As cross-border mergers and acquisitions are on the rise globally, businesses in Asia and abroad are turning their attention to Southeast Asia.
A 2013 report on trends in cross-border M&A indicates buyers are expanding their acquisition targets to include next-generation high-growth markets, including countries in Asia. The report, commissioned by the global law firm Baker & McKenzie and written by The Economist Intelligence Unit, also indicates Asian-based companies themselves are establishing a stronger presence on the acquisition side of M&A.
“I think we’re seeing, in terms of the geographical spread, whether it’s investors from outside the region or inside the region, a lot more activity in Southeast Asia than, say, a decade ago,” said Jon Worsfold, a partner in the Singapore office of Baker & McKenzie.
Mr Worsfold said cross-border M&A activity had been picking up noticeably in the Philippines, Vietnam and Indonesia.
“Indonesia has been fairly hot the past four of five years,” he said. Market interest has mainly focused on the resources and consumer sectors but with an emerging middle class, healthcare and education are also becoming appealing assets.
However, deal completions have not been as high as they could be, Mr Worsfold said. This is likely due to “price issues” between sellers and potential buyers, he said.
“The reality is slightly more damp than people seem to think,” he said. “The expectations of the sellers have been a little bit high and the buyers coming in have not been prepared to pay those prices for assets.”
But expectations on the buy and sell side are coming closer together and Mr Worsfold predicts Indonesia will remain a region of interest for the next six to nine months. Beyond that, much may rest on the 2014 election outcome, he said.
“The [outlook in] the next year to two years, I think, will be dependent on what happens with the election,” he said. “A lot of investment in Indonesia is really governed by regulation and if the foreign ownership regulations become tighter, then sentiment, I think, will drift away. I think it’s a ‘wait and see’.”
Mr Worsfold also identified Myanmar as a country to keep an eye on. He calls it a “new frontier”, albeit one that requires reform.
“There’s a lot of interest, but at the moment there’s not a lot of deal activity. The laws are not yet in place for a lot of investors and there are land ownership issues,” he said. “The whole pricing at the moment is all a bit crazy. So that needs to settle down, I think.”
Another upcoming potential cross-border M&A game changer is the Asean Economic Community integration, set for the end of 2015.
“Every country should see benefits,” said Kitipong Urapeepatanapong, chairman of Baker & McKenzie’s Bangkok office.
The integration will reduce labour costs, lower tax barriers and allow people to move more easily between countries, he said.
In Thailand, where large companies have already taken advantage of cross-border M&A, medium-sized companies could see the most benefit from integration, Mr Kitipong said.
“A medium-sized, family-owned company, in my view, needs to be finding some alternatives for sources of raw materials or distribution,” he said. “Thailand may be good at one thing but not good at another thing, so we need to combine.”
However, he cautions that it is important for companies to work with lawyers or bankers who are already familiar with the countries in which they’re interested.
“They have a footprint here and over there, so they can interview customers together,” he said, adding that banks may have already screened prospective M&A partners.
These industry professionals can help companies navigate the foreign country’s specific government policies and practices, he said. This is important since rules and regulations are more nuanced in Asia than in European or North American countries. “You can’t do it by yourself.”
In terms of cultural similarities, Asian companies also may have an advantage over outsider companies when pursuing cross-border M&A in Asia, Mr Kitipong said.
“Asians tend to be more humble. We do not take an aggressive view. So we are not saying anything bad against others. And we are very quiet and don’t expect opinions, unlike people in the Western world,” he said. “One of my colleagues mentioned that a Japanese person may be more patient in talking rather than an American colleague.”
The importance of overcoming cultural hurdles is evident in Baker & McKenzie’s report, which is based on a survey of 357 senior executives around the world. Cultural barriers were identified as the general issue (i.e. non-legal, regulatory) creating the greatest challenge to the success of a cross-border acquisition.
The report gives one example of a cultural barrier in India: the meaning of “yes”.
“You have to know that ‘yes’ could actually mean ‘no’ or ‘I’ll think about it’, and you often have to go back and redo what you thought you already negotiated,” Ashok Lalwani, chairman of Baker & McKenzie’s India practice, was quoted as saying.
“But this is all part of the song and dance and people should understand this and be prepared for the long haul.”
Although cultural differences will be present regardless of where the prospective M&A partner is located, these and other challenges such as economic and political instability, aren’t slowing the demand for cross-border M&A.
Nearly half of the survey respondents said they expected the appetite for cross-border M&A to grow over the next two years. Executives in both developed and high-growth markets also said they’ve witnessed an increase in cross-border M&A activity over the past five years.
Mr Kitipong sees this growth trend as a result of companies recognising the opportunities available in an increasingly interconnected world.
“Local M&A is not sufficient,” he said. He gave the example of Thailand, a country with a population of 67 million, whose companies could be taking advantage of opportunities available in throughout Asean, a region with a population of more than 600 million.
Mr Kitipong said that when companies secure cross-border M&A deals in a new country they gain access to a wider variety of options for manufacturing, marketing, and distribution.
“Now the world is smaller and smaller,” he said. “There’s no way that you are talking about only Thailand, or only Malaysia, or only Indonesia. It’s global now.”