EY sees slight cooldown in regional M&A transactions

09:00 | 08/08/2018

The mergers and acquisitions outlook across Southeast Asia has cooled down slightly after witnessing record-high deals in the past six months, according to the EY Global Capital Confidence Barometer, with numerous regional companies facing challenges in completing planned acquisitions.

ey sees slight cooldown in regional ma transactions
EY sees slight cooldown in regional M&A transactions, Source: internet

Confidence versus challenge

As per EY’s 2018 mergers and acquisitions (M&A) survey, entitled Global Capital Confidence Barometer, confidence across the regional M&A market remains strong, with some 75 per cent of the Southeast Asian companies surveyed believing in its improvement over time, up from 53 per cent six months ago. Nevertheless, 83 of these respondents admitted that they have failed to complete or cancelled a planned acquisition in the past 12 months.

The reasons for the failure, as cited by these companies, include competition from other buyers or disagreement over the valuation (54 per cent), concerns about competition or antitrust views (22 per cent), and intervention by activist investors (15 per cent).

According to Vikram Chakravarty, leader of EY’s ASEAN Transaction Advisory Services, although interest in conducting M&A in the region remains very high, internal and external pressures are impacting companies’ ability to complete deals. “A more effective and structured portfolio transformation may be necessary to ensure that deals are closed and are successful,” he said.

“Deal competition is increasing and evolving. Traditionally, corporate buyers have been dominating the Southeast Asian M&A market. However, we are now seeing an increasing number of private equity firms, which have significant dry powder funds to invest, looking to pursue high-value assets in the region,” he added.

With regards to Vietnam, following an active year with the withdrawal of state capital from state-owned enterprises (SOEs), M&A activities are seen to be cooling down this year, while the local stock market is in a technical correction phase that caused the VN-Index to fluctuate around the 1,000-point level for months.

“Vietnam has been a hot spot for M&A in the past few years, which gives domestic companies more options in finding a partner. Currently, medium-sized companies tend to seek strategic partners who can add value by providing management best practices as well as expertise in market expansion,” said Tran Vinh Du, EY Vietnam partner and leader in Transaction Advisory Services.

“Meanwhile, big local companies often look for global financial investors with big brand names to boost their reputation and plan for initial public offerings (IPOs). Accordingly, to a certain extent, small and medium private equity funds seem to have disadvantages in winning investment deals with good companies,” Du added.

More for less

For Vietnamese companies, and ultimately their counterparts in the Southeast Asia cluster, to prepare themselves for future M&A activities, portfolio transformation is viewed as the top priority, with 72 per cent of respondents agreeing. Through continuous assessment of current operations, risks, and opportunities, executives are looking for ways to identify strategic gaps in their current portfolios–something they will need to do more of if they want to boost their ability to see deals through to completion.

In addition, cloud computing and big data (39 per cent), distributed ledger technology such as blockchain (29 per cent), and artificial intelligence and robotic process automation (21 per cent) also feature prominently on the board agenda of the Southeast Asian corporations, which look to improve overall decision making and boost company performance through these technologies. As more companies adopt new technologies, 64 per cent of Southeast Asian respondents indicated that they are struggling to hire people with the right skillset.

“Digital transformation is driving companies to adopt a laser focus on portfolio transformation. Opportunities offered by new technologies as well as the potential threats posed by digitally savvy competitors are now key factors in businesses’ transformation plans,” said Chakravarty.

To support M&A plans from the corporate sector in the near future, Southeast Asian executives now demand more government spending on smart public infrastructure investment. 90 per cent of respondents see this as a critical driver for their M&A growth plans. This is much higher than expectations from respondents in the US (59 per cent) and across Europe, the Middle East, and Africa (69 per cent).

According to Chakravarty, governments in the region are focused on building smart cities, improving transport infrastructure, using new technology, and building digital eco-systems.

“With investments in the region, including those from China’s One Belt One Road Initiative, Singapore’s focus on smart nations and digital economy, and significant infrastructure budgets in other countries, we are seeing notable deal activity in sectors such as technology, utilities, automotive, and transportation driven by this investment and expect this trend to continue.”

Home sweet home

The top investment destinations among Southeast Asian respondents, as the survey found, are Malaysia, Singapore, Indonesia, Thailand, and Vietnam. Power and utilities, oil and gas, and industrials are the top sectors across Southeast Asia that look to make acquisitions. The automotive and transportation, technology, and life sciences sectors are also hunting for assets as they address the impact digital disruption has on their business.

In Vietnam, following the case of Vinfast, the automotive sector will definitely become a hot sector to watch, with major investments expected to materialise. Other sectors which have been in the centre of attention for the last few years such as food and beverage, consumer-related industries (especially light manufacturing), and retail will also continue to be key magnets in the country’s M&A landscape.

Trang Nguyen

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