Red tape puts suitors off deals, survey finds

PUBLISHED : Wednesday, 16 May, 2012, 12:00am
UPDATED : Wednesday, 16 May, 2012, 12:00am

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'Regulatory creep' in the Asia-Pacific region is deterring companies from mergers and acquisitions, according to global law firm Clifford Chance and threatening to choke economic activity.

The firm commissioned a survey of about 400 companies worldwide with revenues of more than US$1 billion, of which a third are based in the Asia-Pacific area.

Of the Asia-Pacific respondents, 22 per cent of Southeast Asian companies and 21.4 per cent of Chinese companies said 'regulatory creep' was likely to stop them from embarking on M&A activity. Regulatory creep is loosely defined as a regulation expanding beyond its original intent.

China, Southeast Asia and India, are their top three M&A destinations in the region. Hong Kong-based Clifford Chance partner Simon Cooke said regulators' more robust stance - sometimes driven by local politics - could have a 'knock-on effect' on deal structures, forcing them to take minority or majority stakes or even a joint venture instead of a buyout.

Matthew Layton, the firm's London-based head of global corporate practice, said foreign firms were gearing towards joint ventures when entering emerging markets to mitigate business risk and other issues like intellectual property right protection, with the help of their local partners.

The survey also found that companies in the Asia-Pacific region were relying less on banks and more on cash and public debt markets to finance M&A activity as deleveraging by European and US banks meant credit had tightened and corporate finance took longer to approve.

Clifford Chance finance partner Anthony Wang said banks had become more selective in lending since the euro-zone crisis, taking longer to approve and complete loans.

The survey found that 33.6 per cent of the Asia-Pacific respondents preferred to use existing cash reserves to fund M&A transactions, followed by debt raising, bank bonds, and external bank debt.

Two years ago, the survey found that external bank debt was the major source of M&A finance.

Wang said firms would rather pay out of their own pocket, and re-finance later, than wait for banks' approval as the time frame for deal completion was often very short.

Asia-Pacific companies ranked political uncertainty, regulatory issues and currency fluctuations as the three top barriers to cross-border merger and acquisition.

27%

The proportion of survey respondents who said China was the prime location for M&A activity