What makes Asia so attractive to M&A targets?
Brown: What’s exciting about Asia at the moment is the fact that you have two different sets of investors who are interested in doing deals in Asia. The first is companies, private equity firms and sovereign wealth funds from the West and the Middle East that are looking to access Asian markets and capital.
Perhaps the more surprising is the second component, which is companies and owners within the region looking to expand or secure access to key resources. You get quite a lot of intra-Asian deals because it’s such a large region. I think that’s what makes it so attractive at the moment; you’ve got these two very different groups looking to do deals.
Which industry sectors show the most promise for M&A activity in Asia in 2013?
Brown: We are beginning to see a trend based on Q3 and Q4 in 2012 and Q1 of 2013. The hot areas in Asia right now are mining and natural resources, telecoms and insurance.
A number of the region’s governments have recently started to award the types of telecom licenses that we are very familiar with in the US and Europe. You’ve got large telecom companies either waiting for the local firms to buy these licenses and then maybe looking to take them over or perhaps partnering with them at an early stage to get involved in the telecom licenses.
A lot of the big insurance companies that are headquartered in the US or Europe are looking to divest some of their non-core assets. I think that’s interesting because you would have thought that with this access to people in developing markets, they might want to focus on those. But I think they are looking to exit, perhaps, for capital raising requirements, which are forcing them to look at their strategy and perhaps retrenching a little bit to core markets that they are more familiar with.
What stage of the M&A transaction process poses the biggest challenges for investors in Asia?
Brown: The biggest challenge is the gap between buyer and seller expectations — particularly when you have a buyer from the United States or Europe and a seller from Asia. In some of these developing countries in South East Asia, the deal mechanics can be less sophisticated. That’s why big international companies and private equity firms have been using international law firms with local advisors to help get all sides up to speed on what they should expect.
Where do deals between US and European buyers and Asian targets typically go wrong?
Brown: A lot of times the deal can go wrong before it even gets started because people underestimate the whole Asian concept of face. It does not necessarily mean losing face, it’s a much broader concept. It involves just very simple things like going for a meal or a coffee with someone and absolutely not talking about the deal. A lot of deals are done in Asia on trust and part of that is getting to know people. You have to invest the time if you want to get a deal done here.
The second issue is the information gap. Sellers in Asia can be taken aback by the amount of diligence that buyers want to see — even before they strike any form of deal. That’s definitely an educational process.
I think the third area where deals fall over in Asia is because of the local laws. If you are looking at an Asian target — you have to appreciate that a lot of these laws are very new and it’s very difficult for local advisors to be as definitive as they might be as to what impact the local legislation is going to have. Very often it’s not been tested in the courts or the regulations underpinning the law have not been enacted — or only enacted in part. It’s hard for our clients to price that information gap, or to price the risk of that local law not playing out the way they think it might.
What other cultural difference should Western companies be aware of?
Brown: You have to look at HR issues at a much earlier stage of the deal than you would perhaps if you were working in the US or Europe. Things like fit. For example, is your business model and the way you look after your employees going to work in Asia? Have you considered the fit, cultural changes, pay differences and management styles? If you get these wrong, you have mispriced the deal.
Has the eurozone crisis impacted M&A activity in Asia?
Brown: I think it has, but in a positive way. With the lack of access to capital for big deals in Europe, private equity firms have started to broaden their horizons and that has perhaps accelerated their plans to set up in Asia. And when they get here, they want to do deals. But I don’t think you can underestimate the dislocation the eurozone crisis has had everywhere.