Cross-border M&A: Perspectives on a changing world Asia Pacific highlightsglobalmandatoolkit.cliffordchance.com/downloads/CC-EIU... · 2015-02-13 · Cross-border M&A: Perspectives

Cross-border M&A: Perspectives on a changing worldAsia Pacific highlights

2 Clifford ChanceCross-border M&A: Perspectives on a changing worldAsia Pacific highlights

Some highlights from the survey: M&A opportunities. Globally respondents view China (27%) as aprime destination for M&A activity ranked only behind NorthAmerica (37%). Asia Pacific respondents are also focused on thelocal market with south east Asia, China and Australia/NewZealand being viewed as the top three target markets.

Regulatory hurdles. Asia Pacific is perceived as the region withthe highest regulatory barriers to M&A. South east Asia ranked first,followed by China and the Rest of Asia. Interestingly, Australiawhich forms part of Asia Pacific and is a large contributor to M&Aactivity in the region is seen as the country with the lowestregulatory barriers reflecting the diversity of the region and just howdifficult it is to classify the region as one economic bloc.

Biggest barriers/risks to M&A activity. For Asia Pacificrespondents, political uncertainty (30.8%), regulatory issues(29.9%) and currency fluctuations (29%) are seen as the top threebarriers/risks to M&A activity. This contrasts with the global viewwith competition, rising costs and regulatory issues being viewedas the top three barriers/risks.

Some highlights from the survey: Organic growth vs M&A. In reviewing responses by sector,respondents in the Consumer Retail, Oil and Gas and TMT sectorssaw their organisations favouring organic growth whilstrespondents in the Metals and Mining, Power and Healthcaresectors favoured growth through M&A.

Cash is king. Asia Pacific respondents ' preferred method forfunding M&A transactions is to use accumulated cash reserves.Two years ago, external bank debt was seen as the main source offinancing for M&A deals by Asia Pacific respondents.

Deal intelligence. Asia Pacific respondents rely more on externalsources of intelligence on potential M&A targets with a majority(53.3%) citing investment banks as the key source of M&A targets,whereas European and North American respondents cited theirown in-house experts and legal advisers (55.1% and 45.1%,respectively) as the key source of intelligence.

In the first quarter of 2012, the Economist Intelligence Unit carried out onbehalf of Clifford Chance a global survey of 377 high-level executives fromdifferent industry sectors about cross-border M&A activity. Asia Pacificrepresentatives made up one-third of the total respondents. This shortdocument highlights some of the findings from the survey from an Asia Pacificperspective and the views of a number of our experienced lawyers in theregion on some of the trends and issues affecting M&A activity in Asia Pacific.

3Clifford ChanceCross-border M&A: Perspectives on a changing world

Asia Pacific highlights

Perhaps unsurprisingly, Asia Pacific companies are heavily focusedon Asia Pacific targets. Approximately 60% of Asia Pacificrespondents see growth opportunities in emerging and high growthmarkets whereas 30% are focusing on developed markets.Responses from Asia Pacific respondents reveal that the focusremains heavily within the region, with south east Asia, China andAustralia/New Zealand considered to be prime M&A opportunitiesacross all sectors (see Figure 1).

Not all sectors in Asia Pacific are focused on M&A as a growthstrategy. The survey reveals that Consumer Retail, TMT and Oil & Gas sectors in Asia Pacific are focusing on organic growthover the next two years whereas Power, Metals and Mining and Healthcare sectors in Asia Pacific are looking to grow through M&A.

While south east Asia and China continue to get a lot of attentionas the spotlight remains on emerging and high growth marketsglobally, the focus has also been shifting to Australia, a developedmarket, specifically in the Metals and Mining sector, and particularlyfor intra-Asia Pacific M&A.

Perspectives on the M&A market in the region

Figure 1: Countries/Regions considered prime opportunitiesfor M&A by Asia Pacific respondents

South east Asia

China

Australia/NZ

Rest of Asia Pacific

India

0 10 15 20 25 30 35 4540

The Clifford Chance view:

“Despite the headlines we often see of AsiaPacific companies' successful acquisitions orfailed attempts in Europe or North America,we continue to see a lot of companies in AsiaPacific pursuing opportunities within theregion as well," said Hong Kong M&A partner,Simon Cooke. "Given the diverse range ofpotential for growth within the region acrossdifferent sectors, such as consumer and retailin Indonesia, resources in Australia,healthcare in China, Asia Pacific companiesrightly see their own region as the primelocation for growth through M&A”Simon Cooke, M&A Partner, Hong Kong


During the first quarter of 2012 in Asia Pacific, Australia rankedbehind only China and India in terms of M&A deal values.1

This has been driven mainly by the global demand for resourceswith Australia as being a leading source of minerals andcommodities. According to Austrade, there is currently a AUD460billion investment pipeline for mining and resources in the country.So is interest in Australia likely to continue?

A safe bet to buy and holdGlobally, while not at the top of the list, Australia remains a populardestination for acquisitions, ranking as the tenth most populardestination for acquisitions, and ranks low – 20th out of 25 – as acountry where respondents were likely to make disposals.

This is perhaps not surprising, as the country was considered the least risky country destination for those considering M&A.

Regional competition

Compared to the global results, analysis of the Australianrespondents to the survey showed them likely to stick closer tohome for acquisitions, with domestic transactions top (48%), equalwith south east Asia (48%) and closely followed by China with afocus on creating synergies for existing projects. Asia Pacificrespondents in the metals and mining sector also considerAustralia along with south east Asia as a prime area for M&Aactivity. We will see competitive pressure continuing to build asdomestic Australian players vie with its Asian neighbours over ashortage of attractive assets and investment opportunities in the resources sector.

1 Source: Mergermarket M&A Round-up for Q1 2012

Resource hungryAsian companies have been very active in Australian Mining andResources M&A. Some of the more recent transactions include:

� Marubeni Corporation/POSCO and STX Corporation'spurchase of 30% stake for A$3,532 million in Roy Hill Holdings.

� China Africa Development Fund/CGNPC Uranium Resources'acquisition of 57.26% stake valued at A$1,169 million in ExtractResources Limited.

� Sinopec's acquisition of a 10% stake in Australia Pacific LNGfor A$1,045 million.

� Yanzhou Coal's acquisition of Queensland miner SyntechResources for A$202.5 million.Resource hungry

� Yanzhou Coal's acquisition of Gloucester Coal for A$2.1 billion.

� Mitsubishi's acquisition of Murchison Metals for A$325 million

China, with its ever growing need for natural resources, continuesto lead the charge on these Australian deals but competition is alsocoming from its Asian neighbours in the shape of Japan, Korea andTaiwan, whose trading houses and corporates increasinglyrecognise the need to access their country's future resources requirements.

Country focus: AustraliaThe Clifford Chance view:

“Australia is no different from the rest of the world,with different segments of the country andindustries now moving at different paces at anygiven time, according to demand, currency, pricingand costs. It's a more difficult landscape to managebut what is clear is the fight to secure naturalresources – from iron ore to wheat – is far from over,and this country can continue to benefit as aproducer, developer and investor.”Michael Lishman, M&A Partner, Perth



Healthcare is a sector which gives a heavy weighting to M&A as aroute to growing business (see Figure 2). With approximately 61%of Asia Pacific respondents in the Healthcare sector consideringM&A as their current preferred growth strategy, 55.6% of suchrespondents consider China to be the prime opportunity for M&A activity, which makes for a hot market for deals in the sector on the mainland.

With biotechnology being identified as one of the seven key priorityindustries in China’s 12th Five-Year Plan and with the Chinesegovernment emphasising foreign investment in the development ofthe healthcare sector in China, investors and analysts predict asurge of M&A activity in this sector in China.

Global companies in the healthcare sector understand theimportance of China as a growth opportunity for their businesses.Pfizer, a global pharmaceutical company, entered into China in the1980s and has continued to expand its operations in China since.However, healthcare companies without a presence in China, or healthcare companies looking to increase their market share in China, will look to acquire established businesses or companies in China, which is likely to fuel competition for attractive targets.

Globally, healthcare companies seem to be concerned about thelimited number of attractive targets within the industry, as theyranked increased competition as the top risk for M&A activity overthe next two years. This contrasts with companies in Asia Pacificwho did not view increased competition as a particular risk for M&A activity, but were rather more concerned about, amongst other things, political uncertainty.

Sector focus: Healthcare


“There is no question that the healthcareindustry will continue to focus on China givenpersonal and household incomes are on the rise.We've seen a marked increase in interest byforeign companies looking to break throughexisting regulatory barriers by partnering withlocal companies, even where this means cedingcontrol.”Emma Davies, Shanghai partner and Head of CliffordChance’s Asia Pacific Healthcare Group

Pfizer: The industry viewpoint

Evan Goldberg, Sr. Director, Strategy & Business Development Pfizer Biopharmaceuticals, China

The opportunity in China is rooted in patient needs. Great improvements in access to healthcare is allowing many more of China’s 1.3billion people to have diseases that impact them diagnosed and treated. To serve the Chinese consumers, Pfizer is committed to bringhighly innovative medicines to the market, partner with Chinese drug manufacturers to supply high quality generic medicines, provideneeded medical education to physicians and patients, and contribute to the development of the Chinese healthcare system.At the sametime, work we do in R&D and manufacturing in China has become a core part of Pfizer’s global capabilities.

Figure 2: Asia Pacific respondents in sectors considering M&Aas growth strategy versus organic growth

OrganicM&A

Power 75.0% 25%

Metals & Mining 66.7% 33.3%

Healthcare 61.1% 38.9%

Oil & Gas 46.7% 53.3%

Telecommunications,Media & Technology 29.2% 70.8%

Consumer Retail 28.6% 71.4%

Regulatory change is happening all around us. Even without thefallout from the global financial crisis, regulators across the globehave been steadily increasing their influence and M&A transactionshave not been immune from the effects of this "regulatory creep".

The role of regulators in Asia Pacific has inevitably increased as thelevel of interest and number of deals in Asia Pacific has increased.Not only are the regulatory rule books expanding but the regulatorsare increasingly not afraid to use their powers. From Hong Kongimposing strict fines over conduct of sponsors on IPOs, to Japancracking down on insider trading, to India cancelling licenses givento telecommunication companies following a rigged sale, these arebut a few examples of regulators increasing their use ofenforcement actions in the region.


Regulatory creep in Asia Pacific


“Asia Pacific remains a relatively benign,although fragmented, regulatory environment.However, some risks are increasing. In moredeveloped countries, regulators are enforcingmore robustly. In other countries, local politicscontinues to drive regulatory behaviour, whichmeans uncertainty,”Martin Rogers, Partner and Head of Litigation and DisputeResolution, Asia Pacific.

Power Healthcare Oil and gas Consumer Retail Metals & Mining TMT

Politicaluncertainty


Regulatory issues


Regulatory issues

Currency fluctuations

Regulatory issues


Rising costsRegulatory issues


Limited growthprospects


Increasedcompetition



Reputational risk Rising costs

Integration/cultural issues

Rising costsPoliticaluncertainty

Integration/cultural issues

Increasedcompetition


Reputational risk Reputational riskLack of availablefinancing


Lack of availablefinancing

Lack of availablefinancing

Figure 3: Top five barriers for Asia Pacific respondents for growth through cross-border M&A deals by sector



Global respondents' perception of regulatory risk within Asia Pacificvaries significantly. South east Asia (22%) and China (21.4%) rankas the top two regions/countries where respondents viewed theregulatory environment as likely to stop them from embarking onM&A activity, whereas Australia/New Zealand (1.9%) ranked last.Asia Pacific respondents view political uncertainty, currencyfluctuation and regulatory issues as top three risks and/or barriersin cross border M&A, although the top three risks vary acrossdifferent sectors. (see Figure 3).

In terms of regulatory risks in cross border M&A in Asia Pacific,protectionism remains one of the key concerns (see figure 4).Restrictions on foreign ownership has been a significant factor inM&A deals in the region in recent times. Australia outright blockingSingapore Exchange's bid for its Australian equivalent in 2011 and(at the time of publication of this report) DBS's plan to buy PT BankDanamon in Indonesia being stalled until the Indonesian centralbank revises its caps on single shareholder stakes in Indonesiancommercial banks, are a couple of examples of measures in theregion which could be viewed as protectionist in nature. Some AsiaPacific regulators are planning on tightening up foreign ownership

restrictions even more as a result of increased level of interest intheir respective countries. For example, Indonesia is currentlyproposing to decrease the limit on foreign ownership in local minesto 49 per cent from the current level of 80 per cent.

Figure 4: When considering cross-border M&A opportunitiesover the next two years, which of the following do you see asthe biggest legal or regulatory risks for your organisation?

Tax law 34.6%

Financial regulation 32.7%

Protectionism/restrictions on level offoreign ownership

30.8%

Employment laws 30.8%

Environmental laws 26.2%


Local regulatory requirements can have a variety of different impacts on M&A deals. Fromstructuring decisions such as control vs. minority with appropriate protections, to timing and costimplications of regulatory condition precedents to fundamental business changing decisions, forexample a competition regulator’s conditional clearance. When you add to the mix multipleinstances of these elements in a cross-border transaction, you can begin to see why this area is akey focus for M&A participants in the region. Andrew Whan, M&A Partner, Tokyo


Asia Pacific companies seem to be adjusting their investmentstrategy to cope with the increased influence of regulatory regimesin the region. Asia Pacific respondents have indicated an increasingpreference for acquiring a minority investment in local companieson cross-border deals as compared to past practice. This changein preference in deal structure is not only a way of managingcommercial risks in cross-border deals but is also likely to bereflective (to at least some degree) of foreign investment restrictionsin various Asia Pacific jurisdictions and also of a desire to mitigatethe risks of merger control regulations.

Indeed, competition regimes present an alternative route for stateregulators to influence M&A activity. There is an increasing numberof regimes in the Asia Pacific region which have introduced mergercontrol laws, including China's Anti-Monopoly Law which wasimplemented in August 2008 and the merger control provisions ofthe Indian Competition Act 2002 which came into force on 1 June2011. A Competition Bill in Hong Kong is also currently underreview which, if passed, would introduce a broad competitionregime in Hong Kong (although not at this stage a comprehensivemerger control regime). Merger control elements of such regimescan in particular have significant impact on cross-border M&Atransactions and parties need to be aware of, and be well-advisedas to, the potential implications.


Today executives need to be mindful, of notonly the increasing levels of merger scrutinyin the region, but also the timing implicationsinvolved in coordinating potentially morefilings across multiple jurisdictions. For manyclients, managing antitrust is a critical part ofdoing business in Asia Pacific.Ninette Dodoo, Antitrust Counsel, Beijing



Sources of financing for deals in Asia Pacific has also shifted ascompared to two years ago. Asia Pacific executives now prefer touse existing cash reserves as opposed to external bank debt asthe main source of financing for M&A deals (see Figure 5). 33.6% ofAsia Pacific respondents preferred the use of existing cash reservesfor financing M&A transactions, followed by public markets debtraising (27.1%) and bank bonds (26.2%) with external bank debtplacing fourth. Two years ago, these same respondents sawexternal bank debt (41.1%) as the main source of financing.

This is consistent with the global responses to the survey with 37%of all respondents citing existing cash reserves as the preferredmethod of financing M&A deals.

Asia Pacific companies have also seen the value of their local cashhoards grow relative to the US dollar and Euro over the past fewyears with many of the Asian currencies including the Renminbi,Japanese Yen and Australian dollar appreciating substantially overthe US dollar and Euro – making overseas acquisitions more

attractive. This coupled with the pressure from stakeholders toeither use these cash reserves or return it to shareholders, putsAsian companies in a good position to be able to spread theirwings and look at the M&A opportunities outside the region. Weare starting to see more examples of this such as state-ownedenterprise Bright Foods recent announcement on its acquisition ofa majority stake in Weetabix, a European consumer brand.

However, in line with the global respondents, when asked aboutthe key financial concerns associated with their overall M&Astrategy, currency fluctuation also remains a significant concern forthe Asia Pacific respondents.

Financing M&A


Banks have been more selective in who theylend to since the Eurozone crisis andcertainly for a period of time following theonset of the crisis, banks have taken longerto approve and completeacquisition/leveraged loans. This has mostlikely driven corporate and private equitysponsors to look at funding acquisitions withtheir own cash, in particular for those dealswith tighter completion timeframes, withpossible plans for refinancing at a laterstage. However, in recent months, we haveseen increased activities among banks in theacquisition/leveraged finance area in theAsia Pacific market, so these fundingpreferences may very well change as lendingmarket conditions improve.Anthony Wang, Finance Partner, Hong Kong

� Now � 2 years ago

Figure 5: Preferred methods of financing forM&A deals

0 2010 30 40 50

External bank debt

Bank bonds

Company’s existing cash reserves

Public markets debt raising

%


Ongoing concerns regarding Eurozone sovereign debt and thestrength of the economic recovery globally continue to have animpact on M&A activity in the Asia Pacific region. As companies inthe region look for growth opportunities in emerging and highgrowth markets, cross-border transactions within the Asia Pacificregion are likely to form a larger part of the overall cross-borderM&A transactions in which companies in the region participate.

Some sectors and countries are likely to draw more attention thanothers as investment opportunities. With Asia Pacific regulatorsreacting to ever changing market dynamics, their policies andapproach to cross-border M&A may create impediments for foreigninvestors. Drawing on the expertise of external advisers in thetarget market to help understand and navigate through regulatoryand legal frameworks can assist market participants, especiallynew entrants, to be better prepared for issues and risks that mayarise in cross-border M&A deals in Asia Pacific. Companiesconsidering opportunities in Asia Pacific can benefit significantlyfrom taking the time to plan ahead and to try to understand betterthe risks associated with the deal and the target market.

Conclusion


Asian markets offer good and attractiveopportunities. Although they also come withrisks, and deal making can be challenging,with a good understanding of the business,cultural and legal environment in the relevantmarkets, companies should be able toachieve their objectives and take advantageof the opportunities in the regionRoger Denny, Partner and Head of M&A Asia Pacific



Key contactsRoger DennyPartner and Head of M&A Asia PacificT: +852 2826 3443E: [email protected]

Simon CookePartner, M&A, Hong KongT: +852 2825 8995E: [email protected]

Tim WangPartner, M&A, BeijingT: +86 10 6535 2266E: [email protected]

Simon ClintonPartner, M&A, SingaporeT: +6 6410 2269E: [email protected]

Martin RogersPartner and Head of Litigation andDispute Resolution, Asia PacificT: +852 2826 2437E: [email protected]

Andrew WhanPartner, M&A, TokyoT: +81 3 5561 6615E: [email protected]

Mark PistilliPartner, M&A, SydneyT: +61 2 8922 8001E: [email protected]

Andrew MatthewsPartner, M&A, BangkokT: +66 2401 8822E: [email protected]

Huw JenkinsPartner and Head of Finance, Asia PacificT: +852 2826 3428E: [email protected]

Emma DaviesPartner, M&A, ShanghaiT: +86 21 2320 7215E: [email protected]

Michael Lishman Partner, M&A, PerthT: +61 8 9262 5502E: michael.lishman @cliffordchance.com

Anthony WangPartner, M&A, Hong KongT: +852 2826 3434E: [email protected]

www.cliffordchance.com

This publication does not necessarily deal with every important topic or cover every aspect of thetopics with which it deals. It is not designed to provide legal or other advice.Clifford Chance, 28/F Jardine House, One Connaught Place, Central, Hong Kong© Clifford Chance, May 2012Clifford Chance LLP

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Cross-border M&A: Perspectives on a changing world Asia Pacific highlightsglobalmandatoolkit.cliffordchance.com/downloads/CC-EIU... · 2015-02-13 · Cross-border M&A: Perspectives