While Asia Pacific escaped much of the immediate effects of the global financial crisis it was unable to escape the aftershocks. Amid the turmoil financial services (FS) institutions in the region stalled their plans for M&A to focus on their core business strategy. Now operating in clearer skies, confidence has returned remarkably quickly and with it a renewed focus on M&A.
The proportion of Asian financial institutions expecting to do deals has returned to near pre-crisis levels. But with new external factors at play and recent shifts in FS institutions’ business priorities, the Asia-Pacific FS M&A landscape has been left significantly altered and firms now face a raft of new challenges, according to a new report from PricewaterhouseCoopers (PwC), in collaboration with IDC Financial Insights Asia/Pacific.
The number of financial services deals disclosed in Asia/Pacific slowed by 12% from 567 transactions in 2008 to 499 in 2009 with total disclosed deal value falling by US$8.2 billion. The decline was broadly spread with largest decline in deal value seen in Australia with a drop of 62.4% from US$27.7 billion to US$10.4 billion, in part due to the fact that the 2008 figure was boosted by the US$17.9 billion acquisition of St Georges Bank by Westpac. In contrast activity in Japan doubled to US$30.6 billion and Taiwan saw deal activity increased by 113% to US$6.0 billion.
Matthew Phillips, leader of financial services M&A, PricewaterhouseCoopers China, said:
“The storm clouds that previously engulfed the M&A markets are now lifting and we expect to see significant increases in the breadth of deal activity in the coming year. Global players that survived the crisis are faced with limited growth in mature markets in the west and Japan and are renewing their pursuit of growth opportunities in the regions growth markets. They will be joining the resurgent super-regional players that have sustained deal activity over the last couple of years and together this will increase competition for deals.”
‘What Lies on the Horizon? New Players – New Rules – New Opportunities’ has revealed a new impetus for FS M&A activity in the Asia Pacific region. Although attractive acquisition targets are increasingly scarce, 81% of respondents expect M&A activities to ramp up in 2010 and indicated that size was core to success. Those parties keen on inorganic expansion will move quickly over the coming months to ink deals. 54% of respondents expect to evaluate or undertake M&A transactions in 2010, compared to 42% in 2009. Only 21% have pointed to the potential divestment of businesses in 2010, compared to 25% in 2009.
Nelson Lou, transaction services partner, PricewaterhouseCoopers China, said:
“The 2009 mantra, ‘focus on what is core’, is no longer enough. Financial institutions have a new found confidence and are now placing a higher emphasis on new sources of growth. 2010 will bear witness to a number of FS institutions making maiden forays into new geographies across the region.”
Indeed, 56% of those looking to expand inorganically have ambitions to expand into new geographic regions. Countries likely to witness the highest number of new market entrants include Mainland China, India, Malaysia and Indonesia.
The survey has also highlighted that Asia’s ‘super-regionals’ have now gained the upper hand. As a number of global institutions scaled back their activities Asia-based institutions stepped up to fill the vacuum and are now aggressively undertaking acquisitions to support ‘super-regional strategies’.
Matthew Phillips, leader of financial services M&A, PricewaterhouseCoopers China, said:
“Homegrown institutions are furiously building significant region-wide platforms to seize opportunities in the broader Asia/Pacific market. As the dust of the crisis settles, we see these institutions gaining strength to compete against established global players, creating a new competitive landscape.”
Regulatory changes will continue to shape the market during 2010. For instance, Thailand and Malaysia are bringing to market new master plans in 2010, just as Taiwan, Vietnam, and India are introducing salient changes to regulations governing competition in the banking and insurance sectors within their markets. In general, these master plans aim to lift the efficiency and competitiveness of the industry, typically by encouraging consolidation and opening up the sector to a greater number of new or foreign players.
Nelson Lou, transaction services partner, PricewaterhouseCoopers China, said:
“Regulation will have huge implications for the future shape of the Asia-Pacific FS M&A market. While there are a number of positive developments in certain markets which will also encourage investment and deals, Basel lll proposals may substantially increase the capital requirements and liquidity constraints for some. This coupled with the spectre of protectionism which still looms in a number of markets makes it particularly hard to chart a course at the moment.”
Regulation was cited by 48% of respondents as a key challenge to post crisis growth. However, in a sign of the increase in the competitive environment, 53% of respondents said the most challenging factor was the lack of personnel with appropriate skills as new players in the market and increasingly aggressive incumbent players fight for crucial but scarce skills. Concerns over the quality and scalability of IT platforms to support growth were the third most commonly cited concern (38%).
Matthew Phillips, leader of financial services M&A, PricewaterhouseCoopers China, said:
“Some institutions have put major system migrations on hold during the crisis. Addressing these issues whilst at the same time devoting resources to the integration of systems in a major acquisition pose real challenges. Institutions that build into their acquisition IT and operations plans the prospect of acquisitions will be much better placed to integrate the people, processes and technology aspects of the two separate entities such that there is minimal disruption to “business as usual”. Although easier said than done, those organisations that have given serious thought to these issues as part of their business strategy will be much better placed to make integration happen quickly which will result in a real competitive advantage.”
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