Financial institutions are cautiously optimistic about M&A in Asia’s new playing field

SINGAPORE , 23 March 2009 – Asia’s financial institutions are actively investigating expansion opportunities and maintaining a cautious, strategic view on mergers and acquisitions (M&A), according to the latest findings in Asia conducted by the Economic Intelligence Unit (EIU) for PricewaterhouseCoopers (PwC).

According to the survey of 215 senior financial services executives conducted in January and February 2009 which looks at the impact of the crisis on M&A in Asia, the majority of Asian countries are generally more bullish about taking advantage of unprecedented opportunities in the current crisis. Respondents from Australia (63 per cent) and China (63 per cent) are the most likely to take advantage of the current condition to expand, followed by Indonesia (55 per cent) and Malaysia (52 per cent).

The more cautious response came from Singapore, Japan and India. In Singapore, 47 per cent of the respondents intend to restructure to reduce capital expenditure in anticipation of prolonged difficulty in accessing capital. More than half of Japan’s respondents (53 per cent) and one in three in India are putting investment and expansion plans on hold until the market has stabilised.

Dominic Nixon, PwC Asia Financial Services Leader says:

“There is now a greater degree of realism in the market but this can be attributed to a lack of confidence. Although recovery and confidence will take time to return, M&A is still on the cards for financial institutions that have emerged from the crisis with some degree of grace and are looking to sustain growth and footprint in the region. The fundamentals in Asia remain strong which gives executives a cautious optimism about the future.”

Forty-two per cent of all respondents from Asia plan to make acquisitions in the next year. This indicates that financial institutions are surprisingly, marginally more optimistic about M&A compare to the 2008 survey conducted early last year, where 38 per cent had indicated expectations to undertake M&A.

The 2009 survey shows respondents from Taiwan (70 per cent), China (68 per cent) and Vietnam (63 per cent) being more likely to consider an acquisition in the next 12 months than Singapore (32 per cent), Japan (25 per cent), Pakistan (25 per cent) and Hong Kong (22 per cent).

Overall, financial institutions in Asia see expansion as an important strategy to move from survival to sustainable growth, with many actively planning to take advantage of the unprecedented opportunities arising from the financial crisis. Fifty-one per cent are saying they plan to invest further in their existing core businesses, 36 per cent are planning to enter into new business lines and 33 per cent new markets. Only 22 per cent of the respondents have frozen investment and a mere 2 per cent says that divestment is a key to their overall strategy.

Sam Kok-Weng, Partner, Financial Services Industry Practice, PwC LLP (Singapore) observes:

“There is significant variation in the growth strategies in Asia and hence, the case for M&A. Singapore is clearly more directed towards new geographic markets and new product markets compared to Australia, where the focus is on strengthening the franchise by securing distribution. Indonesia and Vietnam have become the most favoured destination for financial institutions wishing to increase footprint in Asia. Building market share will be a dominant driver for M&A in most of Southeast Asia.”

For financial institutions in Asia intending to acquire, Indonesia (18 per cent), Vietnam (14 per cent) and China (12 per cent) top the list of preferred targeted locations that include Europe (11 per cent), Middle East (9 per cent) and North America (9 per cent). Singapore and Australia tie for the same fifth position in the list at 10 per cent.

Sam Kok-Weng, Partner, Financial Services Industry Practice, PwC LLP (Singapore) observes:

“The slowing of deals in some of the markets may be a reflection of differing price expectations and opportunities elsewhere. The appetite for larger deals may have waned as buyers go for smaller-sized strategic deals. Recent currency movements have further altered the deal making dynamics in Asia. In the end, relatively stronger balance sheets in Asia and a prolonged economic downturn increase the chances that buyers and sellers will have to sit on the sidelines until an agreeable consensus can be reached.”

As a barrier to undertaking M&A deals in Asia, nearly half of the respondents at 49 per cent find valuation of assets a principal challenge. Lack of clarity on the financial position of many institutions is cited by 42 per cent of the respondents as the most significant obstacle to fair valuation while 40 per cent says it is continued market volatility.

Of the respondents planning acquisitions, 32 per cent says they will be targeting distressed assets. However, to account for the increased risks in today’s environment, 73 per cent says they plan to conduct additional due diligence and 62 per cent plans to rely on price adjustment tools. Similarly, 57 per cent of all respondents say they thought the current environment will encourage buyers to conduct more robust diligence to help develop integration priorities and only 39 per cent says that they thought there will be greater focus on cost synergies.

Dominic Nixon, PwC Asia Financial Services Leader says:

“The game financial institutions in Asia are playing has changed. We are seeing a move back to simplification as the region plays to traditional, universal banking models. Domestic Asian institutions, especially the better capitalised ones with stronger balance sheets and better access to funds, are feeling pretty good about their ability to take advantage brought in by the crisis and will dominate M&A activity in Asia.“

Sam Kok-Weng, Partner, Financial Services Industry Practice, PwC LLP (Singapore) observes:

“Continued favourable but watchful regulatory environment means that financial institutions will be re-thinking their priorities that include overhauling its risk management capability and changing their reward structures.”

Financial institutions are shoring-up operations and restructuring internally in the immediate term to sustain growth. As a result of the crisis fall-out, respondents have indicated priorities to overhaul risk management systems (84 per cent), changing reward structures to reflect longer term performance (78 per cent), bringing customer-relations in-house to improve service functions (75 per cent) and retrenching staff (67 per cent) to manage talent and cost better.

Few respondents expect current market conditions to improve soon: 83 per cent expects the credit crunch and resulting economic downturn to persist for a further one to two years. A significant majority suggest that the pricing of assets will become more attractive to their companies within 12 months. Pakistan (67 per cent), China (63 per cent), Taiwan and Indonesia (both 60 per cent) are the most optimistic, expecting assets to become more attractive in the next six months.

By sector, insurance and private equity are more bullish than others on expansion with two-thirds (67 per cent) actively seeking expansion opportunities. There are continued opportunities in wealth management as household balance sheets are under leveraged compared to those in the West.

Dominic Nixon, PwC Asia Financial Services Leader concludes:

“Cautious optimism is really a measure of the degree of uncertainty about the future in terms of perception about the continued worsening of credit quality and the availability of funds. Many of the players are remaining relatively neutral as to the areas that would have the most impact and many are also looking to developments in G20 to see how issues such as fair valuation and timely disclosures of market, credit and liquidity exposures and liquidity management will be addressed.”

- ENDS -


Media contacts:
Ivana TT Teo (direct line: (65) 6236 3959, email: ivana.tt.teo@sg.pwc.com )
Chen Yih Lin (direct line: (65) 6236 3960, email: yih.lin.chen@sg.pwc.com )

*A copy of the survey publication will be available in end April. Contact us if you need a copy.

Note:

The survey is the 4 th PricewaterhouseCoopers annual survey “The new playing field: the impact of the crisis on M&A in Asia”. The survey which cover 215 respondents across Asia: Australia, Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, South Korea, Taiwan and Vietnam. Thirty-three per cent of the respondents are senior management (CEOs, Chairmen and Board members), 15 per cent in business development, 13 per cent in finance and the rest across various functions from risk management, to operations, treasury and others.

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