Asia’s Frenzied Financial Services Deal Environment Increases Risk of Overpaying

The surge of M&A activity seen in 2006 in the Asian financial services industry will continue over the next five years. High levels of economic growth across the region will continue to attract investment, boosting demand for a limited supply of quality assets, thereby increasing the risk of overpaying, according to the findings of ‘Financial Services M&A: Going for growth in Asia’, an annual survey from PricewaterhouseCoopers, conducted in association with the Economist Intelligence Unit. According to the survey findings, 74% of the 230 senior financial services executives surveyed across Asia, and 69% of Singapore respondents predict that their organisations will undergo further significant M&A activity in the coming five years, compared to just over two-thirds (68%) of the total respondents in the previous survey conducted in 2005. This optimism is all the more astonishing as financial services deal activity in the region is already at record levels, with 2006 disclosed deal value up 66% to US$64billion compared with the previous year. The risk of overpaying was clearly reflected in the survey findings which highlighted that pricing has become the key perceived barrier to deal making. High pricing was identified by 54% of Singapore respondents and 50% of total respondents to the 2007 survey as the primary barrier to doing deals (up from only 32% of total respondents in 2005), whereas in 2005, the primary barrier identified was the limited supply of attractive targets. Identified as the primary barrier in 2005, the lack of attractive targets is now the second major barrier in the 2007 survey. Respondents rated uncertain regulatory requirements as the third major barrier in both surveys. Dominic Nixon, Asia Financial Services Leader, PricewaterhouseCoopers Singapore commented: “High pricing and regionalisation are considered to be the key challenges now facing financial services companies across Asia. The rapidly evolving markets and significant growth factored into deal prices make it very easy to overpay. Regulatory protectionism and the sheer diversity of the region continue to present further barriers to regionalisation and this continues to hamper the development of regional platforms and make cross-border deals difficult.” Collaboration has emerged as one way to address both high pricing and current regulatory restrictions and, when considering potential investors or joint venture partners, was cited as the most important influencing factor for almost 60% of Singapore respondents, and two-thirds of total respondents up from only 38% of total respondents in 2005. More than 76% of Singapore financial services organisations claimed that joint ventures and partnerships will be the key to expansion in Asia and 67% are actively seeking strategic foreign investors for significant new ventures over the same timeframe. Survey respondents now consider regulatory liberalisation less of a driver of M&A than in 2005 (24% compared to 30% in 2005). This result suggests that in the current booming market, Asia’s financial services industry is learning to live with the underlying implications of the regulatory environment or at the least to prioritise growth. It is the pursuit of the unique growth opportunities offered by the region that is driving activity, with the need to increase market share (46%) and entering new geographic markets (46%) coming out on top in a list of objectives for Singapore buyers. The increase in deal activity is broad-based in terms of countries within the region and individual industries buyers are targeting. Banking activity levels remain high with significant deals in South Korea, Taiwan and Japan but the sector demonstrating the fastest growth rate was insurance, with activity up three-fold over 2005. Karen Loon, Financial Services Industry Practice Partner, PricewaterhouseCoopers Singapore commented: “The outlook for deals in the insurance sector remains strong as global players seek to catch up with the market leaders and regional players begin to emerge, particularly from Japan.” Interest in M&A activity in China by Singapore respondents remains high (63%) but overall was slightly down on last year (47% now versus 52%), however it remains an important, strategic market. Activity is now broadening as sectors, such as insurance and trust companies, begin to open up. China and India still remain the top two targets for M&A in the region due to underlying economic growth conditions, and the survey shows overall interest in India has increased slightly from 37% in 2005 to 39% in 2007. However, Taiwan, Pakistan and Vietnam are also fast emerging as growing markets of M&A activity, having opened up from both a regulatory and vendor perspective. Whilst predictably, India remained at the top of countries where financial services companies will most likely set up outsourcing arrangements (39%), followed by China (25%), Singapore has become an increasingly more attractive location as the next preferred country in the poll (16% compared to 7% in 2005). Dominic Nixon, Asia Financial Services Leader, PricewaterhouseCoopers Singapore concluded: “In the area of outsourcing, Singapore continues to gain ground. A number of global financial services companies have expanded their support operations in Singapore in recent years. Singapore's robust infrastructure, stable political landscape and thriving business climate are reasons why it continues to be a popular outsourcing destination for the financial services industry.” --www.theasianbanker.com (May 25 2007)--

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