Malaysia is well on its way to see more merger and acquisition (M&A) activities in 2011 as industry players continue to seek ways to unlock value via synergistic ventures.
Within the first half of the year, the country has seen a total of US$12.1 billion in M&As.
This pattern was reflective of the global and regional M&A trend, said sources from Bloomberg.
“The M&A market for Asia-Pacific closed the first half of the year with a total of US$328.7 billion in deal volume, representing an increase of 21 per cent when compared with US$272 billion in the first half of 2010,” noted Bloomberg in its report titled ‘Southeast Asia: Mergers and Acquisitions Rakings 2Q 2011’.
However, as growth slowed in developing countries, companies have been trying to increase their global footprints in the faster-growing emerging markets.
Malaysia, as an emerging market, has seen its share of M&A deals. This trend is expected to continue as growth in developed countries will remain relatively stagnant in the near future, thereby driving foreign M&A investors into Malaysia.
Increasing foreign interest in Malaysia
According to Gan Eng Peng, the head of equities of HwangDBS Investment Management Bhd (HwangDBS IM), there were a few factors which encouraged the recent wave of foreign consolidations into Malaysian assets.
“There has been a host of Japanese companies buying into various Asian assets, not just Malaysia. These include countries like Australia, Singapore, India, China, and Vietnam,” he said to BizHive Weekly.
The rationale for this, he said, could be traced back to the Asian crisis and the state of Japan’s economy.
“Since the crisis, Japanese corporations have been hoarding cash to bolster their balance sheets. Studies have shown that half of the large cap companies in Japan are in net cash positions and a large portion of them have large cash piles.
“In an environment where cash returns on the yen are almost zero, there has been rising pressure for these corporations to direct their investments out of Japan to make better use of their cash,” Gan outlined.
“Japanese investment choices are limited in their home country due to the lack of sustainable economic growth in the last fifteen years or so.
“The action is now in Asia’s emerging markets, and that is where they are pouring their M&A monies into. The fact is that the relative strength of the yen versus Asian currencies has not been worst off in the last 10 years. This means that their buying power has not been diminished,” he added.
Nor Zahidi Alias, the chief economist of Malaysian Rating Corporation Bhd (MARC) believed that M&As – both local and foreign – were good for the economy in general.
“What it (M&As) boils down to is the increase in private investment which will be positive for the economy in general.
“As long as such mergers do not lead to massive layoffs that affect the labour market and consumer spending, M&As normally lead to an improved business sentiment in the economy as bigger entities are able to take advantage of economies of scale,” he affirmed. “In most cases, this will also lead to an improvement in competitiveness.”
‘Enlivened by major deals’
Supporting this fact was statistics from Bloomberg, which revealed that from January 1 to June 30 this year, Malaysia had seen a total of 167 M&A deals with a volume of US$12.1 billion.
The average disclosed deal size was approximately US$99.98 million, while the average premium for a consolidation transaction was at 15.35 per cent.
These figures supported the prediction for more M&A exercises in 2011 made by industry expert Dr Yeah Kim Leng, group chief economist from RAM Ratings Bhd (RAM Ratings) in December last year.
When asked for an update for BizHive Weekly, Dr Yeah said Malaysia’s M&A scene had so far been enlivened by major deals in certain industries – namely in banking, property, construction, and oil and gas.
“Strong corporate earnings and equity prices also facilitated these acquisitions and mergers,” Dr Yeah affirmed. “These drivers are expected to continue in the second half despite the less than favourable external environment caused by the ongoing fiscal and debt problems afflicting the European and US economies.”
Yeah noted that deals capitalising on projects identified under the Economic Transformation Programme (ETP) could also keep firms busy scouring for more opportunities in the second half.
“In particular, takeovers and restructuring deals for selected utilities and infrastructure projects could also take the spotlight as the investment momentum picks up more strongly in the second half.”
Consolidations in SCORE?
Although Malaysia has seen significant M&A activities in 2011, Sarawak has yet to see considerable action under M&As, said Oxford Business Group’s (OBG) editorial manager, Robin Carballido.
“One company that has been making a name for itself in the M&A field is Sarawak Cable Bhd (Sarawak Cable), which has made a string of acquisitions in recent months. In 2010, it acquired 75 per cent of Sarwaja Timur, a steel fabrication and hot dip galvanising company, for RM28.875 million. Sarawak Cable then announced in early August its acquisition of the remaining 25 of Sarwaja Timur, which would make it a wholly-owned subsidiary.”
The news, Carballido said, came as Sarawak Cable was labelled an ‘excellent proxy’ for development under the Sarawak Corridor of Renewable Energy (SCORE).
“The massive government-led development plan will include major infrastructure buildout, especially involving power projects.
“Within the SCORE framework, M&As have been limited, with companies preferring to set up joint ventures as a means to bring in technical expertise from foreign entities. Cahya Mata Sarawak Bhd, for example, has signed a memorandum of understanding with Singaporean OM Holdings Ltd to set up a manganese smelting plant at SCORE’s Samalaju Industrial Park,” he further noted.
“Given the limited size of local firms and the need for foreign experience and capital, M&As will likely remain limited to a few large players, with more projects taking place as joint ventures.”
With all this in mind, BizHive Weekly takes a look at how M&As have its hidden values unlocked in each industry as well as future potential for the latter half of the year.