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Mergers & Acquisitions: Outlook in Asia

A Look at the Past Year

The year 2015 did not end well for equities markets in Asia with their stock indices plummeting, especially in the last quarter of 2015. Despite this, dealmakers were celebrating a record high in M&A transactions in the same year. In fact, 2015 saw a new all-time high of 12,762 announced deals with volume of S$1.9 trillion which encompasses transactions where targets, acquirers, or sellers are located in Asia.
This figure surpasses the previous all-time high of 10,143 announced deals with volume of S$925 billion in 2007, just prior to the global financial crisis.

The contributing factors to this strong performance were the large deals whose volume increased more than twice the previous year’s figures. Mega deals (deals with a value over S$10 billion) increased 191% to S$374 billion. Deals with value from S$5 to S$10 billion increased 222% to S$241 billion. While deals with value from S$1 to S$5 billion increased 118% to S$531 billion. The two other categories, deals with value from S$0.5 to S$1 billion and S$0 to S$500 million also showed an increase in volume, albeit in smaller proportion.

There were 7,352 strategic buyers, accounting for 9,811 deals with total deal value of S$1.6 trillion. Other statistics worth mentioning: 47% of the deals were cross border, 61% of the deals were paid using cash, 93% of the deals were S$0 – S$500 million in size, and 99.6% of the deals were friendly bids.

What were the driving forces behind the frenzy of deals?
Here are several factors to help answer this.

• Strong balance sheet
After the last financial crisis, companies had been piling on undeployed cash. Firms were under pressure to employ their large cash reserves in order to earn higher returns for shareholders.

• Low cost of capital
Financing was cheap. The interest rates had remained very low for nearly a decade. Given the improving US economy, there had been expectations that the Fed would raise the Federal Funds Rate, which was eventually raised on December 16th. When the Fed raised the rate, borrowing costs followed suit. With this in mind, firms were going on spending spree to take advantage of the record low borrowing costs while they last. Apart from that, the US dollar was getting stronger – it hit a six-year high against the yen and had soared in value compared with many emerging market currencies. The US stock market also had continued its bull run, setting record high in early 2015. The strong dollar and relative valuations provided the currency for cross-border transactions including outbound transactions to Asia.

• Low-growth macroeconomic environment
With the low global inflation rates and the inability of companies to achieve price increases, firms were finding it difficult to pursue top line revenue growth through business-as-usual. In the absence of organic growth, companies had to turn to M&A to boost the top line as well as the bottom line via cost cutting and synergies.

Outlook for the Year Ahead

What is the prediction for M&A activity in 2016? To help answer this trillion dollar question, we need to look at the main drivers for the M&A fever in the past two years. Globally, M&A activities have been fuelled by the search for growth amid the sluggish economy. As one expert puts it, the theme for the current M&A cycle is about disinflation, deflation, and cost-efficiency. Companies around the world have been pursuing M&A in an attempt to reduce costs, from overheads to taxes, to overcome stagnating consumer prices and flat sales. In general, M&A cycles last between four to five years. Many experts believe that we are not at the peak of the M&A cycle yet as we are still at the initial trajectory phase of economic growth post global financial crisis. As per Robin Rankin, the Co-Head of M&A at Credit Suisse puts it: M&A activity tends to correlate with GDP growth.

Another main driver was the relatively easy access to debt financing. Even though the Fed raised the Federal Funds Rate by a quarter points last December, the interest rates remain relatively low. Furthermore, the Fed's statement suggested that rates would remain historically low well into the future, saying it expects only gradual increases. Therefore, it will take a while for the increase in borrowing costs to have an effect on M&A activity.

IntraLinks Deal Flow Predictor (DFP) predicted that M&A activity levels in Japan and Southeast Asia will increase whereas the outlooks for North Asia and South Asia are more uncertain. IntraLinks is a provider of software and services, including Virtual Data Rooms (VDRs), for managing M&A transactions, private equity fund raisings and corporate development. It forecasts the volume of future M&A announcements by tracking early-stage M&A transactions that are in preparation or have reached the due diligence stage. These early-stage deals are six months away from their public announcement, on average. The latest IntraLinks DFP data showed that the early-stage deal activity in Japan and Southeast Asia has increased 55% and 11% respectively in the last quarter of 2015. This indicates that we can expect continued strong growth in M&A deal announcements in the first half of 2016. Early-stage deal activity in North Asia and South Asia has increased 21% and 14% in the last quarter of 2015 and deal announcements are expected to increase in second quarter of 2016 following a flat or declining activity in first quarter of 2016. Although there are some mixed reviews especially due to the concern of China’s currency and equities market, the majority of the experts agree that deals are not going away in 2016. We at Nexia TS take a similar view that the good times for M&A are here to stay, at least for a while.

To support you in your M&A activities, our consultants at Nexia TS Advisory can advise on financial and tax due diligence issues, corporate restructuring, fund raising options and buyer/investor sourcing both in the Singapore and regional markets.

This article is authored by Olyvia (Manager, Valuation & Transaction Services, Nexia TS).


For more information, please contact:

Ms Grace Lui
Valuation & Transaction Services

Mr Ross Y. Limjoco
Assurance and M&A

Ms Karen Lau
Associate Director
Valuation & Transaction Services

Ms Olyvia
Valuation & Transaction Services