This article first appeared in The Edge Malaysia Weekly on July 13, 2020 - July 19, 2020

NOT surprisingly, merger and acquisition (M&A) ­activity in the Asia-­Pacific (excluding Japan) region, including Malaysia, declined substantially in the first half of 2020 amid the various levels of lockdown imposed by governments as a result of the Covid-19 pandemic. However, signs of a recovery in deal-making are beginning to emerge, experts say.

There were 1,501 deals valued at US$225.6 billion (RM962 billion) announced in the region in 1H2020, compared with 1,525 deals valued at US$241 billion in 1H2019, according to data collated by Mergermarket. In terms of deal value, it was the lowest first half since 2013.

The second quarter, which bore the brunt of the lockdowns, saw only US$104 billion in deals generated, the lowest second-quarter value since 2012.

Interestingly, the region’s two biggest deals were generated close to home: Thai conglomerate CP Group’s acquisition of Tesco’s businesses in Thailand and Malaysia for US$10.6 billion; and the US$8 billion merger of two of Singapore-based CapitaLand’s real estate investment trusts. These were announced in the first quarter.

In Malaysia, M&A deal value in 1H2020 fell 78.4% year on year to US$828 million from US$3.83 billion. There were 27 deals in total compared with 29 before. As for private equity (PE) M&A activity, deal value fell by a fifth to US$1.33 billion on 14 deals compared with 19 before.

Robert Huray, CEO of RHB Investment Bank Bhd, expects to see a pickup in M&A activity, including privatisations, in Malaysia.

“In terms of M&As, the domestic market in Malaysia has demonstrated progressive recovery. During the same period, however, the capital markets have shown a far stronger recovery. As such, stronger firms will be looking for opportunistic acquisition and merger targets to diversify their business or integrate across the value chain to better serve their customers. Current valuations in certain sectors may also be attractive, providing an opportunity for promoters who believe in the long-term fundamental growth of their business to either personally or work with financial partners to privatise their business,” he tells The Edge.

He notes that in the current challenging business environment, one sector that has shown some resilience, apart from the glove sector, is the consumer sector. “We expect M&A activity to pick up in this sector, driven by the underlying future domestic economic growth, attracting both local and foreign funds,” he says.

RHB Investment Bank, which had invested in building its M&A team over the past few years, is in the midst of executing several domestic and cross-border transactions, Huray says, declining to elaborate.

Meanwhile, Mergermarket spokesperson Tony Goh expects M&As to continue to be mainly domestic-driven in 2H2020. The value of Malaysia’s outbound M&A deals in 1H2020 rose 18.8% y-o-y to US$784 million on five deals compared with seven previously.

“Based on feedback given by PE firms and M&A advisers, the situation in Malaysia in relation to M&As in 2H2020 will continue to be domestic-driven, as any major cross-border deals [are] unlikely to take place until the Covid-19 situation is under control and there are clear bilateral border reopening guidelines,” Goh says in an email interview.

“Sectors such as healthcare, pharmaceuticals, manufacturing of rubber gloves, technology, e-commerce and logistics are the ones that are most active in terms of deal flows. Other potential sectors in distress or with overcapacity like oil and gas and aviation (AirAsia/AirAsia X/Malaysia Airlines/Malindo Air) are also expected to see consolidation.”

When it comes to PE firms, the priority now for most will continue to be managing existing portfolios to ensure they survive the slowdown and challenging business environment with better cash flow management and prudent capital expenditure.

“But potential bolt-on acquisitions in resilient sectors such as healthcare and consumer staples remain active, while access to cheaper loans and capital in the current low interest rate environment will support domestic M&A activities,” he notes.

Upcoming M&A deals may involve the AirAsia group, which like most airlines now has cash-flow issues. Last Thursday, the Business Standard reported, citing unnamed banking sources, that Indian conglomerate Tata Sons was in talks to buy out AirAsia Group Bhd’s stake in their airline joint venture in India at a steep discount.

In late May, the Armed Forces Fund Board (LTAT) said it was mulling a proposal to privatise Boustead Holdings Bhd, of which it is the controlling shareholder. In an update last month, however, LTAT said there had been no material development in the plan.

In Southeast Asia, deal value in 1H2020 fell 12.5% y-o-y to US$28.97 billion, even as deal count declined to 150 from 186. Meanwhile, in the broader Asia-Pacific ex-Japan, Mergermarket says signs of recovery in deal-making began to emerge in the second quarter, following the end of the first wave of the Covid-19 pandemic, despite global economic headwinds and growing geopolitical uncertainties.

It notes that central banks’ expansive monetary policies will lead to lower interest rates that could spur financial transactions, even with governments’ efforts to redirect liquidity towards the real economy.

In addition, mainland China and Hong Kong — the largest contributors to M&A activity in the region, accounting for 54% of deal value in 1H2020 — are returning to economic growth, which might improve investor sentiment despite a resurgence of coronavirus cases in Beijing.

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