A recent survey has shown that despite the downturn many companies are still expecting expansion – albeit in a very different way to previous years.
No sector of the world economy has been harder hit by the global financial crisis than the financial services sector (FSS). And while Asia is yet to see any of its FSS heavyweights go the way of Lehman Brothers, Freddie Mac or Fannie May, that’s not to say they aren’t experiencing some serious discomfort.
But, as the results of a recent study conducted by PricewaterhouseCoopers (PwC) and Economist Intelligence Unit show, as much as financial institutions in the region are looking to sure up their current operations, they are also looking to expand by engaging in strategic M&A in the year ahead.
However, this is not the same type of financial services M&A that has occurred in the past – this time around it will be smaller and faster, target different sectors and locations, and will be driven by different imperatives. The task confronting M&A lawyers who want a piece of this action is correspondingly more complex.
Expanding in the downturn
According to the survey, 42% of all financial services respondents said their company plans to make an acquisition in the year ahead. By jurisdiction, Taiwan and China claimed to be the most acquisition-hungry, with 70% and 68% of respondents respectively saying they would be looking to pick off cheap assets both domestically and overseas in the year ahead. Respondents in Japan and Hong Kong, however, noted that they were only 25% and 22% likely to look to strategic acquisitions this year. Meanwhile, respondents in Australia and China are both actively looking to take advantage of opportunities to grow their business (both 63%), while those in Singapore (37%) and Japan (26%) seem to be more inclined to sit on the sidelines until calm returns to the economic landscape.
Somewhat surprisingly, only 22% of survey participants said their companies had frozen all investment. Rather, expansion was cited by 48% of respondents as the key to their business strategy, with more than a third of respondents saying that they would be looking to enter into new markets or business lines.
Asia: strong financials but caution needed
For many, statistics such as these confirm the innate strength of Asia’s domestic financial services sector – most boast impressive balance sheets and the ability to effect such strategic acquisitions. But according to PwC partners Christopher Chan and Matthew Phillips, we shouldn’t expect a flurry of outbound activity in the sector just yet. For although Asia’s banks and financial institutions are in a stronger position to make acquisitions abroad than their counterparts in the US or Europe, the same problems apply to financial services M&A as to M&A in other sectors: namely forex fluctuations and difficulties in valuing assets. “Domestic Asian institutions are expected to dominate M&A activity in the region as foreign institutions consolidate and even withdraw,” Phillips says.
But according to Chan a number of factors will limit activity. “[Hurdles to M&A in the region include] problems in home markets and recent currency movements [which] make investment outside their home markets comparatively more expensive,” he says, noting that, in addition, almost half of all respondents identified difficulty in valuing assets in the current environment as the principal barrier to undertaking M&A deals in Asia. A lack of clarity on the financial position of many institutions was cited as the most significant obstacle in this regard, as was continued market volatility.
Smaller deals, newer players
Phillips says the deals that do come to fruition will almost certainly be smaller, with more activity from China and other emerging markets in the region. “I now expect to see an increased number of smaller deals to build share in underweight markets or segments, rather than the game-changing deals that one might have expected at the beginning of the crisis, as western players retreat,” he says. “While activity from China has been low, we are seeing some signs of renewed confidence and I would not be surprised to see the resumption of outbound deals by Chinese institutions within a matter of months.”
Companies in China’s financial services sector had previously been some of the most acquisitive in the region. After cleaning up their balance sheets and taking on foreign investors, many conducted IPOs and followed them with one of the largest foreign buying sprees on record. Some of the more notable deals were China Merchant Bank’s takeover of Hong Kong bank Wing Lung for US$4.6bn, ICBC’s US$5.5bn acquisition of 20% of the shares in Standard Bank and Minsheng Bank’s purchase of up to 20% of shares in US bank UCBH Holdings.
On the inbound side, both China and India have fallen down the pecking order as favoured destinations for financia services M&A. Only 12% of respondents expected to do a deal in China in the coming year while only 8% were looking to India for strategic acquisitions. Indonesia, meanwhile was set to become the most popular, according to 18% of respondents.
Where lawyers fit into the picture
Even so, closing such deals is expected to become even more arduous, not least because more than a third of respondents said they would be targeting distressed assets both at home and abroad.
The task confronting lawyers who want to pick up their share of the work emanating from this sector is clear. The deals they work on will need to be closed in tighter timeframes and with more attention paid to making transactions bankruptcy-proof. In addition, lawyers can expect much more of their time to be occupied doing due diligence, something nearly three-quarters of respondents identified as something they would be doing more ‘robustly’ than perhaps was the case in the past.
Similarly, regulatory change, especially that aimed squarely at the financial services sector, will become the focus of attention, with many companies waiting to see how this pans out before embarking on their strategic expansion plans. “There is, in particular, still a degree of uncertainty about the future in terms of the impact of tightened regulation,” Phillips says. “Respondents remain relatively neutral as to the areas that would have the most impact, but two-thirds point to further and more timely disclosures of market, credit and liquidity exposures and tighter liquidity management. Time will tell if these alone will be sufficient to offset the pro-cyclical bias of the past or whether more radical steps will be required.”
Either way, M&A lawyers can expect to see a lot less of their time spent being deal makers and a lot more of it spent being regulatory advisors – a trend that is already noticeable in M&A practices across the region. ALB