Asian M&A: Riding the wave

It will be quite evident to even the most casual observers that Asia has become the focus of the world, due in no small part to the current challenges in the developed Western hemisphere. As a result, growth in and through Asia is now on the top of the agenda for most global and Asian companies.


We see mergers and acquisitions (M&A) as a critical driver of industry structure and future competitiveness in this region. However, M&A activity on a meaningful scale has been slow to come to Asia, even as the region’s growth rate significantly outpaces that of the rest of the world. Though deal activity is heating up in Asia (Asia’s share of global M&A has doubled in the last decade), the industry endgames are still far away and dealmaking is still in its infancy.


We expect the coming decade to be critical for Asian M&A and therefore for the competitiveness of Asian industry. The Asian M&A story is expected to unfold rather differently and perhaps more unpredictably compared with the patterns established in the developed markets of the West.


We see three different themes about Asian M&A:


First, there will be room for multiple local deals in the Asian consolidation, due to the extensive fragmentation of customers and markets. This is unlike the West where there is a single optimum model with a handful of companies dominating each industry. For example, while Coca-Cola and PepsiCo might be the national beverage leader in China, local beverages that cost less and come in flavours that appeal to local tastes (for example, ready-to-drink herbal tea) dominate specific segments and geographic regions.


Second, there is a tendency for cross-border M&A to happen in Asia even before local consolidation takes place, unlike in the West. Asia’s share of outbound M&A, excluding Australia and Japan, grew from 4% to 22% of global outbound M&A from 2001 to 2010. The expansion strategy via M&A is driven by five key reasons:


The quest for new markets: Asian players in different industries such as SingTel in telecommunications, CIMB in banking and Infosys in IT have all used acquisitions to expand beyond their domestic markets.


Filling gaps: These can be in market access, distribution network, brand names, or new technologies, as exemplified by Lenovo’s acquisition of IBM to gain access to the latter’s global distribution and brand, and Tata’s acquisition of Jaguar Land Rover to get access to its top-end design and engineering operation.


Expanded balance sheets: Asia’s surging stock market, easier access to global bond markets as well as cash hoards that companies have built over the years have given Asian companies the means to acquire. In addition, some countries such as China are using its huge foreign reserves to support their national corporations’ bids to buy offshore assets.


Surging Asian currencies: Gains relative to the US dollar and euro have made acquisitions of Western companies more compelling from a value perspective. Thai Union Frozen’s acquisition of MWBrands and NTT’s acquisition of Dimension Data came during periods when the euro and dollar had depreciated at least 10% relative to the local currency over a 12-month period, following a long-term trend of Asian currency appreciation.


Domestic resistance to local consolidation: Sometimes it might be too difficult to consolidate locally compared to expanding internationally due to resistance by shareholders of family-owned companies, or complex cross-holding company structures as is common in many Asian countries.


Third, most Asian economies are dominated by government-owned or government-linked companies, which are typically lethargic, ponderous and bureaucratic compared to private companies. M&A could bring about a real and transformative benefit, allowing for a mindset shift to improve their competitiveness.


This is especially true in sectors traditionally dominated by government-linked entities, such as energy, telecoms, airlines, exploration and production, refining and downstream oil and gas, mining, metals and complex manufacturing. In some cases, government-to-government links may facilitate joint ventures, partnerships and even M&A between two government companies, thus favouring government-led M&A.


Asia is clearly rewriting the rules of global engagement. We are already seeing the emergence of Asian champions, and before the decade is out, there will be many global champions originating from Asia. We have one message for Asian companies: This is your time. If you want to track Asia’s trajectory and be a future Asian or global champion, you need to think about M&A.


http://www.bangkokpost.com/business/economics/305033/asian-m-a-riding-the-wave