A perfect match
As the forces of globalisation move forward, Asian mergers and acquisitions activity is surging, and investment banks scramble for lucrative adviser roles, Jon Ogden reports
MERRILL LYNCH has been almost glowing with pride after it was knocked from the global top spot in the securities underwriting stakes by Citigroup.
After all, these days it prefers to emphasise it is chasing profits, not market share. But bragging rights for top mergers and acquisitions (M&A) adviser in Asia still seem to count for something.
Morgan Stanley for example actually pre-empted a release by Thomson Financial to claim it was No 1 in Thomson's regional M&A league table for last year. The following day JPMorgan was trumpeting its triumph in a Bloomberg poll, which has a looser definition of an Asian deal.
Morgan Stanley claimed the Thomson survey was an older and more established standard, while JPMorgan claimed Bloomberg's was equally valid.
Whoever is the real winner, the public-relations posturing illustrates the increasingly competitive nature in what global investment banks hope will be an area of strong growth as the urge to merge catches on in Asia.
Thomson's headline figure of regional mergers for last year was US$106 billion against US$196 billion in 2000. Bloomberg put last year's figure at US$196 billion versus US$263 billion in 2000.
The decline may have been exaggerated due to Pacific Century CyberWorks' huge US$35 billion takeover of C&W HKT and a similar-sized deal by China Mobile to buy networks from its parent, inflating the 2000 numbers.
There are plenty of what investment bankers call drivers indicating that last year's M&A downturn was a one-off.
Sean Wallace co-head of investment banking at JPMorgan said: 'Call me an optimist, between [the World Trade Organisation] the Olympics, low interest rates and hopefully growth in the United States, we are going to see a very good M&A market in 2002.'
Depressed stock markets tended to go hand in hand with a decline in M&A deals even though it might create bargain-basement prices, bankers said.
Harry van Dyke, head of regional M&A for Morgan Stanley said: 'The problem is when the stock market is going down, people are saying 'I'm not selling because my price is depressed'.'
The precedents are certainly there for more activity. The Asian financial crisis helped break down barriers to deal making.
'Mergers are becoming more accepted as a business tool,' Mr van Dyke said.
Transactions in Asia have gone from about 1 per cent of the global total to more than 20 per cent since 1994, according to Thomson Financial. The pattern of deals has also changed.
'If you go back prior to '97 . . . the prevalent theme at the time was foreign companies coming into the region setting up joint ventures,' said Yong Hak Huh, a leading deal maker at JPMorgan.
'But following the financial crisis the . . . countries that were facing difficulties had to divest to foreign acquirers.'
The Asian financial crisis also caused foreign investors to become more critical of corporate structures in Asia.
Cezar Consing co-head of investment banking at JPMorgan said: 'Through most of the 90s growth was a sufficient condition to obtain capital. But in today's market, growth by itself is certainly one thing but it is not by itself enough.'
Asian bosses are being driven by markets towards 'corporate clarity' which means selling off non-core assets, creating work for investment bankers.
Chip foundry Taiwan Semiconductor Manufacturing was a good example of how Asian companies are tuning in to corporate governance issues.
David Sloan, a senior JPMorgan deal-maker said: 'They talk about how their disclosure is appreciated in the marketplace.
'Other corporates might talk about their level of transparency and disclosure and how that provides access to capital whether it is debt or equity.'
Of course there is the old-fashioned reason for mergers, which is to take out rivals, consolidate the market and create pricing power. That is a theme which was underlined in Asia by last year's bank mergers in Singapore and Hong Kong.
Among the deals, Singapore's Oversea-Chinese Banking Corp bought Keppel Capital for US$3.74 billion as the Government orchestrated consolidation, while DBS bought Dao Heng Bank in Hong Kong for US$5.68 billion.
In Singapore 'the story is not over there either. There are three banks and that is not necessarily the end game', Mr Sloan said.
Mobile phones in Hong Kong had a similar story with a crowded, unprofitable market of six operators ripe for consolidation.
Most investment flows have been one way into China. But some cash-rich companies benefiting from the global trend to outsource manufacturing in the mainland might soon be on the acquisition trail themselves.
'The one thing we are surprised about Chinese corporates is they really are thinking on a global basis,' Mr Wallace said.
Investment bankers are still drooling over a landmark deal in which Emerson Network Power of the United States was able to buy Chinese electricity generator Avansys Power for US$750 million.
The vendor, Huawei Technologies, wanted to concentrate on its core telecommunications equipment business. The October deal marked the first time a foreign company was able to come in and buy 100 per cent of a Chinese asset.
'From the buy side coming in there is keen interest in that as a model,' Mr Sloan said.
While there are plenty of reasons to believe the deal flow will grow in Asia, the fee pie for investment banks is growing at an even faster rate.
The 'no adviser' deal has traditionally been a strong player in Asian M&A stakes because investment banks take a fee of between 0.1 per cent to 1 per cent of the deal size. But companies are increasingly looking for help from bankers as their fees can be more than offset by the better pricing on deals.
Companies are also having to meet market demands for better corporate governance. Using an adviser can make a deal more transparent.
'The market share of 'no adviser' is going down every year,' Mr van Dyke said. It is likely to drop from 20 per cent to the 5 per cent seen in the US.
The M&A fees are becoming concentrated in fewer hands as the forces of globalisation also play out on the investment banking scene.
Companies are increasingly demanding their advisers have a worldwide reach, the big firms claim. One example was a Taiwanese technology company which was having 'scale and distribution problems'.
JPMorgan said it found an ideal US company for them to take over which was operating at only 20 per cent capacity. 'It was the perfect match,' Mr Wallace said.