Mergers and acquisitions (M&A) in Asia-Pacific were down in 2017, most likely because of China’s moves to curb the levels of foreign investment being carried out by the country's big businesses. The total deal value of M&A activity across the Asia-Paciic region in 2017 was $1400bn, a 4.3% decline on 2016, according to figures from Thomson Reuters. In China alone in 2017, the transaction volume was $140bn, a fall of about one-third on the previous year.
Beijing is clamping down on outbound overseas M&A activity in an effort to stabilise the renminbi and strengthen its foreign exchange reserves. “The Chinese government is concerned about issues of capital flight from overseas M&A,” says Charles Maynard, founding partner at BDA Partners, a cross-border investment banking advisory group focused on Asia.
Outside lane
Deals valued at $1bn or more are coming under greater scrutiny in China, especially if they are outside the investor’s usual area of operation. State-owned companies have also been prevented from investing more than $1bn in any single overseas real estate deal.
Among the industries subject to the greatest scrutiny are sport and the media. “The Chinese government has rightfully observed that a significant proportion of the earlier wave of overseas acquisitions did not pay careful attention to how the targets would integrate with the existing businesses of the Chinese acquirer, and how the targets could contribute to systematic growth,” says Choe Tse Wei, global head of strategic advisory at Singapore’s DBS Bank. Or, as another insider puts it: “The Chinese government was unhappy with investors buying up international football teams.”
This clampdown was followed in July by proposals to reduce the volume of foreign money coming in to the country. As part of protectionist moves, in part a response to US attempts to reduce the number of Chinese acquisitions of US businesses, the commerce ministry has made controls of foreign investments part of its national security review process.
The restrictions raised concerns regarding their effect on the Asian M&A market, which had consistently surpassed the $1000bn mark in recent years.
Taking a hard line
As part of more strict reforms, the Chinese government is making it harder for companies to be publicly listed. “The government is seeking to reform the IPO approval process, with individual regulators now having lifetime responsibility for the initial public offerings [IPOs] they approve,” says Mr Maynard. “The outcome is higher quality IPOs, fewer applications and a higher rate of rejections.”
However, this is creating issues with investments made in previous years, when there was an expectation that a company would be publicly listed. This has led to more companies looking to M&A as a solution to their problems.
“Equity investors who invested anticipating an IPO still need to get their cash back,” says Mr Maynard. “M&A is increasingly being used as a tool to solve this problem, with either the investor’s stake or, in cases where the founders are also looking for an exit, the entire business being sold. Trade sales of the entire business to either strategic or financial investors have become an appealing option.”
The Chinese government’s historic family planning policies, coupled with the family-owned structure of many expanding companies, has contributed to this complex situation. “There are growing succession issues in Chinese family companies which are exacerbated by the one-child policy, with many children preferring a sale of the business to inheriting it,” says Mr Maynard. “IPOs are harder to execute and do not solve the succession issue. This leaves trade sales as an increasingly common solution.”
Where the flow goes
In some ways, the slowdown in China is a rebalancing following the huge growth of the past few years. “In 2016, Chinese outbound M&A spiked to record highs. There were a lot of funds available and there were no curbs on outbound transactions,” says Apoorva Shah, co-head of M&A for Asia (excluding Japan) at Nomura.
It is no surprise that activity has been forecast to remain slow into 2018. However, Bloomberg figures show Asia-Pacific companies were involved in $734bn-worth of M&A deals during the first half of 2018, representing a 38% increase on the same period in 2017. So if China is not moving funds as it was in previous years, which markets are cornering the action?
“India and Japan are showing themselves as strong M&A markets in Asia this year,” says Rohit Chatterji, co-head of Asia-Pacific M&A at JPMorgan. “We are seeing our best year ever in M&A in India. Deals such as Wal-Mart’s acquisition of Flipkart, Blackstone’s sale of Intellinet and UPL’s acquisition of Arysta have delivered great momentum.”
The acquisition of a stake in Indian online retailer Flipkart by Wal-Mart is one of the year’s largest deals globally, with $16bn buying the US retailer a majority share in the biggest e-commerce deal to date in the world.
One Indian sector that is proving particularly tempting for overseas investors is technology. “While India has been promoting its manufacturing sector through the 'Make in India' initiative, another important factor driving FDI is strong foreign interest in investing in the country’s technology companies, e-commerce start-ups and healthcare sector," says DBS Bank’s Mr Choe. “While India might be best known for its manufacturing, it is actually being driven by the country’s tech start-ups.”
The country’s huge population has made retail a good prospect. Indian e-commerce is forecast to be worth $200bn by 2027 according to Morgan Stanley, and some companies are wanting a slice of the market without having to first set up operations. There have been reports in recent months that the online supermarket Bigbasket has been looking for funding. There has been talk of China’s Alibaba looking to join with India's Reliance Retail.
Mr Shah adds: “India is relatively closed in terms of inbound M&A, but bigger deals are happening. When something comes along such as the decision by GlaxoSmithKline to sell its Horlicks [business in India], global companies get excited.”
Coca-Cola is reported to be among the parties interested in a $4bn Horlicks deal, which would see the company further diversify its portfolio away from the soft drinks market. But Coca-Cola faces strong competition: Kellogg's, Unilever and Nestlé are also believed to have registered their interest. The sale is thought to be a way to finance GlaxoSmithKline’s $13bn buyout of Novartis from their consumer healthcare joint venture.
First-time buyers
The cost of businesses in India has also been appealing to investors over the past few years, who are often making their first moves into the country.
“The public and private valuations in the Indian markets have been attractive in the past 12 to 18 months, which has enabled some private equity investors to optimise their holdings and has provided opportunities for new investors to come in,” says Mr Chatterji.
Away from large-scale corporates, India has been actively encouraging investment into businesses facing hard times. “Inbound investment into India provides essential funding for vibrant companies and contributes towards productivity growth. This helps to offset the impact of several financially distressed companies that have been a drag on economic output and on banks’ balance sheets,” adds Mr Choe.
Beyond borders
While China is tightening controls on outbound overseas acquisitions, the same cannot be said for the rest of Asia-Pacific. Some players seem to be seizing this opportunity.
"Asian companies have achieved years of successful growth, and have accumulated significant capital as a result," says Mr Choe. "As they face increasingly saturated home markets, they are seeking growth beyond their own shores. Often this means looking to expand in other Asian markets where the demographics are favourable and disposable incomes are rising."
The mega-economies of Japan and India are a case in point. Mr Chatterji believes India companies have been biding their time. “Indian companies with global businesses have been waiting for the right time to acquire in the overseas markets,” he says. “The desire has been there for some time, but this year the stars lined up for companies such as UPL and Novelis.”
This resulted in UPL’s purchase of multinational agrochemicals company Arysta Lifescience for $4.2bn, and Novelis’ purchase of Ohio-based rolled aluminium products supplier Aleris for $2.6bn. The latter purchase was made after a bid in 2017 by China Zhongwang failed to make it past US regulators .
Indian companies are also finding plenty of opportunities within their domestic market. The appetite for domestic consolidation is continuing, motivated by the desire to create stronger corporates. “[India-based] multinationals have been interested in gaining share in select sectors,” says Mr Chatterji. “Telecoms has seen consolidation to create a better, more cohesive market. Investments in ecommerce, payments and tech-enabled business models have been active.”
During 2017, India’s telecoms sector saw $14.7bn in M&A deals, a five-fold increase on 2016’s figure, according to EY. Significantly, 58% of the deals were domestic and represented a staggering 98% of the total deal value in the sector.
Japan changes tack
Dealflow is increasing in historically strong markets. Japanese M&A activity has seen an uptick in recent months, and in a change in approach, companies are looking overseas for investment.
“Japan is traditionally a strong market for M&A, typically with a focus on domestic deals,” says Samson Lo, head of Asia M&A at UBS. “But as a result of the slowdown in China, Japan is increasingly participating in outbound deals. Takeda Pharmaceutical’s $46bn acquisition of [Ireland-based] Shire is a high-profile example.”
The country is also taking steps into the Chinese market, a notable move given the often fraught relations between the two countries. “Japanese companies have moved into China, such as Mitsui Sumitomo Insurance taking a stake in BoCommLife Insurance, which is part of Bank of Communications,” says Nomura’s Mr Shah. “Nomura advised Mitsui Sumitomo Insurance on this transaction, which is pending approval.”
There has also been a rise in Japanese activity in Australia, where deals in the mining, energy and utilities sectors have generated the most interest. “This has been an active year in Australia. Australian corporates have been buyers of overseas assets in business services and industrials,” says Mr Chatterji. “The domestic resources sector and infrastructure assets have seen a lot of interest. Financial sponsors have also been active bidders.”
Indeed, much of the surge in M&A activity in Asia-Pacific can be attributed to intra-regional deals being struck. "The significant trend is that cash accumulated by companies in one Asian country is being used to acquire companies in other Asian countries," says Mr Choe. "A recent example is Malaysian-owned IHH Healthcare acquiring a 31.1% equity stake in India’s Fortis Healthcare through a subscription of new shares for Rs40bn [$556m], with an open offer to acquire an additional 26% interest, valued at Rs33.5bn, from existing shareholders."
China looks internally
Although there has been a slowdown in China, Mr Shah is keen to emphasise that the numbers in the country are still huge. “It has been a big year in India and Japan, but they have not overtaken what was seen in China,” he says. “To put things into perspective, a bad year in M&A in China would be a good year for Japan in absolute terms.”
Indeed, the numbers remain strong. According to figures from PwC, the first six months of the year saw $348.3bn in M&A in China, a decline of 18% compared with the second half of 2017. By comparison, Thomson Reuters figures show Japan’s M&A figure for the first half of 2018 surge to $232.4bn, four times the recorded figures for the same period in the previous year. While Japan’s numbers seem to be skyrocketing and China’s floundering, the Chinese market still recorded in excess of $100bn more in activity.
In part, this is down to China refocusing its approach. As outbound investment has slowed, the Chinese market is looking instead at deals in the domestic market which may have been set aside during the international boom seen in 2016. “In some cases, companies are revisiting legacy merger plans which may have been discarded when the focus moved to looking overseas,” says Mr Lo.
The domestic merger strategy is also helping to build up the strength of companies that can present stronger competition on the international stage in future deals. “China has sought to create champion companies that are likely to become potent challengers when the vogue for outbound deals returns,” says Mr Lo.
Although facing greater restrictions, Chinese businesses are not banned from conducting overseas deals and transactions are still being completed.
“Despite the strict regulatory landscape, Chinese investors are still looking to the rest of the world for deals,” says Mr Lo. “The recent purchases of Sirtex Medical and Nature’s Care in Australia are good examples. At the same time, the HNA Group is continuing its programme of asset sales to pay down debt.”
Chinese companies are becoming more specific in what they are looking for, as they seek to acquire not only businesses but the skills and expertise needed to meet the demands of its growing middle-class consumer base, and healthcare requirements for its ageing population. “China Inc is looking for brands in the tech, consumer and healthcare space,” says Mr Shah.
Room to grow
The growth of Asia-Pacific’s M&A scene has soothed fears of a market slump in the face of the Chinese clampdown. Thomson Reuters found the value of deals involving companies from the region was $801.2bn in the first half of 2018, a record for the period.
Even with these huge numbers, the region is still falling short of its potential according to some market watchers. “Overall, Asia is seeing some real progress in M&A,” says Mr Shah. “But it is still a relatively nascent industry. It takes time to develop, and these sort of deals are often slower to play out in the region compared with the US and Europe.”
The difficulties in navigating the cultural landscape of Asia, especially for those from outside the region and inexperienced in the peculiarities of its business structures, may put the damper on some deals. “Average deal sizes are lower in Asia than the West, and the M&A market is less well developed,” says Mr Maynard. “More issues arise that can trip up deals.”
As the market matures and Western businesses become more comfortable operating within Asia-Pacific, there is potential for the M&A space to develop even further. Regardless of the approach China adopts in the coming years, the potential seen in the rest of the region could be enough to ensure healthy figures and the opening up of more sectors and markets in the region’s emerging economies.
