BUSINESS: Asian mergers and acquisitions

April 1997

By Salil Tripathi

Big Is Beautiful

The future belongs to larger, leaner and meaner corporations. As they gear up for the increasing global competition, more and more Asian firms are entering into alliances or buying into one another, a trend confirmed by Asia, Inc.'s survey of the top 50 M&A deals in 1996

Central-bank governor Ahmad Don pulled no punches when he spoke to a closed-door meeting of more than 100 of Malaysia’s top bankers. His message was: consolidate or else. His Bank Negara has warned for ages that Malaysia’s banking sector is overcrowded. Some 37 commercial banks are too many for a country of 20 million. Most are medium-size or small, and they cannot hold their corner against foreign heavyweights. Ahmad argued that Malaysia needed fewer, leaner and stronger banks, able to compete on a regional basis. Unknown to many in the room, senior officials of the country’s leading stockbroker, Rashid Hussain Bhd. (RHB), were working quietly on a dramatic shake-up of the banking sector. For weeks before the September meeting, they had been immersed in case-books on bank mergers around the world.

A few weeks later, Rashid Hussain, 47, an urbane British-educated multimillionaire who heads the firm named after himself, pulled off a stunning coup. Rashid announced the biggest bank merger in Malaysia’s history. He agreed to buy Malayan Banking Bhd.’s 75 percent stake in the medium-size Kwong Yik Bank (the oldest in the country) for $854 million, and to merge it with RHB’s banking and securities business. The mega-deal will create Malaysia’s second-biggest bank in terms of profits and third-largest in terms of assets. At once, RHB became a multi-function financial supermarket. Rashid, who is married to a daughter of billionaire tycoon Robert Kuok, predicted: “It will be difficult for small banks to exist in a future where competition is going to be a lot fiercer and where the sophistications of the financial world are greater.”

The RHB tie-up, the fifth largest in Asia, Inc.’s survey of the Top 50 Asian M&A deals in 1996, underlines the recognition of many of the region’s corporations that they need to grow if they are to compete in the global economy. It also reflects a trend toward carefully prepared and focused business alliances. (If a single element marked RHB’s approach, it was meticulous planning.) The latest survey, conducted in conjunction with the Asian M&A Reporter in Hong Kong, confirms the pattern of previous years: an increasing resort to mergers and acquisitions among Asian companies, a trend which is likely to gather pace over the next few years. High economic growth rates are fueling this upsurge. So, too, are active stock markets and the need to cut costs. More and more companies are shopping for firms to buy.

Last year 24 Asian companies in the Top 50 merged with, purchased or invested in another company in the region. The total was one more than in 1995, and reinforces the trend toward mergers and acquisitions observed in the past three annual surveys. While the size of intra-Asian deals in 1996, at $9.7 billion, was considerably smaller than the previous year’s figure of almost $40 billion, one massive deal distorted the 1995 total: the $34 billion merger that created the world’s largest bank, Bank of Tokyo-Mitsubishi. If that deal is taken out of the equation, the total value of intra-Asian deals was more than 50 percent up on the figure for 1995.

But Asian M&A volume overall still remains a small fraction of the total number of deals taking place worldwide. Asia’s Top 50 deals last year were worth $22.2 billion. This compares with the record $659 billion worth of mergers and acquisitions announced in the U.S. Anil Thadani, chairman of Schroder Capital Partners (Asia) in Hong Kong, says: “There aren’t enough mega-deals yet in Asia. This is an ego business, after all. For some investment bankers, a deal of $50 million is below their dignity. It’s not worth their while.” Even so, investment banking majors are beefing up their presence in Asia. And Asian companies increasingly see M&A as a legitimate strategy for growth at home and abroad. Gary Stead, managing director for M&A at Merrill Lynch (Singapore) Pte. Ltd., says: “Today Asian M&As may seem like a fraction of the figures in the U.S. But five years from now, the Asian figures will be bigger.”

Another trend is toward strategic link-ups between Western firms and highly regarded Asian companies. These transcontinental deals have grown larger. In 1996, there were 147 major deals involving Asian and U.S. companies, worth $9.4 billion. European-Asian link-ups trailed only marginally behind, marking up 115 deals worth $9.3 billion. In all, deals within Asia grew to 325.

Many successful Asian businesses begin in a shophouse. Often, they grow into regional empires straddling several countries. Their owners are justifiably proud of what they have achieved. Traditionally, they have been reluctant to surrender command to a new owner, even though such a deal might make excellent business sense. Jeff Pirie, corporate finance manager at accounting firm Arthur Andersen in Singapore, likens Asian companies, with their strong tradition of family ownership, to European firms in the 1920s. He predicts: “That will change, and as with everything else in Asia, much faster.”

Daniel Schwartz, director of AVCJ Holdings, which publishes the Asian M&A Reporter, says that traditional family-owned businesses are now more willing to sell assets to third parties. “Four or five years ago intra-Asian mergers and acquisitions were virtually non-existent. Basically, you didn’t sell assets; you passed them on to the next generation,” he says. That’s changing, however, as the sons and grandsons of corporate founders take control of family businesses. Increasingly, the scions of Asian trading houses, often educated at Western business schools and familiar with modern management concepts like “core competency” and “sticking to the knitting,” are listening to the advice of investment bankers, who say that the way to lure international investors is to give more coherent shape to their businesses. Andrew Moore, Singapore-based senior manager at accountancy firm Price Waterhouse, says: “We will see increased focus on improving shareholder value. Those parts of the business that soak cash or destroy value will be disposed of.” However, hostile mergers and acquisitions are still rare in Asia. This is partly due to Asia’s business culture, and partly a reflection of the iron grip that shareholders, often founding families, have on listed companies.

But business logic increasingly drives deals, even if they confront the principal players with bitter choices. Gordon Wu, for example, built an impressive regional power company in Hong Kong-based Consolidated Electric Power Asia (CEPA). But saddled with large debts, he followed the advice of his investment bankers, Peregrine Capital, who found a suitor in faraway Atlanta: Southern Co., the largest producer of electricity in the U.S. In a deal that tops the 1996 list, Southern agreed to pay $2.7 billion for an 80 percent stake in CEPA, creating one of the world’s largest independent power producers, and giving the U.S. corporation an entry into Asia’s vast, energy-hungry markets. Still, Wu had the satisfaction of staying on as chairman of CEPA. His legendary deal-making skills will be of vital importance to Southern as it ventures into terra incognita. Sam Chang, executive director of Union Bank of Switzerland in Hong Kong, says: “We haven’t seen such a level of activity for a while. It is a real landmark deal for Asia.”

Other headline-making deals in 1996 included:


The link-up between Softbank Corp., Japan’s largest distributor of computer software, peripherals and systems, and the U.S.’s Kingston Technology Corp., the world’s leading supplier of memory modules.


The move by China-backed CITIC Pacific to raise its stake in Cathay Pacific Airways, ending half a century of British domination over Hong Kong’s aviation industry.


Malaysian tycoon Robert Kuok’s deal with Australia-based Coca-Cola Amatil Ltd., which positions his Kerry Group as a dominant player in emerging markets for the world’s best-known brand of soft drink.

The past year also saw Western telecommunications companies establishing a presence in Malaysia and the Philippines; South Koreans continuing their outward drive; and technology firms seeking new market niches.

The increased international interest in Asia is only natural. This is the biggest market for the future, and early entrants can expect high rewards. Every banker knows the facts: about China’s potentially huge consumer market; the purchasing power of India’s 200 million-strong middle class; and the fact that Hong Kong’s per capita income is now bigger than Britain’s. The easiest way to enter these markets is to buy market share. It is no wonder that multinationals are on the prowl, looking for suitable partners and targets. Avijit S. Bindra, managing director of Citicorp International in Hong Kong, says: “M&As are not just the preferred route of entry; in some countries that strategy is often the only route.” Publisher Schwartz warns outside companies not to delay if they are contemplating buying assets in Asia. He says: “If you think you can take your time getting into this market, you’re wrong.”