Insights into Asia Pacific M&A. FinanceAsia and Clifford Chance M&A Survey

Transcription

1 FinanceAsia and M&A Survey

2 M&A: Views from Asia Pacific Roger Denny Head of M&A Asia Pacific 2015 was a bumper year for M&A in the Asia-Pacific region. The boom in M&A in the region was largely driven by a significant increase in the value of intra-regional deals, particularly group restructurings. Outbound deals from Asia-Pacific strategic acquirers were also a key part of the market, with numerous US$ billion+ acquisitions by Chinese and Japanese companies. We expect the strength of outbound and intra- Asian M&A to continue in the next year. This is supported by our survey, where 90% and 88% of the respondents respectively expect an increase in, or at least the same levels of, activity for outbound and intra- Asian M&A in Challenges still remain though, with legal and regulatory enforcement on the rise, and with anti-corruption, merger controls, foreign investment clearances, sanctions and comprehensive and reliable due diligence being key issues to overcome for the successful completion of M&A. As the survey highlights, this puts much greater emphasis on the need for experienced advisers in the region, who understand the markets, to ensure a proper assessment of acquisition opportunities and to minimize the risks which naturally arise in making acquisitions. Another interesting feature of this year's survey is that the balance of power in M&A deals in the next 18 months is seen as shifting strongly in favour of the buy side, increasing in the survey over the past three years from 60% in favour of the buyer to 79%. This is the highest we have seen in the nine years of conducting the survey, so we expect to see more deal terms and protections swing in favour of the buyer with, for example, more buyer friendly purchase price consideration mechanisms, material adverse change conditions and warranty protections and limitations. That said, in the case of attractive businesses, we expect auction processes to be able to generate strong competition and they will probably be more favourable to the sell side. In this context, we have a separate annual survey of Asia-Pacific Market Practice in Private M&A, which provides detailed analysis of deal terms and protections, which we would be happy to share with you. I look forward to hearing from you if we can support you in your assessment of M&A opportunities or if there are any areas on which you would like us to share our insights. 2

3 Key findings Inbound. China again remains the top destination with an increased aggregate of 65% respondents selecting it as a top three destination for Asia Pacific inbound M&A, followed by India (33%). Interestingly, Australia/New Zealand and Japan have both risen strongly on last year, with 31% and 22% respondents respectively picking them as popular choices for inbound M&A. Hong Kong and Vietnam also feature strongly, with Indonesia still high at 27% but significantly down on last year. Outbound. Sentiment remains positive with 90% of respondents expecting an increase in, or at least similar levels of, outbound M&A on the previous year. The US (87%), the Eurozone (63%) and UK (47%) continue as the most popular target jurisdictions for outbound M&A, with the US and UK increasing significantly on the previous year. 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 ve continued to see deal sizes get bigger, with more US$ billion+ deals this year in Asia Pacific than before. 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. The desire to find new markets and future growth is also driving inbound M&A and 64% of respondents believe Western companies are likely to continue their focus on their emerging market strategy, notwithstanding the greater economic uncertainty in those markets. Drags. Concerns about local protectionism and regulatory issues remains a major issue in cross border M&A and was identified as having the greatest negative impact. Global and regional economic conditions and sellers' unrealistic price expectations also featured next most strongly. Significant concerns were also raised about bridging cultural differences in the acquisition process and the integration of companies acquired in the region was considered more difficult than expected (60%). Buyer in control. The balance of power is seen as shifting strongly in favour of the buyer in the next 18 months, having increased in the survey over the past three years from 60% in favour of the buyer to 79%. This is the highest imbalance we have seen in the nine years of conducting the survey. We do, however, expect strong competition in auction processes for attractive assets and, therefore, a more balanced, or seller friendly, situation in those circumstances. Deal Structure. Full control of targets was the most popular structure according to 39% of respondents. Alternative deal structures are also seen as viable, with joint ventures with a strategic partner and partnerships with private equity and other financial investors the most preferred structures according to 25% and 16% of respondents respectively. Keys for success. Comprehensive due diligence to ensure no surprises and a good acquisition team, including advisers with local knowledge, were identified as the joint top factors to successfully complete deals in the region. Whilst 60% of respondents felt integration in the region was more difficult than anticipated, the good news is that 65% felt their acquisitions had been successful. 3

4 Other key findings Expected M&A deal size over the next 12 months Who is in control? Balance of power will be with Sellers Buyers US$100 million US$500 million 41.4% < US$100 million 26.5% US$500 million - US$1 billion 22.4% > US1 billion 9.7% 21% 79% Factors for success Preferred methods of financing Good deal structure and protection in legal agreements 48% Managing and clearing regulatory hurdles 42% Assured funding 46% Bank loans Deals with strategic /financial co-investor ECM 55% 69% 60% Comprehensive due diligence 63% Good acquisition team including advisers with local knowledge 63% Managing stakeholder expectations 39% DCM Cash reserves Equity Swap 40% 35% 42% 4

5 Sector trends Consumer, retail and leisure is identified as the top priority sector this year. It has now been the top sector for three years. This no doubt reflects the fact there are still opportunities to find new markets and growth in the region and to take advantage of the increase in disposable incomes which, in the medium to long term, still remains attractive. Retail deregulation in Vietnam could make the country very attractive, while populous countries like China, India and Indonesia will continue to drive activities in the region. Financial services and TMT came in a close second and third choice respectively, as indeed they have in the past three years. Many global financial institutions continue to seek to reshape their businesses in light of regulatory changes and increased compliance risks and costs, and regional institutions are looking to grow their businesses through acquisition, particularly in key new markets and product lines. 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. With the market correction in the natural resources sector, there may be an opportunity for acquirers, although we may need to see more stress in the sector before a wave of deals are signed. Consumer, retail and leisure Financial services Technology, media and telecom Pharma/healthcare Real estate Oil and gas Power Mining Industrials and chemicals Transportation Other services 1 4 Greatest investment Greatest + 2nd greatest investment Total (Greatest + 2nd greatest + 3rd greatest) 5

6 Asia Pacific inbound M&A 22% Japan Overall, the outlook for inbound M&A from non-asia- Pacific strategic acquirers remains positive, with 81% of respondents expecting an increase on the previous year or at least similar levels. Mainland China 65% 12% South Korea Mainland China continues to be the top destination for inbound M&A, increasing to 65% from 58% last year. India was the second most popular target jurisdiction, followed by Australia/New Zealand and Indonesia. Interestingly, Australia/New Zealand and Japan have both risen strongly on last year. Australia's devalued currency is driving M&A, with activity in infrastructure, agriculture, consumer and healthcare sectors. Although there is interest in the commodities sector after the fall in prices, we may need to see more stress before a wave of deals sign. Hong Kong, Vietnam and Singapore also feature strongly. Indonesia remains popular but is significantly down from last year's 47%, reflecting a general lowering of the strength of many South East Asian markets, which for several years has been a "hot" subregion both in Asia-Pacific and in the global context. In aggregate, however, there is still considerable interest in South East Asia and Vietnam and Singapore featuring more strongly than last year. India 33% Thailand 9% Malaysia 9% 20% Vietnam Indonesia 27% 26% Hong Kong 18% Singapore 5% Taiwan 10% Philippines 31% Australia/ NZ 6

7 Top 3 drivers of Outbound M&A Asia Pacific outbound M&A Overall, the outlook for cross border outbound M&A from Asia-Pacific strategic acquirers remains very positive, with 90% 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 increasing to 87% from 71% in the prior year. The UK has also seen a notable increase in interest, rising to 47% from 36% in the prior year. In light of the drivers of outbound M&A highlighted below, we are expecting even stronger outbound M&A in the next year, with Chinese and Japanese companies in particular likely to be strong participants as their domestic market growth slows, they see more limited opportunity to expand in their domestic markets and they adopt a global strategy. Canada 23% UK Eurozone 63% 47% CEE 16% Asia companies adopting global strategy 73% US 87% Africa 22% 14% Middle East Desire to find new markets Depressed valuations in target markets Desire to secure knowhow/technology, brands 49% 46% 38% South America 26% Improving economies in US/Europe Desire to secure supplies of natural resource 23% 21% 7

8 Key drivers Asian companies adopting global strategy The 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 A top driver of Asia-led M&A and inbound M&A. In respect of the latter, 64% of respondents believe Western companies are likely to continue their focus on their emerging market strategy notwithstanding the greater economic uncertainty in those markets Desire to secure know-how/technology, brands Are key drivers for TMT, CG&R and Industrial sectors 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 Strategic repositioning of financial institutions Disposals driven by increasing complexity and cost of regulatory compliance and focus on more profitable businesses, particularly by Western headquartered institutions. Regional companies interested in opportunities to grow outside their home markets. Correction in natural resources With the fall in commodity prices, and a rebound not expected soon, 59% of respondents believe the market is attractive for opportunistic acquirers Increased confidence of acquirers Asian companies continue to become more sophisticated in cross border M&A Lack of opportunities in home markets Particularly relevant to low growth markets and where companies already have strong domestic positions Successful acquisitions 65% of respondents state acquisitions they have involved in have been considered successful for the acquirer 8

9 ...and challenges Concerns about local protectionism and antitrust Growing complexity in navigating anti-trust and other regulatory regimes and increasing enforcement action in major jurisdictions. 70% of respondents see protectionism as one of the most significant concerns for buyers, up from 64% last year Regional and global economic conditions Slow down in growth in Asia-Pacific, especially China, and the effect on the US and European economies as quantitative easing ends are seen as significant risks Sellers unrealistic price expectations In the past two years, seen as the biggest drag on M&A and potentially stalling M&A deals - still seen as one of the top three most significant challenges this year Cultural differences in process Comprehensive due diligence to ensure no post-acquisition surprises and good deal structures and legal agreements seen as key to successful M&A, but can be resistance to these for various reasons from the seller. Advisers with local experience key to manage this Insufficient comfort in respect of due diligence Poor transparency heightens risks. The need for comprehensive due diligence and a good acquisition team with local knowledge are identified as the two of the most important factors when conducting M&A in the region Lack of attractive targets Companies are holding on to quality assets Bribery and corruption Global reach of bribery and corruption regimes necessitating increased scrutiny of investments and due diligence as well as issues with post-acquisition integration Post Merger Integration 60% 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 9

10 Antitrust and other regulatory hurdles Antitrust laws have continued to expand and develop across the Asia Pacific region. Having flexed their muscles in the early years of China's antitrust regime, the three Chinese antitrust agencies are going through periods of internal reform and reflection ahead of an overhaul of the Anti-Monopoly Law next year. For most M&A deals which are reviewable in China, the transformation has been positive in terms of the timing and predictability of review periods and MOFCOM has seen a huge leap in the number of filings as a result. However, as last year's decision to block the P3 shipping alliance shows, MOFCOM remains able and willing to step in where it believes China's interests are threatened by global deals. Similarly, India has seen an increase in the number of merger filings and has imposed a number of fines for gun-jumping, making it increasingly important in deal-planning. Elsewhere in Asia, Hong Kong finally introduced its Competition Ordinance in December 2015, whilst across ASEAN, the Philippines, Laos and Thailand enacted new competition laws. Strategic considerations 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 prenotification and/or more data input), and have a timing strategy and be disciplined on timing and deadlines. Many of the recent big deals have been in sectors where antitrust enforcement has traditionally been high - technology, pharmaceuticals and consumer goods. The proportion of notified deals in these sectors subject to some form of antitrust intervention remains relatively high. In many cases, buyers come into these deals with a pre-agreed remedy package in order to pre-empt antitrust concerns. Crafting the right package of remedies is often the key to managing the objections of antitrust agencies and the timing expectations of other stakeholders. Antitrust enforcement actions in the major jurisdictions are also increasing. Most of the major jurisdictions saw a resumption of the trend towards ever higher fines, reflecting increasingly aggressive enforcement by the antitrust authorities. China's National Development and Reform Commission imposed a record fine of nearly USD 1 billion on Qualcomm in early South Korea saw its first criminal prosecution of a foreign firm for participation in an international cartel. Indonesia's competition authority is seeking to raise its status and obtain more independent powers to enable it to combat cartels. Communication Where possible, coordinate responses to overlapping requests, with similar and consistent information submitted across jurisdictions. Generally assume that regulators are communicating with each other. More regulators and more rules make navigating the global merger control map increasingly complex. The recent spate of mega-mergers has helped keep enforcement rates high, particularly in the pharmaceutical and tech sectors. Richard Blewett, Head of Anti-trust, China 10

11 Focus on compliance and risk management With increasingly aggressive enforcement and focus by regulators around the world, and in particular, the US, UK and China on corruption, due diligence in this area and steps to mitigate risks are of increasing importance for buyers and sellers. Some key target areas to focus on are: M&A in the face of heightened economic sanctions Political and military uncertainty (e.g. Russia/Ukraine and Middle East) including economic sanctions is seen as a significant drag on M&A. Whilst this is a concern for companies looking at acquisitions, measures can be taken to ensure compliance with sanctions laws and minimise risks against potential penalties. Buyer Seller/Target Pre-acquisition Post-acquisition Ongoing monitoring 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 Avoidance of transactions that lead to unmanageable liability risk Planning ahead detailed plans regarding anti-corruption practices and procedures that will be implemented post-completion 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 Due diligence to cover 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. Economic Sanctions shouldn't prevent companies from operating in a given jurisdiction; but it does require comprehensive diligence pre-acquisition and continuous monitoring post-acquisition. Wendy Wysong, Partner, Litigation & Dispute Resolution 11

12 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 Clear delineation of roles and decision making Can be unstable What happens next? Extensive due diligence required Detailed contractual framework required Contractual framework must address how disputes to be dealt with Critical to agree exit mechanism at the outset Bridging the pricing gap 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 12

13 Private Equity in focus There was a slight reduction in expectations compared to last year that PE funds will be increasing or maintaining similar levels of activity on the buy-side (89.5%) and sell-side (86%) has been a year of two halves with a busy first half of the year and second half being quieter due to the significant equity market volatility in the late summer and a more pessimistic growth story, in China in particular. PE buy-side activity Increase Similar Decrease 10.5% 38.5% 51% PE sell-side activity Increase Similar Decrease Auction processes become somewhat of a lottery sourcing proprietary transaction opportunities is a key focus of the Asian PE funds for quality assets at the right price, these remain few and far between. Simon Cooke, Co-head of PE, Asia-Pacific 14% 51% 35% 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. 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 Germany s Metro winning the auction for EQT s Classic Fine Foods being a good example 13

14 About the survey This is the ninth year in which and FinanceAsia have collaborated on a regional M&A survey. Over 200 respondents expressed their views in November 2015, with 69% 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 Mainland China Singapore Southern Asia North America Malaysia Indonesia Taiwan Australia India Japan Eurozone Europe other Middle East South Korea Thailand UK Others 7% 6% 5% 3% 3% 2% 2% 2% 1% 1% 1% 1% 1% 1% 2% 15% 18% 29% Banking Asset management Services Alternative Legal/Advisory Private equity Industrial Consumer TMT Energy and resources - Others 10% 9% 9% 7% 6% 5% 3% 1% 1% 9% 18% 22% MD/CEO/Partner COO/CFO/Director Company executive Business development or M&A manager Others 14% 16% 17% 20% 33% 14

15 Global M&A Key Contacts Global Guy Norman T: E: guy.norman Africa Spencer Baylin T: E: spencer.baylin Asia Pacific Roger Denny T: E: roger.denny 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 Andrew Whan T: E: andrew.whan 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 Kathy Honeywood T: E: kathy.honeywood 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 15

16 This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice., 10 Upper Bank Street, London, E14 5JJ LLP 2016 * Linda Widyati & Partners in association with