Clifford Chance

EIU survey published by Clifford Chance finds Asia Pacific companies looking within the region for M&A

Asia Pacific companies are looking within the region and to their own cash reserves to grow their businesses, according to the results of a survey by leading international law firm Clifford Chance.

Regional analysis showed approximately 60% of Asia Pacific respondents identify growth opportunities in emerging and high growth markets with 29% also focusing on developed markets. The results reveal that their focus remains heavily within the region, with South east Asia, China and Australia/New Zealand considered prime M&A opportunities by all sectors.

Amongst respondents in the region, the sectors demonstrating the highest interest in M&A activity as opposed to organic growth were power at 75%, mining at 67%, healthcare (particularly in China) at 61%, and oil and gas at 47%.

The survey shows that regional M&A participants' preferences for financing their transactions has changed; two years ago external bank debt was seen as the preferred source of financing for M&A deals, while today cash reserves are the most favoured option.

The survey was conducted in the first quarter of this year by the Economist Intelligence Unit on behalf of Clifford Chance. It surveyed nearly 400 companies with revenues of more than US$1 billion, of which a third are based in Asia Pacific, , including 80 chief executives and 185 other C-level executives from a wide range of industries and regions worldwide. Respondents were asked to rank their top strategic drivers for, and perceived risks and barriers to, cross-border M&A activity.

"While Asia Pacific companies' successful acquisitions or failed attempts in Europe or North America make headlines, the real story from this survey is the continued pursuit of opportunities within the region by these companies," said Clifford Chance M&A partner Simon Cooke. "Given the diverse range of potential for growth within the region across different sectors, such as consumer and retail in Indonesia, resources in Australia and healthcare in China, Asia Pacific companies rightly see their own region as the primary location for growth through M&A."

Emma Davies, Shanghai partner and Head of Clifford Chance's Asia Pacific Healthcare Group, said, "The healthcare focus on China will continue as personal and household incomes rise. We've seen a marked increase in interest by foreign companies looking to break through existing regulatory barriers by partnering with local companies, even where this means ceding control."

Clifford Chance finance partner Anthony Wang explains the changes in financing: "Banks have been more selective in lending since the Eurozone crisis, and also take longer to approve and complete these types of loans. This has most likely driven corporate and private equity sponsors to look at funding acquisitions with their own cash, in particular for those deals with tighter completion timeframes, with possible plans for refinancing at a later stage."

Asia Pacific highlights from the survey:

• M&A opportunities. Globally, respondents identified China (27%) as the prime destination for M&A activity, ranked only behind North America (37%). Asia Pacific respondents are more focused on the local market, with South east Asia, China and Australia/New Zealand viewed as the top three target markets.
• Regulatory hurdles. Globally, Asia Pacific is perceived as the region with the highest regulatory barriers to M&A. South east Asia ranked first, followed by China. Interestingly, Australia, which forms part of the region and is a large contributor to M&A activity in the region, is seen as the country with the lowest regulatory barriers – confirming the diversity of the region and the continued difficulty of classifying it as a single economic block.
• Biggest barriers/risks to cross-border M&A activity. For Asia Pacific respondents, political uncertainty (38%), regulatory issues (30%) and currency fluctuations (34%) were seen as the top three barriers/risks to cross-border M&A activity. Respondents elsewhere see competition, rising costs and regulatory issues as the top three barriers/risks.
• Organic growth vs M&A. In reviewing responses by sector, respondents in the consumer retail, oil and gas and TMT sectors favour organic growth whilst respondents in the metals and mining, power and healthcare sectors favoured growth through M&A.
• Cash is king. Asia Pacific respondents' preferred method for funding M&A transactions is to use accumulated cash reserves. Two years ago, external bank debt was seen as the main source of financing for M&A deals by those same respondents.
• Deal intelligence. Asia Pacific respondents rely more on external sources of intelligence on potential M&A targets with 53% citing investment banks as the key source of intelligence on M&A, whereas European and North American respondents cite their own in-house experts and legal advisers (55% and 45%, respectively).

Matthew Layton, Global Head of Corporate concludes, "Clifford Chance's Cross-border M&A: Perspectives on a changing world survey provides many insights into the current mind-set of companies considering M&A, demonstrating that today's global M&A market is diverse and complex. Drivers of M&A strategy and the perceptions of barriers and challenges to deal-making vary dramatically around the world.  As the world begins to re-shape following the crisis, companies need to acknowledge and understand these risks in order to successfully grasp the much sought-after new market opportunities."