M&A on the rise in Asia’s financial services sector with China and India as top targets

1. Singapore, 20 June – M&A activity within Asia’s financial services sector is expected to gather impetus over the next five years, fuelled by a widening expectation of market liberalisation, despite continuing obstacles posed by the regulatory environment and diverse corporate cultures, according to a joint survey by PricewaterhouseCoopers (PwC) and the Economist Intelligence Unit (EIU).

2. China is likely to remain the major target for M&A in the region, according to the survey. Fifty-two percent (52%) of companies say that they expect to conduct M&A in China over the next five years and just over a third (37%) will target India. Singapore ranks fifth as a prime destination for M&A activity in Asia.

3. The value of M&A totalled US$38.7bn in 2005, a decline over the previous two years which saw a number of large financial services deals in Japan. However, the number of deals remained high at 194, with China picking up momentum as activity in Japan tapered off. Inbound M&A activity from the US and Europe replaced regional activity in 2005 as the larger source of M&A on a value basis. Inbound M&A was valued at more than US$23bn compared to US$15bn for regional M&A.

4. “Deals in China have skyrocketed despite the fact that ownership rules mean that foreign investors still have limited influence over their Chinese investments. Also, the recent introduction of new regulations is slowing the pace of change such as the hampering of the roll-out of bank branches. There is, however, the promise that banking and insurance markets will open up further to foreign competition by the end of 2006,” says Dominic Nixon, PwC Asia Financial Services Leader.

5. “Regulatory restrictions have also kept India’s market penetration by international financial institutions low compared to domestic banks, despite many financial services companies operating there,” he adds.

6. The survey, entitled ‘Going for growth: The outlook for M&A in the financial services sector in Asia’, sought the views of 130 senior executives in Asia’s financial services industry. More than two-thirds of survey respondents predict that their organisations will undergo significant M&A activity in the coming five years and an equal number agree that joint ventures and partnerships will be the key to their expansion plans in Asia.

7. Predictably, India is at the top of countries where financial services companies will most likely set up outsourcing arrangements (39%), followed by China (32%). Singapore is the next preferred country in the poll (11%).

8. "It is interesting that city state Singapore is a preferred outsourcing destination in the region, despite the availability of lower cost options in the region. This finding supports the current phenomenon that financial institutions have transitioned from the earlier phase of offshoring/outsourcing to achieve economies of scale to the current stage of focusing on centres of excellence, together with ramping up the capacity and capability of selected offshoring facilities. Matching centres of excellence with scaling current operations allows them to focus on process efficiencies and their core businesses. In addition to being the region's financial hub, Singapore's robust infrastructure, stable political landscape and thriving business climate are reasons why it is a popular offshoring destination," says Karen Loon, partner, Banking and Capital Markets Industry Group, PwC Singapore.

9. Increasingly, western banks are investing heavily in stakes in China’s largest banks with little in return in the way of operating control. However, as part of these equity deals, many banks are also negotiating joint ventures and alliances in relation to savings, insurance and credit card products.

10. Protectionism abounds in some of the region and there is a danger of escalation. While onerous state regulation aimed at protecting consumers is increasing and is to be supported, regulation aimed merely at protecting local business is still common and in some cases is actually increasing.

11. While the respondents in Asia believe that organic growth is the best strategy to meet objectives such as maintaining a focus on core businesses and managing risk, it is clear that such growth alone is not enough to meet all needs. Of the growth strategies available, 38% of respondents say M&A will be the primary focus for organisational restructuring activities over the next five years; 40% cite M&A as the best strategy for increasing market share. In reality, achieving scale and efficiencies is particularly difficult in Asia where multi-channel strategies involving a combination of direct investments, equity stakes and joint ventures are often necessary. Barriers cited by companies included regulation, differences in corporate culture, defensiveness by managers of the acquired company and political interference.

12. “Expansion in the region is powered by a strategic imperative to seek out new under-served markets and to meet a rising tide of competition from both domestic and foreign players,” comments Mr Nixon. “Regulatory barriers elicit far less fear and loathing than five years ago as investors are demonstrating a willingness to engage with regulatory authorities over the long haul, either directly or through a local partner. This has become just another cost of doing business in the short term and prudent forward planning over the long term”.

13. Financial services executives in Asia face growing pressure to satisfy shareholders, please customers and capitalise on their successes. With falling barriers, the threat of new competition continues to escalate, and executives have no choice but to maintain a constant surveillance of new market trends and growth opportunities, all the while trying to maintain a consistent corporate culture across disparate ethnic cultures and integrating any acquisitions already made. In order to succeed, financial services executives will need to do the following:

  • Be prepared for larger, more aggressive M&A, joint venture and partnership deals
  • Know their company’s strengths and apply M&A to hone competitive edge
  • Outsource/offshore back-office and other non-strategic operations
  • Pursue M&A strategies despite regulatory uncertainty, not because of it
  • Stay vigilant for operational efficiencies and opportunities for scale
  • Ensure proper risk management is in place
  • Use M&A as part of an overall growth strategy incorporating organic growth strategies as well
14. “Bigger is not always better. Most companies cut the deal, then deal with the cuts; they lack a solid understanding of the risks involved which is critical to the long-term success of a M&A deal. Firms should not be overzealous and blinded by an aggressive M&A appetite,” concludes Mr Nixon.
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Notes:

About the survey
  • The survey was conducted with 130 senior executives in Asia’s financial services industry exclusively for this briefing, prepared by the EIU for PwC. Respondents were a mix of Asia-headquartered institutions (48%) and regional subsidiaries of foreign institutions.
  • Respondents hailed from Singapore (19%), Hong Kong (14%), Australia (13%), China (13%), India (10%), Japan (9%), Indonesia (5%), Malaysia (3%), Thailand (3%), Korea (2%), New Zealand (2%), Philippines (1%), Vietnam (1%) and others (1%).
  • Deal volumes and values used in the report are based on announced completed deals and sourced from M&A Asia, March 2006.

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