APAC financial sector mergers and acquisitions will slow further as buyers wary of big bets

Mergers and acquisitions in the financial sector in Asia-Pacific will continue to slow after the total number of transactions fell in the quarter ended June 30, as market uncertainties forced buyers to become more cautious and selective.

M&A deals in the financial sector in the quarter fell to 154 from 165 a year earlier, led by a slowdown in activity in the banking and non-banking financial institutions sectors, according to data from S&P Global. Market intelligence. The ongoing war in Ukraine, rising inflation, interest rate hikes and a bearish market environment will weigh on investors’ appetite for trades.

“Due to some unexpected short-term volatilities, some deals that are signed but not yet closed could be impacted, and deals currently in progress could collapse,” said Miranda Zhao, Head of M&A for Asia-Pacific at Natixis Corporate & Investment Banking.

For incomplete transactions, parties may seek to rely on material adverse change provisions to opt out, Zhao said, referring to the agreement’s provisions to deal with unforeseen events, such as war, that could have a impact on target valuation. Some parties may even waive money already deposited in escrow accounts as transaction collateral to avoid completing the transaction.

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Russia’s invasion of Ukraine in February and the subsequent surge in inflation rattled global equity markets. The S&P 500 index lost more than 20% between the start of 2022 and June before recovering somewhat. The benchmark is still down 17% in 2022. In early July, Tesla Inc. CEO Elon Musk called for the termination of a $44 billion deal to acquire Twitter Inc., saying the social media platform had not cooperated with requests for information about fake accounts run by bots. . Twitter, in a counter filing, said Musk’s firing was “invalid and abusive” and that the company had not breached any of its obligations.

Analysts expect continued market volatility and geopolitical tensions to force buyers to become cautious in their search for offers.

“Mergers and acquisitions activity in [the financial] sector will continue but [deals] will be selective and localized and driven by a variety of specific criteria,” said Brian Chia, partner at Wong & Partners in Malaysia and chairman of Baker McKenzie’s Asia-Pacific M&A practice.

Chia expects opportunistic M&A activity to continue. “Insurance companies, for example, continue to view large parts of Southeast Asia as underserved and underpenetrated,” Chia said. underserved markets by developing new market segments”.

In Asia-Pacific, 28 insurance offers were struck in the June quarter, compared to 24 in the prior quarter and 25 in the prior year quarter.

Potential buyers will also push for more rigorous due diligence, particularly around supply chains, potential sanctions impacts and financial ties to war-affected countries, Natixis’ Zhao said. In addition, rising interest rates will impact financing feasibility and investors will become more cautious, Zhao added.

Market Intelligence data shows that M&A activity slowed in Hong Kong and India in the second quarter compared to the previous quarter, although the number of deals in Australia, mainland China and South Korea increased . The biggest transaction announced during the quarter was the merger of HDFC Bank Ltd. with parent company Housing Development Finance Corp. Ltd., India’s leading mortgage lender, worth $60.37 billion. The other largest deal volumes lag far behind, with the quarter’s second-largest deal valued at $1.60 billion.

Most buyers in second-quarter financial sector deals remained from the Asia-Pacific region, the data showed.

bright spots

There are still some positives for mergers and acquisitions, however, according to experts. Fintech will remain popular after the digitalization rush caused by COVID-19. Blockchain and cryptocurrency will be an area of ​​focus for transactions despite ongoing market issues.

“The desire to go fast and deepen technology is growing and this can only be achieved by acquiring new technology enablers,” Chia said. “It will be a key catalyst for technology mergers and acquisitions for players in the financial sector. In the medium to long term, neither the pandemic nor the specter of stagflation will temper the inevitable pull towards technology. »

According to a July 21 Market Intelligence report, investor interest in the region’s fintech sector remained robust in the second quarter despite the market selling off and rising rates. Venture capital dollars disbursed to private fintech companies were $3.53 billion in the quarter, up 6% from the previous quarter.

Companies in need of funding may also be forced to sell to players with deeper pockets, said Daryl Liew, chief investment officer at wealth and asset management firm Reyl Singapore. The market still has buyers interested in acquiring companies, such as many U.S. special purpose acquisition companies that listed between 2021 and the first quarter of 2022, Liew said.

“There’s still a lot of dry powder looking for acquisitions following the SPAC listing wave,” Liew said. “Current market conditions are extremely unfavorable for growing businesses, especially those that have yet to make a profit.”

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