For Asia Pacific’s M&A Upswing, Look Down Under

As Asia Pacific (APAC) enters the home stretch for 2022, Australia-New Zealand (ANZ) is virtually alone in buoying optimism for the region. The mood of ANZ clients remains positive. Early fears of bank rate increases seem to be subsiding, and the mergers and acquisitions (M&A) market is repositioning asset valuations accordingly. In Japan, for example, there’s anticipation for a market pickup from a relatively subdued Q3 2022.

The outlook for the rest of APAC looks more subdued. In Greater China and South Korea, a wait-and-see approach prevails as dealmakers analyze the headwinds of policy direction and rapidly rising interest rates. In India, valuations have taken a hit and investors are raising questions about profitability. Capital markets have been volatile here, so M&A and initial public offerings (IPOs) have slowed. In Southeast Asia, challenges have grown for stakeholders — especially coupled with macro rapid interest acceleration, stock market volatility and geopolitical uncertainty.

(The SS&C Intralinks Deal Flow Predictor for Q4 2022 goes deeper into the regional and global market trends for M&A. It’s out now, having been compiled by tracking early-stage M&A transactions globally that are in preparation or have begun due diligence.)

Overall, the sentiment across the Asia Pacific region is a far cry from expectations at the start of the year. There are pockets of robust activity in Japan with inbound cross-border M&A driven by the weakening of the yen as well as activities from private equity (PE) funds, but the pipeline for M&A remains the strongest across ANZ despite not performing as well at height of the post-pandemic recovery era. There is a sense of optimism in Southeast Asia as dealmakers revisit strategies to pivot and adapt to market conditions. Conversely, in Greater China, a huge year-over-year (YoY) decrease is making for a very weak pipeline with declining domestic and cross-border deals. In South Korea, new deals, driven by the abundance of dry powder, are in the market while investors are still increasing their allocations to private equity (PE) funds. Meanwhile, in South Asia, the M&A outlook is lukewarm — the environment has many slow-moving deals and cautious clients.

Sectors to watch

Competition for qualified assets remains fierce across APAC, particularly in Healthcare, Real Estate, Energy and Natural Resources in ANZ. The technology space looks to have softened throughout 2022 and will likely continue to do so into 2023.  

Corporates in Japan seem more cautious to invest in the current climate. PE funds with significant dry power are stretching out their investments to diversify and reduce risks. In South Korea, a growing number of financial investors are finding it difficult to buy firms using leverage, resulting in a competition pool with bigger players who have deeper pockets.

Investors in South Asia are finding targets with better valuations. The market has seen some companies being more aggressive with their strategy to leverage the current situation.

Valuations are high across the board here. The outlier: Southeast Asia. Valuations corrected to normal levels in ANZ and South Korea, the latter having soared to historic highs in recent years. Relatively stable equity markets in Japan have allowed valuation levels to hold up well.  

In South Asia — following fears of a bubble burst from unrealistic expectations in startups — investors are being more careful in looking at revenue and profitability.

Pick a headwind, any headwind

Rising interest rates and potential recession fears in Japan and ANZ are causing bidders to become more selective on the quality of assets and their durability into 2023 with more looking to divest non-core assets to strengthen balance sheets as opposed to a dash to the finish line to close deals.

In Greater China, most are focused on increasing cash flow and having more control over expenditures. This has resulted in a significant number of IPO plans being suspended or postponed.

For South Asia, the current geopolitical situation is a concern, with implications on global import and export restrictions although there are upticks in domestic healthcare and industrial sectors. In Southeast Asia, clients are facing uncertainties across sectors, with the high cost of capital, increased pressures on revenue and potential inflation over valuations.

Sectors size up as a mixed bag across APAC. Healthcare, Agriculture and Natural Resources are strong in ANZ. While Technology has suffered here, it’s trending high in Japan, China and Southeast Asia.

Real Estate looks worthwhile in ANZ and Greater China, as does Energy in China, Japan and South Asia. Life Sciences is showing promise in China, South Korea and South Asia. Retail is trending in Japan, with Industrials doing the same in South Asia.

Entering Q4 2022, certain regions within APAC are worth the extra attention: Restructuring and debt capital markets in Greater China as well as Japan’s outbound M&A activity, which have not shown any signs of picking up. For deal flow to recover in Japan, a pickup in outbound M&A activity and a stronger yen is key to getting the market back on track.