A recently released Boston Consulting Group (BCG) study found that investors, acquirers and targets do better with downturn deals and divestitures with ROIs increasing, on average, by at least 13%. Based on a study of over 408,000 deals from 1981 through 2008, with a special focus on more than 5,000 divestitures, the unique longitudinal report gives a compelling reason for pursuing M&A when the economy is weak. “Downturn deals have a higher chance of creating shareholder value and delivering greater returns. They are twice as likely to produce long-term returns in excess of 50% and, on average, create 14.5% more value for shareholders of the acquirer.”
The figures for divestitures are almost identical. “Divestitures have a higher probability of success for buyers than the purchase of entire companies and can create substantial value for sellers as well. Sellers overall returns from divestitures are 1.5% on average, rising to 1.7% during downturns (a 13% increase), suggesting that it is a good idea to clean up portfolios during downturns.”
And it’s this type of study that has many across the region heralding 2009 as the year of strategic M&A, the year of empire building and of mid-market consolidation. But chances are you won’t find too many lawyers among that number. While lawyers have turned remaining optimistic during even the most pessimistic of times into a fine art, even they admit that the M&A landscape in Asia at the moment is a little hazy, difficult, and uncertain – and likely to remain that way for a while yet.
Notwithstanding, the reality of the situation is that the sector can never completely stop and transactions will never come to a complete halt – there will always remain something for lawyer to do whether it be at the front- or back-end of transactions. But while the work may, in many respects, stay the same, the game has well and truly changed. Lawyers ALB spoke with noted that while the old ‘vanilla’ ways hadn’t died, they are becoming infused with a different set of concerns. Clients are requiring deals to be completed in tighter timeframes, calling on counsel to accelerate due diligence while at the same time asking them to make sure all bases are covered. They are asking lawyers to ensure that document control is strict and that MAC and force majeure clauses are watertight. Being an M&A lawyer in the downturn is less about the type of work being done and more about the way it is done.
A new world order?
The end of the Asian financial crisis (AFC) late last decade brought M&A of unprecedented levels to Asia’s shores. Companies from the US, UK, and Europe, companies which had not been affected by Asia’s storm, pillaged some off Asia's household names, making use of devalued Asian currencies to buy up companies on the cheap and stake claim in Asia.
This time around, however, things are a little different. This time, it is those US, UK and European companies who did the buying 10 years ago who are struggling to keep their heads above water while their Asian counterparts, companies in countries like China, Japan and India, who are cash-rich, boast envious balance sheets and are looking, rather nationalistically, to plant their flags across the globe. This time, it seems, the shoe is on the other foot.
But according to Tan Chong Huat, managing partner of KhattarWong, the nature of the current financial crisis means that Asian companies may have to chose their western targets carefully or risk becoming casualties themselves.
“The 1997 crisis was limited to Asian economies and resulted in Asian companies becoming attractive targets to western MNCs, since funding was not restricted in those economies,” explains Tan. “The current worldwide credit and financial crisis may, however, not lead to an immediate charge by Asian companies on western targets given that the current crisis was contributed to, in the main, by the toxic assets of the western economies.
Keith Johnson, head of corporate/M&A at Linklaters in Hong Kong, agrees and suggests that those waiting for an Asian-led M&A spree may have to wait. According to Johnson, while it is true that some Asian companies have better vitals then their European or US counterparts at the moment, everyone is bound by the same set of M&A rules.
“It’s true that Asian companies, particularly Japanese companies, are strong, have good balance sheets and have a lot of cash at the moment, but there probably won’t be the outbound rush that a lot of people are predicting,” says Johnson. “Sellers, no matter if they are in Europe, the US or Asia, are all unwilling to accept the low multiples that buyers are looking for at the moment and this mismatch between the expectations of buyers and sellers is holding up deals.”
And this trend – the so-called ‘valuation gap’ – is a pattern identified by all of the lawyers ALB interviewed for this report. All note that despite the current economic climate investors are still going in search of high ROIs, more choice and lower price-to-earning ratios. Many agree that M&A in Asia, and for that matter throughout the world, may be at an impasse.
It should come as no surprise then that the most active segments of the M&A sector for lawyers are those that do not depend on a consensus ad idem between buyers and sellers.
“We are seeing a lot of private M&A activity,” says Nicola Wakefield Evans, managing partner international at Mallesons Stephen Jaques. “[We are seeing] a lot of acquisitions and dispositions and strategic acquisitions, particularly with distressed assets as corporate restructurings are on the rise.”
The situation is the same for Loo Choon Chiaw, managing partner of Loo & Partners, who takes a philosophical view. “One must not forget that the same capital market turmoil that has caused the delays in projects, the cancellations of sale orders and the insolvency of companies will also bring about more divestments, privitisations and distressed sales.”
Eddy Hendra, one of the founding partners of Indonesian firm Hendra, Soenardi & Rekan, agrees and says that his firm is witnessing a spike in M&A transactions that are about survival. “Large M&A like we saw earlier this decade probably won’t be there this year. We will smaller see M&A in select sectors like oil and gas and coming out of emerging economies in southeast Asia, like Indonesia, Vietnam and Thailand, and most certainly India and China.” Whichever way you look at it, it seems that that the days of the mega M&A deal are over, and that transactions which were hitherto routine are set to become ‘remarkable’ in 2009.
NEXT: The color of money
Go to page: 1 2