Growing demand for assets from Asian companies has intensified global competition for acquisitions.
Growing demand for assets from Asian companies means that competition for acquisitions will intensify, both in developed and rapid-growth markets.
This could push up valuations, particularly in highly competitive markets like China, where many developed-market companies are trying to establish a foothold.
The scale of M&A ambitions from some Asian companies can be staggering. In 2011, Chinese state media reported that the China National Offshore Oil Company (CNOOC) planned to invest more than US$151b over the next five years.
This is an astonishing figure, particularly when one considers that the largest single M&A outbound deal from China from the previous year was Sinopec’s US$7b acquisition of Repsol’s Brazilian subsidiary.1 CNOOC has already put its war chest to good use with its US$15b bid for Nexen.
With global M&A activity still sluggish, competition for good assets that come to market can be feverish. In addition, developed-market companies are increasingly finding themselves up against new Asian competitors.
Earlier this year, for example, potential acquirers from Korea, Japan and the US targeted Elpida Memory, a bankrupt Japanese company that makes chips for Apple’s mobile devices. US-based chipmaker Micron ultimately won the race, agreeing to acquire Elpida for US$2.5b, although Elpida bondholders have subsequently contested the sale.
Asian companies’ vigorous hunt for assets comes as good news at a time when many companies in developed markets are seeking to focus on core competencies. Ernst & Young’s most recent Global Capital Confidence Barometer found an increase in the proportion of companies seeking to make divestments over the next 12 months from 26% to 31%.2
Have a well-developed competitive intelligence
Present yourself as an acquirer of choice
Structure acquisitions properly
Developed-market companies seeking to make acquisitions must make sure that they have a well-developed competitive intelligence. They also need to present themselves as acquirers of choice.
On the divestment side, developed-market companies that are thinking of selling non-core assets need to cultivate a thorough understanding of what Asian companies are looking for, and ensure that they can effectively manage the complexities of these deals.
Although Asian companies have become more sophisticated at handling these transactions, deal failure remains a risk. “Sellers in developed markets need to think carefully about the due diligence process, and counseling the buyer about what will be expected may become an important part of the mix,” says Greene.
Furthermore, structuring acquisitions properly can improve a potential acquirer’s competitive position when bidding for assets. For example, thinking about how to make the deal efficient from a tax perspective can make a substantial difference.
If the company has many intellectual property assets, for instance, acquirers need to consider where those assets need to be located because different tax rates across jurisdictions will have a significant impact on profitability.
Tax can be a component of what makes an asset or business attractive to a potential buyer. “If a company is looking to divest a non-core business or assets, it should consider structuring it in a tax-effective manner,” says Yvonne Metcalfe, a Principal in Ernst & Young’s Tax Effective Supply Chain Management practice.
“This can help to drive interest in the business from an after-tax profitability perspective and could enhance the seller’s ability to secure a higher price.”
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.