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Activity in Asia-Pacific’s M&A market reached record highs during 2014 with industry experts agreeing the lucrative trend will continue. With global market players targeting Asia Pacific with interest and confidence, the IFLR Asia M&A Forum will provide M&A stakeholders with key know-how on developments and trends in transactions, regulatory and market practices. Keeping abreast of the fast-changing landscape to succeed in this market has never been so important.
Against this backdrop, this forum will bring together leading counsel from corporates and banks with their top private practice peers to demonstrate the best methods and techniques to close deals. This comprehensive two-day forum will be the must attend event of the year.
Scroll down to check out the KEY TAKEAWAYS:
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.
Frenemies: best practices in JV governance, competition and exit strategies
- Chinese companies are looking to the European markets, and the value proposition has been compelling
- JV parties must be aware of EU competition law; they must be self-standing entities and not rely on the partners for key support. Failure to do so could trigger anti-competition issues
- It’s important for the JV to be established in a jurisdiction where the protection the parties are seeking is recognised by courts
- From a European perspective it’s best to include the clauses that really matter in the bylaws rather than the shareholders’ agreement. If there is a breach of the shareholders’ agreement, the party is entitled to damages but is unlikely to get an injunction in a court
- Veto rights exist to remind the majority shareholder that the minority shareholder is involved, but alternatives include cooling-off clauses, move-up clauses and side-note clauses.
Best practices when managing the M&A auction process: strategies for buyers and sellers
- There are still very few true auction processes in Asia; instead they tend to be truncated auction or sales processes
- Sellers are able to control who is able to bid as well as the information flows. It’s best to give information in stages
- The biggest hurdle to auction processes can be entrepreneurs themselves, who can be focused on headline price versus other terms that could add value
- More counterparties add completion risk, and could chip away at the headline price – regardless of how attractive it looks initially
- Warranty and indemnity insurance is becoming popular in Southeast Asia, and can make bids more attractive. Buyers may be required to pay for coverage in auctions for high-quality assets.
Know your ABCs: Asia-outbound opportunities in Argentina, Brazil and Chile
- Argentina, Brazil and Chile are very different markets although they’re in the same region; while Argentina is facing sovereign debt issues, Chile is investment-grade
- Buyers from Asia – not only Chinese companies but also those from Japan and Korea – are looking to natural resources and agriculture assets in these countries
- In particular Chinese companies are looking at oil and gas in Argentina – particularly shale oil and shale gas – and infrastructure in Chile
- Bilateral investment treaties and free trade agreements are helpful when investing – and if necessary, enforcing – in these jurisdictions.
Developments in dealing with conflict of interests in M&A
- There are cultural and jurisdictional differences between different regions and countries, so banks must create a customised or fact-pattern-specific solution
- Aside from looking at external conflicts, counsel must also consider conflicts between teams within the bank
- Clients will sometimes say that they don’t have issues with a conflict, but banks won’t be able to carry out the transaction regardless. That comes down to reputational risk and regulatory concern
- Regulators around the region have sharper teeth, and as they become more sophisticated, they are increasingly focussed on conflicts.
Sanction restrictions and the impact on your business
- Sanctions are now targeting actual individuals and entities that the EU and US governments feel that are most responsible for certain issues, and that’s more difficult for financial institutions to monitor
- Lawyers and in-house are focussing on sanctions issues on the client on-boarding side
- There have been no major enforcements involving the financing of transactions that could be viewed as contravening sanctions, but no bank has the risk appetite to be the first
- It’s unclear whether Asian countries will implement sanctions regimes, but China has followed the example of other US regulatory regimes – including its anti-corruption and anti-trust regimes – in the past.
Asia M&A Forum Advisory Committee 2015
IFLR would like to thank the Asia M&A Forum Advisory Committee for their contribution:
Managing director and head of legal & compliance
Sullivan & Cromwell
Baring Private Equity Asia
||Suet Fern Lee
Partner, Stamford Law
Executive director and head of investment banking legal – Asia, Morgan Stanley