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Why Asia bankers aren't satisfied with US$552 billion in deals

People pass the JP Morgan Chase & Co.

[HONG KONG] Asian investment bankers are watching the region's busiest deal spree on record, with upwards of a half trillion dollars in acquisitions this year. They still aren't popping the champagne corks.

Cross-border deals accounted for 42 per cent of the region's deal volume through June, the lowest proportion since 2004, according to data compiled by Bloomberg. That's a setback for the bulge-bracket banks that can generate higher fees from these transactions, where their international networks are most valuable.

Dealmaking has been dominated by group restructurings from Asia's industrial titans, as China slows overseas energy purchases to focus on increasing corporate efficiency at home. Some Wall Street banks were conflicted out of the biggest cross- border deal from Asia, and they're facing the threat of increased competition from boutique firms expanding in the region.

"The volumes are great, but to say 'hey, we've got a booming M&A market,' that's just not the case," said John Kim, Goldman Sachs Group Inc.'s head of mergers and acquisitions for Asia excluding Japan. "It's all moving in the right direction, but there's just not enough flow of the larger real advisory deals." Corporate Confidence In headline terms, acquisitions involving Asia Pacific companies excluding Japan surged 61 per cent to US$552 billion in the first six months. That's the fastest start to a year on record, the Bloomberg-compiled data show. The number of cross- border deals where a financial adviser was credited actually fell - a blow for banks, which can be paid as much as 20 percent more on such transactions, according to research firm Freeman & Co.

Advisers can charge more for cross-border transactions because they need to field banker teams in multiple locations, and navigating overseas regulations can lengthen the time for deal completion.

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A look at the five biggest deals reveals the problem. Internal revamps at South Korean and Hong Kong conglomerates took up three slots, rounded out by a Chinese developer buying assets from its parent. Only one actually showed an Asian firm with the confidence to expand: Hutchison Whampoa Ltd's US$16 billion purchase of Telefonica SA's O2 wireless brand in the UK.

While global acquisition volumes this year were boosted by megadeals including Royal Dutch Shell Plc's proposed $61 billion BG Group Plc purchase and Charter Communications Inc's takeover of Time Warner Cable Inc, there was just one deal above US$10 billion from Asia.

"If you strip out the dissonance in the numbers, the M&A market been pretty mediocre at this point in time," said Keith Pogson, a Hong Kong-based senior partner for financial services at EY.

Rise of the Boutiques Boutique investment banks are finding opportunities amid the shifting landscape. Moelis & Co. worked with Hutchison on its UK foray and accounted for more than 20 per cent of cross- border dealmaking in Asia. Rothschild was among banks advising China National Chemical Corp. on its 7.4 billion-euro (S$11.1 billion) bid for Milan-based tiremaker Pirelli & C. SpA, while Australian transport firm Toll Holdings Ltd hired Lazard Ltd for its sale to Japan Post Holdings Co.

New competition is coming. Four ex-bankers from Barclays Plc's Hong Kong-based team are forming their own firm called Quintus Partners, and Anthony Steains is leading a spinoff of Blackstone Group LP's Asian M&A advisory business. Goldman Sachs isn't among the top five banks working on Asian cross-border acquisitions this year, though it still ranks as the No. 1 deal adviser overall, according to data compiled by Bloomberg.

"There is now a much more equal playing field between us and the integrated banks," said Claire Suddens-Spiers, head of Asian equity advisory at Rothschild.

Cross-border deals are suffering as China, last year's second-most acquisitive country after the US, concentrates on overhauling its bloated US$3 trillion state sector. The government combined two locomotive makers in May to form a US$70 billion company better able to compete worldwide, and is in the process of pooling 300 billion yuan (S$64.9 billion) of tower assets owned by the three major phone carriers.

Cofco Corp, the Beijing-based food giant with US$57 billion of assets, will consider combining units and selling peripheral businesses, people with knowledge of the matter said in May. The government is also weighing a separation of the national oil firms' pipeline assets, estimated to be worth as much as US$300 billion, people with knowledge of the matter said the same month.

"We see the big chunky deals still coming from domestic consolidation and restructurings," said Brian Gu, co-head of Asia Pacific M&A at JPMorgan Chase, which led the financing for the Pirelli takeover. "They're important deals, but they may not be the biggest fee generators."


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