Embracing a Brighter 2021


Miranda Zhao
Head of Mergers and Acquisitions
Asia Pacific

2020 was a turbulent year in every respect.


For M&A in Asia Pacific, first-half activities fell to their lowest levels since the global financial crisis. But starting from the third quarter, while the total number of deals remained lower versus 2019, we witnessed a dramatic up-tick in the number of mega-deals, mainly driven by in large domestic and inbound transactions in the region.


Overall, Asia Pacific was the only region to record growth both in terms of total deal value and number of deals in global M&A market share last year, with total deal value (26.4%) and number of deals ( 23.6%), up 7.4% and 2.2% respectively. The growing importance of the APAC M&A market and key drivers behind this market development are reflections of the profound impact of post-Covid economic consequences, stimulus plan of the major global economies, global geopolitical dynamics, FDI policies, the rise of new technologies, etc.


If we first look at China, the government deployed market-oriented policy, designed to reshape key economic sectors, boost domestic consumption, and promote industry consolidation. Private sector enterprises also embraced M&A to strengthen their competitive positions, or to expand into relevant new businesses. Private equity firms and Multinational Corporations (MNCs) have been encouraged to invest in the local market to boost the economy. In terms of the impact from Covid-19, China was the first major economy to emerge from disruptions and resume normal production, reflected by the fact that its GDP grew at 6.5% in Q4, and 2.3% for the year as a whole – compared to a contraction of -3.5% globally in 2020.


The inbound activities into the Southeast Asian and Indian markets remain high, confirming their status as one of the world’s most attractive regions in terms of growth, as companies and funds look to make investments into growth businesses across the region.


Overall, a majority of the deal volume has been focused on industries that have (in many regards) benefitted from the outbreak of Covid-19; such as technology and health care. And the market is paying increasing attention to ESG factors in M&A deal making.


The Asia Pacific region has clearly become a key global growth engine – with high growth prospects from emerging Asia and overall emerging markets set to be one of the main driving forces of the global M&A market. Asia Pacific also offers a unique combination of high growth emerging economies co-existing with sizeable mature developed markets such as Japan, Korea and Australia. This contributes to positioning Asia Pacific a key strategic market globally in terms of both scale and growth profile.

"Overall, a majority of the deal volume has been focused on industries that have (in many regards) benefitted from the outbreak of Covid-19; such as technology and health care. And the market is paying increasing attention to ESG factors in M&A deal making."

So what can we expect in the months and years ahead?


Increasing FDI into Asia Pacific and possible resurgence of cross-border deals

The region is set to attract significant Foreign Direct Investments going forward. China’s net inbound flows are increasing, driven by the country’s transition from an export to a consumer-led economy, its further opening-up policy to attract foreign capital. More specifically, China has adopted a dual circulation policy focusing more on the domestic market while placing less reliance on its traditional export-oriented development strategy. In the meantime, MNCs will remain active with strategic moves in the region.


China has also recently lowered its thresholds for A-share investments by foreign investors, further strengthening the appeal of its domestic capital markets. Its onshore RMB assets potentially offer higher yields for global players, given its growth fundamentals and interest rate strategy prospective. In 2020, China’s FDI increased by 4% - in a year in which global FDI dropped by a dramatic 42% across the board. And as of January 2021, China had firmly overtaken the US as the world’s top destination for global FDI.


India also witnessed a 13% rise in FDI in 2020, compared to the previous year, boosted by investments into its booming digital economy.


Looking at outbound deals in Asia Pacific, flows have been significantly impacted by the global political environment over the past few years, especially for Chinese outbound investments. However, the fundamental need to deepen trade and investment with the rest of the world is a secular trend. What remains to be seen in the medium term is whether the new US administration will be more open to cross-border M&A involving Asian buyers and investors.


The EU-China Comprehensive Agreement on Investment, offering mutual greater market access and cooperation between the two markets, is expected to create a new dynamic for cross-border investments and may have global impacts. It could become a strong catalyst for the global M&A market, even if it is not certain that it will be ratified by all parties by 2022. We expect the treaty to have an effect prior to its effective implementation as companies may want to pre-empt the changes and take advantage of any opportunities, and governments may also want to send friendly signal to the market during the next stage negotiation  – for example, for China’s inbound market.  


The Regional Comprehensive Economic Partnership (RCEP) is another positive development in the region, as it promotes tighter integration of Asia Pacific economies. ASEAN countries are expected to benefit from increasing FDI tied to the manufacturing supply chains, with related intra-region M&A potentially.


The divestment of non-core overseas assets and continued industry consolidation post-Covid will also be the factors that drive cross-border M&A transactions across regions.   


SPACs in Asia

Special Purpose Acquisition Companies (SPACs) and Private Investment in Public Equity (PIPE) deals, which became a focus in 2020 in the US mostly, could now boost M&A activities in Asia Pacific. Asian-based high-growth businesses are now increasingly becoming targets for listed SPACs in US and Europe, and sponsors from Asia Pacific have emerged as well. SPACs may also potentially be listed in Asia soon, with major listing venues like Singapore and Hong Kong studying the possibility of introducing the structures to their listing rules.


Factors including higher market volatilities, a low interest rate environment and the significant dry powder from investors, have boosted SPAC listings in US – which saw total volumes in 2020 reaching almost six times the levels seen in 2019. Private equity firms are actively backing SPACs and raising capital through SPACs, after prioritizing managing downsized risk in the portfolio companies during the early stage of the pandemic crisis, or focusing on lower risk bolt-on or smaller size transactions during the first half of 2020.


Newly listed SPACs typically have 18-24 months to merge with a target company and complete the “de-SPACing” process, or the SPAC will be liquidated and the capital raised returned to investors. Thus, with all active SPACs looking for acquisition targets in order to “de-SPAC” before their respective deadlines, and the scarcity of targets in the US and Europe, APAC may become a hunting ground for those new aggressive buyers.


That said, we do not expect SPAC transactions to take over the traditional M&A market. SPACs are to some extent, more comparable to an IPO or a hybrid between a trade sale and an IPO process, but for some of the earlier stage businesses, a M&A deal would still make more sense strategically especially given the existence of industrial synergies.


As suitable targets become more and more difficult to find, SPACs will either have to settle for lower-quality targets, of pay a higher premium for better quality assets, at which point the return will no longer make sense for shareholders. However, we still have the hope that the market will take action to come up with more innovative structures to accommodate relevant stake holders – which is already happening  – which may cool-down the “SPAC heat” with a “soft-landing”.

"We expect the global M&A market to continue to recover post-Covid, with Asia Pacific playing an increasingly important role due to its attractive markets, superior growth opportunities and opening up policies."

Asia Pacific M&A is well positioned for the years ahead

We expect the global M&A market to continue to recover post-Covid, with Asia Pacific playing an increasingly important role due to its attractive markets, superior growth opportunities and opening up policies. M&A will play a larger role for corporates in Asia, as they look to consolidate and expand their business, as well as take advantage of regional and global opportunities. Private equity firms continue to raise record funding and grow rapidly in the region, with SPACs potentially adding to the momentum, starting in 2021. All these factors should position Asia Pacific as a fast-growing M&A market in the coming years.


As our clients in the region continue to grow along with their economies, we are ready to help them seize regional and global opportunities, thanks to our client-centric approach and global and local coverage through our unique M&A  setup of a combination of big bank and boutique approach. We continue to actively serve our MNC clients for their Asia Pacific strategies, which have included acquisitions, JVs, minority investments and divestments. Innovative structures and new market themes, such as SPACs, are also creating new opportunities for our clients and driving the further growth and diversification of M&A activities.