to dispose of assets or receive fines. 

Slow economic activity and issues with the property market have also impacted confidence and led to a slide in activity. 

Mr Narain suggests the slowdown has come as part of a longer-term trend: “Pre-Covid, China’s volumes were tapering down, but hadn’t fallen off a cliff. Post-Covid, lockdowns and geopolitics have played a part in the substantial downturn in volumes, but there has also been a fundamental shift of ‘China for China’, with a move towards domestic deepening.” 

Strong performances 

Among the shifting patterns of M&A flows, there have been countries and sectors which have enjoyed a successful year. 

Elaine Tan, senior analyst at London Stock Exchange Group, says the majority of deal-making activity in Asia-Pacific during the third quarter of 2022 targeted the financial sector, worth $158.2bn and accounting for 21.1% of market share — a 15% increase on the previous year. She points specifically to India’s HDFC Bank’s pending merger with Housing Development Finance Corp (HDFC) in a deal valued at $60.4bn. “It is the largest Indian-involvement deal on record and the region’s top deal this year,” Ms Tan adds. 

The HDFC deal is one of a wider trend. “Indian and south-east Asian markets have recently led the region in M&A deal volume. These regions have exhibited relatively high M&A activity growth rates, despite India’s historically protectionist economy,” Mr Martin says. 

India has led the way in private equity (PE) acquisitions, with Ms Tan saying the country captured 28% of market share in Asia-Pacific’s PE-backed deals, ahead of China’s 24%. “This is the first time since 2008 that India accounted for a larger market share than China in Asia-Pacific’s PE-backed M&A activity,” Ms Tan adds.  

Strong demand from within the region has supported some sectors. Mr Liang says: “Outbound deals from Asia-Pacific have fallen, but domestic deals within the region have actually increased, underscoring the increased focus on Asia-Pacific. Asia-Pacific companies are leveraging M&A as a vehicle to transform their businesses, acquire digital capabilities and build scale.” 

The changes in focus may not come as a surprise to seasoned investors, who have seen the shifting nature of deals in the region before. “M&A activity in the Asia-Pacific market is a portfolio game because countries do not follow the same rhythm — whether because of what is happening in their domestic markets, the business climate, currency, politics, the amount of capital available or diversification,” says Mr Clayton.

“For example, we will remember 2022 as a bumper year for Australia, with a much larger contribution to regional activity than in recent years. There is a lot of capital focused on Australia that likes infrastructure-related assets. Activity around the energy sector has also been popular as has been consolidation in some sectors.” 

Sectoral focus 

The sectors receiving the most interest have also shifted. Mr Clayton says: “For some time, deals were more concentrated in a few industries in most countries in Asia-Pacific. But in the past few years, most countries have seen some level of activity in all industries, which helps with transaction volumes and can be a hedge against business slowing down in a few sectors. For example, healthcare has become busier throughout the region.  And, as with technology, it is an area where both strategics and PE like the outlook.” 

Ms Tan cites hi-tech, referring to industries such as renewable energy and artificial intelligence, as seeing the greatest numbers of deals in the third quarter of the year, capturing 13.7% of market share and totalling $103.2bn. 

Target M&A activity in Asia-Pacific’s renewable sectors totalled $24.9bn, up 29% from a year ago

Elaine Tan

“Energy transition and renewables also continue to emerge as key themes this year,” she says. “Target M&A activity in Asia-Pacific’s renewable sectors totalled $24.9bn, up 29% from a year ago, as the number of deals grew 17% year-on-year. M&A activity targeting Asia-Pacific companies operating in sustainable industries totalled $46bn, up 5% from a year ago, led by China and India.” 

Part of the growth in new technologies is being spurred by traditional industries looking to expand. Mr Liang says: “Cross-sector deals are more prevalent in 2022, with technology being the most sought-after sector. Non-technology companies are investing in technology-targeted deals to transform their businesses, while technology companies are investing in consumer use-cases, such as the mobility sector, and offering financial services to its consumers.” 

Examples of this have been seen with sectors like consumer healthcare intersecting with technology. The accessibility of technology, combined with consumer familiarity, with services necessitated by the pandemic have seen companies building tech capabilities around their core businesses. 

In the case of healthcare, changing demographics are playing an important role. “China and Japan are facing an ageing population,” Mr Narain says, “and this is impacting what is seen as sectorally important for citizens and the government. In China, oncology and medtech are important in deepening healthcare expertise within the country to continue that ‘China for China’ focus.” 

The year to come 

What the year ahead will bring for M&A activity in the region depends on the steps taken forging new deals. Mr Martin says a more structured approach to M&A among businesses would benefit the landscape, and proactively searching for opportunities would likely boost the quality and quantity of options. 

He believes that activity from governments would also assist, suggesting incentives for lower household savings rates would support economic activity, boosting M&A activity in the process. 

“Governments and businesses can intensify efforts to either reduce geopolitical shocks or mitigate the negative downstream effects of events outside their control,” Mr Martin adds. “Efforts can include strengthening international corporate dealings, improving international free-trade agreements, diversifying revenue streams, and other methods of lowering various types of risk exposure.” 

There is a high probability China opens up next year, and there is a lot of pent-up demand

Raghu Narain

The types of deals that emerge in 2023 may be ones which had previously been shelved, according to Mr Clayton. “It can be the case that when things are more uncertain, people revert to the deals that they’re most comfortable with,” he says. “And sometimes those deals are with companies you have known or monitored for a long time and provide traditional rationales — including synergies, scale, and competitive positioning. It will be interesting to see if this will be a main theme of 2023.” 

Another significant impact will come from developments in China. Mr Narain says: “There is a high probability China opens up next year, and there is a lot of pent-up demand. The ‘China for China’ mindset will continue to deepen as lockdowns are eased. Several of our state-owned clients are looking at cross-border investment but are on hold, waiting for October proceedings to conclude and the market environment to improve.” 

He believes the desire for economic strength will ultimately win out. “China does not want to continue to grow at 2% or 3%. To climb back to their 5% or more targets requires foreign investment coming into the country. Even if China does not open up, there is a strong chance that the state-owned enterprise activity will resume,” says Mr Narain.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter