The Changing Face of M&A in Asia Pacific

On the sidelines of a Natixis CIB cocktail event celebrating the Singapore Branch’s 40th anniversary in early September, Raghu Narain shared his views to an insightful question from a client: How has M&A changed in Asia-Pacific?

Historically, and certainly for the last decade at least, China has been a considerable market in terms of outbound and inbound acquisitions. Today, this has fundamentally changed. China M&A volumes illustrate this point.

There are a few elements which have evolved and are essentially changing the flows of the M&A business in Asia. First, and perhaps most obviously, is geopolitical risk, which is impacting various dimensions:

Primarily, the conflict between countries and the weaponization of economics/politics is affecting the M&A and investment trade flows; regulation is part of this. Secondly, data security is having an increased impact. The vast amounts of data we have today compared to just ten years ago, which are being generated by businesses today, mean that data security has grown in importance, especially where predictive power of data and sensitive information are relevant. Where previously the power of data was less relevant, today there is a higher concern on protecting and sharing data.

And so geopolitics and data security have become vastly more correlated, which then impacts the way that practitioners, deal makers and markets think of M&A and investment flows.

It also means that the traditional flows that were coming from China into the US and Australia have been curtailed. But this also gives rise to new flows. What we are seeing here is new flows in the “intra-Asia” regional M&A block, which has started to function similar to the homogenous market in North America, and the semi-homogenous market in Europe. And within the intra-Asia M&A block, you have South Asia, Southeast Asia, North Asia, functioning as their own blocks, all interacting with China; for example, Singapore, Thailand and Pakistan with China. Furthermore, India due to structural reforms and higher growth prospects is attracting FDI rapidly and PE / Infrastructure funds global investments, especially from Japan and Korea. China, meanwhile, is seeing outbound into still-friendly parts of Europe, Latin America and the Middle East. Thus geopolitics is designing the current and future flows of M&A.

What has changed in terms of how practitioners are thinking of M&A activity, is that for the next few years, M&A activity will have to be undertaken in a world where volatility is high. Any time that volatility is high, a couple of things happen – achieving the confidence to pull the trigger on a deal requires much more work, and more rigor of thinking, and range of outcomes can be wide.

The second thing that will happen when volatility is high, is that the bid-ask spread, and the valuation exercise can have gaps between buyer and seller expectations. It then becomes the mandate of M&A practitioners to evolve solutions such as contingency based payments or earn-outs – which mitigate those gaps. But we are certainly entering a world which will face higher volatility simply as the central bank “puts” (liquidity) is taken away.

The impact of volatility, however, is not limited to the valuation gap – first and foremost it’s a matter of confidence, which naturally oscillates with the news flow. Those who are able to see growth in a risk-off mode are in the minority, and these are the companies or management teams who will distinguish themselves at times like this to gain advantage.

Thirdly, practitioners now need to think of downside cases that include the transmission of inflation through the entire system; meaning higher cost of funding, higher costs running through the P&L impacting earnings per share, whether you are buying assets with your earnings , or you are selling your earnings. The category of inflation impacts everything. When you look at an asset or you are doing the M&A analysis – the situation has changed from the past.

The other thing that has changed is that countries’ “appetites” particularly vis-à-vis China, although it applies somewhat to Korea (in outbound) and Japan/India (attracting investments), and sector preferences are changing. Post-Covid, sector differentiation is more relevant -- healthcare is clearly become more important with aging demography in China, Japan and Korea. Technology and Energy Transition too. Some of those sectors will continue to see higher forms of activities and attract M&A/investment flows. There in an ongoing sector bifurcation of appetite. Further leading the evolution of the China market is the acceleration of the “China-for-China” strategy, and its dual circulation policy implying a deepening of the domestic M&A market, with the technology sector playing a dominating role.

When you think of M&A as a function of attracting capital – by divestment of assets or attracting growth capital – you are essentially looking at, in Asia, an opportunity set that is rapidly evolving. There is significant capital sitting in southeast Asia, including set-up of Family Offices and Funds in Singapore, that needs to be deployed. Thus, within this intra-Asia regional block, you can/will see that there is country differentiation that will start to appear for investment appetite. One may argue that this will see less capital flowing into China in the near term as lockdowns continue.

Illustrative of this intra-Asia Regional M&A, is a transaction we recently announced for advising Ratch Group in acquiring Nexif Energy Holdings. The industrial logic of this deal is predicated on several points above; energy transition, intra-Asia buildout, acquirers with conviction and capability navigating volatility while successfully achieving their strategic ambitions.