Clifford Chance

Clifford Chance survey finds Europe offers attractive M&A prospects for Asia Pacific companies

Hong Kong/Singapore: While caution prevails as economic uncertainty continues and transaction volumes still lag historic norms, the European M&A market remains very much on the radar for Asia Pacific investors. The relatively low valuations of European assets and opportunities arising from European companies' divestments of their quality non-core assets, present attractive M&A options for discerning buyers willing to commit to a transaction.

These are among the findings from the latest annual global survey that forms the basis of Clifford Chance's European M&A: On the road to recovery? report. This is the second annual global M&A survey conducted by the Economist Intelligence Unit (EIU) on behalf of Clifford Chance. EIU canvassed the views of senior executives at close to 400 large companies globally from a wide range of industries. Over one-half of companies represented in the survey have annual revenues in excess of US$1 billion.

Why Europe?

The financial crisis in the Eurozone and unresolved instability continues to dampen appetite for M&A in Europe and around the world with the latest figures representing the lowest quarterly global M&A levels since 2009 according to Mergermarket. Yet only 9% of Asia Pacific survey respondents do not consider Europe an attractive place to do M&A deals. In the past year, the UK has been the number one target jurisdiction for Asian companies, followed by Germany and France*. The appeal of UK companies stems in part from the fact that the country has been less affected by the Eurozone crisis and is seen as having a more open foreign investment environment and, generally, they have healthy balance sheets, with some Citi analysts forecasting these firms will hold GBP150 billion (US$230 billion) by the end of the year.**

Gaining technology and know-how is a key driver for acquisitions in Europe, selected by 43.4% of Asia Pacific respondents , particularly in countries such as Germany where we have seen several deals including Korean conglomerate Hanwha's acquisition of solar panel maker Q-Cells and China's Sany Heavy Industry's acquisition of Putzmeister, a leading manufacturer of concrete pumps.

Gaining market share is another key driver with 28.7%. This is particularly relevant for Asia Pacific companies in mature markets such as Japan who are looking offshore for future growth given the limited growth prospects domestically.

Obtaining strong name brands is important for 26.2% of Asia Pacific respondents and a strategy for many Chinese companies looking to grow their business. "Going overseas is unavoidable for Chinese companies to succeed, grow, improve competitiveness and to move up the value chain; the easiest and safer way for doing so is by tapping into the resources of international companies to gain strategic management skills, brand and market access," said Hong Kong IP partner, Ling Ho.

Attractive valuations creating 'bargain' opportunities

The risks inherent in Europe today are opening up opportunities for bold investors to acquire assets at attractive valuations. Approximately 43% of global respondents say that the challenging socio-economic conditions are increasing their appetite for European M&A.

Moreover, 72% of Asia Pacific respondents consider that assets in Europe are either undervalued or their valuations are about right, and 71.3% expect that asset valuations will either stay the same or decrease over the next two years. This means we should continue to see opportunistic acquisitions by Asian investors into distressed European situations over the next few years.

Cash rich but still M&A shy

Asia Pacific companies generally have healthy balance sheets with 87.1% of Chinese respondents and 80% of Japanese respondents preferring to use cash reserves to finance M&A transactions. Yet given all the strong drivers and positive sentiments, the volume of M&A transactions into Europe have not materialised and Asia Pacific companies are still holding back.

Currency risk is seen as the greatest threat to executing M&A in Europe by 41.8% of Asia Pacific respondents, followed by rising costs including labour and taxes (35.2%) and reputational risk (30.3%).

The continued reduced levels of M&A deal activity suggest that the perceived risks in doing M&A in Europe still outweigh the rewards for many market participants.

Roger Denny, Head of M&A, Asia Pacific adds, "Although the results of our survey found that Asian companies are primarily focused on acquisitions within their own region, Europe still maintains an attraction and a strategic opportunity for many Asia Pacific companies to develop their businesses. We expect the growth in Asian outbound investment to continue and Europe to be a key part of this."