Asia’s Frenzied Financial Services Deal Environment Increases Risk of Over Paying

23 May 2007 – The surge of M&A activity seen in 2006 in the financial services industry in Asia will continue over the next five years. High levels of economic growth across the region will continue to attract investment, boosting demand for a limited supply of quality assets, thereby increasing the risk of overpaying, according to the findings of ‘Financial Services M&A: Going for growth in Asia’, an annual survey from PricewaterhouseCoopers, conducted in association with the Economist Intelligence Unit.

Almost three-quarters (74%) of the 230 senior financial services executives surveyed across Asia predict that their organisations will undergo further significant M&A activity in the coming five years, compared to just over two-thirds (68%) in the previous survey conducted in 2005. This optimism is all the more astonishing as financial services deal activity in the region is already at record levels, with 2006 disclosed deal value up 66% to US$64billion compared with the previous year.

The risk of overpaying was clearly reflected in the survey findings which highlighted that pricing has become the key perceived barrier to deal making. High pricing was identified by 50% of respondents to the 2007 survey as the primary barrier to doing deals (up from only 32% in 2005), whereas in 2005 the primary barrier identified was the limited supply of attractive targets (down from 52% in 2005 to 34% in 2007). Respondents rated uncertain regulatory requirements as the third major barrier in both surveys.

Matthew Phillips, partner, PricewaterhouseCoopers China, commented:

“High pricing and regionalisation are considered to be the key challenges now facing financial services companies across Asia. The rapidly evolving markets and significant growth factored into deal prices make it very easy to overpay. Regulatory protectionism and the sheer diversity of the region continue to present further barriers to regionalisation and this continues to hamper the development of regional platforms and make cross-border deals difficult.”

Collaboration has emerged as one way to address both high pricing and current regulatory restrictions and, when considering potential investors or joint venture partners, was cited as the most important influencing factor for almost two thirds of respondents, up from only 38% in 2005. More than 68% of financial services organisations claimed that joint ventures and partnerships will be the key to expansion in Asia and 62% are actively seeking strategic foreign investors for significant new ventures over the same timeframe

Survey respondents now consider regulatory liberalisation less of a driver of M&A than in 2005 (24% compared to 30% in 2005). This result suggests that in the current booming market, Asia’s financial services industry is learning to live with the underlying implications of the regulatory environment or at the least to prioritise growth.

It is the pursuit of the unique growth opportunities offered by the region that is driving activity, with the need to increase market share (47%) and entering new geographic markets (46%) coming out on top in a list of objectives for buyers.

The increase in deal activity is broad-based in terms of countries within the region and individual industries buyers are targeting. Banking activity levels remain high with significant deals in South Korea, Taiwan and Japan but the sector demonstrating the fastest growth rate was insurance, with activity up three-fold over 2005.

Matthew Phillips, partner, PricewaterhouseCoopers China, commented:

“The outlook for deals in the insurance sector remains strong as global players seek to catch up with the market leaders and regional players begin to emerge, particularly from Japan.”

Interest in M&A activity in China was slightly down on last year (47% now versus 52%), however it remains an important, strategic market. Activity is now broadening as sectors, such as insurance and trust companies, begin to open up. China and India still remain the top two targets for M&A in the region due to underlying economic growth conditions, and the survey shows interest in India has increased slightly from 37% in 2005 to 39% in 2007. However, Taiwan, Pakistan and Vietnam are also fast emerging as growing markets of M&A activity, having opened up from both a regulatory and vendor perspective.

Unlike the European market, the dominant domestic players in the more mature markets in particular areas of Asia, are yet to fully flex their muscles on a regional basis. This is expected in the next few years when these businesses develop the depth of management to enable them to explore opportunities in Asia as well as further a field.

Matthew Phillips, partner, PricewaterhouseCoopers China, commented:

“Although growth might be shifting in terms of key markets, the survey has confirmed that Asia is still the ‘home of growth’. When compared to Europe, entry into the Asian market presents more of a challenge as the environment is less conducive to control deals, which in turn increases the risks if you are not able to find the right partner. Although this risk in Asia remains high, the growth potential will continue to present compelling opportunities.”

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