This article first appeared in The Edge Malaysia Weekly on July 8, 2019 - July 14, 2019

HEIGHTENED trade and technology tensions between the US and China this year look to be taking a toll on merger and acquisition (M&A) activity in the region, particularly China.

“M&A activity in Asia-Pacific (APAC), excluding Japan, during the first half of the year slowed down to levels unseen since 2013, amid an escalating US-China trade and technology war,” says deal-tracking firm Mergermarket in its latest global and regional M&A report, released last week.

According to Mergermarket’s data, deal value in APAC ex-Japan stood at US$241 billion in 1H2019, down 36% from the same period last year, even as the region’s market share of global M&A shrank to 14.4% from 18.6%. The number of deals generated in the first half fell to 1,525 from 2,031.

China and Hong Kong — typically where the largest deals are generated — together accounted for about 55% of the total regional deal value. Together, their deal value fell 39% year on year to US$131.85 billion, while deal count fell to 751 from 958.

“The trade war and escalating tensions between the US and China are to blame for declining M&A activity in China and Hong Kong. [These are] creating political and economic uncertainties, affecting investors’ sentiment. For example, investors worry that regulators’ powers could be used [as] a tool in the Sino-US spat. Chinese authorities’ deleveraging efforts are another crucial factor in cooling down M&A activity,” Mergermarket’s APAC research editor, Riccardo Ghia, tells The Edge in an email interview.

Deal value in mainland China alone plunged 44.7% y-o-y, while that in Hong Kong fell by a more modest 11.1%.

In contrast, M&A activity in the US was buoyant in 1H2019, despite the ongoing trade war and calls to regulate the big technology companies. The US had a market share of 53.2% of global M&A, the largest so far on Mergermarket’s record.

“This has as much to do with strong levels of activity in the US — up 14.6% by value [to US$957.3 billion] from the comparable period last year — as with the weak performances of both Europe and Asia, [which were] down 38.8% and 34.2% respectively,” says Mergermarket.

Deal value in the US for the half-year period was the highest in recent years, behind only 2H2015 (US$973.5 billion).

Interestingly, Southeast Asia (SEA) bucked the overall gloomy M&A trend within Asia. Deal value in the 10-nation sub-region was up 42.1% y-o-y to US$34.9 billion, despite a lower deal count of 164 [1H2018: 211].

Singapore-listed property giant CapitaLand Ltd’s acquisition of Ascendas-Singbridge Pte Ltd from Temasek Holdings — a deal struck in January and valued at US$8.1 billion — was the largest transaction in APAC ex-Japan in the first half of this year. CapitaLand announced on June 30 that it had completed the transaction.

Total M&A deals in Singapore rose 156% y-o-y to US$17.2 billion in 1H2019, the largest in SEA.

“Political uncertainties and clouds over economic growth have impacted equity and bond markets, spurring investors to increase their allocations into the real estate sector. Singapore is seen as a safer haven compared with Hong Kong, which is going through a period of political instability due to a combination of domestic factors and international forces,” Ghia says, explaining why SEA managed to buck the trend.

Apart from that, infrastructure investments related to the China-led Belt and Road Initiative and individual national government policies — for example, the Build Build Build (BBB) campaign by President Rodrigo Duterte in the Philippines — also contributed to SEA’s strong M&A activity, he says.

The BBB campaign is spurring consolidation among cement players.

“Thailand [however] remains a sore spot in the SEA region as deal-making activity slid 64.7% y-o-y in value [to US$3.1 billion] amid growing political uncertainty caused by the ongoing power struggle between pro-military allies and opposition parties,” Ghia adds.

In Malaysia, deal value rose 23.3% to US$3.88 billion in 1H2019. The biggest deal in the period was Thailand-based PTT Exploration and Production PCL’s acquisition of Murphy Oil Corp’s oil and gas assets in Malaysia in a cash transaction worth US$2.127 billion that was announced in March.

In APAC ex-Japan, all sectors except for the consumer sector saw a decrease in both value and volumes in 1H2019. The consumer sector recorded a 7.6% y-o-y increase in value to US$23.2 billion, across 144 deals.

The technology sector dropped a substantial 66% in value to US$22.9 billion across 174 deals, as the tech war between the US and China is threatening to disrupt the supply chain and create a “digital iron curtain” between countries using US technologies and those who adopt Chinese ones, according to Mergermarket.

Chinese outbound investment into the US and Europe in 1H2019 — worth a combined US$5.9 billion over 43 deals — was particularly subdued, reaching lows not seen since 2009, it adds.

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