Asia’s Renewed Deal Frenzy


The Nikkei’s purchase of Britain’s Financial Times may be a sign of bigger things to come, with Asia set to remain at the center of global merger and acquisition (M&A) deals through 2018, analysts say.

On July 23, the Japanese business daily outbid Germany’s Axel Springer media group to buy the venerable British newspaper from Pearson group for $1.3 billion, a record acquisition for a Japanese media organization. According to Bloomberg News, the Nikkei won the deal by paying a multiple of 35 times adjusted operating profit, making it “hard to argue with the price.”

Japanese companies have already shelled out a record $28 billion worth of overseas acquisitions in 2015, including Japan Post’s $5 billion purchase of Australia’s Toll Holdings and Itochu’s similarly sized deal for a stake in China’s Citic.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

But this could be the tip of the iceberg according to research by law firm Baker & McKenzie and Oxford Economics, who have predicted global M&A will rise from $2.7 trillion this year to exceed $3.4 trillion by 2017, with much of it involving Asia.

“Despite a slowing in China’s GDP growth, we expect the region’s strong economic fundamentals to spur a renewed upturn in transactions from 2016 to 2018. A resurgence in cross-border transactions, including outbound activity by the Chinese into neighboring Asian countries, will drive this projected increase,” the report said.

Developed economies will drive much of the growth in transactions, aided by cheap money policies and low oil prices. However, many smaller and emerging economies are seen showing the biggest growth in deal activity, rising by 56 percent to an estimated $678 billion by 2018, up from $435 billion last year.

The value of cross-border transactions is expected to rise by 17 percent this year to exceed $1 trillion, representing 38 percent of total deal activity.

China and Hong Kong top the list of forecast M&A activity growth over the period through to 2020, with expected gains of 153 percent and 118 percent respectively, while fifth-ranked India is set to post a 72 percent rise and eighth-placed Indonesia a 56 percent jump.

Increased privatizations of state-owned enterprises are expected to offset a slowing economy in China, with its M&A deals rising from $183 billion in 2014 to a forecast peak of $290 billion in 2018.

Japan is also seen enjoying an uptick in activity, rising from around $65 billion worth of M&A deals in 2014 to a peak of $91 billion in 2017, aided by the Bank of Japan’s drive to combat deflation through cheap money policies.

In initial public offering (IPO) activity, Vietnam ranked third behind Spain and Egypt with a forecast 208 percent growth over the same period, while Thailand placed eighth with an expected increase of 84 percent.

Overall, Asia-Pacific IPOs are expected to accelerate, peaking at $87.4 billion by 2018 as the regional economy expands and companies seek to raise capital on domestic markets from the growing middle class.

Asia also rated highly in “transaction attractiveness,” an index based on past activity and a weighted average of 10 economic, financial and regulatory drivers of M&A and IPO activity.

Among the top 12, Hong Kong ranked first with Singapore second, while Australia and Japan placed equal 10th along with the United States.

Pharmaceuticals and healthcare are seen continuing to drive global M&A, with other key sectors including consumer goods and services, technology and telecommunications, along with the energy and financial sectors.

“Many U.S. and European companies have accumulated large cash balances available for acquiring new businesses,” said Tim Gee, Baker & McKenzie’s global head of M&A.

“Financial sponsors also have the potential to boost global transactions, with private equity firms sitting on a record $1.1 trillion in uninvested capital. Cross-border transactions will play a significant role as companies look to gain market presence in high growth markets.”

However, transaction peaks in 2017 and 2018 are not expected to match those before the global financial crisis, since “the global economy is not experiencing the same bubble-like conditions as prior to 2007.”

While the report assumes global economic activity will rise by an average growth rate of 2.9 percent over the next three years, compared to an annualized 2.5 percent since 2012, it noted a number of downside risks. These include Greece exiting the Eurozone, Britain leaving the European Union, the U.S. Federal Reserve hiking interest rates faster than expected and a “hard landing” in China.

“The Chinese authorities are engaged in a tricky balancing act of trying to maintain strong growth while dealing with financial imbalances and an overheated property market. The increase in total debt from 176 percent of GDP in 2007 to 264 percent of GDP by 2014 illustrates the government’s challenge in maneuvering the economy onto a more sustainable path,” the report warned.

“Investment could quickly collapse if financial stress erupts, resulting in GDP growth falling below 4 percent. In such a scenario, Chinese outbound transactions activity would fall sharply, hitting financial activity throughout the Asia-Pacific region, particularly in Hong Kong.”

Overall, the outlook beyond 2017 is less upbeat, as markets adjust to tightening monetary conditions.

“As the global economic recovery continues, central banks will begin to raise interest rates in developed markets, leading equity markets to decline. As the world then adjusts to higher benchmark interest rates and the end of easy credit, there will likely be a moderate slowdown in global deal-making activity in 2018 through to 2020,” the report said.

Similarly, IPO activity is expected to peak in 2017, with a balance of $233 billion and nearly $90 billion between domestic and cross-border deals, including continued growth in emerging market-based companies seeking listings in Western markets, such as the $25 billion IPO of China’s Alibaba on the New York Stock Exchange.

In the meantime though, with China and Japan eager to invest overseas and the West keen to grab a slice of the action, the M&A wave should keep chief executives, lawyers, bankers and financial journalists busy for some time yet, as Asia’s companies expand from their own backyards onto the global stage.

Sign up for our weekly newsletter
The Diplomat Brief