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Digitalisation, decarbonisation drive M&A deals in APAC

In Q1, technology, media and telecom (TMT) was the busiest sector in the Asia Pacific by volume with 622 deals.

Businesses’ pursuit of digital transformation has been driving dealmaking activity in Asia Pacific and several experts predict it will continue to do so for the remainder of 2023. First-quarter activity showed that the technology, media and telecom (TMT) sector contributed two of the largest deals in the region and was the busiest sector in terms of deal volume, with 622 transactions. 

“Tech acquisitions have been a consistent force driving mergers and acquisitions (M&A). Last year, we saw a lot of deals revolving around artificial intelligence and the future of work,” Sapana Maheria, director for Thematic Research at GlobalData Plc, told Singapore Business Review.

“Automation and cybersecurity were very strong themes in the last few years. Cloud is also a very strong theme,” Sapana added.
 
These days, generative AI applications such as ChatGPT are making waves in the market. “I think innovation and tech are the two things that are going to be very strong drivers for M&As in 2023. What we expect is that as cost-cutting is going to be one of the main focus areas for businesses, we will see a lot of focus on automation, with innovations, (and) more collaborative tools really picking up, hence, driving the M&A deal trends as well,” she said.
 
Within the TMT sector, Sapana said there will likely be a lot of companies focusing on cloud, cybersecurity, AI, big data, and 5G connectivity that will be acquired during the year.
 
In March, Singapore’s GIC Private Limited acquired a 50% stake in the Bain-owned Works Human Intelligence Co., which offers cloud-managed service, amongst others. The deal had a value of US$2.6b, making it amongst the top deals in APAC for Q123.

Decarbonisation draws deals
 
Whilst digitalisation plays a dominant role in driving M&A deals in APAC, and globally, Sapana said decarbonisation is also seeing an upward trend.
 
“As 2030 approaches… decarbonisation is going to be one of the primary themes driving the M&A activity,” Sapana said, adding that most companies have environmental, social, and corporate governance (ESG) goals set seven years down the road.
 
Data from Marketmaker showed that in Greater China, the largest deal in terms of value was the merger of Wuhan-based luxury electronic-vehicle (EV) maker Lotus Tech with Singapore-based special-purpose acquisition company L Catterton Asia Acquisition Corporation at US$5.5b (SG$7.39b/HK$43b).
 
Greater China’s fourth-largest deal also involved another EV maker, WM Motor Global. The company was acquired by Hong Kong’s Apollo Future Mobility for US$2b (SG$2.69b/15.63b).
 
“Automotive is another sector [which will likely see growth] given the themes like autonomous vehicles and electric vehicles. We’re seeing a lot of investments happening and those kinds of things,” Sapana said.
 
At present, the theme of decarbonisation is more prominent in venture capital deals, with companies investing in businesses and products that allow them to collect data on their emissions or track their performance of goals.
 
Sapana underscored that companies are also under pressure from their shareholders to address the various aspects of ESG. “Gen Z, which will soon be the majority of the workforce, is very aware and conscious about the carbon footprint that a company has, so companies need to be very actively investing in reducing it,” she stressed.
 
Given the ESG movement, Sapana also predicts that the power sector will see growth in M&A deals.
 
“Energy transition is one of the major themes in the sector. Hydrogen and renewable energy are massive themes as well and are getting a lot of investment,” she said. “We expect [the power sector] to remain either consistent or grow in its M&A activities in 2023.”

Banking on China
 
Apart from decarbonisation and digitalisation, some reports are stating that the resurgence of China’s economy will also likely drive transactions in 2023.
 
China’s recovery, however, “may not be as smooth sailing as most have expected,” according to Sumit Punwani, partner for Corporate Finance, Deal Advisory at KPMG Singapore.
 
“China’s reopening in Q4 2022 has led to a significant recovery in consumer consumption as seen by its recent strong performance in the domestic tourism sector during the ‘golden week’ in early May as well as a strong recovery in luxury goods spending,” Punwani said.
 
“Despite the meaningful rebound in the services economy, China’s manufacturing PMI declined from 51.9 (March) to 48.8 (May) and there was a subsequent decline across bellwether commodities such as crude oil, Newcastle coal and copper,” he added.
 
Given these factors, the KPMG expert believes that “interest from China-based companies to participate in M&A activities will likely increase in a moderate fashion, instead of a sharp V-shape rebound.”
 
Sapana, for her part, underscored that there has been “greater scrutiny” on any acquisitions by Chinese firms, given the geopolitical tensions involving the APAC superpower.
 
When it comes to UK-based or US-based companies, especially those with patents, those kinds of acquisitions are getting blocked. We expect it will probably continue, not just in 2023, but probably long term as well,” Sapana said.

Dragging deals
 
Geopolitical tensions, along with macroeconomic forces, have contributed to the regression of M&A transactions across APAC in the first quarter of 2023 and these factors are likely to dampen deal sentiments throughout the year.
 
“Market sentiments due to recent developments in the financial services sector, recession fears and geopolitical concerns such as China’s economic recovery and the Russia-Ukraine situation will continue to influence sentiments among C-suites in the Asia Pacific region,” said Punwani.
 
“Given current elevated levels of global macro uncertainty, we are expecting companies to be more prudent in their overall M&A strategy and to adopt a cautious approach, especially until the end of Q3 of 2023,” he added.
 
Also, supply chain issues may impact the M&A market negatively in the short term, asserted Sapana.

Entering deals

Given the risky macro environment, Punwani said companies should “adopt a long-term lens in assessing deal opportunities.” 
 
“The value extraction timeline could be prolonged in the event of a further downturn in the economy. In the same vein, companies should ensure that their cash flow requirements can be met with sufficient margins of safety when contemplating to fund an acquisition. This is a key area that companies tend to overlook, as the cash flow requirements of the target post-acquisition are often underestimated, which could result in funding stress during a prolonged economic downturn,” the KPMG expert added.
 
However, he said the current environment can create ample opportunities for companies, especially those with strong balance sheets and funding capabilities.
 
Sapana had a similar sentiment, saying that valuations have dropped and it’s a good time to make a strategic acquisition.
 
“One of the quotes by Warren Buffett is when the valuations are lower, when we are in a recessionary environment, that’s the best time to go for an acquisition because you will get the same company or the same capabilities, but at a lower price,” she recalled
 
“We’ll see those kinds of critical acquisitions definitely happening, and APAC will play a massive role,” she said.

RELATED: SG to see a 20% growth in inbound cross-border M&A activity in 2023 

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