July 5, 2017

Asia Venture Capital Journal
Tim Burroughs, Managing Editor

Paul DiGiacomo, a managing director with Asia-focused advisory firm BDA Partners, discusses the latest trends in M&A, from increasingly sophisticated Chinese buyers to more willing multinational sellers

Q: How has the nature of BDA’s advisory business in Asia evolved over time?

A: We were set up in 1996 to advise on cross-border deals in Asia. Back then there was increasing Western appetite for Asia and a gap in the market for mid-market M&A advice. We started off in Southeast Asia, doing buy-side advisory for multinational clients, and in the early 2000s we broadened our coverage into northeast Asia. Over time the business model has done a 180 and we have shifted more to the sell-side, acting for clients – be they financial sponsors, entrepreneurs or multinationals – who are selling assets in Asia or globally but to an Asian buyer universe. In the early days, financial sponsor involvement in Asia was VC or pre-IPO investment and it usually didn’t trigger M&A transactions. That has changed significantly in the last five years. Many parts of Asia are beginning to look like the US or Europe, with private equity investors doing control deals and exiting investments through structured transactions.

Q: How prominently do Chinese buyers feature in the processes you run?

A: In most of the processes we run there are multiple Chinese parties involved. And they are becoming increasingly sophisticated. Two years ago people asked whether Chinese buyers could compete in auctions in the West. We are now seeing that they can. They are being creative and determined in understanding the obstacles that arise along the way. For example, the foreign currency issues that emerged towards the end of last year have largely been absorbed by the market. Sellers are pricing it in and understanding the issues, while buyers are coming to the table with solutions because they know they have to deliver deal certainty to the sellers in order to be considered credible. They are entering into partnerships with groups that have offshore funding, securing bank support, and starting processes earlier with SAFE [the State Administration of Foreign Exchange] so processes are de-risked.

Q: To what extent have the restrictions on cross-border capital movement disrupted transactions?

A: We had a couple of deals that were in the process of closing and they still closed – it was more like a bump in the process than a road block. Where the regulations have made an impact is in reducing the likelihood of a wild-card buyer, someone from industry X paying $500 million for a US business in industry Y. However, we haven’t seen a slowdown in strategic acquisitions, companies buying assets in their core industries with a view to bolstering their business or bringing in technology that is relevant to China. Looking at our pipeline, there is huge interest in healthcare and on the consumer side we see a lot of activity relating to food safety issues.

Q: How progressive are Chinese buyers on post-deal integration planning when they bid for an asset?

A: They are often quite far down the track in terms of how they can drive post-merger integration. At the same time, we do see buyer activity that is predicated on maintaining the status quo, at least for a year or two. In certain cases – for example, services businesses overseas – a Chinese buyer might be attracted to an asset because of what can be learned from it and applied to service delivery in China. The existing management stays on and is incentivized to continue delivering, and there isn’t necessarily a concrete plan in place on day one for full integration.

Q: Are you seeing more private equity to private equity transactions?

A: The prevalence of private equity buyers in these processes is certainly increasing. There is more capital to put to work and a certain level of comfort in buying a business that already has a private equity shareholder. There is also a greater appreciation that private equity firms of different sizes are right for a company at different points in its development. Another trend – which also explains they there is more private equity activity – is the rise of multinational sellers. Twenty years after we were working for multinationals coming into Asia, we are starting to see these groups rationalizing their portfolios in the region, much as they do in the US and Europe. We are increasingly advising on the divestment of Asian subsidiaries. They might have built a China business of scale but not significant profitability, and while they don’t want to exit China completely, they are happy to own a smaller piece of this business and sell the rest to a Chinese partner that can drive value.

Q: Which other groups are becoming more active buyers?

A: There is a lot more intra-regional M&A. For a long time Japan was a significant investor in much of the rest of Asia but it was mostly greenfield. We now see more acquisitions of existing businesses by Japanese investors, particularly in Southeast Asia. The same can be said of Korea, especially at it relates to Vietnam and Indonesia. The Korean M&A market has always been highly competitive with large domestic conglomerates fighting it out to the end for assets. That trend has been transplanted to Vietnam. It is a really interesting dynamic if you are selling a business in Southeast Asia. You will have a baseline bid from regional private equity and then all kinds of strategic players from Korea and Japan might get involved.