Growing M&A bustle as Malaysia moves past GE14

This article first appeared in The Edge Malaysia Weekly, on November 26, 2018 - December 02, 2018.

Kong is optimistic that the slower economic growth experienced by the region could be a prelude to an upward trend in the medium term

Maimoonah: There are people who are looking to take the opportunity now to merge their companies or find strategic partners

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INVESTMENT banks have seen a pick-up in enquiries for mergers and acquisitions, particularly in the consumer, technology and education sectors, prompting optimism that the wait-and-see period — prior to the May 9 general election and after, when the untested Pakatan Harapan swept to power — could be coming to an end.

Even so, bankers caution that converting the potential into actual deals will depend on the extent of business certainty.

Since taking Putrajaya, the PH coalition government has been pulling double shifts to assure investors that Malaysia remains business-friendly, is committed to institutional reforms and continues to welcome long-term investments that are not detrimental to the country’s interests.

Investment bankers say the hard work is beginning to yield results.

“The recent increase in interest in Malaysia shows investors’ renewed confidence [coming] on the back of the country’s stable economic policies, underscored in the recent Budget 2019 that promotes institutional reforms, greater governance and entrepreneurship,” Datuk Kong Sooi Lin, CEO of CIMB Investment Bank Bhd, tells The Edge in an email.

CIMB is also seeing an increase in interest from within and outside Malaysia in quality targets, particularly in consumer-related, education and healthcare sectors.

Kong acknowledges that systemic reforms will require time to implement, but points out that it is worth the effort as strong fiscal management and institutional reforms will place Malaysia on a stronger and more sustainable growth path.

“Coupled with the finance minister’s announcement on investments to facilitate readiness for the Fourth Industrial Revolution, foreign investors with relevant technology are also looking at digitising fundamentally strong but traditional businesses (namely blockchain technology providers working with financial institutions) in Malaysia, spurring further M&A potential,” she says.

Similar to Kong, Affin Hwang Investment Bank group managing director Datuk Maimoonah Hussain says she has seen “a lot more” M&A enquiries in recent times.

“There are people who are looking to take the opportunity now to merge their companies or find strategic partners,” she says of the improved level of corporate activity.

Recently, Affin Hwang, together with its partner Daiwa Securities Group Inc, arranged for Japanese investors to meet Prime Minister Tun Dr Mahathir Mohamad during his visit to Japan.

“There is a lot of interest. They see a change in government that happened smoothly. They see the commitment, sincerity of this government to build the economy again and that the government is serious about fighting corruption,” says Maimoonah.

Compared with the period of quiet and inactivity following GE14, she thinks there is a growing bustle.

After the initial excitement that a new administration had managed to unlock the chokehold of the Umno-led coalition’s 61 years of uninterrupted rule, reality began to set in post-GE14 when PH revealed that the government’s coffers were far more depleted than originally thought and that the country was deeper in debt than previously divulged.

Given the many binding fiscal constraints and mountain of debt in excess of RM1 trillion, Putrajaya deferred and put under review or, in some cases, outright cancelled a number of mega infrastructure projects.

Because of the measures, a lot of capital market fundraising activities and bond issues, which were initially planned for the infrastructure projects, had to be either deferred or cancelled as well.

“In terms of investment activities, a lot of that just quieted down significantly. There was a period of inactivity,” Maimoonah says, adding that uncertainties over the position of the top leadership in some of the government-linked companies (GLCs) were also a concern given that PH moved to replace a number of individuals perceived to be BN-partial.

CIMB’s Kong agrees that the uncertainties before and after GE14 subdued the market and weighed on M&A in the country. Rising trade tensions between the US and China compounded the problem.

“The subdued performance of M&A in Malaysia since 2Q2018 has been the result of the contagion effects from domestic and external headwinds with investors’ decisions heavily influenced by the run-up to, and post-GE14 developments, rising trade tensions, China’s economic slowdown and volatility in financial markets.

“Furthermore, with capital being channelled to the US due to the US Federal Reserve’s raising of interest rates, we saw similar trends in other Asean countries such as Singapore, Thailand and the Philippines when comparing year-on-year 3Q deal volume,” says Kong.

In the first nine months of the year, Malaysia saw 55 inbound and domestic M&A deals worth a total of US$5.32 billion, placing it behind Singapore, Thailand and Indonesia in terms of value.

In Asia-Pacific excluding Japan, there was a significant downturn in M&A in the third quarter amid rising trade tensions between China and the US. A Mergermarket report shows Southeast Asia’s total deal value fell 23.8% to US$42.2 billion in the third quarter compared with the same period last year. There were also 28 fewer deals than last year.

Melissa Yan, research analyst with Mergermarket, says the trade policies under US President Donald Trump are one of the factors that affected M&A in the region.

“With Trump’s controversial trade policies and the Chinese government’s capital outflow curb continuing to cast a shadow on the relationship between the two powerhouses, Chinese dealmakers’ interest in the US continued to fall,” Yan says in a global M&A report for 3Q.

Nonetheless, Kong is optimistic that the slower economic growth experienced by the region could be a prelude to an upward trend in the medium term and that investors looking to capitalise on the current slowdown are already on the prowl.

A spokesman of Maybank Kim Eng was equally sanguine, noting that M&A opportunities exist thanks to greater clarity in government policy post-Budget 2019, including in taxes, and plans to reduce the government’s large shareholding in GLCs.

However, the spokesman said there are some concerns over how PH intends to implement some of its election manifesto pledges.

“There are still uncertainties over how some manifesto pledges will be carried out (dealing with companies deemed as monopolies and abolition of tolls, for instance), which affect the business certainty of companies directly impacted as well as parties that conduct business with such companies.”

The spokesman also observed that M&A could be tempered by a potential slowdown in the global economy. “In such an environment, we expect companies to be more circumspect in deploying capital towards M&A, especially when [the sellers’] valuation expectations have not moderated.”

Regionally, investors have also adopted a wait-and-see approach in Indonesia and Thailand given impending elections in those countries next year.

The spokesman also highlights that the growing appetite for M&A notwithstanding, translating it into actual deals will depend on the extent of business certainty.


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