Although economic indicators and deal volumes remained encouraging, recent trends suggest that despite this, Asia Pacific companies are changing the way they approach M&A transactions. Parties active in the M&A sector are increasingly sophisticated and more conscious of the risks that can be inherited with acquisitions. With less appetite to accept this risk than they might previously have had, Asian companies are focusing themselves more than ever on due diligence, risk identification and risk mitigation strategies.
In addition, as the regional regulatory landscape evolves and the scope of legislation across Asia Pacific with the potential to impact M&A transactions increases, companies are being required to consider and address an increasing number of issues in their wider assessment of the merits of a deal.
Increasing use of warranty and indemnity insurance
One area where this tempered appetite for risk has manifested itself is in the market for warranty and indemnity insurance. Last year we noted that a market for specialist warranty insurance was beginning to emerge in the Asia Pacific region in response to a demand triggered by the prevailing economic climate.
Whilst the Asia Pacific market for such products remains in its infancy and small in relative terms when compared with the equivalent European market, 2010 has seen significant growth in percentage terms in the number of policies being written in the region, far outstripping growth in the European market where reduced deal activity, particularly from private equity funds, impacted the volume of policy writing in 2010. Providers of insurance in the region have reported an increase in enquiries and of insurance cover being put in place, particularly in respect of transactions involving private equity players or multi-national companies seeking to achieve clean and final exits from investments.
As the market and the number of international brokers operating in the region grows, the premiums charged for cover on certain transactions have been reducing considerably. Whilst the costs of securing cover on transactions involving less sophisticated processes or higher risk jurisdictions remains at 2 to 3 per cent. of the insured amount, for transactions documented to international standards and involving the more developed jurisdictions the same cover has been available for 1 per cent. to 2 per cent of the policy amount.
Strategic Joint Ventures
Continuing a trend noted in 2009, many buyers, cautious from lessons learned in the Global Financial Crisis and combined with, in some cases, having limited or no previous experience in running the types of operations they have been acquiring, are choosing to structure transactions so as to reduce the commercial risks inherent in pursuing any mandated international expansion strategy.
In many M&A transactions, this has taken the form of a partial acquisition alongside joint venture arrangements. In the Asia Pacific region, foreign ownership restrictions already limit the size of interest an overseas company can control in companies in certain sectors, making joint ventures necessary in any event. Now, increasingly cautious buyers into these sectors are, in some cases, not even seeking the maximum permitted interest on first investment.
Such arrangements will normally incorporate an option in favour of the buyer to effect a full acquisition (or to increase its stake to the permitted maximum) in the future, a strategy that offers the advantage of being both a less risky entry route into new territories and business areas and an opportunity to familiarise with the target company and any potential issues affecting it before seeking complete or greater control.
As well as having regard to existing regional and international anti-corruption legislation, the burden of regulatory compliance for Asia Pacific companies is being increased by the introduction of the UK Bribery Act in April this year. We are already seeing evidence that the Act will have a significant impact on how buyers conduct due diligence in M&A transactions globally.
The Act introduces a new strict liability corporate offence targeted at commercial organisations pursuant to which an organisation becomes guilty of an offence if a person associated with it commits bribery intending to obtain or retain business or an advantage for that organisation. No intention to bribe by the commercial organisation itself needs to be shown and the organisation does not even need to know that any element of bribery took place.
Furthermore, the extra-territorial reach of the Act is such that all corrupt activity of an organisation wherever such activity occurs can be caught, provided the offender has a close connection to the UK. With the corporate offence applying even if the body corporate is not incorporated in the UK (as long as it carries on business, or part of a business, in any part of the UK), it is easy to appreciate the potential concern the Act presents.
The risk of indirectly inheriting liabilities for previous acts of the target group or exposing itself (and incoming directors on the target’s board) to liability where acts continue post completion, makes it particularly important for buyers to identify during due diligence, situations or circumstances where bribery or corruption concerns could exist.
Buyers are choosing to address concerns regarding corruption uncovered during the due diligence process via a combination of: (a) specific indemnity protection (unlikely to be sufficient in itself); (b) re-negotiation of the purchase price to reflect consequent value reductions and/or remediation costs; (c) seeking clearance from relevant authorities; or (d) ring fencing or excluding the offending entity or business. In extreme situations, a buyer may ultimately decide to abandon the transaction. If the buyer does elect to proceed notwithstanding the risks identified, then as a minimum, a buyer should be comfortable that such issues can be addressed on acquisition or prior to completion. Failure by the buyer to address these issues can result in criminal and civil penalties being imposed, considerable remediation and other costs, reputational issues as well as a significant reduction in the value of the target.
Anti-trust / Merger control
Over recent years, as the volume and value of cross border M&A transactions affecting Asia Pacific businesses continues to increase, it has become an increasingly important feature of transactional due diligence and execution to understand and comply with the merger control regimes in regional jurisdictions as those jurisdictions introduce and expand the scope of relevant legislation.
2010 saw yet more evidence of the increasing willingness of Asia Pacific regulators to intervene in M&A transactions and enforce their merger control regimes. In October 2010, BHP Billiton and Rio Tinto abandoned a proposed iron ore joint venture plan when a number of regulators, including in Japan and Korea, objected to the venture in its proposed form.
In addition, the Australian Competition and Consumer Commission blocked the proposal by National Australia Bank to acquire AXA Asia Pacific, even after concessions were offered by National Australia Bank to address objections raised by the commission.
July 2010 also saw the introduction in Indonesia of the long delayed mandatory merger control regime. Given the increasing value of M&A activity affecting Indonesian companies, the regime, which provides for mandatory post closing notification of certain mergers, consolidations and share acquisitions which meet certain thresholds, is expected to become a significant consideration for parties involved in Indonesian M&A activity.