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Draining away: 1Q23 M&A revenue shrinks in line with other regions

Investment banking (IB) M&A revenue in Asia-Pacific continued to ebb in 1Q23, in line with the rest of the world. Levels dipped to lows not seen since the height of the pandemic in 3Q20, as financial turbulence and a gloomy macro outlook cooled global market activity. While fees from equity capital markets (ECM) continued to make up the lion’s share, as they have since last year, revenue from M&A sank 48% from 1Q22 to around USD 750m, as corporates and financial sponsors alike pared back inorganic growth strategies and reassessed portfolios. The APAC region registered its lowest quarterly M&A figure since 2Q20 and the deal count collapsed to a level not seen since 2005.

Silver linings

Despite fees in APAC shrinking overall compared with 4Q22, the region is relatively insulated against the banking, technology and real-estate headwinds buffeting the Americas and EMEA, and glimmers of hope can be found. Japan, which in 1Q23 generated the most fees by any Asian country at USD 290m, brought in more capital than it did in 4Q22, as was the case with South Korea. Healthcare, industrials and technology are driving the two countries’ success stories, while in 2023 year-to-date (YTD; to 25 April), financial sponsors have also been upping their involvement, contributing 38% of overall M&A fees compared with 35% in 2022.

As a region, Asia-Pacific targeted deal values have risen in Australia and Japan in 2023 YTD, suggesting both countries remain attractive to investors and may contribute to higher fees this year. Indeed, mining and healthcare deals have already been making headlines Down Under, with the largest in the first quarter being a AUD 32bn (USD 21.2bn) offer from US-based Newmont [NYSE:NEM, TSX:NGT] for Newcrest Mining [ASX:NCM]. Australian Clinical Labs has pitched a AUD 3.2bn (USD 2.2bn) approach for domestic healthcare player Healius [ASX:HLS], while India is also anticipating an uptick in overseas capital, with the country’s growing population and bouyant growth story luring foreign buyers.

The narrative in China appears more positive after the country opened its doors in late 2022 and curtailed its stringent zero-tolerance coronavirus (COVID-19) strategy, and activity is expected to bounce back in 2023. Although M&A fees in China slumped 43% year-on-year in 2022, this trend is likely to reverse this year, as Chinese corporate giants realign portfolios, sell non-core businesses, and scour global markets for cheap deals, as they did during the global financial crisis of 2008. Manufacturing firms have been encouraged to indulge in M&A as Beijing seeks upgrades. Financial sponsor stalwarts such as Blackstone [NYSE:BX], Carlyle and KKR [NYSE:KKR] are all contemplating exits in players such as cosmetics packaging manufacturer ShyaHsin Packaging, Jin Gong Men China (McDonald’s China), and lighting products manufacturing and distribution business NVC China, respectively.

Size matters

Over the past 10 years, the percentage of fees derived from larger deals in the APAC region has been slowly ticking upward. Between 2014 and 2017, more than 40% of revenue came from transactions under USD 500m, as smaller deals abound. However, over the past five years, revenue from larger deals has edged up, with more fees coming from the USD 2bn-5bn, USD 5bn-10bn, and USD 10bn+ categories. Although mega-deals north of USD 10bn are not expected to flourish in 2023 in light of the uncertain environment and soaring interest rates for acquisition finance, a rise in the number of deals above USD 2bn is forecast to generate the bulk of the region’s fees.

Ongoing deals include planned divestitures by Japan’s Mitsubishi Electric [TYO:6503], Korea’s LG Display [KRX:034220] and Indian conglomerate Shapoorji Pallonji Group; while Australia’s lithium miner Liontown Resources [ASX:LTR] could be a potential target after it rejected the US-based specialty chemicals manufacturer Albermarle's [NYSE:ALB] AUD 5.2bn (USD 3.45bn) offer.

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