PETALING JAYA: Although total merger and acquisition (M&A) deals’ value declined in 2023 with the collapse of tech M&As being the biggest drag on strategic M&As, experts are expecting more deals to be carried out in 2024 supported by the big backlog of assets that did not come to market in the down year of 2023.
The recent Global M&A Report 2024 by Bain & Co stated that the total M&A market dropped by 15% year-on-year (y-o-y) to US$3.2 trillion, the lowest level in a decade.
Moreover, strategic M&As dropped by 6% y-o-y with more than 27,000 deals announced, totalling about US$2.4 trillion.
The local M&A scene, however, has come alive and saw some major deals being done including the takeover of UMW Holdings Bhd
by Sime Darby Bhd for RM3.57bil, as well as the sale of its healthcare business Ramsay Sime Darby Health Care Sdn Bhd to Columbia Asia Healthcare Sdn Bhd for RM5.7bil cash.
In October 2023, AMMB, MetLife aimed to sell jointly-owned units to Great Eastern for RM1.12bil, while reports said Global Infrastructure Partners or GIP is in talks to buy up to a 49% stake in MMC Port Holdings, in a deal potentially valuing the country’s biggest port operator at around RM30bil.
Only this week, French energy company TotalEnergies paid some RM4.27bil to OMV of Austria for its 50% stake in upstream natural gas producers SapuraOMV Upstream Sdn Bhd. More deals could be on the way said analysts, including Sapura Energy Bhd’s need to sell its 50% in the same company to fund its multi-billion- ringgit debt restructuring.
Tradeview Capital chief executive officer and founder Ng Zhu Hann said in order to spur the activity in the local M&A market, foreign funds’ participation and the vibrancy of the domestic stock market needed to go hand in hand.
“If these two factors co-exist, naturally the deal-making space will become more active, which includes private equity (PE) transactions such as exits through initial public offerings or sales to other PE firms.
“For the past five years, our stock market has been on a downtrend and only in January this year have we started seeing foreign funds coming in.
“The net inflow for January was RM630mil, so, this is a very good sign as it indicates that foreign funds are returning to Malaysia,” he told StarBiz.
Ng said the sectors of interest in the local M&A space will be those that are backed by government policies like the National Energy Transition Roadmap and New Industrial Master Plan.
“Sectors like renewable energy, utilities and healthcare will definitely be an exciting space for M&A activities,” he said.
Deloitte Malaysia M&A advisory leader Yap Kong Meng said one of the key appeal of M&As in Malaysia has always been the fact that the country is an emerging market with good growth potential and established business infrastructure.
“We have always seen a good level of M&A activities within many sectors in Malaysia, including consumer-driven businesses (covering retail and manufacturing), healthcare and technology, as well as energy/resources.
“In the coming years, I do expect to see the E&E/semiconductor industry to have more M&A activities than in previous years, given the very favourable secular macro trends playing out in the industry globally,” he said.
Moroever, Yap said established and large Malaysian companies and investment funds are making acquisition forays into overseas markets and the volume of such outbound transactions tends to be about a third of the overall M&A deal volume in general in the past two years.
On the apparent obstacle of exits in M&A deals in the past as seen in examples like PE firm CVC Capital Partner’s multiple attempts to sell its stake in QSR Brands (M) Holdings Bhd, and the recent conclusion of PE firm KKR & Co’s deal with Weststar Aviation Services Sdn Bhd to exit its stake in the company after 10 years, Yap said the ability of PE firms to exit is driven by the respective investee companies’ sector performance and outlook.
“Investee companies which are facing declining sales due to slowing consumer spending in the past 12 months will tend to face a more challenging exit environment.
“Since PE firms focus on investing in established businesses with a good profit track record as a minimum requirement, we should continue to see a good level of M&A activities in Malaysia, so long as our government continues to create a good local environment for businesses to flourish,” he said.
On this note, Ng said the problem of difficulty in exiting deals among PE firms should not persist going forward. On the other hand, Grant Thornton Malaysia senior partner Hooi Kok Mun said the biggest challenge in M&A deals is the uncertainty and volatility of the market.
“These will impact the demand and the attractiveness of the investments and subsequently it affects valuations of the investments. Investing is a tough job given that PE look at certain returns upon exit and the only catalyst that could improve deal making is when there are consistent policies and a stable government coupled with an optimistic growth forecast,” he said.
Hooi expects education, healthcare and food production to continue to be the sectors of interest in the M&A space in Malaysia given the weakening of the ringgit and also the specialised nature of these sectors.
“There are many reasons for M&A but I see synergies or means towards exponential growth as being the major drivers for M&A in Malaysia. This is where the potential partners can see the benefit of coming together.
“Given the weakening of the ringgit, I believe there is a higher prevalence of foreign companies acquiring Malaysian companies rather than the other way around,” he said.
Rakuten Trade head of equity sales Vincent Lau said with the interest rate in Malaysia currently at a stable and comfortable level of 3%, there is no sense of urgency or pressure for companies to engage in fire sales, where firms need to offload assets quickly at discounted prices.
“As a result this makes it more challenging for deals to materialise. Private equity firms, in particular, may find it difficult to identify opportunities for bargain acquisitions. Overall, the absence of fire sales contributes to a more cautious and deliberate approach to deal-making in Malaysia,” he said.
Lau added while the technology sector sees significant activity in terms of fundraising through IPOs, M&A activity within this space is relatively subdued. This aligns with global trends where tech companies often opt for IPOs rather than M&A transactions.
The Bain report noted strategic M&A market reflected uneven performance. For example, tech deals cratered while activity in healthcare and life sciences as well as energy and natural resources rebounded. The Americas market held steady as Europe and Asia faltered.
While healthcare and life sciences as well as energy and natural resources M&As saw a rebound last year globally, it was not enough to offset declines in tech and manufacturing, the report stated.
The management consulting firm identified the gap between valuations as the biggest obstacle that contributed to the lowest year for strategic M&A in a decade and caused prices to plunge.
Notably, the overall deal multiples at 10.1 times was the lowest in 15 years, with room to drop further. As such, Bain said buyers took a skeptical view of assets priced with pride while sellers saw little reason to give away value, amidst declining valuations. Additionally, it was reported that PE exits were down 44% in value and 22% in volume in 2023.
“The valuation gap was the only thing that surveyed buyers and sellers seemed to agree on. More than two-thirds of buyers told us that it negatively impacted M&A activity. On the other side of the table, at nearly the same rate, potential sellers cited more favorable deal valuations as a top factor in deciding when to bring their assets to market,” it said.
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