‘Cash-rich Asian firms to lead global markets through M&As in 2013’

In the first three months of 2012, national oil companies were involved as buyers in some 25 oil and gas transactions with a combined value of $12.4bn. The most active deal-makers in Q1, 2012 were NOCs from Asia and Russia.

Cash-rich Asian companies will be among those corporations with healthy balance sheets driving global stock markets higher through acquisitions in 2013, says a fund manager.

On a historical basis, merger and acquisition activity is extremely cheap to finance because interest rates are so low, said Jeremy Leach, managing director of MPL, a fund management company.

“In the 1990s the cost of debt was 10% plus but it can be done for a fraction of that now. So it is cheaper to raise money with debt rather than raise equity. It is far better issuing some sort of convertible debt and allowing conversion when the share price has gone up.

“Leading Asian businesses are also likely to lead the way with acquisitions in Europe because they are so cash-rich and Europe is so cheap. We could quite easily see a situation where one of the leading bank brands in Europe is acquired by an Asian bank because it has the purse strings to do it,” Leach said.

He said there are several factors that support takeover activity, especially from Asian firms.

In the first three months of 2012, he said national oil companies (NOCs) were involved as buyers in some 25 oil and gas transactions with a combined value of $12.4bn. The most active deal-makers in Q1, 2012 were NOCs from Asia and Russia.

Recent years have witnessed the Asian NOCs’ international pursuit of production and reserves to meet aggressive supply targets. Most deals announced by Russian NOCs focused on the acquisition of stakes in independent domestic oil and gas companies or regional partnerships to help develop domestic oil and gas reserves

Global sourcing and distribution multinational Li & Fung said it will accelerate its acquisitions in 2013 on the back of continued strong profits. Recently, in Hong Kong, William Fung, chairman of Li & Fung, said, “As the company’s organic growth is virtually zero due to the sluggish market demand in the European and US market, we have to make more acquisition in order to push up the core operating profit performance. Amid the current global economic slowdown, we can find more attractive acquisition targets by paying much cheaper prices. Those European and Asian region focused companies and those health & beauty product providers will be our main priorities for acquisitions.”

Saudi Basic Industries Corp (Sabic), which acquired US’ GE Plastics for $11.6bn five years ago, has indicated that it now has appetite to making further significant acquisitions in a bid to become the largest chemicals producer in the world. Sabic is fairly typical of large Middle Eastern companies that see the need to expand outside the region because the continued impact of the Arab Spring and is likely to do so for some time to come, he said.

With the discounted value of many UK and European banks, many are prime for acquisitions by the Asian heavyweights and the timing would appear to be ideal as conservative lending margins (typically 4% above base) have never been more profitable for banks than they are today. Their only restriction is capitalisation, which many wealthy Asian banks could easily deliver to the ailing balance sheets of UK and European lenders

“A wall of cash is waiting to enter the equities market. The longer the recession goes on for the longer the more dramatic the bounce will be. When it happens we will see a period of sustained recovery that produces better financial results, more trade of equities and more M&As,” Leach said.

However, he does believe Europe will continue to struggle. “Europe has a long journey ahead of it. Austerity can work in a country such as Spain, which has its own economy but Greece has a fabricated economy, with most people working for a government that has no money. It just isn’t feasible that Greece will ever be able to repay its debts.