Asia Pacific financial services firms adapt to new terrain and maintain a cautious optimism to M&A

Asia Pacific financial services firms are actively investigating expansion opportunities and maintaining a cautious optimism towards M&A, according to the latest data from a survey conducted by the Economist Intelligence Unit (EIU) for PricewaterhouseCoopers.
According to a survey of 215 senior financial services executives conducted in January and February 2009, Asia Pacific financial institutions are, surprisingly, marginally more optimistic about M&A than in the previous year, with 42% still expecting to make an acquisition in the next year. This is compared to a similar survey conducted in 2008, in which 38% expected to undertake M&A over the next year.
Respondents in Taiwan (70%) and mainland China (68%) are the most likely to make an acquisition in the next year. The lowest percentages were recorded in Japan (25%) and Hong Kong (22%).
Financial institutions in India remain optimistic about expansion, with many firms actively planning to take advantage of the unprecedented opportunities arising as a result of the financial crisis. Forty four percent of respondents cite expansion as their key strategy in the current economic climate, with 50% saying they plan to invest further in their own businesses, 25% planning to enter into new business lines and 50% into new markets. 33% of respondents have frozen new investments.
Commenting on the Indian scenario, Bimal Tanna, India leader for private equity practice, PricewaterhouseCoopers, said:
“A new stable government committed to economic reforms, wider bank and institutional credit, better management of fiscal deficit, continued investments in infrastructure development and some good news on the global economic front could see M&A in India back on the fast track in a year or so. It is expected that this time M&A will be led by a need for consolidation and profitability rather than increasing scale of operations.”
Meanwhile, a greater percentage of respondents in China and Australia (both 63%) are seeking to take advantage of opportunities to grow their business than are those based in Japan (26%) and Singapore (37%). The more active stance in these countries may be the result of the comparatively stronger bank balance sheets and lower levels of outbound M&A activity in recent years which has left them with more powder amid the effects of the financial crisis.
Few respondents expect current market conditions to improve soon: 83% expect the credit crunch and resulting economic downturn to persist for a further one to two years. A significant majority suggest that the pricing of assets will become more attractive to their companies within 12 months. Pakistan (67%), China (63%), Taiwan and Indonesia (both 60%) are the most optimistic, expecting assets to become more attractive in the next six months.
For India, Bimal Tanna, added:
“The global credit crisis, the resulting economic sluggishness and the uncertainty arising out of events such as the terrorist attacks / threats, upcoming elections, mounting fiscal deficit etc, have made investors hold back and have forced them to adopt a wait and watch approach. All these have certainly impacted the strong M&A trend witnessed in India in the past few years.
However, given that the long term underlying growth story remains intact, India can be one of the first economies in Asia to come out of this crisis. This optimism is evident from the survey result, wherein 73% of the respondents in India, as compared to 50% in Asia Pac, believe that the credit crisis and the resulting economic down turn will not persist for more than a year. The market is moving to realism, with 39% of the respondents believing that their company will make an acquisition in the coming year.”
Almost half of all respondents (49%) in the survey identify difficulty in valuing assets in the current environment as the principal barrier to undertaking M&A deals in Asia. Lack of clarity on the financial position of many institutions was cited by 42% of respondents as the most significant obstacle to fair valuation, while 40% cited continued market volatility.
Of those respondents planning acquisitions, 32% said they will be targeting distressed assets. However, to account for the increased risks in today’s environment, 73% said they would conduct additional due diligence and 62% said they would rely on price adjustment tools. Similarly, 57% of all respondents said they thought the current environment would encourage buyers to conduct more robust due diligence to help develop integration priorities and 39% said they thought there would be a greater focus on cost synergies.
The survey also identifies those countries likely to see increased M&A activity. Indonesian investments are now the most favoured, with 18% respondents expecting to do a deal there in the next year. China, previously the most favoured destination for strategic investment, slipped to third with 12% and India saw the most dramatic change with only 8% of respondents expecting to do deals here.
By sector, insurance and private equity are more bullish than others on expansion with two thirds (67%) actively seeking expansion opportunities.
The main external drivers of M&A are increased competition from domestic players (43%) and the unprecedented opportunities offered by the current climate (36%). Competition from foreign players was cited by only 15%, down from almost half in 2008 (46%).
While looking for opportunities, financial services firms are also seeking to shore up their operations. In light of the fall-out from the financial crisis, many institutions will be focusing on overhauling risk management systems (84%), changing reward structures to reflect longer term performance (78%), bringing customer relations in house in order to improve service functions (75%) and retrenching staff (67%).