- 45% of executives in Asia-Pacific plan to acquire in the next 12 months – above the 42% historical average for the region since 2010
- Robust deal appetite despite 52% citing geopolitics and regulation as potential threat to M&A
- 76% see increased competition for assets from corporate investment funds and private equity
The mergers and acquisitions (M&A) appetite in Asia-Pacific remains resilient amid rising competition for assets and geopolitical disruption, with 45% of corporate executives in the region planning to acquire – marginally down from 46% six months ago – and above the historical average of 42% since 2010. This is according to the Asia-Pacific edition of the 19th EY Global Capital Confidence Barometer (CCB), a biannual survey of more than 2,600 executives across 45 countries, of which 760 are from the region.
The survey – conducted at a time of heightened geopolitical protectionism globally that has significant implications to many parts of the region – shows Asia-Pacific dealmakers are looking for growth through M&A while also acknowledging risks. More than half (52%) see geopolitical and regulatory changes as the biggest potential risk to dealmaking, while 29% also see this as a risk to the growth of their core business.
Harsha Basnayake, EY Asia-Pacific Strategy and Transactions Leader, says:
“Asia-Pacific companies are encountering headwinds from ongoing trade disputes as well as rising US interest rates – but dealmakers in the region remain resilient. Achieving scale through mergers is the answer to slower growth for many companies. While many will be cautious as the geopolitical landscape shifts, others will not lose focus of intra-regional opportunities across Asia-Pacific markets – the longer-term opportunities for growth are compelling for companies.”
One aspect fueling this resilience is increased competition for assets. In the survey, 76% of Asia-Pacific respondents cited increased M&A competition, where they see this competition coming from is split. Thirty-eight percent see competition most likely from private equity (PE) and 41% from corporate investment funds. Nearly a quarter (24%) of respondents indicated PE as a major theme in the M&A market for the coming year.
Basnayake says: “There are record dry powder funds globally and a proportion is being earmarked for Asia-Pacific markets. That will need to be deployed. Private capital has also been a good option for unlocking value by many listed, entrepreneurial businesses that have not attracted expected valuations. Some can provide very creative ideas when it comes to carve outs and deal structures.”
International dealmaking a priority despite growing nationalism globally
The first nine months of 2018 alone saw a 69% increase in total cross-border deal values among Asia-Pacific companies. And that trend could continue with more than half (55%) of Asian executives planning deals citing cross-border as a priority. This contrasts sharply with only 28% of global executives looking beyond their own borders for M&A.
Asia-Pacific companies are pursuing cross-border deals to secure their supply chains and gain access to local markets. The top five investment destinations for the region’s executives are China, the United States, Australia, Japan and the United Kingdom.
Basnayake says: “Cross-border expansion is a natural evolution for growing businesses. This has been seen in China, Japan and many of the mature Southeast Asian companies. Despite current geopolitical issues and related government regulation, companies are planning deals proactively to get ahead of the competition. They are looking to cross-border M&A to mitigate the potential impact of geopolitical disruption, secure market access and to protect against lower growth in their domestic economies.
Portfolio optimization comes to the fore
The complex environment is prompting Asia-Pacific executives to review their portfolios more frequently. The vast majority of executives (84%) are reviewing their portfolios at least every six months – far more than their global counterparts (66%). Just 15% of companies in Asia-Pacific review their portfolios once a year and only 4% continuously assess their book of business. As a result of portfolio reviews, more than half of companies (61%) have identified assets to divest due to underperformance or risk of disruption, which could see more assets coming to market in the medium term.
Deal fundamentals remain strong but some caution remains
M&A imperatives and macroeconomic fundamentals in Asia-Pacific for the longer term remain robust, with 86% of respondents expecting the global M&A market to improve and 78% expecting their local market to do the same in the next 12 months. The majority of executives (85%) in Asia-Pacific believe global economic growth prospects are improving, with only 4% predicting short-term market stability to decline and 3% predicting equity valuations to deteriorate.
Basnayake says: “We are entering a period when companies will have to balance growth ambitions with managing the risks on the horizon. Positive sentiment is fundamental for deal making and deal appetite. The trade and geopolitical tensions are testing that sentiment at the moment. Taking a longer term view recognizes the need to face up to disruption and capture growth opportunities in the current market. Offense in the form of M&A plays the best defense for the long term.”
View the survey online at ey.com/ccb and follow us on Twitter: @EY_Strategy and Transactions | #EYCCB
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About EY Global Capital Confidence Barometer
EY Global Capital Confidence Barometer is a biannual survey compiled by Euromoney Institutional Investor Thought Leadership of more than 2,600 senior executives from large companies from 45 countries and across industry sectors. This is the 19th biannual CCB in the series, which began in November 2009; respondents for the 19th edition were surveyed in August and September 2018. Respondents represented 14 sectors, including financial services, consumer products and retail, technology, life sciences, automotive and transportation, oil and gas, power and utilities, mining and metals, diversified industrial products, and construction and real estate. The objective of the Global Capital Confidence Barometer is to gauge corporate confidence in the global and domestic economic outlook, to understand boardroom priorities in the next 12 months and to identify emerging capital practices that will distinguish those companies building competitive advantage as the global economy continues to evolve. ey.com/ccb #EYCCB