This article first appeared in The Edge Malaysia Weekly on August 2, 2021 - August 8, 2021

SOUTHEAST Asia is on track to witness its busiest year for mergers and acquisitions (M&A) in over a decade despite Covid-19 raging, experts say, with technology expected to be the hottest sector and growing interest in renewable energy.

The region saw 482 deals worth US$85.2 billion (RM359.6 billion) announced in the first half of this year (1H2021), according to M&A data provider Dealogic. This was 141% higher than the US$35.35 billion generated in 1H2020 across 406 deals.

For the year to date, deal value stands at US$93.68 billion (531 deals), which is already not too far off 2007’s high of US$95.57 billion (2,067 deals).

“Our perception, based on what’s crossing our desks, is that the market’s very busy right now. 2021 is probably on track to be the busiest year for M&A in Southeast Asia for some time. Earlier in the year, we saw the bigger deals proceeding and not so many of the smaller deals, but now we’re seeing a good spread across the value chain,” says Jamie McLaren, a partner at legal firm Herbert Smith Freehills in Singapore who specialises in M&A in the region.

According to McLaren, among the more active markets currently are the Philippines and Indonesia.

“We’re seeing a lot of activities in the tech, digital infrastructure space in the region and renewable [energy] is also quite attractive now. One of the things that we’re seeing quite a lot of this year is tech players taking a direct or indirect stake in renewable [energy] businesses,” McLaren shares.

M&A deals involving distressed assets may take off this year, he says.

“There was a lot of speculation last year about distressed M&A and special-situations type transactions taking off. That hasn’t really happened, save for in a few sectors such as hospitality and aviation. That might be something which we [may] see a bit more of in the next six to 12 months as [lockdown] restrictions ease in different countries and as government support falls off, or where companies just run out of steam and can’t carry on without further investment,” he opines.

Sumit Punwani, a partner at KPMG Singapore in corporate finance and deal advisory, notes that deals are bubbling in the region despite the ongoing pandemic.

“Though we’re still in a pandemic, I think the key difference probably is that people know what to expect, they know it’s not going away and that it’s probably a mid-term issue that they’re dealing with, so everyone’s figuring ways to work around it. Hence, we’ve seen a higher deal volume in 1H2021 as compared with 1H2020. It’s been underpinned mainly by technology and telecommunications,” he says.

Punwani and McLaren were among the speakers of a webinar on deal momentum in Southeast Asia organised by Mergermarket and Datasite last Thursday.

The rise in M&A deals this year comes on the back of high levels of private equity (PE) activity, increasing corporate divestment and restructuring activity, a low interest rate environment as well as a steady rollout of vaccination programmes in parts of the region.

The region’s biggest deal by far in 1H2021 was Singapore-based Grab’s pending US$40 billion merger with US special purpose acquisition company (SPAC) Altimeter Growth Corp.

The next biggest was the merger of ride-hailing and payments group Gojek with e-commerce firm Tokopedia in Indonesia that created the country’s largest digital services company.

Regional PE firm Navis Capital Partners says it saw more deals in 1H2021 than in the comparative period a year ago.

“When Covid-19 hit in early 2020, there was a significant impact on M&A activity. We saw many transactions being delayed, not only because of the travel restrictions, but also because of uncertainty around the potential impact on the performance of the [target] company. But now, we’re seeing an improvement,” says Khun Thom Peunchob, a Bangkok-based partner at the firm.

“I think investors are more comfortable about negotiating and coming up with reasonable assumptions, and can agree upon valuation. Starting from the second half of last year, we saw a number of delayed deals closed, and I think that trend continued to early 2021. I believe some of the companies are in desperate need of funding and they really can’t get funding as easily [from banks] as they used to prior to Covid-19, so that’s why we are seeing an increasing number of deals coming to us,” she adds.

However, with Covid-19 cases rising again in the region, completing such deals may become a problem again.

“With the recent outbreak in Thailand and Vietnam and continued high number of Covid-19 cases in a number of countries in this region, I’m not sure how that would impact the ability to complete the transaction. There might still be some delay and some difficulty, but in terms of deal activity itself, I think it is very active in this part of the world at the moment,” she opines.

Khun Thom notes that Covid-19 could also delay the timing of PE firms’ exit from investee companies.

“Covid-19 does have a significant impact on our portfolio of companies. For some of those companies, the timing of the exit might have to be delayed because we have to re-work the strategy and it will actually take some time to show the result,” she comments.

Another speaker, Desmond Chua, Datasite’s head of Asia-Pacif ic, says he expects environmental, social and governance (ESG) issues to become increasingly important in the M&A process.

“In one of the surveys that we conducted earlier in the year, two-thirds of M&A professionals stated that ESG risks will climb higher on their due diligence checklist in 2021, and more than half of them stated that ESG concerns, if left unchecked, will be the biggest factor to derail a deal this year. I think that puts into perspective how important this component of M&A is,” he says.

Datasite is the leading tech provider for the M&A industry.

Meanwhile, interest around SPACs, somewhat of a buzzword earlier this year, may cool off.

“In 1Q2021, we saw SPACs really take off as a way for companies, especially direct-to-consumer tech companies, to go public. It’s a viable exit option if you think about the faster timelines to reduce pricing risk as well as the opportunity to work with a great or experienced management team. But now, we’re starting to see it kind of slow down with the increased regulatory requirements surrounding its framework, as well as its operating rules,” says Chua.

“But I do think that this is a good thing, as what is likely to happen is that better companies are going to emerge out of this process … and investors would also come out in better shape,” he adds.

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