Clifford Chance

Increased investor confidence and interest in consumer and retail to drive M&A over the next 18 months

As 2013 draws to a close, investors and advisors are feeling much more positive towards Asia Pacific M&A than last year, according to an annual survey conducted by leading international law firm Clifford Chance and Asia Pacific business magazine FinanceAsia. Business confidence is on the rise with 91% of respondents expecting an increase or similar level of activity for intra-Asia M&A and similarly, 88% for outbound M&A.

China remains the favourite target jurisdiction
China (46%) continues to be the most popular inbound destination, followed by Indonesia (37%) with its excellent growth potential and abundant natural resources, and India (24%) third. Meanwhile, Asia Pacific companies show interest primarily in the US and Eurozone with 55% and 54% respectively.

Roger Denny, head of Asia Pacific M&A at Clifford Chance commented, "We have seen a strong pick-up in Asia Pacific M&A activity since the summer, with many companies keen to deploy their cash in pursuit of growth opportunities. We expect this trend will continue to grow next year with more Asia Pacific companies looking for targets in the US and Europe as part of their global strategy to expand their businesses to developed or new markets."

Consumer Goods and Leisure is the hottest sector
The consumer goods and leisure sector comes out as the most popular sector (46%) for M&A investment over the next 12-18 months, followed by technology, media and telecom, financial services, real estate and oil & gas. Food and agri-business, in particular, seem to be much sought-after businesses including the high-profile acquisition of Smithfield Foods by China's Shuanghui, the fierce battle for Australia's Warnambool Cheese and Butter and the recent merger of American companies Sysco Corporation and US Foods which will have a combined enterprise value of US$8.2 billion.

The mining sector has dropped significantly from last year's number two position, as commodity prices have declined and demand for natural resources have slowed down.

Adopting global strategy and looking for new markets as key drivers
Respondents believe that Asian companies looking to adopt a global strategy (40%) and a strong desire to explore new markets (38%) are the key drivers for continued Asia Pacific outbound M&A. Companies in mature markets such as Japan have an estimated US $2.27 trillion in cash, according to the Bank of Japan, and face immense pressure from the government and from shareholders to put some of this cash to work. Other drivers include the desire to secure know-how/technology and brands (30%), and depressed valuations in target markets (29%).

Drags on M&A
Despite the more positive sentiment towards M&A, about 72% of respondents believe that bribery and corruption is one of the most significant concerns for companies looking at targets in Asia Pacific. The region is viewed as one of the riskiest for corruption with nine out of 27 countries receiving a passing grade of 50 points on the 2013 Transparency International's Corruption Index. The potential ramifications post-acquisition for an investor can be costly, time-consuming and damaging to a company's reputation.

Local protectionism and regulatory hurdles are also seen by more than half of respondents (72%) as a major concern, and similarly, unrealistic price expectations from the sellers.

Denny continued, "Local protectionism, achieving regulatory approval and pricing mismatch remain the key challenges in M&A, especially in cross-border transactions. The good news is there are steps that can often be taken to mitigate these risks to get deals across the line."

How the survey was conducted
This is the seventh year in which Clifford Chance and FinanceAsia have collaborated on a regional M&A survey. 207 respondents were surveyed in October 2013 with 75% working at CEO, COO, MD, CFO or director level. FinanceAsia was appointed to conduct this M&A trends survey by engaging with leading decision makers and M&A professionals using an online questionnaire. The goal was to gauge perceptions on the very latest market conditions and identify M&A trends in Asia Pacific.