Alvarez and Marsal
A&M Global Transaction Advisory Group

Cross Border M&A 2018 Trends: Factors Impacting Asia

Xuong Liu
Asia Practice Leader, Global Transaction Advisory Group
xliu@alvarezandmarsal.com

From diverse cultures to differing economic profiles, the Asia-Pacific region is seeing a shift in the M&A landscapes within respective jurisdictions.

Through our regional presence in Beijing, Shanghai, Hong Kong and Seoul, our Alvarez & Marsal Global Transaction Advisory Group possesses the advantage of having the unique perspective on the observed trends currently happening in the industry. Below, I give insight on regional and global factors impacting cross-border deal activity in Asia.

What is Driving M&A Activity in the Asia Region?

CHINA’S CHANGING
SOCIO-ECONOMIC ENVIRONMENT

Urbanisation and Middle-class Growth
This is driven by the Chinese government’s goal to shift its economy from being a low-value / export-driven hub to a value-added services and domestic consumption-oriented economy, thereby resulting in an increase in investments in the services sector such as:

  • Healthcare
  • Education
  • Retail / Consumer
  • High-tech manufacturing

Shift in the Population Demographic
The aging population and long-term effect of the Chinese government’s one-child policy has contributed to investments in the healthcare (i.e. hospitals and elderly homes) and education sectors, amongst others.

Chinese Inbound and Outbound Investments
With China opening up to foreign investments due to a World Trade Organisation (WTO) entry condition, higher levels of investments are being expected in the previously restricted sectors such as automotive and financial services. However, the government has not relented on Chinese outbound investment restrictions to prevent the offshore outflow of RMB as a means to counter the depreciating Yuan.

GEO-POLITICO-ECONOMIC CHANGES
IN SOUTHEAST ASIA

As China moves away from the low-cost manufacturing sector, Southeast Asian countries such as Vietnam, Myanmar, Thailand, Indonesia and Philippines, are competing with each other to gain this investment flow. Even with investor concerns caused by the Asian Financial Crisis in 1997, many countries in the region have demonstrated consistent political and economic reform, infrastructure improvements and increased upskilling of the workforce which has positively impacted the region’s cross-border activity.

Overall, the majority of the raised global private equity funds have been dedicated to Asia / China. All steadily increasing in size, many of these are already into their second or third funds. And while this investment activity will continue, the regional market competitiveness is expected to increase and in turn, will drive up asset prices.

What Global Trends Are Affecting M&A in the Region?

The current trade tensions between the US and China is globally impacting cross-border M&A. Chinese investments into the US have slowed in the past few years with the increasing role the Committee on Foreign Investment in the United States (CFIUS) has played on vetoing transactions on the grounds of national security. This has provoked the escalating trade tensions contributing to China redirecting its capital to other global economies such as Europe and the Middle East.

With the US incorporating steel imports from the European Union, Canada, and Mexico, it is further widening these existing trade tensions and will inevitably impact other regions given how interconnected the global economy is today. This could be a precursor to full-blown regional trade wars that can result to tariffs on a wide range of products and services.

An initiative by the Chinese government, investments are directed towards infrastructure-related projects along the Silk Road. This compliments the trend of Chinese outbound investment having the focus of acquiring technology and brands to bring back to the country. These trends, among others, have market participants paying close attention to how current and future deal making will be impacted. In the event that policy-makers will continue to expand the scope of tariffs, global M&A will be affected as export businesses will become less attractive as investment targets. Companies focused on domestic markets, which could be an expected result from implemented protectionist policies by governments if the trade tensions continue to escalate, will likely see more investments coming their way. While from a long-term view, multinational companies will potentially increase greenfield investments overseas to manufacturing locally to avoid tariff impositions.

These trends, among others, have market participants paying close attention to how current and future deal making will be impacted. In the event that policy-makers will continue to expand the scope of tariffs, global M&A will be affected as export businesses will become less attractive as investment targets. Companies focused on domestic markets, which could be an expected result from implemented protectionist policies by governments if the trade tensions continue to escalate, will likely see more investments coming their way. While from a long-term view, multinational companies will potentially increase greenfield investments overseas to manufacturing locally to avoid tariff impositions.

The Investment Opportunities: Where Do They Lie?

 

  • Robust GDP growth with an annual 6% increase.
  • The shift to a domestic consumption-driven economy and a “hard landing” not happening despite prediction by the experts.
  • Opportunities also lie in companies with succession issues as many founding entrepreneurs are reaching the retirement age.
  • Corporate divestiture of non-core assets.
  • Investments in sectors such as healthcare and education, expected to fuel such rebalancing, will be likely paid back long-term as these are highly defensive sectors and are generally shielded from economic cycles.
  • Investors should select companies who have the right management team, a differentiated business model, strong innovation and R&D capability.
  • Outbound investments as the government encourages domestic companies to grow into national champions and further into global players.
  • The belt and road initiative

 

How can Alvarez & Marsal assist you?

In today’s economic climate, investment size and stakes are clearly becoming larger in order to capture the opportunities mentioned above. The shift from minority style / pre-IPO investments to control-type / buy-out situations has been gradual as investors try to capture these same opportunities and generate greater alpha.

Our Alvarez & Marsal Global Transaction Advisory Group is highly versed in such investments and can help clients navigate through these market complexities and challenges through our unique integrated financial, tax and operational due diligence offering. Combining our global reach and international best practices with our strong local knowledge, we identify quality investment opportunities and create maximum deal value across these different landscapes.

For more information about our Alvarez & Marsal Global Transaction Advisory Group, visit: https://www.alvarezandmarsal.com/expertise/global-transaction-advisory

Source:

SOURCE: ALM VANGUARD: TRANSACTIONS - ACQUISITIONS CONSULTING JUNE 2019 REPORT

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