27 Nov ‘Adjacency’ in Asia
According to Intralinks’ Deal Flow Predictor, the Asia Pacific M&A recovery is well underway, with quarter-on-quarter and year-on-year gains in early stage M&A activity in Q3 this year. Leading the pickup in activity were South Korea, Singapore, India and Japan, with Australia and Hong Kong the M&A laggards of the region. However, China and Australia remain top of the M&A tables from both the acquirer and target perspective, according to Thomson Financial Services. These two major economies have represented more than 50% of the total regional deal value between 2010 and 2014.
The Intralinks report also identified Technology, Manufacturing/Industrials and Consumer products as the sectors driving this M&A surge, and their recent ‘Dealmakers Sentiment’ survey also identified Energy as an active sector over the next 6 months or so.
Growth through acquisition is again the focus in Asia, according to the Institute of Mergers, Acquisitions and Alliances (IMAA), who state that growth strategies (eg. increasing market share, expanding products or growing new markets) can be achieved faster and more reliably through M&A as opposed to organic growth.
So what are some of the challenges and ‘secrets to success’ for M&A in Asia?
It appears that hostile M&A in Asia is dead. From its peak in 2006 hostile acquisitions have fallen to almost zero over the last 2-3 years. Therefore getting to know your target is critical, and herein lies the heart of the M&A challenge in Asia: finding the right targets, convincing them to sell, then integrating them successfully into your organisation.
In this region, information about private or family-owned companies can be difficult to find, and the level of financial disclosure may be poor. Local advisers and industry bodies are often well placed to provide market insight, and potential acquirers that are new to the region should seek out local 3rd party support rather than trying to research the market themselves.
For many owner-managers, it is not an easy decision to sell their private or family-owned company. Much time and patience will be required from the potential acquirer to build trust and reach an agreement on price and terms. However the acquirer must then be prepared to rapidly accelerate into due diligence and deal close once an agreement in principle is reached. Also, cultural and/or language differences will pose significant challenges for post-close integration and much focus on preparation and execution will be essential to ensure integration success.
Having just attended IBN’s International Merger and Acquisition Conference in Kuala Lumpur, Malaysia, I heard the majority of the presenters speak with optimism regarding inbound, outbound, and intra-region M&A in Asia. A common theme across many of the presentations was the importance of ‘adjacency’.
When formulating your M&A strategy there are two key dimensions to consider: Business similarity and Geographic proximity. You may be pursuing targets in the same business and geography as your current operation, aiming to enhance your market penetration, or your strategy may be to move along either the Business or Geography dimension to pursue product/service diversification or geographic expansion.
Notwithstanding the tremendous M&A potential in Asia, common wisdom is, given the particular challenges of the region, that acquirers should remember the importance of ‘adjacency’: focusing on targets in your current line of business and local geography, or taking only one step at a time (along either the business or geography axis) to an ‘adjacent’ sector. One presenter at the KL conference warned us that, given the challenges of M&A in Asia, trying to jump into new geographies with new products/services at the same time was the equivalent to playing in the ‘graveyard of M&A’.
The power of ‘adjacency’ can be amplified by a complementary concept – ‘practice makes perfect’. Recent surveys by Bain & Company show that serial acquirers deliver more value through their M&A activities than occasional practitioners. These two approaches (adjacency plus frequency) appear to positively reinforce each other, with successful acquirers being able to build momentum, internal M&A capability and self-confidence through a series of ‘adjacent’ acquisitions.
In Asia, small but frequent acquisitions into ‘adjacent’ sectors is emerging as the key to successful growth through M&A.