Snapshot of ASEAN M&A trends: Early indicator of business confidence

Social Media and Social Business Acquisitions Galaxy by Dion Hinchcliffe

The world’s largest corporates are expected to show greater appetite for mergers and acquisitions (M&A) in 2105, and they will have more capacity to fund prospective transactions, said the KPMG report, released last week.

It attributed the increased appetite to a seven percent jump in predicted forward price to earnings ratio during last year.

Another measure of corporate appetite – the ability to fund transactions, measured by forecast net debt to earnings before tax, depreciation and amortisation (EBITDA) – is expected to improve 14 percent over the next year, with the largest companies paying down debt and stockpiling cash, the KPMG report added.

“The data indicates a return of confidence in the M&A markets. We are seeing an upswing after almost three years of decline,” said Vishal Sharma, KPMG’s Asia Pacific Head of M&A.

“This confidence will drive M&A transactions activity, with both deal volumes and deal values moving in a positive direction during the second half of 2014,” he added.

After declining in the recent years, both deal volumes and values are also moving up.

Trailing 12-month statistics show values for worldwide completed deals rose from $2.09 trillion in January 2014 to $2.45 trillion in December 2014, while deal volumes rose from 28,733 to 29,511, during the same period.

Against the background of this report, what does the future hold for the M&A space? The questions is especially relevant in the context of the changing economic paradigm as the economic weight of the world shifts towards the Asia-Pacific (APAC) and Asian economies rise, while the Western economies decline,

How does this fit into the context of human capital that is flowing away from Europe, creating a talent crunch? Since the introduction of the Euro, Europe has suffered a net loss of qualified workers, with many shifting to the Asia-Pacific.

Prior to the Global Financial Crisis (GFC), the 15 countries that adopted the Euro as currency, experienced a mean net loss of 120,000 post-secondary educated workers per annum, mainly attracted by the United States. From 2000 to 2008, Italy lost around 1.5 million professionals, many of them possessed advanced skills.

The Eurozone crisis has only worsened this talent hemorrhage, with an exodus of professionals from Ireland, Italy, Greece, Portugal, and Spain; most seeking better opportunities abroad. About 100,000 skilled professionals leave Portugal every year, seeking jobs elsewhere. At the same time, worldwide, many baby boomers born between 1946 to 1964 are entering retirement – meaning an exit of senior managers with experience and expertise from corporations.

Also Read: MediaCorp rumoured to be seeking acquisition of KLN

 

Tech bubbles & Asian prospects

 

Where does this leave investors? The M&A market is an early indicator of business confidence, with minimal lags before purchasers enter and exit.

Buyer volatility is the key variable in the M&A market.

In Southeast Asia, business confidence is relatively high, driving the market for business sales and acquisitions over the past year, observed by the flow of Japanese capital in the region, the boom in e-commerce investments and the economic opening of Myanmar.

M&A activity has been progressively growing stronger, with numerous strategic moves by investment firms like Vertex, Infocomm Investments and Rocket Internet, generally engendering greater confidence.

By creating greater growth and stability, or the perception of it, in the startup ecosystem and other economic sectors, the investor confidence grows.

M&A activity is stronger, despite the continuing fragility of the global economy and the possible tech bubble emerging in Silicon Valley. Even if it is not a bubble but a matter of disparities in wages and human capital, according to the Wall Street Journal, Facebook’s acquisition of WhatsApp for US$19 billion in February 2014 and Twitter’s public valuation placing its market capitalisation at US$29.9 billion may have contributed to a distortions in valuation, impacting the M&A space.

Russell Hancock, president of Joint Venture Silicon Valley, commented: “I don’t see any kind of bubble. This is not 2000″, citing gradual growth in investments, positive job growth in Silicon Valley and diverse portfolios featuring Big Data and cleantech investments as indicators of a more stable market compared to the dotcom bust of 2000.

Emerging markets in Asia lead the pack, topping global growth projections until 2017. Bloomberg predicts the world economy will grow 3.2 per cent in 2015 and 3.7 per cent in 2016, after consecutively expanding 3.3 per cent in 2013 and 2014. China, the Philippines, Kenya, India and Indonesia, accounting for 16 per cent of global gross domestic product, are all predicted to grow more than 5 per cent this year.

The US and UK? Combined, they account for close to 25 per cent of global growth;with their economic growth predicted at 3.1 per cent and 2.6 per cent respectively, for 2015. The EU’s growth is predicted at 1.2 per cent, constrained by the economic turmoil of Greece while continuing to be anchored by Germany, which is predicted to grow 1.5 per cent this year.

Also Read: Rocket Internet backed Helpling acquires local rival Spickify in Singapore 

 

M&A in ASEAN

 

The spate of acquisitions by the likes of Google and Facebook in the US, as well as by Rakuten Ventures, Foodpanda Group and Rocket Internet globally and in the APAC region, have buoyed investor confidence. Strong M&A activity indicates market stability, vital to bringing buyers to the market.

Recent moves by the IDA and and its investment arm, Infocomm Investments, to open a $200 million fund targeted at startup ventures in Israel and California,  are strategic moves that tie them into key global startup ecosystem, as well as linking them to Singapore and the ASEAN region by extension.

In M&A markets, stable under-performance is superior to volatile growth and uncertainty, something which drives buyers away and has been present in the global cryptocurrency space since Q3 2014. Investors need to understand how target businesses are performing and their likelihood of future performance in the market.

Their evaluations of firms are impaired, especially when contrasted against a backdrop of volatility, where historic performance is irrelevant and future returns unknown and uncertain. This deters further investment, with the volatility attracting only sophisticated investors with the ability to bear a heavy loss, and speculators.

For example, in Indonesia and Vietnam, resources and manufacturing sectors have seen strong growth, allowing deals to be finalised. Meanwhile, Australia has seen its mining sector boom and agribusiness prospects improve, while manufacturing continues to slump.

However, M&A activity with niche manufacturers remain popular, especially those with substantial long term contracts and maintenance-related recurring revenue streams. Australian construction businesses are also performing more strongly due to a resurgence in housing and infrastructure development.

Meanwhile, Myanmar is in the midst of an investment boom, with ASEAN firms cashing in. The Directorate of Investment and Company Administration (DICA) stating that as of August 2014, foreign firms had invested in excess of $49.4 billion in several verticals that include, oil and gas, manufacturing, mining, hotels and tourism, transport and logistics, real estate, livestock and fisheries, agriculture, construction and services.

Also Read: Foodpanda raises $110m in latest round, Rocket gets controlling stake

 

The Long View

 

The long term picture for business sale transactions is positive, with the majority of baby boomers (now in their 60’s) and retiring. This creates a target-rich environment for strategic investors as senior managers and owners exit and seek to divest their equity in the business.

Industry_Life_Cycle
Image Credit: Wikimedia Commons

However, this is complicated by industry life cycles of rise and decline, which coincide with the exit of baby boomers from brick & mortar businesses in mature industries run on traditional business models, many of which are sunset sectors that have suffered long-term declines. Businesses being sold are usually acquired by purchasers familiar with emerging digital economies.

There is an emerging structural mis-match between the types of businesses that are for sale, and what purchasers are seeking for acquisition. Younger buyers are attracted to new business models and technologies. This will result in more traditional business models being discarded or otherwise adapted to account for the multi-sided online marketplaces of the Internet age.

Industry consolidators migrating into mature markets, usually capitalise on high volumes and strong demand, extracting efficiencies and profits from traditional low risk sectors. They prolong and extend the life cycles, building major industry groups as substantial assets they can either on-sell or retain for their dividends.

This can introduce innovations that extend and renews industries, with bolt-on acquisitions a key part of their purchases as they aggregate businesses. During the GFC they hibernated but have returned to cash in on the investment boom in Southeast Asia, with the possibility of mature sectors seeing extensive consolidation in the years to come.

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Image Credit: SuperTrac

According to a blog post by Tony Brown, its managing director, since 2008 the Australian M&A market were marked by :

  1. GFC – buyers leave the market en-masse and virtually overnight;
  2. Owners linger in the market and try and sell, based on old profits that are now meaningless;
  3. As profits and business values fall, owners also leave the market and retreat to their businesses to rebuild;
  4. Buyers start venturing back after the market has bottomed out and confidence starts to return. Many had their roll-up programmes interrupted and want to regain momentum;
  5. The 2013 change of federal government brings greater confidence and accelerates buyer activity.

Market instability from 2008 caused deal conversion rates (sales completions to total sale engagements) to drop. But a resurgence in buyers since 2009, buoyed by growing confidence, greater stability and market balance has returned the conversion rate to pre-2008 levels, according to Brown.

As more baby boomer businesses come into the market, with their owners seeking an exit, Asian investors and entrepreneurs may want to leverage on these opportunities to expand their portfolios, purchasing assets that can open up access to the mature markets of the West and leverage on their stronger currencies for future ventures.

Related Story: FoodPanda acquisitions are part of the larger Rocket Internet narrative

Image: Dion Hinchcliffe

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.