Deloitte Malaysia M&A leader Yap Kong Meng told StarBiz there would be a contrast in new M&As in 2H22 as macro headwinds such as rising interest rates and rising raw material prices continue or worsen and impact valuations.
PETALING JAYA: Merger and acquisition (M&A) activity in Malaysia should remain healthy in the second half of the year (2H22) as deals in gestation are on track to be completed but rising finance costs and cautiousness could slow new deal numbers.
Deloitte Malaysia M&A leader Yap Kong Meng told StarBiz there would be a contrast in new M&As in 2H22 as macro headwinds such as rising interest rates and rising raw material prices continue or worsen and impact valuations.
“The higher interest rates and high inflation are affecting M&A activity in certain sectors in Malaysia and the world.
“M&A volume would persist in early 2H22 since many deals were gestating this year,” he said.
M&A activity has been strong in corporate Malaysia in 2022 with big-ticket deals to be completed in the 2H22 consisting of the RM5.49bil offer by Amanat Lebuhraya Rakyat Bhd to take over four toll expressways from companies such as Gamuda Bhd
and Lingkaran Trans Kota Holdings Bhd.
Bank Islam chief economist Mohd Afzanizam Abdul Rashid said when Covid-19 hit the economy, calls for efficiency and cost effectiveness became more pressing.“Naturally, M&A is one of the key options for companies to grow albeit inorganic way.
It also includes Fraser and Neave Holdings Bhd’s move to takeover Cocoaland Holdings Bhd as well Malaysia Building Society Bhd’s potential merger with Malaysian Industrial Development Finance Bhd, including the megamerger of Celcom Axiata Bhd with Digi.Com Bhd, among others.Local companies were also active in cross border deals with Axiata Group Bhd and PT Axialta Tbk buying a 66% stake in PT Link Net Tbk for RM2.63bil (with a mandatory general offer for the remaining 33% stake to follow) while telco players Edgepoint Infrastructure and Edotco Group spending some RM6.6bil to buy tower assets from Philippines-based telco operator PLDT.
Meanwhile, Tenaga Nasional Bhd continues its acquisitions of renewable assets in mature markets like the United Kingdom.
Deloitte’s Yap expects M&A activities to be driven by good strategic reasons rather than factors like a weaker exchange rate.
“A company could be acquiring a production base in Malaysia because our exchange rate renders the production base as low cost.
“However, the same company will not make such an acquisition if other factors do not align well such as low labour productivity, poor economic stability, poor general logistic infrastructure, and other factors,” he said.
Global M&A total deal values fell by 23% year-on-year (y-o-y) to US$2.2 trillion (RM9.7 trillion) in 1H22 as major economies raised interest rates to tame runaway inflation, grappled with the conflict in Ukraine and stock markets turning bearish.
Transaction numbers fell by 20% y-o-y to 15,764 deals according to data from Dealogic. Investment banker turned investor Ian Yoong Kah Yin felt there would be a couple of large M&A deals in the banking sector in 2H22.
“The clock is ticking for the unwritten grandfather rule in Malaysian banking, where certain individual shareholders were allowed to exceed the 10% limit in shareholding.
“These controlling shareholders are getting on in age and children are not keen in managing the banks. It is highly likely that they might be keen to sell.
“Indications are that the Australian and New Zealand Banking Group (ANZ) might be keen to divest its 24% stake in AmBank (M) Bhd,” Yoong told StarBiz.
Yoong anticipated sustained M&A activity in the food and beverage sector due to difficulty to scale up to a regional level given the constraints of capital and management.
He added M&A activity is usually highest in mature and progressive robust economies. Capital markets have to be reasonably sophisticated to accommodate such corporate exercises.
“Malaysia’s capital market is fairly sophisticated to drive M&As.
“The proximity of a thriving capital market in Singapore is a boon to M&As in Malaysia. Many large private equity funds and investment banks are located in Singapore.
“The mindsets of founder-owners have evolved in the past decade.
“There is a realisation that it is better to sell the business when the business is thriving under the leadership of the founders than to see the business flounder under the second generation,” he said.
He, however, expects M&A activity would likely taper off as the rising cost of funding will make acquisitions more expensive to fund.
“In a regime of high interest rates, internal rate of return (IRR) computation will be adversely impacted. In basic terms, it is considerably more attractive to invest in a 10-year bond yielding 7% than acquiring a business with an IRR of 8% in high risk businesses.
“The IRR must of course be higher than the company’s cost of capital.
“Acquirers will be reluctant to pay high premiums to market value, sought by business owners, given the economic uncertainty of a potential global recession,” he said.
Bank Islam chief economist Mohd Afzanizam Abdul Rashid said when Covid-19 hit the economy, calls for efficiency and cost effectiveness became more pressing.
“Naturally, M&A is one of the key options for companies to grow albeit inorganic way.
“Certainly, there will be risks associated with M&A and therefore, the due diligence would need to be carried out in a more intense and robust way.
“Competition is going to be more stiff while operating costs are also rising. In some industries, barriers to entry are somewhat lowered thanks to technology.
“A good example would be digital banks and financial technology which will pose a great challenge to the incumbent players, for example, the traditional banking institutions,” he said.
