Last year was a stellar year for M&A across the Asia Pacific region, with the uptick in activity which began in H2 2020 only accelerating through 2021.  On the face of it, the outlook for 2022 appears to be very positive indeed, with unusually strong activity levels early in the year - a time which is traditionally quiet while people celebrate Chinese New Year.

A positive outlook

There seems to be an insatiable appetite for M&A activity now that the initial shock of COVID has passed. Private equity continues to raise vast sums of money and hold unprecedented amounts of “dry powder” which it is actively looking to deploy, albeit that target assets are enjoying incredibly high valuations which could depress returns in the long term. Cheap debt remains readily available and, while recent interest rate hikes may mean that it is slightly more expensive than before, it is important to remember that the cost of borrowing remains at historically low levels and this is unlikely to change materially provided inflation can be kept under control. Many markets in the region are looking to open up again to business and international travel after two years of restrictions due to COVID, which should facilitate the due diligence process in particular, but dealmaking more generally.

COVID has also accelerated the introduction and importance of new business themes such as environmental, social and governance (ESG) and digital adoption, which have long since ceased to be mere “box ticking” issues and are now typically seen as being central to a company’s strategy and ability to attract investment. The significant rise in volume and value of deals across the region in renewable energy and the use of technology to reduce carbon emissions is irrefutable evidence that this is a trend that is here to stay and that will dominate board agendas in the coming years.

But storm clouds could be gathering on the horizon

However, whilst there is generally considerable optimism across the region as a whole, the immediate outlook for Greater China in particular is more uncertain. There are a number of reasons for this. Whilst China contained the initial outbreak of the virus successfully and rebounded from the initial COVID crisis in 2020 at a remarkable rate, the economy slowed towards the end of 2021 and activity seems set to remain suppressed. China and Hong Kong’s pursuit of a zero COVID strategy, where lockdowns are common and the country is effectively closed off to international travel, will inevitably put considerable pressure on global supply chains and many multinational companies are looking to secure alternative supply chains with other upwardly mobile countries in the region.  A heightened emphasis on domestic policy through wealth redistribution and regulatory reform leaves trade tensions with the West, particularly the US, unresolved.  A recent crackdown on the technology and education sectors wiped away billions of dollars of value and triggered much uncertainty among international investors looking to get into these lucrative sectors.  Factor in the high levels of debt in the struggling property market with the attendant risk of defaults on loan repayments, high profile corporate collapses or bailouts, and it is understandable that many M&A players may take a “wait and see” approach to China.

As the engine-room of the regional economy, any turbulence in the Chinese market is likely to be felt also across the APAC region and beyond.  However, it is worth remembering that distressed situations themselves present attractive opportunities for dealmakers, particularly in a climate where it is difficult to deliver growth and high returns to investors from other expensively-acquired assets.

Interesting developments

Perhaps the most interesting new development has been the recent introduction of SPAC listing regimes in both Hong Kong and Singapore, aimed at enabling these two key Asian markets to replicate the phenomenal success that US SPAC listings have enjoyed over the past two years.  The objective will be for a Hong Kong or Singapore De-SPAC to represent a viable alternative option to traditional M&A or IPO exit routes.  In parallel with the anticipated growth of SPAC listings within the region, with the clock ticking on the two year window for US-listed SPACs to announce a De-SPAC transaction, inevitably Asia’s many tech unicorns in particular will be attracting considerable attention from overseas as potential takeover targets.

Conclusion

Overall then, M&A practitioners in Asia go into 2022 with considerable and justifiable optimism. However, predicting the future has never been more difficult and various risks (some identified already and, no doubt, some not) will need to be negotiated very carefully if dealmakers are to match or even exceed 2021 performance levels.

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