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.