Strong M&A appetite and robust market confidence among SEA corporates

By Digital News Asia July 23, 2018

50% of SEA companies intend to pursue acquisitions in the next 12 months
72% of SEA executives see portfolio transformation as the most prominent boardroom issue

Strong M&A appetite and robust market confidence among SEA corporates

AFTER record-high deal intentions six months ago, M&A outlook across Southeast Asia (SEA) has tempered slightly.

This is according to the 18th EY Global Capital Confidence Barometer, a biannual survey of 2,500 executives across 43 countries, including 180 from SEA (Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam).

Half (50%) of SEA executives indicate that they plan on pursuing deals in the next 12 months, down from 56% six months ago.

Confidence in the local M&A market remains strong with about three-quarters of SEA respondents (73%) believing that it is improving, up from 53% six months ago.

At the same time, nearly all (99%) SEA executives expect corporate earnings to either improve or remain stable.

Despite the upbeat sentiments, SEA companies appear to experience challenges in completing deals: 83% shared that they have failed to complete or cancelled a planned acquisition in the past 12 months.

The reasons cited by SEA respondents include competition from other buyers or disagreement in price of valuation (54%); concerns about competition or antitrust views (22%) and intervention by activist investors (15%).

Vikram Chakravarty, EY Asean Transaction Advisory Services leader says: “While interest in conducting M&A in the region is very high in SEA, internal and external pressures are impacting the ability to complete deals. A more effective and structured portfolio transformation may be necessary to ensure that deals close and are successful. Deal competition is increasing and evolving.

“Traditionally, corporate buyers have dominated the SEA M&A market. However, we are now seeing an increasing number of private equity firms, which have significant dry powder funds to invest, looking to pursue high-value assets in the region.”

Portfolio transformation tops boardroom agenda

As SEA companies look to prepare themselves for the future, about three-quarters (72%) view portfolio transformation as the top priority in their boardroom thinking.

Through continuous assessment of current operations, risks and opportunities, executives are looking for ways to identify strategic gaps in their current portfolios — something they will need to do more of if they want to boost their ability to see deals through to completion.

Cloud computing and big data (39%), distributed ledger technology such as blockchain (29%) and artificial intelligence and robotic process automation (21%) also feature prominently on the board agenda of the SEA corporates, which look to improve overall decision-making and boost company performance through these technologies.

As more companies adopt new technologies, 64% of SEA respondents indicate that they are struggling to hire people with the right skillset.

Chakravarty says: “Digital transformation is driving companies to adopt a laser focus on portfolio transformation. Opportunities offered by new technologies as well as the potential threats posed by digitally-savvy competitors are now key factors in businesses’ transformation plans.” Strong M&A appetite and robust market confidence among SEA corporates

Demand in SEA for “smart” public infrastructure investment

SEA executives see government spending as a critical driver of their growth plans as 90% expect government investment in infrastructure to increase over the next 12 months.

This is much higher than expectations from respondents in the US (59%) and across Europe, Middle East and Africa (69%).

George Koshy (pic, right), partner, Ernst & Young and Malaysia Transaction Advisory Services Leader says: “Governments in the region are focused on building smart cities, improving transport infrastructure, using new technology and building digital ecosystems.

“With investments including those from China’s One Belt, One Road initiative and focus on the digital economy, as well as significant infrastructure budgets in the region, we are seeing notable deal activity in sectors such as technology, utilities, automotive and transportation driven by this investment and expect this trend to continue.”

SEA companies look homeward for deals

The top investment destinations among SEA respondents are Malaysia, Singapore, Indonesia, Thailand and Vietnam.

Power and utilities, oil and gas and industrials are the top sectors across SEA that look to make acquisitions.

Automotive and transportation, technology and life sciences sectors are also hunting for assets as they address the impact digital disruption has on their business.