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MERGER and acquisition (M&A) activity here took a tumble this year but market participants are hoping that 2016 will bring a rebound as a government-linked company (GLC) restructuring trend continues to unfold and a global backdrop of low growth and low returns dampens opportunities for organic growth.
Singapore companies are increasingly shaping up as ripe M&A targets as the country builds on its regional hub status, bankers and lawyers say, adding that the unfolding of recent developments such as China's One Belt One Road initiative, Japan Inc's overseas buying spree and the Asean Economic Community could fuel more deal activity next year.
M&A activity in the Republic nearly halved in 2015 from 2014 with the average deal size shrinking. According to Thomson Reuters data, the total value of announced M&A deals involving Singapore firms had reached US$52.3 billion by the middle of December, a 44.8 per cent drop from US$94.9 billion in 2014, and the average size of disclosed deals also fell to US$107.7 million this year compared with US$133.4 million in 2014.
The top few deals this year were dominated by GLCs. These included French shipping firm CMA CGM's roughly US$5 billion deal to snap up Neptune Orient Lines (NOL), conglomerate Keppel Corp's S$2.7 billion privatisation of its property arm Keppel Land and a merger of four units under Temasek Holdings and JTC into a single urban development giant worth S$5 billion.
Market participants told The Business Times that Singapore M&A in 2016 could be driven by the steady maturing of local companies and regional trends, with more Asian companies going on the acquisition trail to defend their market share against increasing competition. Private equity (PE) fund activity could pick up too as valuations remain low.
"Despite a slower velocity of deal activity across both M&A and capital markets in Singapore over the past 12 months, strategic interest for transformative M&A remains high. Leading domestic players across key industries continue to have relatively strong balance sheets, and interest to grow inorganically," said David Aronovitch, co-head of South-east Asia investment banking at Morgan Stanley.
Morgan Stanley flagged the potential GLC restructuring trend in June 2015. It shone the spotlight on Temasek-linked companies, saying that GLCs with a high potential to internationalise and pursue M&A activity included Ascott Residence Trust, ST Engineering, Keppel Corp and Sembcorp Industries while unlisted GLCs included PSA International, Singapore Power, Surbana Corp, Wildlife Reserves Singapore, Singapore Technologies Telemedia, Mediacorp and Pavilion Energy.
Stefanie Yuen Thio, joint managing director of TSMP Law Corp, said the GLC-related M&A deals this year show the maturing of the Singapore market. "Our companies have become corporate forces to be reckoned with in the global marketplace. The rise of Asia as a world economic hub has also made Singapore a natural focal point of M&A activity ... At the same time, these mergers and acquisitions allow Singapore corporates to realise some of the value in companies they have been building up over the last few decades, and will free up capital for them to make strategic investments offshore."
Apart from this domestic trend, there could be more M&A interest next year from Japanese and Chinese buyers as well as PE funds, market participants said.
Alvin Lim, head of banking advisory for South-east Asia at HSBC, said that Asian companies are generally attractive targets given the region's growth potential. "Japanese companies in particular will continue to be active in scouting for assets abroad, given the need to seek growth outside of their domestic markets."
Major inbound investments by Japanese firms included engineering giant Chiyoda Corp's investment in offshore firm Ezra Holdings' subsea business, Kintetsu World Express' purchase of NOL's logistics arm APL Logistics and conglomerate Mitsubishi's investment in commodities trader Olam International.
David Cheng, head of corporate finance at OCBC Bank, said China's One Belt One Road initiative could lead to more M&A deals in the infrastructure, transportation and logistics sectors across South-east Asia.
Rodyk & Davidson senior partner Valerie Ong added: "I believe the catalysts of M&A activity in the near term will be the Trans-Pacific Partnership trade agreement and further along, the Asean Economic Community as it rolls out."
According to Thomson Reuters, inbound M&A from foreign corporates targeting Singapore-based companies reached US$18 billion this year as at mid-December, marking a 24.1 per cent jump in deal value from the previous year and the highest annual value since US$23.4 billion in 2012. Mr Cheng added that although the number of large PE fund deals dwindled this year, that could pick up. "We are aware of a number of potential deals (both private and public) in Singapore involving PE funds, but they are still in progress."
But Gregory Thiery, co-head of South-east Asia investment banking at Morgan Stanley, cautioned: "Singapore and South-east Asia have continued to be challenging markets for private equity investors to find sizeable investment opportunities."
The total deal value for PE-backed M&A in Singapore fell 74 per cent year-on-year to about US$717.8 million as at mid-December 2015, according to Thomson Reuters data.
A sluggish stock market could also trigger more delistings and deals in Singapore. "Lower valuations from the fall in Asian equity markets could mean a trend of privatisations that can drive M&A activity into 2016. We believe that once the equity markets stabilise, the pent-up demand for equity raising will lead to more deals getting done in 2016," Mr Lim said.
Mr Cheng added: "With the sluggish public equity markets, M&As can also be seen as a method of raising capital by companies, especially unlisted companies."
Sectors tipped to see more M&A activity in 2016 include those hit by a prolonged slump in crude oil prices or ones where companies are over-leveraged, bankers said.
On a more positive note, growing affluence in South-east Asia could also prompt more interest in the consumer and healthcare sectors. Mr Cheng also said the IT and technology space could see more deals, "with IT companies looking to grow and a fair amount of capital interested in this sector, including from funds".