While business activity - and mergers and acquisitions (M&A) in particular - in Europe and North America has slowed as a result of the ongoing credit crisis, Asia has remained relatively unaffected. In the first quarter of this year, M&A transactions in Asia Pacific totalled US$236.5bn, a fall of just 5.8% from a year earlier when financing was far easier to obtain. By comparison, M&A declined by 31.8% in Europe and 37% in North America.
Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the July 1, 2008 issue of the Bangkok Post.
By Gary Murphy
While business activity - and mergers and acquisitions (M&A) in particular - in Europe and North America has slowed as a result of the ongoing credit crisis, Asia has remained relatively unaffected. In the first quarter of this year, M&A transactions in Asia Pacific totalled US$236.5bn, a fall of just 5.8% from a year earlier when financing was far easier to obtain. By comparison, M&A declined by 31.8% in Europe and 37% in North America.
In February and March 2008, PricewaterhouseCoopers and the Economist Intelligence Unit surveyed of 281 senior executives to examine what is driving M&A in Asia's financial services sector. Four percent of the respondents were based in Thailand, where M&A transactions in the financial services sector totalled US$2,290m in 2007.
The results of the survey indicate the following:
- M&A activity involving Asian financial institutions at peak levels. The majority (75%) of survey respondents say their firm was involved in an M&A deal in the past three years, up from 73% two years ago. The figure rises to 86% among Chinese institutions. Activity has also picked up in Asia's other giant, India. Sixty-six percent of Indian respondents say they were involved in an M&A deal in the past three years.
- Asian firms are undaunted by the credit crisis and a sizeable minority of them believe the credit crisis will actually increase the future volume of M&A. This suggests a growing confidence within the region and a realisation that Asia is creating a powerful internal market. Nearly 40% of institutions say they will undergo significant M&A activity this year and 70% say they will be involved in M&A activity over the next five years. China is likely to see the most activity, with 50% of Chinese institutions saying they will undertake deals in the next 12 months.
- Most institutions will be targeting wealthy Asian consumers. Up to now, commercial banks have been the object of most M&A attention but this is likely to shift to retail operations as a consequence of consumers saving and investing more of their considerable combined earnings. In five years' time, the landscape will evolve further yet. The principal M&A targets will be securities firms, asset managers and private banks, as bank savings are re-invested in higher-yielding products.
- Regulation remains an obstacle. Financial services firms see regulation as the biggest obstacle to their M&A ambitions, but the number citing regulation as a major barrier has fallen since the same survey was carried out in 2005. While some countries have been slow to deliver on promises to deregulate, others have forged ahead and created a more hospitable environment for deals.
- Domestic competition is increasingly important as a motivating factor in M&A in Asia's financial services market. While large western institutions were the biggest competitive concern in the 2005 survey, maturing markets and improved skills and knowledge have turned Asian institutions into more aggressive competitors.
Growing a company is a delicate balancing act. While there is clearly no reward without risk, over-aggressive expansion can undo years of hard work. The challenges are all the greater in the fast-moving regulatory environment and volatile markets that Asian financial services firms face today.
To come out on top, financial institutions in Asia will need to follow the path of regionalisation. Intra-Asian trade and investment flows have been increasing in recent years. Our survey found that 15% of respondents expected their companies to conduct M&A activities in Thailand over the next five years. Reduced demand from the West in the near term, and from the US in particular, will only encourage an acceleration of this trend.
As industrial groups spread across the region, their traditional suppliers of financial services will need to keep pace. The process of regional expansion may be slowed down in the short term by Asian regulators' reaction to the credit crisis. They have seen the contagion of sub-prime assets elsewhere in the world and do not wish to be responsible for allowing their jurisdictions to become "infected".
Once the alarm levels have subsided, regulation should continue to liberalise and the process of regionalisation is likely to proceed. Institutions that pursue solely domestic strategies could find their local markets penetrated by competitors with stronger brands and balance sheets.
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