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Trend of M&As, privatisation to continue

Confident entrepreneurs, corporate owners taking advantage of uncertainties in macro environment to adjust capital allocation strategies.

Brexit is leading to increased political risk across Europe, with far-reaching implications from a financial markets perspective as well on UK and eurozone economies.

LOOKING back on the first half of the year, 2016 started off with some headwinds, with uneven global growth, divergent monetary policies and the risk of illiquidity in some markets. Prospects of Federal Reserve tightening, reduced bond liquidity, renewed growth scares in China and intensifying geopolitical uncertainties have sparked off temporary market traumas. Major stock markets have been on a mild downward trend, albeit interrupted by significant gyrations. Similarly, bond yields have generally declined over this period, confirming the outlook for slow growth and low inflation.

Most recently, Brexit is leading to increased political risk across Europe, with far-reaching implications from a financial markets perspective as well on UK and eurozone economies.

On a global macro level, the medium term economic outlook seems to be essentially one of "muddling through", with the risk that negative shocks could further weaken economic momentum.

Behind these, nevertheless, there is an underlying picture of ongoing expansion, with economies around the world continuing to recover, albeit at a tepid rate.

From a long-term perspective, we continue to see secular trends in the social, economic, environmental and technological domains that will ultimately drive economic growth and asset returns.

The economic centre of the world is moving slowly east. Since 2000, emerging markets have seen their share of global gross domestic product (GDP) rise from 20 per cent to 38 per cent, and this shifting economic gravitas is likely to continue in the next decade. In this context, there are significant opportunities in emerging market consumption.

It is estimated that in the last two years, around 100 million new households across the world's largest emerging nations have found their way into the middle class, many of whom are in Asia-Pacific. Aided by innovations in technology, e-commerce and an optimism broadly driven by the younger consumer, even in a challenging economic cycle, structural investment opportunities will continue to benefit investors and businesses.

As a region, Asia continues to have many vibrant, growing emerging economies. Many of these secular trends are driving the long-term business and investment activities of Asian entrepreneurs, who are fundamentally optimistic about the long term prospects of their businesses, even though in the immediate term, they do face the macro challenges of subdued global economic growth, market volatility and a slowdown in China which has negatively impacted market sentiment and hence valuations.

In the past few years and continuing into this year, we have observed many entrepreneurs and corporate owners in the region taking advantage of the low valuations in the financial markets to grow through mergers and acquisitions (M&As) and privatisations, and we have supported many of them in these important growth strategies.

With the sluggish stock markets, lower valuations and low interest rate environment, we have seen a trend of privatisations develop.

While privatisation might not be the strategic path for all companies, it is an important and interesting strategy that could be appropriate for specific companies in certain circumstances. Very often, privatisation takes advantage of a disparity between the true worth of a company and its market value; while at the same, giving management more autonomy to pursue its strategy without being occupied with delivering quarterly results.

There could be a few key motivations and objectives when entrepreneurs consider a privatisation event. First, they could see that their companies are undervalued by the financial markets. Privatisation gives them the ability to deploy capital to acquire the outstanding stock of a business that they know best while the markets are uncertain. Secondly, current market conditions allow controlling shareholders to access relatively cheap debt finance due to low interest rates to finance the privatisation. In some instances, the relatively low debt levels and high cash balances also allow the company to effectively finance the privatisation.

However, the take-private process is not always straightforward and requires critical evaluation of business strategy and execution risks. In such situations, entrepreneurs usually require a trusted financial adviser with whom they have a long-standing deep relationship that can offer comprehensive solutions via a holistic platform combining investment banking, private banking and financing capabilities.

Some businesses owners are also opting to grow through M&As. Globally, companies' M&As reached a new peak in 2015 in terms of value at US$4.6 trillion, with Asia Pacific overtaking EMEA (Europe, the Middle East and Africa) for the first time at over US$1 trillion. In the first quarter of this year, despite the macro events, overall Asia-Pacific outbound M&A continued to outperform, driven by Chinese companies.

This speaks of the confidence of Asian companies in expanding their businesses regionally and globally. Armed with massive cash reserves and undaunted by volatility, business owners and entrepreneurs across Asia are generally optimistic and eager to grow through acquisitions-both within the region and globally.

Since 2008, many of the businesses of Asian entrepreneurs have continued to perform strongly, enabling them to build up robust capital positions. This region is continuing to generate significant amounts of capital for growth, and we see a trend of resilience in both corporate M&As as well as private banking and wealth management, with entrepreneurs continuing to actively deploy capital.

Across a wide variety of sectors, be it consumer-centric sectors ranging from telecommunications, media and technology, agribusiness to financial institutions, or capital intensive industries such as real estate, metals and mining or energy, entrepreneurs are looking for new sources of growth to diversify their businesses, bring value-add products and services to their businesses to meet the changing consumption patterns of emerging middle-class consumers, to expand their customer base and create long term value. Some are looking to divest assets to achieve greater earnings growth and corporate clarity.

In many such M&A situations, entrepreneurs and business owners look to the expert advice and global capabilities of a financial partner with whom they have an established deep relationship, who intimately understands their business lifecycles and can effectively support and execute on complex cross-border transactions for them with multiple stakeholders' involvement.

We believe that the key drivers of M&A will persist this year. Against a backdrop of sluggish economic growth, disruptions to core business models and monetary policy divergence, acquisitions remain a likely route for companies in adjusting their resource and capital allocation strategies in response to the developments and challenges of the macro environment.

  • Pankaj Goel, co-head of Southeast Asia and Head of Southeast Asia M&A, Investment Banking and Capital Markets, Asia Pacific, Credit Suisse
  • Bernard Heng, head of Strategic Advisory and Private Asset Group, Private Banking Asia Pacific, Credit Suisse