Samson Lo, Head of M&A Asia at investment bank UBS, discusses his 2022 dealmaking predictions for APAC with Ansarada.
I think any kind of business with a sustainability angle tends to attract investor interest.Samson Lo, Head of M&A Asia, UBS
Ansarada: Global M&A activity was tremendously strong in the second half of 2020 and so far in 2021. From an APAC perspective, do you expect this to remain the case in 2022?
Samson Lo: We are living through this boom in activity right now. With more in the pipeline – there’s a lot of momentum in the market. In the first half of 2021, I believe APAC deal volume increased by around 80%. I predict by the end of 2021 it will finish 50% ahead of 2020. Looking ahead to 2022, even a very conservative estimate would see volume increase by a further 20%.
A key driver of this activity has been pent-up demand for deals that were put on hold during the peak of the COVID-19 pandemic in 2020, and perhaps even 2021. We have also seen plenty of de-SPAC activity going on. The large number of SPACs that were raised in late 2020 and early 2021 only have a 24-month shelf life. This will result in a steady flow of SPAC deals in 2022 and will serve to push up deal value, as most SPAC transactions are valued at a billion dollar plus. We are also seeing a recovery in outbound deal activity among the Chinese, Japanese and Korean markets. This is a healthy sign that dealmaking is moving in the right direction.
Meanwhile, we have seen an increase in multinationals divesting their APAC businesses. These have been primarily located in China, but sometimes elsewhere in Southeast Asia. We expect this theme of multinationals looking to monetize their APAC assets to continue.
Ansarada: Speaking of key drivers, one topic that comes up regularly in conversations with dealmakers is digital transformation. In your experience, what sorts of acquisitions are companies pursuing in order to achieve their digital transformation plans?
Samson Lo: We have seen this trend play out in traditional sectors such as industrials, where companies need to transform themselves through acquiring technologies such as automation. When Chinese companies are looking for overseas assets in the industrial sector, they are naturally looking to acquire new technologies such as industrial automation and AI.
At the same time, if you look at SPAC targets, sourcing AI technologies in areas such as renewable energy is a popular investment route. These sectors are highly sought after, especially in this new environment we are living in where consumers are looking for convenience after having lived through the COVID pandemic.
Ansarada: China is clearly a dominant force in the renewable energy space – especially in the solar industry. But the rest of Asia has expertise in this field as well. What do you expect to happen with the renewable energy industry in 2022?
Samson Lo: I expect to see a lot of the renewable platforms, particularly the sizeable ones, looking for ways to list, whether it’s through a merger with a SPAC or direct listing. The smaller, mid-cap renewable players will naturally look for private capital to acquire a minority stake so they can continue to develop and then look to an IPO or de-SPAC when they achieve the right size.
ESG is clearly a huge topic of investor interest in today’s dealmaking environment. I think any kind of business with a sustainability angle tends to attract investor interest. These companies are attracting higher valuations, and renewable energy will continue to be an overriding dealmaking theme in 2022.
Ansarada: Moving on from opportunities to the challenges that dealmakers are facing – from your perspective, when you’re advising individuals on their M&A activity, what are their key concerns surrounding potential risks or challenges in 2022?
Samson Lo: Competition for high quality assets is very stiff among PE players. We are living at a time where PE funds are paying above and beyond what strategics are paying. What this means is that valuations are at an all-time high, and investors – especially PE funds – are looking to increase the amount of leverage in deals. It does in some way bring back memories of 2007, when a lot of the large leveraged buyout transactions were carried out in the US at a very high leverage level.
When there is such high leverage, it does put some risk on the operating of the business and the nature of the sale. It also leads to a lot of PE funds having to underwrite very sizable equity cheques. We have seen the trend globally, not just in Asia, of an increasing valuation gap between the transaction multiple and the amount of leverage being put on a deal. I would say this is something that dealmakers need to watch out for as they continue to compete aggressively for high quality assets in 2022.
Ansarada: Certainly – valuations appear to just keep climbing. Do you expect there to be a market correction any time soon? Would there need to be a significant shock to the system for valuations to come down?
Samson Lo: If you look back at the history of M&A, there does tend to be a period of normalization after a period of overly inflated valuations. The interesting thing is a lot of private equity funds are still in fundraising mode.
When a lot of sizable billion-plus assets are coming to market, as we have seen, it does push up equity commitment. What this means is that as long as people are still in this low interest rate environment where they can bet on high leverage and where there is still a tremendous amount of capital supporting buyout activities, valuations will continue to be very high. Maybe there will be a point in time when people will start to become a little bit more cautious. But right now, I haven’t seen any weakness in terms of bidding.