In 2017, dealmaking in Singapore hit its highest level since three years ago, driven in part by big real estate transactions. Interestingly, inbound M&A activity also grew an impressive 115.6 percent in deal value from over a year ago. Corporate lawyers in Singapore talk about some of the key trends they have witnessed in the past year.
The year 2017 was a good one for dealmaking in Singapore. The total value of M&A activity reached $89 billion in the year, an increase of 4 percent compared to 2016, according to Thomson Reuters’ data. This was the highest since the city-state saw a record $93.7 billion being posted in 2014.
In terms of sectors, real estate led the way with a 47.3 percent market share worth $42.1 billion, a stunning 195.7 percent jump from 2016. This was the record for the sector, according to Thomson Reuters data, surpassing the previous high of $35.2 billion set in 2014. This was led by the $11.6 billion acquisition of Global Logistic Properties (GLP) by Chinese consortium Nesta Investment Holdings, the largest private equity buyout of an Asian company of all time.
Total cross-border deal activity in Singapore amounted to 59.1 billion, a 58.6 percent increase over last year, according to the data, which also found outbound M&A activity increased 10.5 percent. Additionally, inbound M&A activity also grew an impressive 115.6 percent in deal value from over a year ago.
“There were several large deals in the real estate sector such as the takeovers of GLP and ARA Real Estate Management and the sales of TripleOne Somerset, Jurong Point to foreign buyers, which inflated the deal values somewhat,” says Andrew Martin, principal at Baker McKenzie Wong & Leow. “We have seen interest in financial services especially insurance, and Temasek’s $7.5 billion sale of Bank Danamon has also contributed to the higher deal value numbers. We have seen a lot of interest in tech M&A and the VC space although the deal size can be quite small depending on the stage of investment.”
Florence Goh, head of corporate at Joseph Tan Jude Benny (JTJB) says that the firm has experienced a surge in corporate-related work as a result. “I believe this is because nearly every country in the South East Asian region has an emerging and growing economy, thereby offering a wide spectrum of business opportunities,” she says. “We see local companies partnering foreign entities to set up joint venture companies in Singapore. The Singapore company is established as a headquarters and base to branch out into the region.”
Melissa Ng, a partner at Clifford Chance, says that her firm is seeing a strengthening in the economies of various Southeast Asian jurisdictions, which has led to continued inbound investment in consumer-related sectors, driven by the growing middle class with a disposable income for consumer goods and services, technology, healthcare and education. “More private equity, real estate and infrastructure funds are seeking investments in Southeast Asia, with PE buy out activity more than tripling in value as compared to 2016. In particular, stiff competition for quality assets in the market has resulted in very hefty price tags, sometimes well in excess of $1 billion,” she says.
She adds that with respect to financial technology investments, Asia continues to be the leading region and Singapore has emerged as the leading tech hub in Southeast Asia. “There was a significant increase in financial technology investment and M&A activity in 2017, and this is expected to continue throughout 2018,” she says. “To seek technological innovation, corporates are also looking at alternative cooperation strategies to M&A, such as joint ventures and licensing and outsourcing arrangements.”
Also, “despite a global fall in China outbound M&A in 2017 – as compared to 2016 – China outbound investment into Southeast Asia has remained fairly buoyant where investments are aligned with the Belt and Road investment policy,” Ng notes.
Quak Fi Ling, a partner at WongPartnership, is also seeing continuing interest from China, with her firm having been involved in major transactions involving logistics companies that were acquired by Chinese buyers. “One can perhaps attribute this to China’s push for its Belt and Road Initiative (BRI) and the approval process under China’s strict capital control rules being relatively more forthcoming for BRI-related projects and investments,” she says.
TRENDS AND TARGETS
So, what are some of the trends in the M&A space in Singapore, and regionally, at this moment? Martin has been seeing start-ups and early-stage enterprises going through multiple successful fundraisings. “A lot of Asian conglomerates have been making these sorts of investments and there is a lot of interest from both the corporates as well as their family sponsors,” he says.
He adds that the firm is receiving a lot of queries around the technology sector. “Companies such as financial institutions are looking for opportunities to bolt on tech players and anything involving payment solutions seems of interest,” says Martin. “Private equity has driven activity in precision engineering and remained interested in education although there is probably more opportunity in the broader Southeast Asia region.”
Quak agrees. “Given that advancement in technology such as artificial intelligence and the internet of things is fundamentally disrupting every industry, investors see great potential for growth in technology companies,” she says.
Additionally, Martin has seen the return of the en bloc sales in Singapore real estate as the property market picks up. “En bloc activity should spur on many other related sectors like the construction and building sectors,” Martin says. “In addition, the improved and stabilising oil prices are leading to increased interest in the offshore marine sector.”
Goh says that the key trend she is witnessing is that overseas company are comfortable to venture into the region using Singapore as the first stepping stone, before they actually reach out to the other jurisdictions in South East Asia. “Singapore is increasingly regarded as the gateway and link to doing business in other parts of this region, being a major global commerce and financial hub with a robust and transparent legal system that promotes ease of setting up businesses,” she says. “Generally, these companies coming into Singapore have regional expansion plans in manufacturing, wholesale and services industry.”
Ng finds that with big oil companies announcing commitments to invest in clean energy, investment firms questioning the long-term value proposition of coal and other conventional hydrocarbons, and rapidly falling technology costs, there has been increased appetite for renewable energy sector investment across the APAC region, which has translated into highly competitive auction processes for strong assets and hefty price tags.
Additionally, the trend of consolidation in the private banking/wealth management industry in Asia has continued in 2017. “This was primarily caused by a squeeze in margins driven by, amongst other reasons, a rise in compliance costs due to tighter regulatory framework,” Ng says. “In order to remain competitive and profitable at the same time, banks with assets under management of less than $25 to $30 billion either were looking to expand or divest their private banking businesses.
Traditional PE houses now face increased competition from smaller fund managers and family offices, says Quak. “As the latter can be more flexible in their investment terms, they have an edge over the large PE firms in certain type of deals, particularly those family-run businesses who are reluctant to relinquish control,” she notes. “In an auction process, the traditional PE houses will also often find themselves on the losing end as they are usually up against strategic buyers who have the better ability to create value internally through consolidation, innovation and greater operational experience, and therefore offer sellers higher value.”
IMPACT ON LEGAL WORK
Martin of Baker McKenzie Wong & Leow says that there have been some new entrants in niche areas such as the VC space and with the increasing competition generally, the firm has had to be innovative in its approach, including fee arrangements, in order to stay competitive and relevant. “There is a lot of concern about data privacy regulation regionally and globally and the impact on the ability to exploit data as an asset given the restrictions on cross-border data transfer and its usage,” he says.
Quak of WongPartnership says the firm continues to support clients in both inbound and outbound M&A transactions as it works more closely with its PRC, Real Estate, Banking & Finance and Infrastructure practices given the increased activity in BRI related transactions. “In addition, the increased fundraising activities by technology companies and venture capital investments have led to a wave of initial coin offerings and venture capital investments,” she says. “This, in turn, meant that expertise from our tax, financial regulatory as well as intellectual property practices are required to augment our M&A work,”
As for challenges facing both buyers and sellers, Lean Min-tze, also a principal at Baker McKenzie Wong & Leow, says that with the competition for assets and increasing number of disposals by PE in a controlled auction environment, buyers are being forced to make their bids as attractive as possible to sellers by purchasing warranty and indemnity W&I insurance.
Goh at JTJB says that some M&A deals involve the acquisition of shares in foreign entities requiring due diligence on these foreign entities. “Buyers and sellers alike are faced with cross-border issues such as tax, and unfamiliar legal requirements in foreign jurisdictions, for example, having to fulfil the requirement of local participation in a regime which does not recognize nominee shareholding or trust arrangement,” she says. We are trying to help them by becoming knowledgeable about foreign legal systems and business environments, identifying potential issues early and working closely with lawyers in those jurisdictions via our international network of lawyers.”
Ng of Clifford Chances lists a number of challenges for clients in Southeast Asia. First, there is local protectionism and regulatory uncertainty. “Southeast Asia is a collection of disparate jurisdictions with dissimilar legal environments. In some countries in the region, the regulatory regime can be opaque and subject to change, resulting in legal – and therefore deal – uncertainty,” she says. “In addition, many jurisdictions have foreign investment restrictions – such as the Negative List in Indonesia, the Foreign Business Act in Thailand, and land ownership restrictions in the Philippines – which may act as a disincentive to foreign investors. We help our clients to structure cross-border M&A transactions in a manner which achieves the parties' commercial objectives while staying compliant with the relevant laws and regulations.”
Then, there is the rapid expansion of competition laws. “More Southeast Asian jurisdiction are implementing merger control regimes which require M&A transactions that meet specified threshold to be reported to, and cleared by, competition authorities,” she says. “This has created a more complex environment for deal-doing – requiring detailed analysis to identify where merger filings may need to be made – and greater uncertainty for the parties involved, as transactions need to be conditional upon regulatory approval. In transactions in the region, our M&A team works closely with our competition law specialists to analyse and provide our clients with practical guidance on where merger filings need to be made.”
Finally, there is a limited number of quality assets. “There is a lot of liquidity in the market, but a limited number of quality assets in the market,” she says. “This means that sale processes for good quality assets tend to be over-subscribed, and result in purchase considerations in high multiples. We assist our clients in structuring M&A transactions in ways that allow the parties to bridge the pricing gap.”
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