Robust M&A appetite and growing market confidence in Asia-Pacific tempered mainly by valuation and competition challenges

Singapore, 1 June 2018

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  • 46% of Asia-Pacific companies intend to pursue acquisitions in the next 12 months
  • 76% see portfolio transformation as the most prominent boardroom issue
  • 77% see the M&A market as improving in Asia-Pacific, with increasing interest in assets from private equity 

After record-high deal intentions six months ago, the mergers and acquisitions (M&A) outlook has tempered slightly in the Asia-Pacific region, according to the 18th EY Global Capital Confidence Barometer (CCB), a biannual survey of 2,500 executives across 43 countries. However, with 46% of Asia-Pacific executives indicating that they plan on pursuing deals in the next 12 months, M&A appetite remains above the long-term average of 41%.

Confidence in M&A appetite is higher with more than three-quarters (77%) reporting confidence that the local M&A market will continue on an upward trajectory, compared with only 52% six months ago. This survey also marks the first time in its history that nearly all (99%) Asia-Pacific respondents expect corporate earnings to either improve or remain stable, which is consistent with fundamental data for industry corporate earnings. A further 76% see short-term market stability improving.

Despite M&A plans, Asia-Pacific companies seem to be experiencing challenges completing deals: 86% of Asia-Pacific respondents say they have failed to complete or canceled a planned acquisition in the past 12 months. This is higher than the global average of 73%.

Increased competition and disparity in valuation expectations between buyers and sellers appear to be the primary reasons that buyers are walking away from deals. Asia-Pacific respondents also cite shareholder activism, and increased regulation and government intervention as contributing factors.

Harsha Basnayake, EY Asia-Pacific Leader, Transaction Advisory Services, says:

“While interest in conducting M&A in the region is very high in Asia-Pacific, internal and external pressures including regulation and shareholder activism are impacting the ability to complete deals. A more effective and structured portfolio transformation may be necessary to ensure deals close and are successful.

“Deal competition is not only increasing, but also evolving — traditionally, corporate buyers have dominated the Asia-Pacific M&A market. However, with significant dry powder funds to invest, we are now seeing an increasing number of private equity firms looking to pursue high-value assets in this part of the world.”

Portfolio transformation is now top of the boardroom agenda

As Asia-Pacific companies look to prepare themselves for the future, more than three-quarters (76%) view portfolio transformation as a top priority in their boardroom thinking. Through continuous assessment of current operations, risks and opportunities, executives are looking for ways to identify strategic gaps in their current portfolios — something they will need to do more of if they want to boost their ability to see deals through to completion.

Forty-one percent of Asia-Pacific executives also state that their boards are considering the use of artificial intelligence (AI) and robotic process automation (RPA) to improve overall decision-making and boost company performance.

Divestitures also appear to be a critical component of successful portfolio transformation for Asia-Pacific executives as they look to raise capital to fund new investments. In fact, the number of companies planning to complete a divestment in the next two years has more than doubled from 35% last year to 83% this year according to EY’s recent Global Corporate Divestment Study 2018.

Demand in Asia-Pacific for ‘smart’ public infrastructure investment

Asia-Pacific respondents see government spending as a critical driver of their growth plans and an overwhelming majority (92%) expect government investment in infrastructure to increase over the next 12 months. This is much higher than expectations from the US (59%) and across Europe, Middle East and Africa (69%) respondents.

Basnayake says: “Governments in the region are focused on building smart cities, improving transport infrastructure, using new technology and building digital ecosystems. With initiatives like China’s One Belt, One Road, Singapore’s Digital Economy and significant infrastructure budgets in other countries, such as Australia, we are seeing notable deal activity in sectors such as technology, utilities, automotive and transportation driven by this investment and expect this trend to continue.”

Asia-Pacific companies stick close to home for deals

China remains a top investment destination, followed by Japan and Singapore. This is aligned with the preference of Asia-Pacific companies to look for deals closer to home — all of the top five investment destinations, which also include Australia and Malaysia, are in the Asia-Pacific region.

Basnayake says: “China is maintaining its position as a top investment destination for global investment markets, particularly as the country speeds up its reforms to further open up its economy to foreign investment.”

Technology, health care and power and utilities remain the top sectors for M&A investment in Asia-Pacific. However, telecommunications, automotive and transportation, and industrial sectors are also hunting for assets as they address the impact digital disruption has had on their business.

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