insights into asia pacific m&aglobalmandatoolkit.cliffordchance.com/downloads/finance...insights...

Insights into Asia Pacific M&A FinanceAsia and Clifford Chance M&A Survey

Clifford Chance

2015 was a bumper year for M&A in the Asia-Pacific region. The boom in M&A in the region was largely

driven by a significant increase in the value of intra-regional deals, particularly group restructurings.

Outbound deals from Asia-Pacific strategic acquirers were also a key part of the market, with numerous US$

billion+ acquisitions by Chinese and Japanese companies. We expect the strength of outbound and intra-

Asian M&A to continue in the next year. This is supported by our survey, where 90% and 88% of the

respondents respectively expect an increase in, or at least the same levels of, activity for outbound and intra-

Asian M&A in 2016.

Challenges still remain though, with legal and regulatory enforcement on the rise, and with anti-corruption,

merger controls, foreign investment clearances, sanctions and comprehensive and reliable due diligence

being key issues to overcome for the successful completion of M&A. As the survey highlights, this puts much

greater emphasis on the need for experienced advisers in the region, who understand the markets, to ensure

a proper assessment of acquisition opportunities and to minimize the risks which naturally arise in making

acquisitions.

Another interesting feature of this year's survey is that the balance of power in M&A deals in the next 18

months is seen as shifting strongly in favour of the buy side, increasing in the survey over the past three

years from 60% in favour of the buyer to 79%. This is the highest we have seen in the nine years of

conducting the survey, so we expect to see more deal terms and protections swing in favour of the buyer

with, for example, more buyer friendly purchase price consideration mechanisms, material adverse change

conditions and warranty protections and limitations. That said, in the case of attractive businesses, we

expect auction processes to be able to generate strong competition and they will probably be more

favourable to the sell side. In this context, we have a separate annual survey of Asia-Pacific Market Practice

in Private M&A, which provides detailed analysis of deal terms and protections, which we would be happy to

share with you.

I look forward to hearing from you if we can support you in your assessment of M&A opportunities or if there

are any areas on which you would like us to share our insights.

M&A: Views from Asia Pacific

2 Insights into Asia Pacific M&A

Roger Denny

Head of M&A Asia Pacific

Clifford Chance

Key findings


Bigger deal sizes. We’ve continued to see deal sizes get bigger, with more US$ billion+ deals this year in Asia Pacific

than before. With many companies pursuing global strategies, we continue to expect to see more big ticket

acquisitions particularly by Asian companies, both within the region and globally.

Inbound. China again remains the top destination with an increased aggregate of 65% respondents selecting it as

a top three destination for Asia Pacific inbound M&A, followed by India (33%). Interestingly, Australia/New Zealand

and Japan have both risen strongly on last year, with 31% and 22% respondents respectively picking them as popular

choices for inbound M&A. Hong Kong and Vietnam also feature strongly, with Indonesia still high at 27% but

significantly down on last year.

Outbound. Sentiment remains positive with 90% of respondents expecting an increase in, or at least similar levels of,

outbound M&A on the previous year. The US (87%), the Eurozone (63%) and UK (47%) continue as the most popular

target jurisdictions for outbound M&A, with the US and UK increasing significantly on the previous year. In light of the

drivers of M&A which were highlighted, the most popular being Asian companies adopting a global strategy and the

desire to find new markets, we are expecting even stronger outbound M&A in the next year.

Buyer in control. The balance of power is seen as shifting strongly in favour of the buyer in the next 18 months,

having increased in the survey over the past three years from 60% in favour of the buyer to 79%. This is the highest

imbalance we have seen in the nine years of conducting the survey. We do, however, expect strong competition in

auction processes for attractive assets and, therefore, a more balanced, or seller friendly, situation in those

circumstances.

Drivers. The biggest drivers for Asia Pacific outbound M&A remain Asian companies adopting a global strategy and

the desire to find new markets, followed by depressed valuations in target markets and the desire to secure

knowhow/technology and brands. The desire to find new markets and future growth is also driving inbound M&A and

64% of respondents believe Western companies are likely to continue their focus on their emerging market strategy,

notwithstanding the greater economic uncertainty in those markets.

Drags. Concerns about local protectionism and regulatory issues remains a major issue in cross border M&A and was

identified as having the greatest negative impact. Global and regional economic conditions and sellers' unrealistic

price expectations also featured next most strongly. Significant concerns were also raised about bridging cultural

differences in the acquisition process and the integration of companies acquired in the region was considered more

difficult than expected (60%).

Deal Structure. Full control of targets was the most popular structure according to 39% of respondents. Alternative

deal structures are also seen as viable, with joint ventures with a strategic partner and partnerships with private equity

and other financial investors the most preferred structures according to 25% and 16% of respondents respectively.

Keys for success. Comprehensive due diligence to ensure no surprises and a good acquisition team, including

advisers with local knowledge, were identified as the joint top factors to successfully complete deals in the region.

Whilst 60% of respondents felt integration in the region was more difficult than anticipated, the good news is that 65%

felt their acquisitions had been successful.

Clifford Chance

Expected M&A deal size over the next 12 months

Preferred methods

of financing

Factors for success

Good deal

structure and

protection in

legal

agreements

48%

Comprehensive due

diligence

63%

Good acquisition

team including

advisers with local

knowledge

63%

Managing and

clearing

regulatory

hurdles

42%

Managing

stakeholder

expectations

39%

Assured

funding

46%

Who is in control?

Balance of power will

be with

Buyers Sellers

US$100 million –

US$500 million

41.4%

< US$100 million

26.5%

US$500 million

- US$1 billion

22.4% > US1 billion

9.7%

Deals with strategic

/financial co-investor

Equity

Swap

Cash

reserves

DCM

ECM

Bank loans

60%

35%

40%

42%

55%

69%

21%

79%

Clifford Chance 4 Insights into Asia Pacific M&A 4

Other key findings

Clifford Chance

Sector trends


31

39

26

16

10

11

6

7

4

2

65

49

52

40

23

27

15

10

11

8

1

Consumer, retail and leisure

Financial services

Technology, media and telecom

Pharma/healthcare

Real estate

Oil and gas

Power

Mining

Industrials and chemicals

Transportation

Other services

Greatest investment Greatest + 2nd greatest investment Total (Greatest + 2nd greatest + 3rd greatest)

Consumer, retail and leisure is identified as the top priority sector this year. It has now been the top sector for three years. This no doubt reflects the fact there are still

opportunities to find new markets and growth in the region and to take advantage of the increase in disposable incomes which, in the medium to long term, still remains

attractive. Retail deregulation in Vietnam could make the country very attractive, while populous countries like China, India and Indonesia will continue to drive activities in the

region.

Financial services and TMT came in a close second and third choice respectively, as indeed they have in the past three years. Many global financial institutions continue to seek

to reshape their businesses in light of regulatory changes and increased compliance risks and costs, and regional institutions are looking to grow their businesses through

acquisition, particularly in key new markets and product lines.

80

67

66

54

40

25

23

22

16

4

45

Pharma/healthcare has seen a number of

big mergers in the US and Europe, and,

although deal sizes in Asia are generally

smaller than these, there is a focus on

acquisitions as the sector consolidates

and as companies pursue a strategy to

take advantage of increasing spending by

governments and individuals on

healthcare in Asia and develop products

suitable for local markets.

With the market correction in the natural

resources sector, there may be an

opportunity for acquirers, although we

may need to see more stress in the

sector before a wave of deals are signed.

Clifford Chance

Overall, the outlook for inbound M&A from non-Asia-

Pacific strategic acquirers remains positive, with 81%

of respondents expecting an increase on the previous

year or at least similar levels.

Mainland China continues to be the top destination for

inbound M&A, increasing to 65% from 58% last year.

India was the second most popular target jurisdiction,

followed by Australia/New Zealand and Indonesia.

Interestingly, Australia/New Zealand and Japan have

both risen strongly on last year. Australia's devalued

currency is driving M&A, with activity in infrastructure,

agriculture, consumer and healthcare sectors.

Although there is interest in the commodities sector

after the fall in prices, we may need to see more stress

before a wave of deals sign.

Hong Kong, Vietnam and Singapore also feature

strongly. Indonesia remains popular but is significantly

down from last year's 47%, reflecting a general

lowering of the strength of many South East Asian

markets, which for several years has been a "hot" sub-

region both in Asia-Pacific and in the global context. In

aggregate, however, there is still considerable interest

in South East Asia and Vietnam and Singapore

featuring more strongly than last year.

Asia Pacific inbound M&A


Mainland

China

65%

India

33%

12%

South Korea

18% Singapore

22% Japan

31%

Australia/ NZ

26% Hong Kong

10% Philippines 20% Vietnam

Indonesia

27%

5% Taiwan

Thailand 9%

Malaysia 9%

Clifford Chance

Overall, the outlook for cross border outbound M&A from Asia-Pacific strategic acquirers remains very positive, with 90% of respondents expecting an increase on the

previous year, or at least similar levels. The US, Eurozone and UK remain the most popular target jurisdictions for outbound M&A, with the US increasing to 87% from

71% in the prior year. The UK has also seen a notable increase in interest, rising to 47% from 36% in the prior year. In light of the drivers of outbound M&A highlighted

below, we are expecting even stronger outbound M&A in the next year, with Chinese and Japanese companies in particular likely to be strong participants as their

domestic market growth slows, they see more limited opportunity to expand in their domestic markets and they adopt a global strategy.

Asia Pacific outbound M&A


US

87%

South America

26%

Africa

22%

Eurozone

63%

Canada

23%

14% Middle East

UK

47% CEE

16%

Top 3

dri

vers

of

Outb

ound M

&A

Asia companies adopting global strategy

Desire to find new markets

Depressed valuations in target

markets

Desire to secure know-

how/technology, brands

Improving

economies in

US/Europe

Desire to secure

supplies of

natural resource

73%

49%

46%

38%

23%

21%

Clifford Chance

Key drivers…


Asian companies adopting global strategy The top driver for Asia-led M&A

Depressed valuations in target markets Attracting investors to target markets with the hope of taking advantage of attractive valuations

Desire to find new markets A top driver of Asia-led M&A and inbound M&A. In respect of the latter, 64% of respondents believe Western companies are likely to continue their focus on their emerging market strategy notwithstanding the greater economic uncertainty in those markets

Desire to secure know-how/technology, brands Are key drivers for TMT, CG&R and Industrial sectors

Improving economies in US/Europe Attracting Asian companies to target acquisitions in those markets and increasing the confidence of companies there to make acquisitions in Asia-Pacific

Strategic repositioning of financial institutions Disposals driven by increasing complexity and cost of regulatory compliance and focus on more profitable businesses, particularly by Western headquartered institutions. Regional companies interested in opportunities to grow outside their home markets.

Correction in natural resources With the fall in commodity prices, and a rebound not expected soon, 59% of respondents believe the market is attractive for opportunistic acquirers

Increased confidence of acquirers Asian companies continue to become more sophisticated in cross border M&A

Lack of opportunities in home markets Particularly relevant to low growth markets and where companies already have strong domestic positions

Successful acquisitions 65% of respondents state acquisitions they have involved in have been considered successful for the acquirer

Clifford Chance

...and challenges


Concerns about local protectionism and antitrust Growing complexity in navigating anti-trust and other regulatory regimes and increasing enforcement action in major jurisdictions. 70% of respondents see

protectionism as one of the most significant concerns for buyers, up from 64% last year

Regional and global economic conditions Slow down in growth in Asia-Pacific, especially China, and the effect on the US and European economies as quantitative easing ends are seen as

significant risks

Sellers’ unrealistic price expectations In the past two years, seen as the biggest drag on M&A and potentially stalling M&A deals - still seen as one of the top three most significant challenges

this year

Cultural differences in process Comprehensive due diligence to ensure no post-acquisition surprises and good deal structures and legal agreements seen as key to successful M&A, but

can be resistance to these for various reasons from the seller. Advisers with local experience key to manage this

Insufficient comfort in respect of due diligence Poor transparency heightens risks. The need for comprehensive due diligence and a good acquisition team with local knowledge are identified as the two

of the most important factors when conducting M&A in the region

Lack of attractive targets Companies are holding on to quality assets

Bribery and corruption Global reach of bribery and corruption regimes necessitating increased scrutiny of investments and due diligence as well as issues with post-acquisition

integration

Post Merger Integration 60% of respondents see integration of acquisitions in Asia-Pacific as more difficult than anticipated. Post-merger integration is key to any successful

acquisition and can be a greater challenge in foreign markets where the business, cultural, legal and political issues are different to those in the acquirer's home markets

Clifford Chance

Antitrust and other regulatory hurdles

10 Insights into Asia Pacific M&A 10

Strategic considerations

Richard Blewett, Head of Anti-trust, China

Communication

Where possible, coordinate responses to overlapping requests, with

similar and consistent information submitted across jurisdictions.

Generally assume that regulators are communicating with each other.

Managing relationships with multiple regulators

Companies may need to balance between focusing on regulators in

"high-intervention" jurisdictions such as China, EU and US, while not

alienating regulators in other jurisdictions.

Timing

Timing is critical: prepare early, have a list of

"prioritized jurisdictions" (e.g., with pre-

notification and/or more data input), and have a

timing strategy and be disciplined on timing and

deadlines.

Antitrust laws have continued to expand and

develop across the Asia Pacific region.

Having flexed their muscles in the early years of China's antitrust regime, the

three Chinese antitrust agencies are going through periods of internal reform

and reflection ahead of an overhaul of the Anti-Monopoly Law next year. For

most M&A deals which are reviewable in China, the transformation has been

positive in terms of the timing and predictability of review periods – and

MOFCOM has seen a huge leap in the number of filings as a result.

However, as last year's decision to block the P3 shipping alliance shows,

MOFCOM remains able and willing to step in where it believes China's

interests are threatened by global deals.

Similarly, India has seen an increase in the number of merger filings

and has imposed a number of fines for gun-jumping, making it increasingly

important in deal-planning. Elsewhere in Asia, Hong Kong finally

introduced its Competition Ordinance in December 2015, whilst across

ASEAN, the Philippines, Laos and Thailand enacted new competition laws.

Many of the recent big deals have been in sectors where antitrust

enforcement has traditionally been high - technology, pharmaceuticals and

consumer goods. The proportion of notified deals in these sectors subject to

some form of antitrust intervention remains relatively high. In many cases,

buyers come into these deals with a pre-agreed remedy package in order to

pre-empt antitrust concerns. Crafting the right package of remedies is often

the key to managing the objections of antitrust agencies and the timing

expectations of other stakeholders.

Antitrust enforcement actions in the major jurisdictions are also increasing.

Most of the major jurisdictions saw a resumption of the trend towards ever

higher fines, reflecting increasingly aggressive enforcement by the antitrust

authorities. China's National Development and Reform Commission imposed

a record fine of nearly USD 1 billion on Qualcomm in early 2015. South

Korea saw its first criminal prosecution of a foreign firm for participation in an

international cartel. Indonesia's competition authority is seeking to raise its

status and obtain more independent powers to enable it to combat cartels.

“ More regulators and more rules make navigating

the global merger control map increasingly complex.

The recent spate of mega-mergers has helped keep

enforcement rates high, particularly in the

pharmaceutical and tech sectors.

”

Clifford Chance

“Economic Sanctions shouldn't prevent companies from operating in a given jurisdiction; but it does require comprehensive

diligence pre-acquisition and continuous monitoring post-acquisition.” Wendy Wysong, Partner, Litigation & Dispute Resolution

Focus on compliance and risk

management With increasingly aggressive enforcement and focus by regulators

around the world, and in particular, the US, UK and China on

corruption, due diligence in this area and steps to mitigate risks are

of increasing importance for buyers and sellers. Some key target

areas to focus on are:


M&A in the face of heightened economic

sanctions Political and military uncertainty (e.g. Russia/Ukraine and Middle East)

including economic sanctions is seen as a significant drag on M&A. Whilst this

is a concern for companies looking at acquisitions, measures can be taken to

ensure compliance with sanctions laws and minimise risks against potential

penalties.

Post-acquisition Ongoing monitoring Pre-acquisition

Due diligence to

cover Target’s

operations with

sanctions targets or

in sanctioned

countries/sectors

If they exist, to

determine extent of

business contact

and whether

exemptions would

be available to

cover business

operations after

acquisition

Newly acquired

company to

implement any

necessary

changes to its

business (e.g. cut

ties with certain

customers,

ringfence US

persons from

certain customer

transactions, etc.)

Implement

sanctions

compliance

programmes

during integration

phase

Sanctions laws (US

in particular) change

continuously

Acquirer must

monitor these

changes

continuously if it

decides its Target

can continue to

interact with its pre-

acquisition

customers that raise

sanctions risks.

Buyer

Earlier, and more thorough due diligence on target's anti-corruption policies and compliance history (particularly if a "red flag“ sector or jurisdiction)

Consideration of transaction structure e.g. asset deal/share deal/ joint venture? (JVs may lead to responsibility for violations of a JV partner)

Additional robust representations, warranties and indemnities from sellers in relation to historical compliance

Obtaining anti-bribery certifications from key persons at target

Avoidance of transactions that lead to unmanageable liability risk

Planning ahead – detailed plans regarding anti-corruption practices and procedures that will be implemented post-completion

Seller/Target

Commencing and/or

refining internal policies to

ensure compliance with

anti-bribery legislation

before sale

Statements of commitment

from management

Risk assessment and

monitoring of compliance

Vetting prospective

employees and appropriate

disciplinary procedures

Education of employees

Diligence of business

relationships

Policies and procedures

that meet highest standards

Clifford Chance

Control deals and joint ventures/partnerships favoured

Full control acquisition of targets has traditionally been the most popular structure, and it is still the most preferred structure according to 39% of

respondents. Alternative deal structures also seen as viable options, with joint ventures with a strategic partner and partnerships with private equity and

other financial investors the most preferred structure according to 25% and 16% of respondents respectively.

Deal structures and pricing gap


Joint ventures and alternative deal structures

Provide opportunity to share business, financial,

cultural and political risk – a particular feature in

emerging markets, and combine JV partners’

expertise

May enable foreign ownership restrictions and

antitrust considerations to be navigated

successfully

May add valuation gap

Often used as a stepping-stone to acquire 100%

Know your partner

Clear delineation of

roles and decision

making

Can be unstable

What happens next?

Extensive due diligence

required

Detailed contractual

framework required

Contractual framework

must address how

disputes to be dealt with

Critical to agree exit

mechanism at the outset

Bridging the pricing gap

60% of respondents believe sellers’ unrealistic price expectations is a drag on M&A. It was ranked as one of the biggest drags on M&A and alternative forms of structuring

can help to mitigate risk. The challenge of bridging the pricing gap can be addressed, at least in part, by the following:

Contingent or deferred consideration e.g. earn-out

Vendor retained stakes

Staggered sales

Purchaser clawbacks

Vendor financing

Warehousing

Clifford Chance

There was a slight reduction in expectations compared to last year that PE funds will be increasing or

maintaining similar levels of activity on the buy-side (89.5%) and sell-side (86%). 2015 has been a year of

two halves with a busy first half of the year and second half being quieter due to the significant equity

market volatility in the late summer and a more pessimistic growth story, in China in particular.

Private Equity in focus

Insights into Asia Pacific M&A

Auction processes become somewhat of a lottery – sourcing proprietary

transaction opportunities is a key focus of the Asian PE funds – for quality

assets at the right price, these remain few and far between.

Simon Cooke, Co-head of PE, Asia-Pacific

35%

51%

14%

PE sell-side activity

Increase Similar Decrease

51% 38.5%

10.5%

PE buy-side activity

Increase Similar Decrease

“ ”

A competitive market

place

Asia-Pacific is becoming an increasingly

competitive market in the PE space –

numerous PE funds have cash which they

need to spend and the quality assets at the

right valuations are few and far between.

GP casualties:

we are starting to see PE

houses fall by the wayside as

they struggle to raise new funds

and effectively drop out of the

buy-side market

The rise of the strategic:

corporates with strong balance

sheets have re-entered the

market in force. PE funds find it

difficult to compete when

strategics can demonstrate the

synergies on an acquisition –

Germany’s Metro winning the

auction for EQT’s Classic Fine

Foods being a good example

13

Clifford Chance

This is the ninth year in which Clifford Chance and FinanceAsia have collaborated on a regional M&A

survey. Over 200 respondents expressed their views in November 2015, with 69% at CEO, MD, CFO or

executive level. FinanceAsia was appointed to conduct this M&A trends study by engaging with leading

decision makers and M&A professionals using an online survey. The goal was to gauge perceptions on

the very latest market conditions and identify M&A trends in Asia Pacific.

About the survey

29%

18%

15%

7%

6%

5%

3%

3%

2%

2%

2%

1%

1%

1%

1%

1%

1%

2%

Hong Kong

Mainland China

Singapore

Southern Asia

North America

Malaysia

Indonesia

Taiwan

Australia

India

Japan

Eurozone

Europe other

Middle East

South Korea

Thailand

UK

Others

14

Respondents’ Profiles (%)

22%

18%

10%

9%

9%

7%

6%

5%

3%

1%

1%

9%

Banking

Asset management

Services

Alternative …

Legal/Advisory

Private equity

Industrial

Consumer

TMT

Energy and resources

-

Others

33%

16%

20%

14%

17%

MD/CEO/Partner

COO/CFO/Director

Company executive

Business development or M&A manager

Others

Clifford Chance

Global M&A Key Contacts

*Linda Widyati & Partners in association with Clifford Chance


Asia Pacific

Roger Denny

T: +852 2826 3443

E: roger.denny

@cliffordchance.com

Australia

Lance Sacks

T: +61 28922 8005

E: lance.sacks

@cliffordchance.com

Latin America

Anthony Oldfield

T: +1 212 878 3407 /

+55 11 3019 6010

E: anthony.oldfield

@cliffordchance.com

Central and Eastern Europe

Alex Cook

T: +420 22 255 5212

E: alex.cook

@cliffordchance.com

Spain

Javier Garcia de Enterria

T: +34 91590 9466

E: javier.garciadeenterria

@cliffordchance.com

France

Laurent Schoenstein

T: +33 14405 5467

E: laurent.schoenstein

@cliffordchance.com

Global

Guy Norman

T: +44 20 7006 1950

E: guy.norman

@cliffordchance.com

Africa

Spencer Baylin

T: +44 20 7006 1519

E: spencer.baylin

@cliffordchance.com

Germany

Thomas Krecek

T: +49 697199 1524

E: thomas.krecek

@cliffordchance.com

Middle East

Mike Taylor

T: +971 4503 2638

E: mike.taylor

@cliffordchance.com

North America

David Brinton

T: +1 212 878 8276

E: david.brinton

@cliffordchance.com

Hong Kong

Andrew Whan

T: +852 2825 8903

E: andrew.whan

@cliffordchance.com

India

Neeraj Budhwani

T: 852 2826 2428

E: neeraj.budhwani

@cliffordchance.com

Japan

Tatsuhiko Kamiyama

T: +81 35561 6395

E: tatsuhiko.kamiyama

@cliffordchance.com

Singapore

Kathy Honeywood

T: +65 6661 2083

E: kathy.honeywood

@cliffordchance.com

Thailand

Andrew Matthews

T: +66 2401 8822

E: andrew.matthews

@cliffordchance.com

Indonesia*

Linda Widyati

T: +62 212988 8301

E: linda.widyati

@cliffordchance.com

China

Terence Foo

T: +86 10 6535 2299

E: terence.foo

@cliffordchance.com

United Kingdom

Mark Poulton

T: +44 20 7006 1434

E: mark.poulton

@cliffordchance.com

Korea

Hyun Kim

T: +82 2 6353 8118

E: hyun.kim

@cliffordchance.com

Netherlands

Hans Beerlage

T: +31 20711 9198

E: hans.beerlage

@cliffordchance.com

This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not designed to provide legal or other advice.

Clifford Chance, 10 Upper Bank Street, London, E14 5JJ

© Clifford Chance LLP 2016

* Linda Widyati & Partners in association with Clifford Chance www.cliffordchance.com

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