DESPITE a challenging external environment, the number of overseas acquisitions by Malaysian companies has held steady in the 1st half of this year. Going forward, merger and acquisition (M&A) experts expect the number and value of cross-border M&A deals involving Malaysian firms to surpass anything the country has seen before.
PricewaterhouseCoopers (PwC) head of corporate finance Mohd Anwar Yahya said there had been 45 overseas acquisitions by Malaysian companies so far this year, broadly on par with the 1st half of 2002 when 47 deals were done.
More significantly, there had been a marked increase in the average estimated deal value to US$69mil from US$44mil, while total values had risen by almost 50% to US$3.1bil from US$2.1bil last year, he said.
Deloitte & Touches corporate advisory unit executive director, Eugene Wong, said that with the advent of the Asean Free Trade Area regionally and World Trade Organisation liberalisation globally, firms' survival options would appear to be limited, and moving overseas could no longer be avoided.
Consequently, he said, cross-border M&A activity by progressive Malaysian companies would likely take off in the next few years.Wong said many of these companies were, surprisingly, small-and-medium-scale enterprises, often with deals too small to be reported in the press. But collectively, they represented a huge force, he said.
The IOI-Loders deal, YTL Powers purchase of Wessex Water or one of Petronas massive foreign acquisitions may make the headlines, but it is the more numerous smaller deals that will drive the growth, he said
Wongs expectation of a strong pick-up in M&A deals was shared by local experts, who said Malaysian firms were still hungry for foreign assets, despite the dampening effects of the ringgit's depreciation against currencies such as the euro, making such buys more expensive and seemingly less attractive.
The ringgits current weakness would not be an overriding factor, concurred KPMG Financial Advisory Services managing director Gan Ah Tee. More important factors are the profitability, cashflow and future financial contribution (of the ventures) ? plus other strategic reasons, he said.
The consensus is that as M&A strategies are long term in nature, the geopolitical concerns and outbreak of Severe Acute Respiratory Syndrome (SARS) that marred the global economic outlook in the 1st half of the year have had little impact on local firms appetite for synergistic targets abroad.
They may have been delayed slightly but they were not put off by any means, said a merchant banker who agreed with the analysis.
He said there were clear indications that some businesses were venturing abroad in search of synergy, lower costs and larger markets, given the limitations of the local marketplace, while domestic takeover targets were becoming scarcer and global competition was becoming a local reality.
Anwar said that in venturing offshore, Malaysian companies were primarily seeking to acquire new technology, new sources of raw materials (e.g. energy sources for Petronas) and complementary products, as well as to diversify their earnings and markets.
Strategic factors, he said, were driving more local outfits to venture overseas demonstrating that Malaysian companies were responding as proactively to the same global challenges as those in neighbouring countries.
The recent publication of 2 seemingly contradictory reports on the growth in M&A activity globally and within the Asia-Pacific suggests that the region could be seeing the start of a sharp upward trend.
A survey released early this week by KPMG said the war in Iraq and the SARS outbreak had caused a decline in the number of M&A deals closed. KPMG said the number of global deals slowed by a third to 7,324 during the 1st half of 2003 from 10,943 during the same period last year, while the value of closed deals fell by 19% to US$464bil from US$571bil.
A Thomson Financial survey published on Wednesday, however, found M&A values in Asia, excluding Japan, rising a third in the 1st half of the year to US$22.3bil based on announced deals.
As completion of deals may lag announcements by several months, this discrepancy could mean that M&A activity in the region was at what Morgan Stanleys Asia M&A head Harry van Dyke called an inflection point.
As he was quoted by Reuters as saying, the fact that so many deals were announced during what was an extremely difficult period means that M&As are becoming an increasingly more important strategic tool for companies in the region.
With markets recovering, the mood has improved and more and more of our clients are re-evaluating opportunities. In many ways, Asia is ahead of the rest of the world and this improvement is reflected in our own pipeline and in the level of M&A dialogue we are seeing, said van Dyke, who sees South Korea and Taiwan as the key M&A markets in the region.
According to Thomson Financial, oil and gas was the busiest sector for M&A deals in Asia during the 1st half of 2003, with 11.2% of the market share.
Petronas purchase of US$1.8bil worth of shares in Egyptian LNG and the West Delta Deep Marine concession was the 2nd largest M&A deal in the region after South Korean Shinhan Financial Groups US$2.8bil planned acquisition of an 80% stake in Chohung Bank, the survey said.
Malaysia also seems to be attracting foreign buyers, with the recently announced liberalised foreign ownership rules and the weaker ringgit making some Malaysian companies likely takeover targets.
The stimulus package does make investing in Malaysian businesses more attractive, said Anwar, who added that there would be foreign interest in the logistics, water, automotive and financial services sectors.
On the domestic M&A scene, where the total value of deals has fallen slightly to US$2.6bil (256 deals) in the 1st half of 2003 from US$2.8bil (288 deals) in the same period last year, the expectation is for further activity in the plantation, ports and logistics, banking, insurance, retail, water and sewerage sectors.