M&As  in 2003 have shown some resilience from the downward trend witnessed last year. But, argue practitioners, a return to the boom times is still some way off. Stephen Mulrenan reports

The largest M&A deal of the year to date is the US$1.51bn purchase of Hyundai Petrochemical by an investor group comprised of Honam Petrochemical and LG Chem, in a cash and assumption of liabilities deal.

Arrangers JP Morgan, Hana Bank and Kookmin Bank were able to secure commitments from over 23 institutions, perhaps indicative of a strong appetite on the part of investors for this type of deal.

But with Korean banking assets continuing to offer nominal margins, the Hyundai Petrochemical deal has come to be viewed more as an exception rather than the rule.

With announced M&A volumes dipping in Asia by 19.14% in 2002 from 2001 levels (from US$145.29bn down to US$117.49bn) and lawyer participation dropping a corresponding 23.56% to US$61.72bn, M&A practitioners entered 2003 with some trepidation.

And with stock markets still in a slump and many offerings postponed, companies still found themselves restricted from raising the necessary capital to fund deals.
Law firms in the region were hurting, with many turning their attention to non-fee earning activities. But such a strategy is unsustainable in the longer term, and the region has since lost the likes of CMS Cameron McKenna (mostly), Cravath Swaine & Moore and Dewey Ballantine, among others.

These departures were, almost certainly, far from inevitable until the onset of two key events in the first quarter of 2003.

The war in Iraq made people stand back and put deals on hold, but it was the outbreak of severe acute respiratory syndrome (SARS) that was particularly damaging, grinding travel within the region to a halt.

"That has slowed down a lot of business, especially in the M&A area," says Barbara Mok, partner-in-charge of Jones Day in Hong Kong. "You cannot effectively negotiate a deal via tele-conference. You can do it sometimes €¦ partially €¦ but that wont really move the transaction forward."

Freshfields Bruckhaus Deringer was one firm that adopted a self-imposed travel ban during the peak of the outbreak. Head of the firms Asian corporate practice Robert Ashworth says: "Coming when it did, in a difficult climate anyway, SARS made things even more difficult than they already were. Nobodys been traveling out of or into Hong Kong in the month of April and most of May."

If the story has been tough for Hong Kong, it has been truly disastrous for China and Beijing in particular.

Chinas economic growth slowed in April as the spread of SARS deterred consumers from shopping. After expanding 9.9% in the first quarter, its economy grew 8.9% in April, compared with a year ago (according to the National Bureau of Statistics).
And Beijing is where the majority of the mainland SARS infections have been recorded, with the Beijing Statistics Bureau estimating that SARS has cost Chinas capital Yuan450m (US$56m).

With investor confidence central to economic growth, the PRC Government attempted to make amends for its initial mishandling of the outbreak and reported that FDI into China rose, year on year, 37.2% to US$4.74bn in April. However, even that did not compare favourably with the 57% rise on the year in the first three months.

Mok says: "The long term impact [of SARS] will be that foreign investors will consider more seriously whether they want to put all their eggs in one basket."
But while SARS is hurting domestic consumption and exports in China, its impact on FDI has been limited, with the fundamental factors behind FDI inflows remaining unchanged, such as the potential of the market and the unlimited supply of cheap labour.

Chinese firms were the second most active targets (after Korean) in the first quarter of 2003, with transactions reaching US$2.69bn, and the most aggressive in acquiring, accumulating a US$3.42bn worth of announced transactions.

By restricting mobility and face-to-face meetings, SARS has impacted announced deals in the region. But deals in progress have also not escaped unscathed, with completion very often being delayed.

"New deals are of concern," says Mok, "but many of the existing deals have also either been put on hold or are progressing very slowly."

She adds: "We were expecting big energy-related M&A deals but we dont know if they will close this year. And then theres the Chinese insurance company IPOs, but again its not certain if theyll launch this year. Probably they will drag into next year."

However, in spite of SARS and its ongoing ramifications, deals are getting done in the region. In addition to the US$1.51bn purchase of Hyundai Petrochemical, there have been other notable deals, such as Samsung Electronics US$226.6m buy-back program and CNOOCs acquisition of a stake in a Kazakhstan oil project, North Caspian Sea, for US$615m.

Dealogics M&A review of the first quarter of 2003 reported that deal value for Asia-Pacific targeted M&A (ex Japan) increased 23% on the same period in 2002, with 675 deals worth US$28.2bn, and but that the number of deals fell 31% from 2002 levels, from 972 worth US$22.8bn.

But this has not been the experience of practitioners in the area.
Clifford Chance head of corporate, Roger Denny, says that although SARS has been another depressing factor, there is still sufficient deal flow coming through.
"The quantity of the work is not down but deal value is."

Ashworth agrees that deal volumes have been more resilient. "Were already starting to see more inquiries coming through and a bit of a pick up in business," he says. "But what were seeing is the value of the deals coming right down. People are not having access to funds and not raising money in the capital markets."
And it is the buoyancy of the capital markets, says Ashworth, that is key to turning around the M&A area.

"What we have yet to see is the private equity houses really engage this market in the same way they have been engaging Europe and the US in the last few years," he says. "There is money that theyre sitting on but, with one or two notable exceptions, there have been fewer private equity deals than you would have expected."

A couple of years ago, private equity funds were the talk of the town, with a lot of activity expected from houses.

"But thats not quite happened yet," says Ashworth. "And the inability to exit their investments via the stock market is the principle reason. A lot of people who invested a few years ago and were expecting to make their returns during 2002/2003 by, perhaps, an IPO €¦ well its just not happening. So theyre locked in. And theyre not able to find trade buyers."

The M&A market has been in a downward spiral for the last 18 months or so. But its a spiral that involves private equity, capital markets and M&A.

While there is little dispute that an easing of the capital markets would certainly help that spiral, there is no consensus at this stage as to when that is likely to materialize.

Says Denny: "I wouldnt be surprised, by the end of 2003, if were in no better position that we are in now."

Ashworth is more bullish. "Maybe were starting to see the turn of it and an upward spiral will start to generate much more activity. If the money starts to move around, the exit opportunities for the private equity firms come back, and the newly listed companies are able to go out and make acquisitions €¦ "