Test of acumen in hot M&A market

THE surging market in mergers and acquisitions (M&A) in the region this year - while music to some ears - may make it increasingly difficult for Singapore companies to make overseas acquisitions. In Asia, excluding Japan in the first half, M&A activity jumped 56.4 per cent to US$199.4 billion over the same period a year ago.

The M&A boom has meant that companies seen as potential targets have also seen their valuations soar. It has also meant a hefty increase in fees for investment banks. According to one estimate, imputed fees for Asia ex-Japan M&As reached US$1.6 billion during the first half of 2007, a 23.1 per cent jump from US$1.3 billion in the previous period. Law firms too have benefited.

As companies across Asia seek to expand their businesses through M&As, the legal work is pouring in. Top law firms in Singapore advised on business transactions valued at US$26.1 billion in the first half of this year, surpassing the US$17.4 billion worth of deals they advised on during the whole of 2006. But for companies looking for regional acquisitions, the hot M&A market may not so welcome. Take the telecommunications sector for instance. For the first two quarters of 2007, telecommunications emerged as the most preferred sector for takeovers with deals worth US$39.9 billion, or 20 per cent of the total M&A market in the region.

The competition for telco assets will make it more expensive for Singapore Telecoms to make the overseas acquisitions it needs to keep its growth going. In its recent acquisition of a 30 per cent stake in Pakistan's Warid Telecom for an estimated US$758 million, SingTel reportedly had to beat off competition from the likes of MTN of South Africa and Britain's Vodafone.

Singapore banks will face the same challenge. The financial sector is the next hottest M&A sector with US$35.4 billion of deals done in the first half of 2007. While banks may benefit in fee income from the strong flow of deals, the likes of DBS Bank, OCBC Bank and United Overseas Bank may find themselves competing for regional banking assets at sharply rising prices.And telcos and banks aren't the only companies facing competition for assets. In electronics and retail, the rise of private equity as a major market force has also put a premium on assets, with well-known names like US-based Blackstone, Kohlberg Kravis Roberts & Co (KKR) and Carlyle group on the prowl. Singapore itself has seen a surfeit of private equity money, snapping up electronic and retail companies and pushing up the value of private equity deals to US$2.9 billion in the first half of this year - a five-fold increase from US$577 million last year.

So, it is pertinent for Singapore companies to get their acquisition strategies spot on. If they are too timid and baulk at competing for assets, they may end up with little or nothing to show for their regional ambitions.

If they bid too aggressively, they may end up paying over the top. Some of the best acquisitions made by corporate Singapore were made in the immediate years following the Asian crisis, when regional assets were out of favour and cheap. Now - amid a sizzling M&A market - comes the real test of management foresight and acumen.