Asia's M&A Boom

Merger and acquisition activity is heating up in Asia, both by investment pursuing growth in developing economies and by investment originating in Asia.

M&A deals in the second quarter this year grew by 65% over the first quarter, according to data from the Merger Market, a research organization, with the largest being a $29.6 billion merger of two Chinese telecoms.

A recent study in the McKinsey Quarterly examined the growing amount acquisitions of foreign companies by Chinese capital, totaling $26 billion in the first quarter of 2008, which was nearly twice the amount for the same period during the previous year.

The rise in Chinese acquisitions can be put down to several factors, the study noted. Financial troubles in the United States and Europe have driven down the valuations of Western companies. The yuan's growing strength against the dollar has turned U.S. companies into bargains. At the same time, foreign investment is seen in China as a welcome outlet for the country's rising liquidity levels.

The targets of Chinese M&As have also become more diverse, according to McKinsey. While in the past they were largely confined to other Asian countries, companies are now buying up competitors all over the world.

"Many of these deals are the first of their kind for the companies involved, and many of them are small and focused-for example, aimed at gaining access to a specific market-rather than large and transformative," the report stated.

M&A magnet

Emerging Asia, excluding South Korea and Japan, remains an attractive location for foreign companies to make M&A deals.

A 2008 survey by the Economist Intelligence Unit and the firm Marsh, Mercer and Kroll found that 75% of executives polled said the region was significant or very significant in their M&A strategies. The survey also found a perception of a high degree of risk associated with Asia.

"In general, M&A flows reflect perceived risk, with more money going to perceived safer destinations," according to the survey authors. This is not the case in China, India and Southeast Asia, which are seen as high-risk locations, yet receive significant investment. "The potential rewards would have to be great to match these risks, and companies pursuing M&A strategies in the region will need to pay extremely close attention to a broad range of risks that may lie outside their familiar experience."

Despite the risks, companies see M&A deals in Asia as vital to their growth strategies and to expanding to new customer bases.

"Whereas previously, investments in these countries tended to be resource-based, to take advantage of inexpensive labor," according to the report, "today they are more likely to be made on the basis of the growing spending power of the huge populations in these countries."