While Southeast Asia offers a diversity of investment opportunities across geographies and industry sectors, it also presents myriad risks and hurdles that must be overcome before investors can confidently commit capital and generate value, according to Kroll Advisory Solutions.
As gateway to the region, Singapore saw the most M&A activity by both volume and value for the 12-month period Q2 2012 to Q1 2013, according to Kroll's quarterly newsletter for M&A practitioners.
Singapore’s regulatory environment and sound governance structures serve as persuasive tools for attracting investment – as such, the city-state accounted for 35% of Southeast Asia deal volume and 58% of deal value for that period.
Malaysia, Indonesia, and Thailand also saw noteworthy deals, and Myanmar is picking up investment interest.
“Conducting business in many parts of Southeast Asia, especially in markets that are just beginning to emerge as prime investment destinations, presents two key challenges for investors: opaque business practices and obscure ownership structures,” says Kroll’s Richard Dailly, Managing Director for South and Southeast Asia. “In many companies in the region sound control and compliance structures aren’t always present. Similarly, ownership structures can often be unclear, reflecting the fact that a number of companies are run through proxies with oversight from family members.”
To successfully navigate emerging and frontier markets in Southeast Asia, investors must be prepared to conduct thorough due diligence to collect accurate, actionable information. Unlike conducting M&A in the United States and Europe, investors cannot rely on collecting information by simply consulting a database or referring to public documents – much of it has to be done by developing a network of contacts within the target community and conducting on-the-ground due diligence.
“Whether investors do this themselves or hire professional support to do so, it’s essential to develop local contacts with parties unaffiliated to the target company so that they can ask meaningful questions and get the answers they need,” says Dailly.
These contacts and ground-level assessments can help investors avoid taking unnecessary risks when engaging prospective local business partners. Dailly highlights that risk is most prevalent in deals that involve land transfers or land-use rights, specifically in mining and plantations or the agriculture sectors.
“The nature of these sectors and the involvement of multiple parties leave considerable room for corruption, fraud, or bribery. Prospective investors must also consider how this land was appropriated. If, for example, minority groups were forced off their land by majority groups, this could result in animosity toward the acquiring company and its stakeholders,” says Dailly. “Investors need to fully understand these nuanced risks in order to properly assess the opportunity and to establish the mitigation factors that need to be applied if they proceed with their investment.”
Southeast Asia M&A trends
Since 2009, cross-border deal traffic has increased from 97 transactions worth US$15bn to 194 worth US$51bn in 2012, and Q1 2013 has seen 27 deals worth US$5bn.
The industrial and consumer industries shared the spotlight for largest deal volumes (19% and 18% respectively), although the consumer sector accounted for 46% of deal value, due in large part to the US$11bn acquisition of Fraser & Neave by Thailand’s Thai Charoen Corporation and the US$6.5bn acquisition of Asia Pacific Breweries by global beverage giant Heineken.
Japan stood out as a key buyer of Southeast Asian assets, with 30 deals valued at US$5.2bn. Japanese M&A concentrated on the industrial, financial services and consumer sectors, with Thailand the top destination for Japanese investment.
While private equity buyout activity declined in 2012 (21 buyouts worth US$2.9bn) compared to 2011 (34 deals worth US$6.5bn), foreign firms continue to target Southeast Asia, opening branch offices in the region to identify investment opportunities.
Myanmar is piquing investor interest – particularly among Japanese and South Korean corporate – as it continues to reform and open to foreign investment.
Already, foreign banks and lenders are looking to set up offices to tap lending and project-finance opportunities for infrastructure projects.