Asia-Pacific restructuring and M&A trends

Asia-Pacific restructuring
and M&A trends

Gokul Laroia
Managing Director
Asia-Pacific Head of Mergers Acquisitions and Restructuring
Morgan Stanley

The last decade has seen a number of defining economic events that have dramatically reshaped the region’s corporate landscape and priorities: the 1997/98 Asian financial crisis, high-profile corporate misconduct cases in the US and the emerging economic dominance of China. Companies across Asia have never faced a more challenging environment. Yet, as in all times of upheaval and change, opportunities abound. Important strategic choices will need to be made by corporate management, influenced by the following key trends:

Deregulation
From telecommunications to other infrastructure and utility industries, markets around the region are changing as industries are deregulated and access to new markets is granted under WTO and other trade agreements. Deregulation creates opportunities, but also new competitive pressures.

Consolidation
With increasing competition, industry consolidation is taking place not only domestically, but also increasingly regionally, as companies seek growth and scale. Consolidation, as witnessed in the banking and telecommunications sectors, in turn creates opportunity, but poses challenges to corporate management.

Emergence of regional players
A new league of leading Asia-Pacific companies is emerging, as corporate ‘winners’ outgrow their home markets and seek regional expansion opportunities afforded them through market deregulation. Companies such as DBS, Hutchison Whampoa and SingTel have become regional and may become global players in their industries. Asian multinationals are now a reality and will continue to grow.

Globalisation
Cost and margin pressures are not the only drivers of globalisation. The investment industry has also become a global business. Many locally listed companies have shareholders based across the world with access to information on industry peers and global markets, and with high expectations for corporate transparency and accountability.

Corporate governance
With Asia’s financial crisis and the more recent US corporate scandals shaking investor confidence worldwide, good corporate governance has become a true necessity and key differentiator. Capital structure, capital management and organisational efficiency are back in focus, prompting many companies to review their position and embark on restructuring processes to improve transparency and their ability to attract investment.

In this climate doing nothing is not a viable option. With the challenge for corporates to compete effectively and successfully for customers and capital, the need to restructure, refocus and reposition has become a necessity. More and more companies are using M&A as a strategic tool.

And as the investment industry has globalised, an increasing number of companies – and governments – leverage the experience and reach of international investment banks for restructuring, benefiting from their

• insights in global industry developments;

• expertise in capital structuring and credit advisory;

• advice on capital raising to fund any part of a transaction; and

• access to international institutional and strategic investors.

Investment banks add value to many aspects of restructurings and M&A transactions (see Table 1), particularly to the increasing number of cross-border transactions, which drive companies to seek the most comprehensive legal and financial advice they can find.

Table 1: How Investment banks add value in M&A and restructurings

Table 1: How investment banks add value in M&A and restructurings. Source Morgan Stanley, 2003

What types of restructuring and M&A transactions can we expect in the region? In our view, and as outlined in Table 2 (see overleaf), we will see:

• domestic consolidations in all markets in the region, with banks and telecommunications leading the way;

• an increasing number of off-shore acquisitions and strategic investments by Asian, US and European multinationals in Asian companies; as well as

• single-company restructuring efforts, especially amongst the region’s conglomerates.

Not surprisingly, China will continue to be an important factor for the region’s economic development, and will become a much stronger focus for the M&A market – for two reasons:

• China’s ever-expanding, already massive domestic market will continue to attract a large number of international companies across all sectors. Several multinationals have recently made investments/acquisitions in China (Anheuser-Busch, SAB Miller, Gillette, etc), and this is a trend that will continue.

• The large pool of low-cost and increasingly highly-skilled labour for manufacturing, but also for outsourcing/relocating other aspects of the value chain such as R&D and services. Huawei’s alliance with 3Com, and ongoing developments in the automotive sector with multinationals such as GM and DaimlerChrysler, are good examples.

Asia-Pacific’s diverse markets often appear to present investors and companies alike with a maze of legal, regulatory, accounting, financial and cultural challenges. Being well advised and well assisted is therefore of utmost importance, especially as the cost of failure is usually too high. We hope this guide will go some way towards assisting you in your restructuring efforts, M&A or strategic investment decisions.