Asia M&A forum day one: key takeaways

Author: IFLR Correspondent | Published: 10 Mar 2015
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In case you missed the first day of IFLR’s Asia M&A forum, being held at the JW Marriott in Hong Kong, here are the key takeaways from today’s panels.

Improving cross-border coordination: best practices in diligencing and allocating corruption risk in M&A

  • It’s important for counsel to align management’s business interests with compliance due diligence practices;
  • Expect more legal risk in the region, particularly in Indonesia and Korea;
  • The process of due diligence largely depends on the scope of your deal. Assessing reputational risk is one of the best and most cost effective ways to begin the process;
  • The speed of transactions with the growth of M&A auctions is becoming a huge problem and has led to many deals collapsing;
  • The recent opinion released by the DoJ 14-02 highlights the need to distinguish improper conduct from unusual legitimate reasons.

New wave of M&A in Vietnam

  • There is an optimistic outlook in the real-estate and investment funds sectors following disappointment in Vietnam’s failure to implement WTO commitments;
  • IFC’s plan to double its annual investments in Vietnam will look to jumpstart the market and is expected to see banks’ lending again along with more compliance and transparency;
  • The government is taking good steps to attract investment into the country, such as its privatisation programme – though implementation is still lacking;
  • M&A is increasingly gaining appreciation by locals and is expected to gain momentum;
  • It is expected that valuation will become much higher and deals will be harder to complete after TPP and FTA negotiations are completed.

Pan-Asian M&A: trends and challenges

  • There is an increasing outflow of capital from China caused by many years of FDI into growing industries and pent up capital;
  • Under leadership initiatives by the Chinese government, the quality of growth companies will be a primary focus;
  • In Southeast Asia there is a trend of new money investing outbound, witnessed by recent deals such as Tokopedia;
  • The Asean initiative is a positive movement, providing an extra regime of protection for Asean related investments not afforded by bilateral investment treaties;
  • Recent changes to the China Foreign Investment Law create a level playing field that’s improving the quality of investments.

Opportunities in China outbound dealmaking

  • Chinese outbound deals have increased by more than one-third in terms of deal number since 2013;
  • Chinese companies have shifted from acquiring raw materials and energy assets, and now are also looking at high-tech assets, foreign brands and real estate;
  • Onshore deals don’t bring a lot to the table, and offer very little competitive upside. In contrast, offshore deals offer brands, profitability, technology and new markets;
  • While onshore acquisitions can be financed through A-shares, the market must improve before outbound deals can be financed in the same way;
  • The cultural gap between Chinese and Western buyers’ practices has been narrowing, and in particular, Chinese buyers are increasingly using intermediaries.

Exit this way: protecting your deal and effective remedies

  • Dealmaking is about relationships, but it’s also important to ask sellers the hard questions in order to fully understand the business;
  • Material adverse change clauses may get watered down by negotiation, and it’s ultimately more effective to include specific risks as negotiated reps in the closing conditions;
  • Warranty and indemnity insurance hasn’t really been seen in Asia, and panellists agreed it should be a tool rather than a panacea;
  • Deposits that range between five to seven percent are increasingly common – and are much higher than break fees – and are a result of Asia’s seller-friendly market;
  • Lawyers must discuss dispute resolution clauses with their clients – they may want to include either courts or arbitration, and in arbitration, that could either be in China, Hong Kong or Singapore.

Acquisition financing trends

  • Local banks are providing solutions in terms of pricing, leverage and structuring in order to compete with international banks;
  • To tap the US term loan B market, the issuer should have a sponsor in the US that investors are familiar with, should be in an industry that’s in favour, and must be in a jurisdiction with a functioning and predictable legal system;
  • Cov-lite is popular in the US and Europe, but there are still fairly stringent covenants in Asia;
  • In Asia it’s important to be careful structuring deals because each jurisdiction’s regime is very different; the restricted industries and financial systems will be factors;
  • The new Safe guarantee rules may change the structures of leveraged buyouts and acquisition financing more generally in China.

Post-acquisition integration obstacles

  • Companies must know the synergies behind the acquisition before the deal is closed;
  • Multinationals are starting to move away from using gold-plated US compliance standards in other jurisdictions, and instead are using the lowest common denominator;
  • It’s important for companies to have an objective in mind when they acquire companies, and get what they want immediately – whether that is the market, the supply chains or the customer databases;
  • Joint ventures can be risky, especially since partners can quickly become competitors;
  • Employment issues can be difficult, especially some courts in the Asia Pacific can be more sympathetic towards employees than employers.