Enthusiasm for M&A remains stable in Southeast Asia

Despite more economic uncertainty globally and locally, Southeast Asian companies still have an appetite for M&A.

Conducted amid macroeconomic and technological uncertainty, the latest EY Global Capital Confidence Barometer sends mixed messages regarding outlook, causes and strategy among corporates in Southeast Asia. EY’s M&A survey of more than 220 executives across Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam finds that while most firms continue to see strong underlying conditions, they face pressure in higher input costs, thinning margins and an increasingly slowing economy.

Southeast Asia companies remain sanguine despite a slowing economy

Geopolitical uncertainties, such as trade tensions, have Southeast Asian executives feeling less confident in the global and local economies: just over two-thirds (68% versus 76% globally) believe that the global economy is growing, down from 76% a year ago (global down from 85% a year ago), and over half (53%) believe that the local economy is growing (down from 74% a year ago).

Despite being caught in the middle of global trade tensions, Southeast Asian executives maintain a reasonably buoyant outlook. A majority expect a resilient economic outlook for the region, with 61% not expecting an economic downturn in the near to mid term, compared to 54% of global respondents who share similar sentiments.

Resilient economic perspective stimulates a stable M&A appetite

This may explain the relatively stable desire to do deals. Forty-one percent of corporate executives in Southeast Asia (compared to 52% globally) indicate they plan to acquire in the next 12 months. Though the acquisition appetite is lower than global levels, it is just below the 10-year historical average of 42% for the region since the inception of the study in 2009.

This stable M&A outlook reflects shifting growth possibilities and acquisition ambitions in different markets across the region. The main drivers for pursuing acquisitions are access to new markets (23% versus 21% globally), acquiring technology, new production capabilities or innovative start-ups (22% versus 21% globally) and acquiring talent (21% versus 20% globally).

Even as Southeast Asian companies are pursuing M&A to accelerate growth, now may be the time to seize the opportunity to restructure to focus on the business and reduce costs while they still have strong balance sheets. This could also present an opportunity for them to shed lesser-performing business units and acquire relevant assets and capabilities. The macroeconomic headwinds are real, yet we are still waiting for Southeast Asian companies to readjust accordingly.

Digital and technology imperative drives investment activity

The search for technology and talent is driving deals as 45% of Southeast Asian respondents (versus 65% globally) say they plan to allocate more than 25% of their total investment capital to technology, with a predominant focus on solutions that drive top-line growth. More than half of executives (52% versus 56% globally) will invest in technology through acquisition, joint ventures or external venture funds.

At the same time, more than two-thirds of respondents (67% versus 61% globally) are experiencing difficulties securing the right skills and talent. In particular, companies face the biggest challenge with hiring or retaining talent with specific technical skills relevant to the core business (26% versus 37% globally).

Yet although Southeast Asian companies, like their global counterparts, acknowledge the opportunities and threats of digital disruption, there is no clear consensus on the approach or the level of change required. Currently, the push is mostly around productivity enhancements, but fundamental strategic shifts have yet to come. As the pace of digital and technology continues to accelerate, Southeast Asian companies need to be rethinking operating models and pushing to create transformed or new true digital businesses.

Increasing competition fuels deal intentions

The most significant challenges for growth plans among Southeast Asian respondents are increasing competition from existing competitors (20%), shortage of talent or skills required (15%) and new market entrants (15%). This is different from global respondents, who identified pricing and margin pressure (14%), increasing competition from existing competitors (14%) and new market entrants (14%) as their most significant challenges.

Continuous industry consolidation across the region, access to private capital and the emergence of start-ups with a wider industry focus are reinventing the competitive landscape. The competition extends beyond customers to talent and skills, posing another significant challenge to their growth plans. Meanwhile, regional consolidation has continued to fuel M&A activities.

Despite the increase in competition, Southeast Asian companies should use the current global headwinds as an opportunity to accelerate their overall industry consolidation and adopt digital, not only to improve productivity but also to build future-proofed business models.