Asia Pacific set to lead global M&A recovery
Dealmakers anticipate uptick in M&A deals driven by strong economic prospects, industry consolidation and increasing private equity activity.
First to feel the pains of Covid-19, Asia-Pacific may be one of the first regions to rebound in a post-pandemic world.
Such is the sentiment among dealmakers where more than half (58%) say Asia-Pacific’s economic recovery will come sooner and swifter than in North America and Europe.
This would be good news as year-to-date M&A in Asia-Pacific falls to new lows, although remaining noticeably higher than global declines. Indeed, large numbers of dealmakers are optimistic about Asia-Pacific’s prospects for the remainder of 2020 and early 2021.
More than a third (37%) say Asia-Pacific has better M&A opportunities than other regions and another 37% say they will be increasing investment here in the year ahead.
These were among several key findings in research conducted by Baker Tilly International and M&A intelligence provider Mergermarket, released today in the report Global dealmakers: Asia-Pacific M&A market update.
Asia-Pacific M&A market update 2020
Download the full report
The report explores current trends and challenges shaping Asia-Pacific M&A and highlights opportunity areas where dealmakers can still find value.
“Asia entered the pandemic first and has emerged first, managing the second wave far better than many other regions, and that has contributed to dealmakers being relatively optimistic,” says Michael Sonego, Partner, Pitcher Partners Australia, Global Corporate Finance Lead, Baker Tilly International.
“With a much better understanding of their own business situation owners and managers have been looking at how they can use M&A to accelerate growth within their business.”
– Michael Sonego
“But the fundamentals of the region also support the sense of recovery, including the high-growth prospects of emerging Asian countries and the stability and opportunity in more established economies.
“While dealmakers are not popping the champagne corks yet, that willingness to make deals is very welcome after such a difficult year.”
Within the findings, dealmakers point to numerous advantages the region has over more developed markets: primarily positive valuations that have strengthened deal activity in addition to a burgeoning mid-market and tech opportunities.
Emerging markets across the region offer ample investments, with respondents pointing to Southeast Asia as the primary market where dealmakers will focus their attention. Advanced markets like Australia will also remain priority target markets for investors looking for more mature markets with stronger fundamentals.
Mr Sonego said that while the uncertainty of Covid-19 had prompted many business owners to narrow their focus on operations and day-to-day survival, as trading began to return to pre-Covid levels it was apparent some had used their time to explore growth options.
“With a much better understanding of their own business situation owners and managers have been looking at how they can use M&A to accelerate growth within their business,” he said.
“This is likely to drive higher levels of M&A activity into the future.”
Opportunities abound but challenges remain
The report found deals are expected to be largely driven by industry consolidation. Indeed, many dealmakers feel there is ample room for M&A within industries, much more so than perhaps in Western markets.
“Although the deal activity in APAC has generally slowed in the current economic environment, we can still see an increase in activity in certain sectors.”
– Andrew Heng
Andrew Heng, Group Managing Partner, Baker Tilly Malaysia, said challenges create opportunities and those who had weathered the pandemic well were using this to their advantage.
“Although the deal activity in APAC has generally slowed in the current economic environment, we can still see an increase in activity in certain sectors,” he said.
“The current situation presents opportunities for those willing to build the right foundation. The question is, what are the right projection numbers to consider in order to complete the deal flow in this time?”
Despite the optimism, a creeping sense of nationalism and protectionism is souring the prospects for cross-border trade.
Many respondents felt geopolitical instability and the impact of the ongoing US-China trade war would be a dominant force influencing deal trends. In fact, many dealmakers view geopolitics as one of the top challenges they face, especially in the run-up to the US presidential election in November. Likewise, many respondents are concerned that political issues and matters of national security could impact or interrupt potential deals for them in the near term.
Mr Sonego said there were growing concerns from dealmakers about the potential for deals to be interrupted while in progress.
“In recent years, we’ve seen a trend for increasingly more restrictive direct foreign investment rules because governments are examining cross-border deals through the lens of national security,” he said.
“The uncertainty created by the repeated changing of rules in some Asia Pacific countries is clearly starting to dent the confidence of some dealmakers to complete transactions.”
Important role for private equity in recovery
Dealmakers expect private equity to be a driving force in the M&A market in the year ahead, with 55% saying there will be increase in buyout activity through 2020 and into 2021. However, large numbers of respondents also say recent development in Hong Kong could complicate matters for funds using the city-state as their base.
“Private equity funds are actively assessing new opportunities. However, pricing gaps between buyers and sellers are leading to longer discussions and funds are cautiously waiting and not rushing to deploy funds yet.”
– Adrian Cheow
“Private equity funds have a high level of dry powder in the region and are actively assessing new opportunities,” said Adrian Cheow, Partner, Baker Tilly Singapore.
“However, pricing gaps between buyers and sellers are leading to longer discussions and funds are cautiously waiting and not rushing to deploy funds yet.
“The crisis is forcing companies to transform and adapt at speed. This is where I believe PE firms play an important role in the recovery as they have capital, skills, and experience to help create value and work through these challenging times.”
While Covid-19 remains a wildcard that could dampen dealmaking into 2021, the extent of government stimulus and the sense by investors that there are bargains to be found, is likely to prompt cash-strong businesses and PE firms to move on investments.
“The amount of global stimulus and strong investor sentiment is indicative of the fact that industry leaders are actively looking to strike on the right deals to consolidate their businesses and create value,” said Gaurav Drolia, Partner, Baker Tilly India.
“This might actually be an incredible period for corporates with strong balance sheets and cash reserves to focus on strengthening their core by getting deals at reasonable or even bargain valuations.”
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