High cost of deals notwithstanding, M&A activity in Asia, specially in the financial services sector, is seen to take on an upward trajectory over the next five years, fuelled by West’s pro-Asia stance looking at the region as the Home of Growth.

That the M&A activity, which made its modest beginning in 2006, is set to gather steam, and is surmised from the fact that today there is furious competition to buy out quality assets that are in limited supply as also following the spread of activity to more countries across the region.

One other significant aspect being that this activity is now spanning out to more sub-sectors within the financial services segment. Competition, capability and capacity building are three Cs that is catalysing the spurt in, and catalyse the future, M&A activity, in Asia.

According to PriceWaterhouseCoopers’ Financial Services M&A Going for growth in Asia June 2007 Survey, if 2005 saw M&A activity of $38.8 billion, in 2006 the same (including insurance) rose to a record 66 per cent to touch $64.5 billion.

The Survey, based on responses of 230 financial services executives, saw nearly 74 per cent of them stating that their organisation would see significant M&A activity in the coming five years as compared to just over 68 per cent of those surveyed in 2005.

The Survey, second such annual exercise, is part of PricewaterhouseCoopers global Financial Services M&A Programme, which examines the outlook for M&A deals in the financial services sector for the coming years, in terms of target countries as well as the goals of M&A activity.

Taking over
And, within the Asian region, China and India, continue to dominate as the preferred M&A destination, driven by their economic growth conditions. Though China saw the interest in the country flag to 47 per cent as against 52 per cent previously, with the players seeking to broaden their horizon of opportunities that is unfolding. China continues to be sought after, thereby giving it that strategic market-edge, as new sectors — insurance and trust companies are exploring prospective deals. Likewise, India, saw interest marginally rise from 36 per cent in 2005 to 39 per cent in 2007.

China and India, for all their imperfections and still unfolding regulatory regimes, are simply too large opportunity to ignore and conventional methods of pricing will often need to be tailored to fully reflect the overriding strategic objectives and the opportunity cost of deferring an investment decision.

Furthermore, what is propelling the rash of M&A activity in the region is the insurance sector which has become a key driver with the overall deal value tripling over 2006’s from $4.4 billion to $13.5 billion. Driving this trend, the survey says, is the desire of Western insurers to catch up with the market leaders.  

Growth & demand
That growth, not regulatory milieu, is catalysing the high spate of M&A activity in the region, the survey says, can be seen from the fact that, 24 per cent of the respondents said they consider liberalisation less of a driver now as compared to 30 per cent in 2005.

Also the results simply imply that Asia’s financial services industry is learning to live with the underlying implications of the current regulatory environment, or at the very least putting more emphasis on growth.
Though many of the drivers behind the trend stayed same as in the previous survey, price as an area of concern emerged as principal barrier to undertaking M&A activity, with half of the respondents citing this as an worrying factor. A clear sign that competition for deals is intensifying. But high prices have not been a deterrent for, on the contrary, it only brought more deals on to the market. However, concerns about value for money is expected to lead some organisations to put more emphasis on organic growth plans.

Capital efficiency
Besides organic growth and high prices, the other factor guiding players, the survey notes, on the M&A path, is capital efficiency, a reflection on the increasing presence of large private equity funds in the region.
This, the survey points out, has led many financial services firms to consider whether or not their balance sheets are appropriately leveraged. In terms of the means of achieving capital efficiency, the respondents put M&A on a par with organic growth.

As competition for deals intensifies, and in the process, buoying the prices of deals, strategic goals would weigh heavily upon companies as they seek to close in on pricey deals and come on top in competitive bids while achieving full price synergies, according to the survey.

Increasing competition from both domestic and foreign players is the main driver of M&A activity in financial services sector, the survey notes pointing out that 47 per cent of respondents cited increasing competition from domestic players as main driver of restructuring over next five years, while 44 per cent cited increasing competition from foreign players.

All are seeking the same goal – a strong local market presence. Indeed, 47 per cent of their organisation’s M&A or restructuring activity over next five years, while 46 per cent said they would use this route to enter new geographic markets. Over medium term, foreign financial institutions already established in Asia are expected to pose the biggest competitive threat.

Besides gearing up for competition from regional players, other factors that are fuelling the spate of frenzied M&A activity across Asia, is the firms’ need to build capability and capacity, seeking a strategic investor to gain the access to management expertise, for enormous shortage of human capital in Asia’s financial services sector is a major inhibitor of growth – both organic and inorganic, observes the Survey.

Similarly, localisation of global standard approaches and methods, improving specific technical skills or capability of management, are other factors driving major players into M&A activity to attain strategic competitive advantage as it is predominantly felt that companies that have prioritised development of their management team will be best placed to capitalise on growth opportunities.

Source: Financial Services M&A, Going for growth in Asia by PWC