INSIGHTS INTO ASIA PACIFIC M&A FINANCEASIA AND CLIFFORD CHANCE M&A SURVEY

Transcription

1 INSIGHTS INTO ASIA PACIFIC M&A FINANCEASIA AND CLIFFORD CHANCE M&A SURVEY

2 M&A VIEWS FROM ASIA PACIFIC 2016 was a stellar year for M&A in Asia Pacific with record-breaking activity levels (in both M&A deal volume and value). This boom was driven by a number of factors including in the PRC's continued outbound M&A binge (best summed up by ChinaChem's US$40+billion offer for Sygenta) and the continued strength in intra-regional deals with numerous US$ billion+ transactions (by way of example, Japan attracting record levels of investment from Asian players including Foxconn's acquisition of Sharp). Whilst we expect that the recent foreign exchange curbs introduced in the PRC will have some adverse impact on PRC outbound M&A activity levels in the year ahead, we anticipate that outbound Asian-wide M&A levels, as well as intra-asian M&A, will continue to be strong in the year ahead. This is supported by our survey, with almost 94% of the respondents expecting an increase in, or at least the same levels of, activity for outbound Asian M&A in the coming year. Whilst the US and UK remain popular jurisdictions for investment flows, both jurisdictions are seen as being less attractive than last year given the uncertainties around the US change of government and Brexit respectively. Interest in the Asian M&A markets is the most balanced in the 10 years that we have been undertaking this survey, with China sharing equal billing for the first time together with both India and Indonesia. We look forward to continuing to work with you and supporting you in your assessment and execution of M&A opportunities. Please do reach out if there are any areas on which you would like us to share our insights. Andrew Whan Head of Corporate/M&A Asia Pacific 2

3 CONTENTS 1. Key findings 4 2. Sector trends 8 3. Asia Pacific inbound M&A 9 4. Asia Pacific outbound M&A Key drivers and challenges Antitrust and other regulatory hurdles Focus on compliance and risk management Economic sanctions Deal structures and pricing gap Private Equity in focus About the survey Global M&A key contacts 18 3

4 KEY FINDINGS INBOUND The previous gap between Mainland China and other markets has significantly reduced, with the most attractive destinations for inbound M&A now equally being Mainland China, India and Indonesia. Australia/New Zealand and Vietnam then follow the top destinations closely. OUTBOUND Asia outbound M&A sentiment shows no sign of abating with almost 90% of respondents again forecasting an increase in, or at least similar levels of cross-border outbound M&A. The US (68%), Eurozone (55%) and UK (38%) continue as the most popular target jurisdictions for outbound M&A, with the US and UK having decreased slightly due to uncertainties related to the new Trump administration and Brexit respectively. In light of the drivers of M&A which were highlighted, the most popular being Asian companies adopting a global strategy and the desire to find new markets, we are expecting even stronger outbound M&A in the next year. BIGGER DEAL SIZES We have continued to see deal sizes increase, with more US$ billion+ deals in Asia Pacific than ever before. Sentiment remains strong for deals in the US$100million US$500million range. With many companies pursuing global strategies, we continue to expect to see more big ticket acquisitions particularly by Asian companies, both within the region and globally. DRIVERS The biggest drivers for Asia Pacific outbound M&A remain Asian companies adopting a global strategy and the desire to find new markets, followed by depressed valuations in target markets and the desire to secure knowhow/technology and brands. Lack of opportunities or weaker growth prospects in home markets were also flagged as being an increased concern over the past. DRAGS Concerns about local protectionism and regulatory issues continue to be major issues in cross border M&A and were identified as having the greatest negative impact. Concerns about economic growth in Asia Pacific and concerns about bridging cultural differences in the acquisition process and during integration featured next most strongly. Significant concerns were also raised about political and military uncertainty including economic sanctions. BUYER IN CONTROL The balance of power still remains strongly in favour of the buyer in the next 18 months, having slightly decreased from 79% to 65% from the previous year. We continue to expect strong competition in auction processes for attractive assets and, therefore, a more balanced, or seller friendly, situation in those circumstances. 4

5 KEYS FOR SUCCESS Managing and clearing regulatory hurdles increased in importance as a factor for success (56%), identified as a joint top factor, along with having a good acquisition team including advisers with local knowledge and experience in successfully complete deals in the region. Respondents considered comprehensive due diligence of decreased importance in comparison to last year. BREXIT IMPACT Some 60% of respondents said they thought Brexit would have a negative impact on investment in the UK compared to just 15% that expected a positive impact. Despite this, the currency depreciation has encouraged deal flow, especially in the property sector, with Chinese buyers continuing to be active in the UK.

6 OTHER KEY FINDINGS Expected M&A deal size over the next 18 months Preferred methods of financing Deals with strategic/financial co-investor 66% 48.7% 26.4% 17.4% 7.5% Bank loans DCM 55% 53% US$100 million US$500 million US$500 million US$1 billion < US$100 million > US1 billion Cash reserves 47% ECM 40% Equity swap 39% Who is in control? The balance of power will be with: Sellers Buyers 35% 65% 6

7 OTHER KEY FINDINGS CONTINUED Factors for success Comprehensive due diligence 50% Good acquisition team including advisers with local knowledge 56% Managing stakeholder expectations 44% Good deal structure and protection in legal agreements 48% Managing and clearing regulatory hurdles 56% Assured funding 42% 7

8 SECTOR TRENDS Technology, media and telecoms (TMT) is now identified as the top priority sector this year, overtaking consumer, retail and leisure which was the top sector for the previous three years. Deal activity in the TMT sector has been buoyant throughout the Asia Pacific conglomerates and corporates in Japan and Hong Kong for example having been actively hiving off non-core TMT assets, and the buoyant China TMT sector continuing to be a big lure for investment. We expect this sector to continue to be a top priority sector in the short to medium term. Despite dropping off its the top perch, the consumer, retail and leisure sector continues to attract interest from investors drawn by the opportunities to find new markets and growth in the region and to take advantage of the growing middle class. Populous countries like China, India and Indonesia will continue to drive activities in the region. Financial services sector activity is driven by the many global financial institutions continuing to seek to reshape their businesses in light of regulatory changes and increased compliance risks and costs. Regional institutions are looking to grow their businesses through acquisition, particularly in key new markets and product lines. Technology, media and telecom Consumer, retail and leisure Pharma/healthcare Financial services Industrials and chemicals Real estate Oil and gas Power Pharma/healthcare has seen a number of big mergers in the US and Europe, and, although deal sizes in Asia are generally smaller than these, there is a focus on acquisitions as the sector consolidates and as companies pursue a strategy to take advantage of increasing spending by governments and individuals on healthcare in Asia and develop products suitable for local markets. Transportation Mining Other services Greatest investment Greatest + 2nd greatest investment Total (Greatest + 2nd greatest + 3rd greatest) 8

9 ASIA PACIFIC INBOUND M&A The outlook for inbound M&A from non-asia Pacific strategic acquirers remains positive, with 71% of respondents expecting an increase on the previous year or at least similar levels. For the first time in 10 years, Mainland China is not the undisputed leader and shares the top destination for inbound M&A equally with India and Indonesia. This can be attributed to the slowing of economic growth in Mainland China and the high competition for quality assets which have made investors look further afield in Asia. Mainland China 42% South Korea Hong Kong 9% 14% Japan Australian/New Zealand and Vietnam follow thereafter, being 34% and 32% respectively. A number of large infrastructure privatisation programs in Australia together with the devalued currency have helped Australia secure this position. Vietnam has significantly increased from 20% in the previous year's survey, also fuelled by privatisation transactions and greater private equity-led investment levels. Singapore, Taiwan, Thailand, Malaysia, the Philippines and South Korea maintain consistent numbers compared to last year. India 42% Malaysia 11% Myanmar Thailand 14% 8% 17% 19% Indonesia 42% Singapore Taiwan 3% 13% Philippines Vietnam 32% Australia/ NZ 34% 9

10 ASIA PACIFIC OUTBOUND M&A The overall outlook for cross border outbound M&A from Asia Pacific strategic acquirers remains very positive, with 94% of respondents expecting an increase on the previous year, or at least similar levels. The US, Eurozone and UK remain the most popular target jurisdictions for outbound M&A, with the US decreasing to 68% from 87% in the prior year, perhaps partly attributed to the uncertainty surrounding the incoming Trump government. The UK has also seen a decrease in interest, declining to 38% from 47% in the prior year, due to Brexit concerns. In light of the drivers of outbound M&A highlighted below, we are expecting continued strong M&A levels in the next year. A desire to secure know-how/technology brands has increased to 45% as one of the top drivers of outbound M&A, along with drivers of lack of opportunities in home markets and fear about downturns in domestic markets. Top drivers of Outbound M&A Eurozone 55% Asia companies adopting global strategy 72% Canada 9% UK 38% CEE 16% Desire to find new markets 53% Desire to secure know-how/ technology, brands 45% US 68% Africa 23% 13% Middle East Other APAC 65% Depressed valuations in target markets Lack of opportunities in home markets 28% 26% 11% South America Fear about downturns in domestic markets 19% Increased confidence of acquirers 17% 10

11 KEY DRIVERS AND CHALLENGES Key drivers Asian companies adopting global strategy The continued top driver for Asia-led M&A Depressed valuations in target markets Attracting investors to target markets with the hope of taking advantage of attractive valuations Desire to find new markets Continues to be a top driver of outbound M&A. Desire to secure know-how/technology, brands Continues to fuel the M&A levels in particular in the TMT, CG&R and Pharma/Healthcare sectors Lack of opportunities in home markets Particularly relevant to low growth markets and where companies already have strong domestic positions such as in Japan and Korea Successful acquisitions Majority of respondents indicated fast M&A successes have fuelled a greater determination to undertake further M&A Correction in natural resources The continued rebound in commodity prices is attractive for opportunistic acquirers Increased confidence of acquirers Asian companies continue to become more sophisticated in cross-border M&A as can be evidenced by their growing relevance and success on the global M&A stage Improving economies in US/Europe Attracting Asian companies to target acquisitions in those markets and increasing the confidence of companies there to make acquisitions in Asia Pacific and challenges Concerns about local protectionism and regulatory issues Continued complexity in navigating anti-trust and other regulatory regimes and increasing enforcement action in major jurisdictions ranks as the top concern for respondents (both within Asia and globally). Respondents expect such challenges to only become more burdensome in the current geo-political climate Regional and global economic conditions Slow down in growth in Asia Pacific, especially China, and the impact on the US and European economies as quantitative easing ends are seen as significant risks Sellers unrealistic price expectations In the past three years, seen as the biggest drag on M&A and potentially stalling M&A deals - still seen as a significant challenge this year Cultural differences in process Comprehensive due diligence to ensure no postacquisition surprises, good deal structures, and legal agreements are seen as key to successful M&A, but there can be resistance to these from the seller. Advisers with local experience are key to manage this environment. Lack of attractive targets Companies are holding on to quality assets Political and military uncertainty including economic sanctions Geo-political factors such as Brexit and the US election result continue to raise concerns Post-merger Integration More than half (58%) of respondents see integration of acquisitions in Asia-Pacific as more difficult than anticipated. Post-merger integration is key to any successful acquisition and can be a greater challenge in foreign markets where the business, cultural, legal and political issues are different to those in the acquirer's home markets 11

12 ANTITRUST AND OTHER REGULATORY HURDLES Protectionism concerns continue to dog M&A. Concerns over protectionism and regulatory intervention creep ever higher up the corporate agenda, helped by geo-political factors such as Brexit and the US election/incoming Trump administration. In 2016, we saw a number of deals run into difficulties in countries normally considered welcoming to inbound M&A. In Australia, a number of acquisitions were blocked, notably the sale of a stake in the New South Wales electricity grid to Hong Kong's Cheung Kong Infrastructure and China's State Grid and the sale of Australia's largest cattle landholder, S Kidman & Co to a Chinese consortium. In Germany, ministerial approval of the acquisition of chemicals firm Aixtron was unexpectedly reversed and the deal was subsequently blocked in the US by presidential decree. In the UK, approval of Chinese investment in a new nuclear build was temporarily put on hold before being subsequently approved on the understanding that future deals in sensitive infrastructure would be subject to a greater degree of government control. The common feature in all of these cases has been the presence of Chinese investors and concern at the rising levels of Chinese investment, much of it by State-owned entities. This trend looks unlikely to abate in the short term and raises the question of whether there will be any form of reaction affecting inbound investment into China. In 2014, Chinese antitrust agencies were strongly criticised for targeting their enforcement activities on foreign companies (a charge they strongly denied). Since then, with some notable exceptions, the focus of the agencies' enforcement seems to have been on domestic industries, including an increase in enforcement against public authorities or State-owned players. Whether this trend continues in an environment that is becoming increasingly difficult for outbound Chinese investors remains to be seen. Strategic considerations Protectionism in the name of "national security" is growing, making crossborder investment more complicated. It is also worth noting that increasingly active and complex antitrust review may possibly co-exist with the national security review or foreign investment review and even affect each other. Richard Blewett, Head of Antitrust, China Managing relationships with multiple regulators Companies may need to balance between focusing on regulators in "high-intervention" jurisdictions such as China, EU and US, while not alienating regulators in other jurisdictions Timing Timing is critical: prepare early, have a list of "prioritized jurisdictions" (e.g., with pre-notification and/or more data input), and have a timing strategy and be disciplined on timing and deadlines Early engagement Companies that are planning to invest in sensitive sectors must take into account national security review, foreign investment review, and merger control risks when they are planning their deals, map out effective government relations strategies and engage their government relations teams at an early stage in the process to monitor progress 12

13 FOCUS ON COMPLIANCE AND RISK MANAGEMENT Compliance and risk management are crucial to successful M&A The negative impact of concerns about post-acquisition differences in business cultures, regulatory issues, and insufficient due diligence can be overcome with a focused assessment of risk, post-acquisition planning, and integrated sustainable compliance programs. UK Some key target areas to focus on are: Buyer Earlier, and more thorough due diligence on target's anti-corruption policies and compliance history (particularly if a "red flag sector or jurisdiction) Consideration of transaction structure e.g. asset deal/share deal/ joint venture? (JVs may lead to responsibility for violations of a JV partner) Additional robust representations, warranties and indemnities from sellers in relation to historical compliance Obtaining anti-bribery certifications from key persons at target Seller/Target Commencing and/or refining internal policies to ensure compliance with anti-bribery legislation before sale Statements of commitment from management Risk assessment and monitoring of compliance Vetting prospective employees and appropriate disciplinary procedures Education of employees Diligence of business relationships Policies and procedures that meet highest standards US China Avoidance of transactions that lead to unmanageable liability risk Planning ahead detailed plans regarding anticorruption practices and procedures that will be implemented post-completion 13

14 ECONOMIC SANCTIONS M&A in a time of economic sanction uncertainty Donald Trump s election has caused uncertainty in long-term planning and M&A prospects due to the possibility that the loosened Iran and Cuba restrictions encouraging investment could be reversed, just as the Russia/Ukraine sanctions which dampened investment are struck down. Until those changes become reality, measures must still be taken to ensure compliance with sanctions laws to minimise the risks of potential penalties Risk management and effective compliance programs should be seen as enablers to overcome the negative impact of uncertainty in M&A transactions. Wendy Wysong, Partner, Litigation & Dispute Resolution Postacquisition Preacquisition Ongoing monitoring Due diligence to cover the target s operations with sanctions targets or in sanctioned countries/sectors If they exist, to determine extent of business contact and whether exemptions would be available to cover business operations after acquisition Newly acquired company to implement any necessary changes to its business (e.g. cut ties with certain customers, ringfence US persons from certain customer transactions, etc.) Implement sanctions compliance programmes during integration phase Sanctions laws (US in particular) change continuously Acquirer must monitor these changes continuously if it decides its target can continue to interact with its preacquisition customers that raise sanctions risks 14

15 DEAL STRUCTURES AND PRICING GAP Control deals and joint ventures/partnerships favoured Full control acquisition of targets has traditionally been the most popular structure, and it is still the most preferred structure according to 39% of respondents. Alternative deal structures also seen as viable options, with joint ventures with a strategic partner and partnerships with private equity and other financial investors the most preferred structure according to 25% and 16% of respondents respectively Joint ventures and alternative deal structures Provide opportunity to share business, financial, cultural and political risk a particular feature in emerging markets, and combine JV partners expertise May enable foreign ownership restrictions and antitrust considerations to be navigated successfully May add valuation gap Often used as a stepping stone to acquire 100% Know your partner Extensive due diligence required Clear delineation of roles and decision making Detailed contractual framework required Can be unstable Contractual framework must address how disputes to be dealt with What happens next? Critical to agree exit mechanism at the outset Bridging the pricing gap The survey revealed that 60% of respondents believe sellers unrealistic price expectations is a drag on M&A. It was ranked as one of the biggest drags on M&A and alternative forms of structuring can help to mitigate risk. The challenge of bridging the pricing gap can be addressed, at least in part, by the following: Contingent or deferred consideration e.g. earn-out Vendor retained stakes Staggered sales Purchaser clawbacks Vendor financing Warehousing 15

16 PRIVATE EQUITY IN FOCUS Expectations remained at the same strong levels as compared to last year that Private Equity (PE) funds will be increasing or maintaining similar levels of activity on the buy-side (89.5%) and sell-side (86%). Whilst deal volume was not particularly strong, 2016 was a year highlighted by a number of high-profile PE-backed transactions including MBK and TPG's US$1.2 billion acquisition of Wharf T&T and KKR's US$4.5 bid for Nissan's Calsonic business. We expect an uplift in activity levels from PE investors this coming year, especially in China which was particularly quiet in A competitive market place Asia Pacific is becoming an increasingly competitive market in the PE space numerous PE funds have cash which they need to spend and the quality assets at the right valuations are few and far between. 40% PE buy-side activity Increase Similar Decrease 10% 50% PE sell-side activity Increase Similar Decrease 14% 35% 51% GP casualties: We are starting to see PE houses fall by the wayside as they struggle to raise new funds and effectively drop out of the buy-side market The rise of the strategic: Corporates with strong balance sheets have re-entered the market in force. PE funds find it difficult to compete when strategics can demonstrate the synergies on an acquisition despite this, PE funds were successful in out-muscling their corporate competitors on a number of auction-side processes including Permira s acquisition of Vistra With the relative scarcity of 'quality assets' we expect that auction processes will continue to be particularly competitive throughout 2017 and for there to be an increase of secondary transactions between private equity firms. Andrew Whan, Head of PE, Asia Pacific 16

17 ABOUT THE SURVEY This is the tenth year in which Clifford Chance and FinanceAsia have collaborated on a regional M&A survey. Over 200 respondents expressed their views in November 2016, with 62% at CEO, MD, CFO or executive level. FinanceAsia was appointed to conduct this M&A trends study by engaging with leading decision makers and M&A professionals using an online survey. The goal was to gauge perceptions on the very latest market conditions and identify M&A trends in Asia Pacific. Respondents Profiles (%) Hong Kong Singapore Southern Asia India Malaysia Australia/New Zealand Mainland China Japan North America Taiwan Thailand UK Indonesia 4% 3% 3% 3% 3% 2% 2% 1% 1% 1% 11% 21% 37% Banking Services Legal/Advisory Asset management Consumer Energy and resources Industrial Alternative investment fund Private equity 5% 5% 5% 4% 3% 15% 12% 10% 23% MD/CEO/Partner COO/CFO/Director Company executive Business development or M&A manager Others 18% 19% 21% 17% 25% South Korea Eurozone 1% 1% TMT 2% Middle East 1% Other 7% Others 16% 17

18 GLOBAL M&A KEY CONTACTS Global Guy Norman T: E: guy.norman Africa Spencer Baylin T: E: spencer.baylin Asia Pacific Andrew Whan T: E: andrew.whan Australia Lance Sacks T: E: lance.sacks Central and Eastern Europe Alex Cook T: E: alex.cook China Terence Foo T: E: terence.foo France Laurent Schoenstein T: E: laurent.schoenstein Germany Thomas Krecek T: E: thomas.krecek Hong Kong Amy Ho T: E: amy.ho India Neeraj Budhwani T: E: neeraj.budhwani Indonesia* Linda Widyati T: E: linda.widyati Japan Tatsuhiko Kamiyama T: E: tatsuhiko.kamiyama Korea Hyun Kim T: E: hyun.kim Latin America Anthony Oldfield T: / E: anthony.oldfield Middle East Mike Taylor T: E: mike.taylor Netherlands Hans Beerlage T: E: hans.beerlage North America David Brinton T: E: david.brinton Singapore Lee Taylor T: E: lee.taylor Spain Javier Garcia de Enterria T: E: javier.garciadeenterria Thailand Andrew Matthews T: E: andrew.matthews United Kingdom Mark Poulton T: E: mark.poulton *LINDA WIDYATI & PARTNERS IN ASSOCIATION WITH CLIFFORD CHANCE 18

19 * Linda Widyati & Partners in association with Clifford Chance **Clifford Chance has a co-operation agreement with Abuhimed Alsheikh Alhagbani Law Firm in Riyadh Clifford Chance has a best friends relationship with Redcliffe Partners in Ukraine. 19

20 Clifford Chance, 10 Upper Bank Street, London, E14 5JJ Clifford Chance 2017 Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC Registered office: 10 Upper Bank Street, London, E14 5JJ We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications