AFTER a soft few years, South-east Asian mergers and acquisitions (M&As) look set for a revival. One major factor is the ongoing interest rate cuts, which will boost dealmaking.
The region’s continued economic potential is another major factor why corporates and financial sponsors continue to be on the lookout for targets.
Regional M&As endured a moribund 2023 at around only US$85 billion, the lowest since 2020 – the year the Covid-19 pandemic began.
This slowed down to only US$22 billion for the first half of this year, meaning that even last year’s numbers will be unattainable if the current pace continues. The number of regional M&A transactions has also fallen to around 300 for the first half of 2024, compared with more than 800 deals for 2023.
This is a stark contrast to the years before Covid-19, when the market saw over 1,400 deals transacted in 2019.
Potential acquirers have been exercising caution, risking less of their capital due to higher financing costs and the prevailing uncertainty that has affected markets over the past few years.
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The ongoing fall in interest rates should boost M&A appetite going forward. The US Federal Reserve started decreasing rates in September, which leaves only the question of the pace of these cuts over the next year or so.
The timing of the rate cuts by South-east Asian central banks will differ, but the general global trend is towards lower rates. And this will almost certainly provide a fillip to M&As, regardless of whether they are funded by US dollars or South-east Asian currencies.
Growth story intact
With South-east Asia’s economic prospects looking strong, many acquirers are expecting to make positive returns further boosted by lowered funding costs.
Regional growth is expected to improve to 4.8 per cent this year, up from 4.2 per cent last year, according to the Asean+3 Macroeconomic Research Office. In contrast, the global economy is expected to grow by only 3.2 per cent this year, according to the International Monetary Fund.
Hence it is unsurprising that South-east Asia last year registered its third straight year of record foreign direct investment (FDI) inflows. While global FDI inflows fell by 2 per cent, this region bucked the trend with a gain of 1.2 per cent to US$226.3 billion due to robust economic growth and extensive global value chain linkages.
The data from the United Nations Conference on Trade and Development showed that South-east Asia is the world’s second-largest recipient of FDI, after only the US.
While South-east Asia is commonly cited as the fifth-largest economic bloc globally, it comprises economies that are widely divergent in size, stage of development, economic structures and policies, and demographics. These are markets within a wider economic and political union.
Accordingly, acquirers tend to take a highly selective approach to dealmaking, towards narrowly focusing on specific criteria that fit their desired strategy, industries or country footprint.
The most successful M&As are those where acquirers combine a sound acquisition strategy, a prudent investment thesis, and strong pre-investment deal execution with post-acquisition integration.
In many cases, diversification and connectivity are driving forces for these acquirers, who are buying strategic assets to expand into new markets or into adjacent industries.
The deal sizes need not be huge in the billions. In fact, we believe that the US$50 million to US$300 million range continues to look interesting. The key is that the outlay remains within their comfort range and achieves their business expansion objectives.
As for sellers, some may be founder-led businesses looking at succession planning. In other cases where the sale only involves a partial stake, it may simply be the case of a company adding a new investor to take on the next phase of growth.
There have been several deals where buyers are looking to expand into a new country, with sellers welcoming a strategic investor.
Take Japanese conglomerate Marubeni Corporation, which has been expanding its electronic components distribution business in Japan in recent years.
It bought a 74 per cent stake in Singapore’s DTDS Technology in April this year. DTDS distributes semiconductors and other electronic components in South-east Asia and India and fits perfectly into Marubeni’s plans to secure full-fledged entry into these markets where rapid growth is expected.
In another deal in February 2024, Thailand’s SCGJWD Logistics acquired a 20 per cent stake in Malaysia’s Swift Haulage. With both companies having overlapping segments, SCGJWD aims to achieve synergies in cross-border transportation, cold chains and automotive logistics with its purchase.
Private equity, private credit and infrastructure funds have also been active.
Despite a muted last 12 months in new investments, exits and the amount of new funds raised, South-east Asia is still ranked by investors as one of the two best emerging markets (alongside India) for investment opportunities, according to data solutions provider Preqin’s 2023 investor survey. Global funds have continued to raise large Asia-focused funds.
Sectors to watch
Industries with a healthy volume of dealmaking in South-east Asia over the last 24 months include healthcare, infrastructure, telecommunications (including telco towers and data centres) and renewables.
In the telecommunications space, US investment firm KKR bought a 20 per cent stake in Singtel’s regional data centre business for S$1.1 billion in September 2023. Subsequently, KKR and Singtel joined hands to invest S$1.75 billion in ST Telemedia Global Data Centres in June this year.
An example of a healthcare deal was IHH Healthcare’s purchase of Island Hospital in Penang for RM3.9 billion (S$1.2 billion). The transaction was announced in September.
These sectors are expected to continue to be deal drivers. Areas to look out for include digital transformation – notably artificial intelligence and other emerging technologies – and green technology, with climate change and ESG considerations driving continued investments in renewables.
South-east Asia is also an attractive destination for supply chain diversification, particularly as businesses seek alternatives to China amid geopolitical tensions and trade disruptions.
As such, sectors that play on the supply chain theme will attract M&A interest – as in the case of both DTDS Technology and Swift Haulage.
On a country basis, Singapore has traditionally topped South-east Asia M&A with Indonesia as the runner-up. This trend looks set to continue although activity will likely also be robust in Malaysia – where inbound FDI momentum has remained strong after approved investments hit a record RM329.5 billion last year.
With lower rates, an intact growth story and the mega-theme of regional connectivity, regional corporate finance teams can expect to get busier very soon.
The writer is head of corporate finance and advisory at UOB
