Cross-border mergers and acquisitions: ASEAN and beyond

Cross-border mergers and acquisitions: ASEAN and beyond

06/12/17

Zhaoqi Zhang

Zhaoqi Zhang, Director of Investigations and Disputes, Kroll, shares insights into M&As in Asia.  

Evolving economies and positive demographics – a large, aspiring, and young population with rising income, maturing consumer sophistication, and increasing upward mobility – are fuelling the Association of Southeast Asian Nations (ASEAN) as a promising new magnet for corporate mergers and acquisitions (M&A) activities.

Investment opportunities are often a combination of risk and return, and these two parameters can be amplified in cross-border transactions when local context no longer applies singularly. While the ASEAN continues to attract the attention of M&A capital, a number of trends have emerged over the past few years in the context of M&A that warrant closer attention from corporate stakeholders from both an execution and strategic standpoint.

Intra-ASEAN transactions

Looking at the source of funds for M&A activities that involve an ASEAN target entity, deals with an ASEAN-based acquirer consistently made up approximately 30% of the total annual deal volume from 2014 – 2017 Q1. In terms of dollar amounts, however, this intra-ASEAN share of the pie has fluctuated since 2014 according to M&A data from Mergermarket in the latest edition of Kroll’s quarterly newsletter Spotlight Asia. The varying dollar share of the intra-ASEAN deal flows, reflecting swings in corporate activities, can be partially attributed to the continuously changing geopolitical situation in the respective ASEAN jurisdictions and the impact that such political cycles have on investments.

The cycle of outgoing and incoming political officeholders, almost never synchronised across the ASEAN states and sometimes unplanned for, bears significant weight on corporates’ M&A decision-making. The following illustrates just a few of the recent political changes in the region:

  • The Philippines had its new President sworn in just last year.
  • Vietnam also installed a new Prime Minister in 2016.
  • Incumbent Indonesian President Joko Widodo won his election by a super slim margin in 2014.
  • Thai Prime Minister Prayut Chan-o-cha seized office in 2014; an additional cloud currently exists in Thailand after the passing of the King in late 2016.
  • Another round of general elections is in the pipeline for both Malaysia (2018) and Indonesia (2019).

The frequency of these events, and sometimes the expectation thereof alone, may be enough to postpone a significant investment decision ahead of anticipated changes in the target country.

Specifically in Indonesia, the government under President Widodo is focused on improving and building infrastructure, such as roads and train services. One of the country’s main challenges is a lack of capital, so the government has been trying very hard to attract foreign investors. However, the social situation is not comfortable, given the pervading nationalist sentiment and rising religious extremism in the country. This hinders foreign investment interest in spite of the government’s efforts to put in place investment-favourable measures through the introduction of policy packages.

Meanwhile, the Duterte government in the Philippines has also put forth a populist and nationalist agenda, which is playing out particularly strong in the resources sector. Elsewhere, the Malaysian and new Myanmar governments are contending with similar pressures and demonstrate signs of capitulating to populism and nationalism.

In the ASEAN as a whole, investors always need to pay attention to changing geopolitical situations which cannot be viewed in isolation, but rather must be observed both in the ASEAN and wider Asian context. An understanding of the local dynamics within the regional framework is one of the keys to success in this region.

The rising influence of China

Both in terms of volume and value, inbound deals by bidders outside of Southeast Asia have been and will likely continue to drive the M&A activities within the ASEAN.

Singapore, Malaysia, and Indonesia consistently rank among the top three ASEAN destinations. Their attractiveness is generally due to having established regulatory framework and infrastructure in place, low language barriers, and sheer market size. The deal-originating geographies, however, have seen some shift in the order of significance among the top three bidders – Japan, China, and the United States – over the past few years.

While Japan has been the primary engine driving M&A activities in ASEAN, China is catching up fast both in quantity and size of deals. If activities originating from Hong Kong and Taiwan were bundled under the Greater China tag, the Chinese-speaking jurisdictions would top the list, accounting for a third of all inbound deals by value and one quarter of the total by volume for the period 2014 – 2017 Q1.

The Belt and Road Forum in Beijing, concluded in May earlier this year, further signalled the rising influence of China in regional affairs with connectivity being the first priority. The conference was attended by several heads of state from key ASEAN economies, including Malaysia Prime Minister Najib Razak, Philippines President Rodrigo Duterte, and Indonesia President Joko Widodo.

China’s infrastructure interest in the ASEAN is also shared by other key investor countries. Three sectors in particular received the most inbound M&A attention in terms of both dollars and the number of projects over the past three years: energy, mining, and utilities (“EMU”); industrials and chemicals, and technology (“Industrials & Chemicals”); and multimedia and telecommunications (“TMT”).

The Belt and Road Initiative is a vivid case in point of the significant and direct role the Chinese government plays in shaping economic policies and investment decision-making in the region. Most of the ASEAN state governments also have an active hand in administering their respective national economies. With the invisible, and sometimes visible, hand of politics in business affairs, the evolving dispute over the South China Sea territorial claims between several ASEAN states and China remains a destabilising force despite promising business prospects and trends. Any investor, especially those planning to ride on the influx of Chinese funds, will see value in navigating the national and political stakeholders situation delicately and with a long-term mind-set.

Moving to consumer sector

While inbound M&As largely focused on the “hard” investment sectors such as EMU, TMT, and Industrials & Chemicals, deals between companies across the ASEAN states have slowly been diverging from that anchor point to weigh in on the “softer” end of the business spectrum, notably the consumer sector. Over the same 2014 – 2017 Q1 period, the consumer sector was the top recipient for intra-ASEAN dollars and ranked third in terms of deal numbers; EMU and TMT shared the other two positions in the top three for both categories.

Such inconsistency in investment focus suggests that regional players, relative to those outside of ASEAN, are likely to be more familiar with, cognizant of, attuned to, and prepared for changing consumer behaviour and preferences in their home markets. This supported them in moving ahead of their foreign counterparts from the 2B (“to business”) space to 2C (“to consumer”) sectors.

This finding is consistent with the notion that 2C businesses require a higher level of localised understanding of on-the-ground nitty-gritties than the 2B equivalents in order to make business sense. Navigating through the array of consumer choices to find the sweet spot for growth does appear to be easier, on a relative scale, for those operating closer to the consumers.

While geographical proximity may give intra-ASEAN players an advantage in picking up sooner on emerging trends, ASEAN is not a homogeneous market. Language and cultural differences, dissimilar demographics, and local idiosyncrasies all render the “copy to ASEAN” business model – i.e., blatantly replicating what worked in more mature markets – potentially futile in this part of the world. Investors interested in this region’s consumer markets should focus on the nuances and dynamics of each country and tailor their approaches accordingly if they are to win over increasingly sophisticated ASEAN consumers.