An intensive wave of legislation recently, in relation to acquisitions by foreign investors, may well see China overtake Australia as the most active jurisdiction in Asia for announced deals

Although 2002 has come to be known as a very tough year for mergers and acquisitions in the Asia Pacific region, the Australian economy isnt listening.
Australia generated the most amount of M&A business last year, accounting for 112 deal announcements valued at US$24.27bn. China leapfrogged a number of its neighbours to become the second busiest jurisdiction, accounting for 74 deal announcements valued at US$22.39bn. Korea was third with 74 deals worth US$21.83bn.

And the story has held true for the first three months of this year. According to the latest Thomson Financial reports, announced M&A activity in the first quarter involving an Australian target or acquiror surged 42.42% in value over the same period last year, from US$5.67bn to US$8.07bn.

"But the first quarter of 2002 was the absolute lowest point," says Tim Bednall, head of M&A at Allens Arthur Robinson. "It was dead basically."
US-based Constellation Brands US$1.42bn takeover offer for BRL Hardy Ltd tops the rank value tables, with Centro Properties US$841.68m bid for AMP Shopping Centre Trust close behind, and Tabcorp Holding Ltds US$587.93m offer for Jupiters Ltd coming in third.

"Compared with whats gone on across Asia and the rest of the OECD, Australias growth is still ticking along at a pretty healthy rate," says Will Irving, deputy group general counsel at Telstra. "So I dont know that Australians would be talking about a recession perhaps in the way that they have been in Hong Kong, for example."

A number of factors have made Australia an attractive target, including the low value of the Aussie dollar and a sound regulatory environment.
"Probably the most important factor is recent tax changes for consolidation and de-mergers which facilitate M&A activity," says Bill Koeck, an M&A partner with Blake Dawson Waldron.

But while announced mergers and acquisitions in Australia continue to soar, domestic acquirors remain the biggest contributors in M&A activity, accounting for 60% of deals worth US$4.85bn. And in the completed tables, domestic acquirors account for 72.2% of deals worth US$7.37bn.

China, on the other hand, has accelerated its absorption of foreign direct investment (FDI) since it first opened its doors to the world in 1978. This only intensified before and after its entry into the WTO in 2001, and in recent months, the PRC has introduced yet another wave of reforms designed to make the legal framework for the entry of foreign investors clearer and more flexible.

The Provisional Regulations on Foreign-Funded Mergers and Acquisitions of Onshore Enterprises, which took effect on 12 April, allow a foreign party to acquire a domestic PRC company or its assets.

Under the new Regulations, a foreign investor may acquire existing or new shares in a wholly domestic PRC company and then convert the company into a foreign invested enterprise (FIE). Alternatively, a foreign investor could establish a new FIE to purchase and operate assets acquired from a PRC company.

Chinas regulation of FIEs differs from its regulation of domestic companies. Foreign investors are issued with guidelines for their entry into the PRC market through M&As with the Chinese governments Catalogue for Guidance of the Foreign Investment Industry.

The latest version (2002) classifies various industry sectors into the encouraged, permitted, restricted and prohibited sectors. Restrictions on market access have been progressively lifted in recent years and now include the banking service and IT services. Further industries are expected to be opened in the future.

Barbara Mok, partner-in-charge of Jones Day in Hong Kong, describes Chinas new legislation as a "very positive development" and "very encouraging".

"Clients are very excited by this new legislation. Where there was doubt in certain areas, they have at least now been covered. It has become more transparent and there is more certainty. Businessmen and lawyers want certainty in their transactions. They dont want to leave things to interpretation."

An additional M&A stimulus in China is the need for domestic companies and FIEs to restructure themselves to survive in a more competitive market. As a result, they are looking for more vehicles to finance their business development.

Freshfields Bruckhaus Deringers regional head of corporate Robert Ashworth says: "Its always difficult to rule China out because theres so much restructuring still going on of the state owned enterprises (the China Mobile deal of last year was exactly that, as was the Bank of China in the lead up to its IPO). And they have significant price tags attached to them. But, in a sense, they are mainly intra-group reorganisations."

In the first quarter of 2003, Chinese companies were the second most eagerly sought in the region (just behind Korean) with transactions reaching US$2.69bn. And China was the most aggressive in acquiring, accumulating a US$3.42bn worth of announced transactions.

Ashworth says that in order to lure M&A activity to their shores jurisdictions must continue to dismantle foreign ownership restrictions.

"Thats what the WTO has achieved for China," he says. "For example, weve been working on some of these fund management joint ventures in China, where youve currently got a 33% limit for a foreign shareholder about to go up to 49% by 2005. Those sorts of percentages are now quite meaningful for foreign investors."

Changing the threshold on foreign ownership has brought tangible benefits to M&A activity in China. But other measures can also help, says Ashworth.

"Everything helps," he says. "The developments in Hong Kong on the corporate governance side, for example, will help make Hong Kong a more attractive place for international investment."

A lack of transparency and lack of management accountability are serious hurdles when trying to attract foreign investment.

"You improve your corporate governance regime and all of a sudden those companies start to become more interesting. Theyre more accountable to their investors," says Ashworth.

"So that is a stimulus for M&A."

Ashworth says that in the first quarter of 2003, Freshfields Bruckhaus Deringer has received the most interest in China M&A.

"If you were to say to us where are you focusing your attention for 2003, it would definitely be China, Korea and Japan, and probably in that order."
A recent change of government in Korea has seen potential investors sitting on the sidelines of late.

"But theres a lot more to come from Korea," says Ashworth. "We are seeing quite a lot of interest."

Like Japan, Korea has taken measures to further liberate FDI. "The main measures are ones of sentiment €¦ that we are encouraging foreign investment."

Says Mok: "Korea is definitely a very active spot on the map. It is one of the economies that bounced back the quickest after the collapse in 1997. We are seeing a bit of activity and are gearing up for more transactions."

And countries are following a similar path elsewhere. For many years, Singapore has adopted tax incentives for companies seeking to establish themselves in the Lion City.

And many foreign investors are now showing a greater degree of interest in India.
"India is an important part of Asia and I think we will continue to see a lot of foreign investment in India," says Mok. "But doing deals in India is not easy."

Finally, Thailand has just changed its takeover regime providing more clarity on how to do acquisitions of companies listed on its stock exchange.

According to Dealogic, Asia-Pacific M&A activity has been focused mainly in the finance and insurance markets, with 98 deals worth US$5.7bn announced in the first quarter of 2003, up 47% on the previous year.

"There are lots of obvious targets in finance as there is a constant pressure to be more efficient," says Blake Dawsons Koeck.

However, practitioners say there should continue to be a lot of opportunities across a range of industries.

Jones Day, for one, is targeting energy related M&As and has hired Denton Wilde Saptes Hong Kong head and senior partner for Asia, Steven Goodman.
"We are hopeful we can do more on that front," says Mok.