In its most recent investment report for 2016, ASEAN has focused heavily upon the intertwined issues of mergers and acquisitions (M&A). The report sheds light on the use of these tools by international investors as well as states within the bloc, providing insight on sentiment of varying parties. For those seeking to enter the region for the first time, understanding these trends is sure to provide important insight in the formation of effective entry and expansion strategy.
Mergers & Acquisitions
While foreign direct investment is often directed towards establishing new operations within a given country, M&As involve the purchase of or integration with a local company. This can present a number of benefits to investors stemming from the preexisting structure, connections, and reputation of the local company’s business. With a preexisting workforce, facilities, and supply chain, the M&A process allows companies to tap into market opportunities in real time. This can prove to be a important tool for those seeking to enter the market before their competition or gain access to sectors with limited access to investment.
In addition to preexisting workers, factories, and permits, M&As also confer considerable intangible assets to foreign buyers. These can involve relationships with competitors, an understanding of regulatory compliance procedures, and most importantly, brand identity within the target market. While foreign investors would definitely be able to build these over time, the ability to build off of the best practices of an existing operations gives foreign investors considerable room to maneuver upon market entry.
ASEAN M&A Trends
In recent years, while total value of M&As has fluctuated slightly, the composition of transactions has changed significantly and can be analyzed by potential investors. As outlined above, both the United States and China have broken into the M&A scene in a large way in recent years. On the part of China, this appetite can be explained by adoption of China plus one manufacturing within ASEAN, and a need to quickly supplement existing production with low cost alternatives. On the part of the United States, pending completion of the Trans Pacific Partnership (TPP) is likely to make key markets such as the Vietnam, Malaysia, and Singapore more attractive for US companies.
In addition to increased appetite from external markets, the role of ASEAN as a catalyst for M&A deals should not be overlooked. Retaining between one third to one half of all value, key ASEAN states such as Singapore, Thailand, and Indonesia have been at the core of these purchases. While Singapore’s position can be explained by its position as a holding company jurisdiction and regional management center – similar to Hong Kong – the strong position of Indonesia and Thailand shows a significant regional interest in the M&A process and intra-ASEAN expansion. With the ASEAN Economic Community (AEC) breaking down barriers to trade and investment between members of the regional bloc, it is likely that ASEAN’s position will continue for some time.
Opportunities for Investment
Despite recent efforts aimed at converging regulation and connectivity through the AEC, ASEAN remains disjointed and disparate in terms of legal infrastructure, taxation, and doing business. These issues present significant obstacles to expansion and are felt not only by investors external to the ASEAN market but also by those within the regional bloc itself. To date, pan-ASEAN operations continue to be dominated by large multinationals, while ASEAN based brands remain largely isolated to their market of origin.
Not only does this help to explain the large percentage of M&A activity being conducted within ASEAN; more importantly, it presents a significant opportunity for foreign investors seeking to expand. Companies external to ASEAN, although not familiar to the region, are unlikely to face significant competition on regional scale from local players. Furthermore, those willing to conduct the due diligence necessary to find profitable local brands in various markets are sure to find ASEAN counterparts eager to expand their horizons.
Support from Dezan Shira & Associates
While M&A can prove an effective tool in overcoming a lack of local market knowledge, regulatory compliance and restriction on investment can easily hinder investors without proper preparation. Those seeking to acquire local companies will often face a variety restrictions and requirements depending on the market and industry in question. If understood, these regulations can be used as a means of evaluating investment options and followed to ensure compliance with regulatory authorities.
This article was first published September 2016.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.