Indonesia-listed firms sit on $70b cash but perform limited M&A activity: Bain report

Photo: REUTERS/Garry Lotulung

Despite sitting on a huge cash pile of $68.6 billion as on 2016, Indonesia-listed companies remain the least active acquirers among their Southeast Asian counterparts, a report by management consulting firm Bain & Co shows.

This is because organic scale-up has been a powerful lever in Indonesia given the exciting growth trajectory across sectors, Bain partner and head of financial investors practice in Asia Pacific Suvir Varma said. Indonesian corporates have been able to deliver material earnings growth on organic growth alone.

“Indeed, this happened for many years in an environment of higher interest rates than BI tries to maintain today. Successful M&A requires investing in building new muscles, which can seem daunting,” Varma said in an interaction with DEALSTREETASIA.

However, as growth in Indonesia reaches moderate levels, he predicts that corporates will need to start thinking about pulling other levers to deliver the earnings growth that shareholders expect.

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The Bain report also found that Indonesian firms focus more on domestic transactions than regional opportunities.

Between 2012 and 2016, Indonesia saw $45 billion in value of domestic M&A activities, about 46 per cent of which were done by foreign strategics – mainly Japanese and Chinese strategic investors.

While focusing on building a defensible leadership position in Indonesia makes sense given the huge domestic market potential, Varma said, the key is ensuring it is an intentional choice, not a choice made by default.

“Furthermore, while focusing on Indonesia in the next short-term, it’s important to keep an eye out on international opportunities to plant the seeds early for the next stage of growth. It also depends on what is the extent to which the company has already managed to consolidate its sector in Indonesia. Many SE Asian companies that have expanded internationally successfully have already built strong leadership positions in their sectors in their home country,” he stated.

The next question would then be: do these companies need to start building capabilities so that over time they can acquire the muscle for overseas deals?

Varma argued that experience from other markets would show that it’s much better for a business to start doing small things overseas even though the core is in Indonesia. In time, the business will be ready to compete and do M&A deals on a regional, even global level.

“If there is so much cash in the balance sheet, and there’s clear opportunity to be seen in some of the other markets, then maybe it’s better for some of the Indonesian corporates to start doing more deals overseas as opposed to only domestically,” Varma said.

Varma predicted that Indonesia is likely to remain top-of-mind for investors interested in Southeast Asia. The challenge, he said, will be finding quality assets at reasonable valuations.

Consumption still drives deals in Indonesia

Although tech and internet-related deals have been making headlines for Indonesia, consumer-driven businesses overall are still leading the country’s investment activities.

Indonesia is predicted to have 37 million new consuming households by 2030, with 29 per cent of its GDP coming from mid-sized cities. About 40 per cent of Indonesia’s gross value added will be services.

Usman Akhtar, Bain partner and head of financial investors practice in Indonesia, said Indonesia remains a very important and attractive location when it comes to consumption story. The country has the largest number of consuming household by the long way, and has the fourth largest population in the world.

“It is still very much true that a lot of the deals that have been done by corporates and financial investors recently are in the consumption space,” Akhtar said in Jakarta.

Some of the biggest private equity names have made billions from Indonesia’s convenient stores, hospital chains, feminine product producer, department stores, and multi-finance. CVC Capital Partners holds Linknet, Matahari, Softex, and Siloam as its most valuable Asia portfolio, while Temasek counts Indomaret, Hypermart, Happy Fresh, and Lazada.

Bain also noted that there is tremendous interest in Indonesia’s new digital economy, which while still nascent, continues to grow rapidly. Tencent’s JD.com recently announced to participate in Traveloka’s $500 million funding round, followed by Alibaba Group leading a $1.1 billion round into Tokopedia. Consumer app Go-Jek is reportedly raising $1 billion from existing and new investors, while its rival Grab is targeting to raise a total of $2.5 billion from Softbank and Didi Chuxing.

Also Read:

Exclusive: Go-Jek, Grab, Traveloka & Emtek in race to buy digital payments firm worth $20m

Thai Kasikornbank buys 10% stake in Indonesia’s Bank Maspion for $20m

China’s JD.com invests $100m in Indonesia’s Go-Jek amid SE Asia push

Exclusive: Indonesia’s GMF AeroAsia sets capex at $400m to hit $1b revenue by 2022

Indonesia: Alibaba leads $1.1b round in e-commerce major Tokopedia

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.