From Asia: M&A Transactions on the Rise

Asian deal making kicked off 2011 in high gear. According to an October released survey by PwC’s Asian operations, deal optimism over the next 18 months is high. Of 375 Asian bank executives polled almost half indicate that their organization will undertake an M&A transaction in the next year and a half.

So what does this mean to the average
U. S. banker?

For one thing it means North American financial institutions trying to break into attractive high-growth Asian markets via acquisitions will face stiffer competition. Countries like Japan, Korea, Singapore and Australia with Asia’s most mature but slower growing markets will be bidding against U.S. and European firms for assets. China, which has already begun staking a claim in Southeast Asia and more eager than most to increase business lines, will likely build the competition for viable targets even further.  To make things tougher for U.S firms, PwC’s survey indicates successful cross-border transactions in the region are most common when there is a strong cultural bond, giving an extra edge to intra-regional bids.

On the flip side, acquirers in the U.S. don’t have much to worry about when it comes to competition from Asian bidders. The percentage of Asian firms interested in potential North America acquisitions is quite low. Only 1 percent of those surveyed by PwC indicated an interest in buying their way into the slow growing North American market. Africa, the Middle East and Latin America hung near the bottom of the list with the U.S. Only banks in struggling European economies proved to be less interesting than U.S. banks to Asian acquirers.

Lack of interest may not translate into NO transactions with American and European firms, though. PwC notes that even though most Asian assets belonging to troubled U.S. and European financial institutions have already been unloaded, Asian bankers indicated strategic assets offered by foreign firms would continue to be viable targets.

If not U.S. bound, where are Asian acquirers looking?

High growth markets are most attractive to Asian buyers. It’s no surprise then that China tops the wish list. While government policies and lack of verifiable information make M&A transactions difficult within China, financial institutions from other Asian countries seem more than willing to risk the unknown to get a foot in the door.

Aside from China, the strongest attraction is Singapore, Hong Kong and Taiwan. And Southeast Asian countries like Malaysia, Indonesia and Thailand are not to be left out of the mix. Southeast Asia is attracting growing attention because of expanding economies and liberalizing financial markets.

Despite excitement surrounding outbound M&A in Asia, the bulk of interest lies within domestic borders. Bankers in PwC’s survey indicate increased market share and capital efficiency are the primary reasons for domestic deals. They also point to a desire to broaden product offerings as a deal consideration. Most Asian bankers believe these three goals can best be met at home. As a result, PwC suggests domestic transactions will make up the bulk of the region’s activity.

Does all this interest translate to a booming Asian M&A market?

Perhaps the answer to that should be a resounding YES. However, this increased M&A interest by bankers in the region doesn’t guarantee clear sailing for transactions domestically or outbound for Asian firms. Three potential stumbling blocks could potentially put the brakes on activity.  Capital restrictions, regulatory concerns and increasing government involvement all have the potential to slow the activity. Couple those factors with a lack of verifiable financial information and pricing gaps, and transactions could prove slower than the optimistic view presented in PwC’s survey.