Asia M&A forum 2019: key takeaways

Author: IFLR Correspondent | Published: 8 Mar 2019
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Activity between China and the USA

The US/China trade war and Cfius notification process is creating a lot more uncertainty for deals;

Deal scrutiny in some areas, such as real estate and logistics, can be surprising, so every transaction needs to be looked at carefully;

Chinese private equity consortia not afraid of deals in contested sectors;

Despite scrutiny, the music hasn’t stopped on US/China deals;

The deleveraging campaign in China is motivating over-acquisitive Chinese companies to offload assets;

Strategies for deal protection include break fees, reps and warranty insurance, careful analysis of Cfius documentation, and motivating sellers with bonuses for successful deals;

It’s important to think about bridge financing and how to get money offshore for deals with capital controls in China.

Driver differences between private equity and strategic players

Private equity funds focus more on how to exit, which cycle to exit, and who potential buyers are, whereas strategic players look at the best synergies with the company;

Management assessment is important in China as the country is still developing a base of executives;

Local entrepreneurs are a good option to consider as they are more willing to get their hands dirty compared with those with multinational company work experience;

China has a growing number of ageing entrepreneurs with family businesses looking for succession, which poses opportunities;

Southeast Asia is an increasingly attractive area to focus on.

What is driving tech deal activity?

In Asia, awareness of data privacy is low compared to the EU and north America, which creates big potential opportunity for those in sectors that focus heavily on monetising user data;

A number of Asian countries are experimenting with fintech regulatory sandboxes, and blockchain technology is here to stay;

Second-generation founders in family businesses are increasingly integrating technology;

Non-technology companies are buying more into technology companies, but issues of cultural and technology gaps are popping up;

The intersection of global data privacy laws is an area to keep an eye on.

Maximising distressed M&A opportunities

India’s bankruptcy code has created M&A opportunities in distressed assets;

A new rule preventing promoters of distressed companies from bidding on businesses in the bankruptcy process is pushing up valuations;

Compared to China, India is opening up its distressed market to international investors more;

Indonesia’s new 270-day workout rule has been hijacked by players in the market, with some bidding on fictitious claims.

Country focus: India

M&A opportunities are abundant in the technology sector, especially in fintech, as India recently put in place the Aadhaar identification system for residents and payments are becoming more popular;

It’s important to consider the perceptions of the government of certain sectors, especially regulated ones;

The Indian government has recently relaxed ownership control limits in insurance to 49%;

Stakeholder management needs to be looked at – aligning governance structures and mutually agreeing on CEO are both key.

Country focus: Vietnam

A growing middle class and young population are fueling the growth of the Vietnamese economy;

The government is interested in the privatisation of state-owned enterprises;

Trade liberalisation and efforts to resolve debts are creating more M&A opportunities;

M&A deals totaled $9.9 billion in 2018, up 160% on 2017;

Real estate is a popular sector for foreign investors, as is retail and consumer goods;

Interest is coming especially from China, Thailand, Singapore, Japan, Hong Kong and South Korea.

Mock negotiations of today’s most contentious M&A elements

Acquisitions of venture-backed US companies are typically structured as reverse triangular mergers, where the buyer creates a new, wholly-owned subsidiary that disappears into the target on closing date;

Buyers strive to include catch-all representations and warranties such as full disclosure and no undisclosed liabilities representation;

Strategic acquirers of venture-backed companies in the US typically rely on post-closing indemnification rights to get compensation for inaccurate reps and warranties in the merger agreement;

Some buyers prefer using indemnification escrows over reps and warranty insurance due to potentially important exclusions in coverage;

M&A deal point studies are increasing but many have skewed survey samples;

The US’ Securities Exchange Act’s Rule 10b-5/full disclosure representation, materiality standard in the accuracy of representations closing condition, and exclusion for consequential damages are all common points for negotiation between buyers and sellers.

Escrow in the M&A structure

Uncertainty from Cfius and the approvals processes on the China side are both drawing more interest in escrows in US/China deals;

In southeast Asia, antitrust risk and challenging local regulatory approvals, especially in financial services deals, are also adding challenges;

The PRC tax rule (circular seven) is prompting use of tax escrow to satisfy regulatory requirement;

Technology, private M&A and founder sale deals are increasingly making use of escrow accounts;

Most commonly holdback escrows are for purchase price adjustments and indemnity;

Use of multiple escrows across jurisdictions can help with speed, flexibility and reliability.

How to succeed in energy and natural resources M&A

Don’t underestimate the potential for renewable energy in Asia even though it is a burgeoning sector compared to north America and Europe;

Financing is challenging for renewable energy because scaling up small projects is time-consuming and due diligence is expensive;

There is a lot of money going into renewable energy globally, but it’s important to get commercial structures right, build up packages and eliminate regulatory disconnects;

India and Australia are seeing large transactions in projects, especially in solar energy. Vietnam also shows huge potential;

Use of reps and warranties insurance has exploded, especially for private equity funds investing in energy;

Bidders are increasingly using insurance to make bids more attractive.

China and ASEAN: at crossroads in trade and investments

Most foreign direct investment (FDI) is running through Singapore into Indonesia in ASEAN;

Wired and online middle class growing and companies such as Alibaba and Tencent are increasingly interested in private enterprises to expand in southeast Asia;

20% of FDI in Asia is within Asia, especially from China and Japan, with private equity being a significant force;

Technology, consumer products and retail are all key sectors of interest;

The Belt & Road Initiative is a key driver of Chinese investment into the Philippines, with China targeting sectors such as clean energy and infrastructure to meet basic needs;

Impediments for FDI include new policies on foreign exchange and ownership, and changes in administration.

Emerging markets

Financial due diligence is an issue for M&A deals in the Philippines, especially private companies;

Litigation issues and lack of information in the diligence process are key challenges in Indian transactions;

Indirect transfer taxes are not included in reps and warranty insurance due to uncertainty;

Local advice for local jurisdictions is important in the diligence process;

Sectoral guidelines, such as licence requirements, need to be carefully looked at in countries such as India;

Reps and warranties insurance is increasing in emerging market jurisdictions in Asia to aid clean exits;

Local protectionism mechanisms such as merger control regulations are emerging in Asia, such as the Philippines, but regulator still lacks the resources to handle approvals efficiently.

Unsolicited/unwanted takeovers

2018 was a strong year for US hostile M&A volume due to the availability of cash;

Hostile takeovers no longer carry the same stigma they used to following the prevalence of institutional investors in US companies, erosion of takeover defences and rise of proxy advisory firms;

Hostile takeovers are less common in Hong Kong though as many companies are family-owned and or built from scratch, plus the lingering stigma of hostile takeovers in Asian culture;

The Securities and Futures Commission (SFC) in Hong Kong has a goal to protect minorities and tends to be more comfortable with global funds but less so with smaller ones, and will ask more questions of private equity;

In Hong Kong, options for target that doesn’t want to be taken over are: use the media to play down the value of the company, hold the bidder to a no-increase statement on price so it cannot be increased to push deal through after it’s announced, and consider regulatory approvals such as antitrust elements that are needed before the deal can go through.