Asia Pacific M&a Bulletin Year End 2008

Asia Pacific M&A BulletinSeeking opportunity in crisis

Year-end 2008

Advisory

Year-end 2008 Asia Pacific M&A Bulletin2 PricewaterhouseCoopers

M&A advisor of choiceNumber 1 Advisor by Volume in Asia Pacific ex. Japan for 2008 by MergerMarketNumber 2 Advisor by Volume in Asia Pacific ex. Japan for 2008 by Thomson Reuters

A selection of recent M&A transactions in Asia Pacific advised by PricewaterhouseCoopers

Korea Express Co., LtdAdvised seller on sale of 60% interest in Korea Express Co Ltd to an investor group for US$4,334 million

Financial Advisor: Samil PricewaterhouseCoopers

Corporate FinanceKorea

Underwriting Agencies of Australia (UAA)Advised UAA on sale of QBE Limited

Financial Advisor: pwc

Corporate FinanceAustralia

2008

Hunan Laobaixing Pharmacy ChainSale of 48% toEQT Opportunity Fund


Corporate FinanceChina2008

SSI LtdMerged withPVP Venture Pvt Ltd for S$717 million via a share swap


Corporate FinanceIndia

Novo Group LtdListing on the mainboard of SGX-ST via a reverse takeover. Transaction value of S$140 million


Corporate FinanceSingapore

Xinjiang Tunhe Industry & Trade Group LimitedSale of operating assets to Blue Ridge China via bankruptcy restructuring


Corporate FinanceChina

2008

2008

2008

CVC Asia Pacific LtdAcquired 65% interest in Stella Hospitality Group. Transaction value of US$1,223 million



IVF Australia (IVFA)Advised vendor on sale of IVFA to Quadrant Private Equity



2008

Toppan Printing Co., LtdAcquired SNP Corporation Ltd for S$220million through Voluntary Conditional Cash Offer


Corporate FinanceSingapore2008

2008

Meiji Dairies CorpMerged withMeiji Seika Kaisha via a share swap. Transaction value ofUS$2,543 million

Financial Advisor: PwC Advisory Co Ltd

Corporate FinanceJapan2008

Nippe Toyama CorpSale of 66.27% to Komatsu Ltd for US$555 million

Financial Advisor: PwC Advisory Co Ltd

Corporate FinanceJapan2008

Guan Sheng Yuan GroupSale of 45% equity stake to Citic Capital for RMB510 million


Corporate FinanceChina2008

2008

Asia Pacific M&A Bulletin Year-end 2008PricewaterhouseCoopers 1

Successful deals are Made, not BornWe view M&A as a coordinated process, not a series of separate steps. Acting as deal managers and due diligence advisors, we help our clients find the right deals, get them done faster, with less disruption and at a more attractive price.

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Using cross-functional teams, we bring together all the relevant expertise from across the Asia Pacific region and globally to provide services across the whole deal continuum. Delivering a fully connected solution to our corporate and financial investor clients, including tapping into our network’s vast industry sector knowledge.

With more than 6,200 dedicated specialists in our global Transactions practice, our clients include the world’s leading companies and private equity houses. In Asia Pacific, we are the leading Transactions practice, with 2,000 specialists including 150 dedicated partners.

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Advisory

Maximise• Post Deal

Integration• Performance

Improvement• Tax Optimisation• Governance, Risk

and Controls• Accounting

Advisory

Execute• Financial and Tax

Due Diligence• Commercial Due Dilligence• IT Due Dilligence• Operational Due Dilligence• HR Due Dilligence• Environment Due

Dilligence

Evaluate• Buy-side Deal

Advisory• Valuation• M&A Tax Structuring• Project Finance

Advisory


Seeking opportunity in crisis

Happy New Year! Most of us have never looked forward to the end of a year as much as we did the last one. For M&A, 2008 had, for all intents and purposes, ended on 15 September, the day Lehman Brothers filed for bankruptcy and Merrill Lynch was taken over by Bank of America. Confidence plunged and fear of systemic meltdown gripped the business world. The credit crunch, which up until then had ravaged mainly the US and parts of Europe, intensified overnight into a global credit freeze. Stock markets across the world plunged. The global banking system and financial markets went into full cardiac arrest. The sub-prime crisis, which until then had been confined mainly to the financial sector, spilled into the real economy.

Governments around the world swung into action immediately. The US pushed through a US$700 billion Troubled Asset Relief Programme in early October. This was originally slated for the purchase of toxic mortgage-related assets but was re-designated in November for recapitalisation of financial institutions. The Federal Reserve also launched two new programmes in November to buy up to US$800 billion in mortgage and consumer loan-backed securities. Over in Europe, the United Kingdom threw a £500 billion lifeline to its banks for recapitalisation, bond guarantee and liquidity; Germany and France announced Euro 500 billion and Euro 360 billion rescue packages respectively.

Credit, the lifeline of both the financial market and the economy, had to be restarted quickly. As a measure of the fear that existed in the credit market, TED Spread shot up from 1.3537% the Friday before the Lehman collapse, to 4.636% on 10 October, its highest level since measurement started 25 years ago. In desperate attempts to thaw the credit freeze and get banks to lend to customers and to each other, over a trillion dollars was pumped into money markets to increase liquidity. Interest rates were also cut aggressively in quick succession by central banks around the world, with the Fed Fund rate lowered to 0 – 0.25% on 16 December. In addition, governments guaranteed not only inter-bank loans to encourage lending, but also customer deposits to prevent panic withdrawals and a run on banks. As much as US$33 billion was withdrawn by customers in the US in the ten days following Lehman’s collapse.

There are early signs that the credit market is improving as a result of these drastic measures. The three-month LIBOR which ended 2008 at 1.43% has continued to spiral downwards in January 2009 to 1.18%. This is off the high of 4.8% on 10 October, and even lower than the 2.8% just before the Lehman collapse. TED Spread ended 2008 at 1.34% and further dropped to 0.958% in January. Nevertheless, we are not out of the woods yet. Even as we start a new year, credit remains tight. Banks burnt by the crisis are licking their wounds and still downsizing their loan books to minimise capital requirements. Even Asian banks that have been largely unscathed by the sub-prime crisis are credit-shy as they hunker down in anticipation of tough times ahead when the crisis develops into a full blown global recession.

The difficulty in securing credit and the volatile stock markets, coupled with the loss of business confidence and uncertainty with regards to the extent and depth of the recession, had knocked the wind out of M&A. The fourth quarter, which traditionally sees a hive of M&A action, was deafeningly quiet this time. M&A activity, already slowing down in first half of 2008 compared to both halves of 2007, dropped 21% in deal value in the third quarter, and a further 15% in the last quarter. Comparing the two fourth quarters in 2007 and 2008, the fall was a

Foreword

Chao Choon OngTransactions LeaderAsia Pacific


Source: Thomson Reuters, based on total domestic, inbound and outbound deals announced as of 31 December 2008

Asia Pacific Quarterly Deal Value & Volume – 2006 to 2008

Deal values Deal volume

No.

of d

eals

Dea

l val

ue (U

S$’

mill

ion)

1Q2007

3Q2007

1Q2008

3Q2008

2Q2007

4Q2007

2Q2008

4Q2008

200,000

120,000

180,000

100,000

160,000

80,000

40,000

140,000

60,000

20,000

- -

3,000

2,500

2,000

1,500

1,000

500

3,500

4,000

1Q2006

3Q2006

2Q2006

4Q2006

whopping 42%. Given that many of the deals announced in the fourth quarter were already in advanced stages of negotiation by the time of the Lehman bankruptcy, we expect that deal announcement statistics will continue to be depressed in the first half of 2009.

Not surprisingly, year-on-year M&A value and volume for Asia Pacific was down 21% and 4% respectively. The steepest falls have come from Australia and Japan, the two most developed countries in the region. China reported growth in both deal value and volume, which may be a result of the longer deal execution process and its predominantly growth capital deals. Anecdotally, we noted that deal activity in China slowed down substantially in the fourth quarter.

2009 started with the economy in intensive care. The general prognosis is that this will be a long-drawn recession, and recovery will be slow. The US economy has been in recession since December 2007 and it may take at least another year before it starts to recover. President Obama has given himself three years to turn the economy around.

The Economist Intelligence Unit forecast that the global economy will contract by 0.9% in 2009, and world trade is expected to contract by 2% as a result of collapsing import demand from the US, Europe and Japan.

Asia Pacific, while not decoupled from the US-European economies, has been somewhat insulated and may just be the silver lining amidst the storm clouds. It was relatively unscathed by the direct impact of the sub-prime crisis as Asian financial markets and institutions are less sophisticated. However, it could not escape the global liquidity crunch and credit freeze arising from US and European banks’ capital deficiency crisis; and Asia’s export-led economies are bracing for the full impact of the US-Europe recession to hit in 2009. Asia’s exports to US and Europe account for 31% of its US$33 trillion exports.

The IMF expects Asia Pacific ex Japan to grow by 5.5% in 2009, thanks to the projected 6.7% growth for China. The Chinese government has projected a more optimistic 8% growth (versus 9% in 2008), although Premier Wen Jiabao recently admitted that achieving it would be a tall order. Premier Wen also disclosed that China is considering additional measures beyond the RMB 4 trillion (US$580 billion) stimulus package that it announced earlier. With US$1.8 trillion in reserves, the Chinese government has the financial muscle to weather this crisis. Premier Wen is upbeat that there are already first signs of a rebound. China’s official manufacturing index, the purchasing managers’ index, rose steadily from a record low of 38.8 in November to 41.2 in December and 45.3 in January 2009. State-owned Chinese banks also heeded the government’s call. Loan volume has risen, hitting a record Rmb1.2 trillion (US$175 billion) in January. It would take a

Asia Pacific Deal Value & Volume 2004 to 2008

No.

of d

eals

US

$ m

illio

n

2004 2005 2006 2007 2008

800,000

400,000

700,000

300,000

600,000

200,000

500,000

100,000

-

16,000

10,000

4,000

14,000

8,000

2,000

12,000

6,000

-

Deal volumeRanking Value inc. Net Debt of Target ($Mil)


2008 Deal value 2007 Deal value 2006 Deal value2006 Deal volume2008 Deal volume 2007 Deal volume

Asia Pacific Deal Value & Volume by Country – 2006 to 2008

3,500

3,000

2,500

2,000

1,500

1,000

500

-

No. of deals

200,000180,000160,000140,000120,000100,00080,00080,00060,00040,00020,000

-

Deal value (US$’million)

Australia

ChinaJa

pan

Singapore

Hong KongIndia

Korea

Malaysia

Indonesia

Philippines

Thailand

Taiw

an

New Zealand

Vietnam



few more months to tell whether the Chinese economy has indeed bottomed out, or if this is a false dawn. While an early China recovery will have positive side effects for Asia, it will not replace the US and single-handedly revive the global economy. The US and Europe account for 60% of the world’s US$30 trillion personal consumption, whereas China only accounts for 3.3%. Nevertheless, an early China recovery augurs well for Asia’s M&A landscape.

Corporate investors with a strong heart and a stronger war chest will find 2009 a unique window for strategic acquisitions. This is the time to use M&A to leapfrog competitors, transform value chains, break into new markets and secure competitive advantage for the next decade. Across all sectors of the economy, significant pain is still to come, especially for those that relied on short term credit from banks. Hard-pressed businesses may have to sell assets and businesses to raise cash for deleveraging. Stressed assets, distressed and motivated sellers, lower gearing and subdued stock markets will result in more attractive pricing - a boon to strategic investors. Strategic investors will also have an upper hand in competitive bidding, as there would be synergistic value which only they can appreciate and unlock. More importantly, businesses which in more normal times are not available for sale may come into the market. One needs to look no further than the financial sector for such examples. With the deluge of bad news everyday, it is easy for corporations to get caught up with day-to-day operational and cost management issues, losing sight of this strategic acquisition window. To avoid this trap, besides gearing up for a long recession in their scenario planning, corporations should also revisit their strategy, and challenge themselves to better leverage on acquisitions to make a quantum leap. There is currently no shortage of private equity funds in the region. Corporations should explore how they can tap on such money for growth, or co-invest with private equity to reduce their acquisition outlay and associated financial risks.

While fund-raising by private equity is exceedingly difficult in the current environment, many private equity funds are sitting on substantial uninvested funds. Globally, unused private equity funds at the end of 2008 stood at US$1 trillion, with almost half in buyout and another 20% in real estate. Of the unused buyout funds, US$45 billion are held by funds focusing on Asia and “Rest of the World”. That is substantial firepower, and private equity sees buying opportunities as valuation nosedives and alternate sources of capital dry up. However, a yawning

valuation gap has emerged as sellers are holding out for better valuation when the stock and financial markets stabilise. The same conditions are causing buyers to be extra prudent. This gap will only begin to narrow when both sellers and buyers perceive that the economy has hit rock bottom, which could be anywhere between the second and fourth quarter of this year. What is certain is that buyout transactions will be curtailed in 2009 as normalisation of the financial system is expected only in 2010, and even then, the lending environment will certainly be far more conservative than pre-2008.

Sovereign Wealth Funds (“SWFs”) have generally stayed on the sidelines in the last quarter of 2008, apart from the £5.5 billion injection into Barclays from Qatar Holding and the ruler of Abu Dhabi. Faced with mounting paper losses on their US$50 billion or so investments in the past two years to shore up US and European banks, over and above those from their other portfolio companies and trading positions, SWFs are likely to remain cautious throughout the first half of 2009. Controlling some US$3 trillion of funds, and having a longer investment horizon, SWFs are able to capitalise on the dearth of credit to exploit cash deal opportunities. Nationalistic sensitivity remains the biggest stumbling block for SWFs’ cross-border investments. As we have seen in recent years, while SWFs may be welcomed as white knights during tough economic times when their funds are needed by the host countries to save companies and jobs, sentiments and politics can change very quickly once the economy recovers. To mitigate this, we expect more SWFs to co-invest with private equity or strategic investors, especially so if sensitive industries or controlling stakes are involved.

This will be a year of opportunities, and also significant risks in M&A.

Controlling shareholders will exploit the depressed • stock markets to take their companies private. A case in point is Hong Kong-listed PCCW Ltd.

Consolidation of the banking industry will continue as • banks deleverage and merge for strength. For Asian buyers, this will create acquisition opportunities in both the Western banks’ Asia operations and their non-core global businesses. Nomura acquired Lehman’s investment banking business in Asia in the aftermath of its collapse. AIG’s on-going sale of ILFC, one of the largest aircraft leasing businesses in the world, is rumoured to be attracting interest from Asian and Middle Eastern SWFs.


but shorter execution timeline. The Bank of America takeover of Merrill Lynch is a good example of what could go wrong and how it could drag down the buyer. The challenge for buyers will be to conduct incisive due diligence in the timeframe permitted - to understand the financial position, cash flow and capital requirements of the business to be acquired, and the value that can be unlocked post-acquisition. To preserve value, distressed deals will require swift and decisive action post-acquisition to take control, restructure and integrate. For distressed businesses, a substantial portion of their value to buyers may arise from post-acquisition restructuring and synergistic integration. It is thus imperative that a high-powered integration team be set up at the start of deal execution, and planning for post-acquisition activities conducted concurrently and fed to the deal execution team. Parts of the plan, including taking control, should be put into action as soon as the deal is signed.

As we enter the eye of this unprecedented financial storm with dread and trepidation, we brace ourselves for the trail of economic destruction ahead. There is pervasive uncertainty about the new world economic order that awaits us. It is too early to predict what new regulation we will see, how the financial sector will be restructured, and what impact these will have on future economic growth and asset prices. What is certain is that the winners will be those with the vision, extraordinary courage and discipline to seek out opportunities amidst the prevailing crisis.

Lavish government stimulus spending will boost the • infrastructure industry.

The oil and mining sectors will remain active as China • continues with M&A to secure resources at relatively low prices. Australia-listed Straits Resources has received interest from Chinese and other Asian buyers for its 47% Singapore-listed Asia Resources, even as it issued AUD$80 million of convertible bonds to Standard Chartered Private Equity.

The environment is clearly on the agenda with the call • for the Green New Deal, although the payback could be delayed by a few years as a result of the recession.

Other sectors that are badly hit, like retail, real estate, • transportation and logistics, will see mergers of necessity as troubled companies align with stronger ones for survival.

Outbound M&A by Asia corporations will increase as • they capitalise on the crisis to acquire Western companies for market access, technology, intellectual property, brands and even international management know-how, as we saw in Lenova’s acquisition of IBM’s personal computer business a few years ago.

We expect to see a surge in distressed deals in the second half of 2009 as more short term debts become due in the coming months. These deals typically have higher risks,


Dominic NixonFinancial Services LeaderAsia

Comments from our industry leaders

Financial ServicesThe outlook for financial services M&A in Asia is one of great caution. With the number of large global banks collapsing or being rescued at unprecedented levels in late 2008, 2009 is expected to be a period of uncertainty for financial institutions in Asia. Senior management in the industry is grappling with issues including managing asset quality, ensuring liquidity/capital soundness, and implementing cost control measures. Although caution appears to be the main policy, many institutions are also carefully watching the market so as not to miss potential bargains or other opportunities arising from the turmoil.

But even when opportunities become available, financial institutions are navigating potential acquisitions very carefully. They are acutely aware of their capital constraints, as well as the probable additional demands on capital as more assets are expected to be written down. In addition, there does not appear to be relaxation on the timetable for implementing new capital rules in Asia (such as risk-based capital rules for insurers). Financial and other institutions which fund their acquisitions via inter-bank funding are also finding their cost of funds escalating significantly. Fraud and mismanagement, best represented by the Madoff incident, further erode confidence when evaluating targets.

The lack of cash is causing many financial institutions to walk away from potentially attractive deals. Many are also evaluating divestments as a way to generate cash or save capital. In 2009, we expect to continue seeing increased sales of non-core assets including properties, minority equity stakes, and ancillary businesses. Restructuring of balance sheets via sale of non-performing assets may also increase. We expect Asia to see a fair share of such divestments, as non-Asian multinationals consolidate and focus on their core European and American businesses. Interestingly, as some of these institutions reduce their exposure to the region, others are increasing it. The narrowing of the quality gap between Asian and non-Asian assets, combined with Asia’s greater growth potential, is leading some previously more conservative financial institutions to reassess their ambitions in the region. We therefore expect some of these players to pursue M&A in Asia.

We also anticipate cash-rich Asian conglomerates seizing the opportunity to increase their exposure to the financial services sector; they are expected to partner financial institutions in joint ventures to look at M&A opportunities.

Finally, current market conditions are leading to uncertainty in the deal process – non-completion risk is expected to be high in 2009. It also remains to be seen if governments and regulators in emerging markets will continue to value the transfer of technical expertise from Western financial institutions, which has been a key justification for deals, given the perceived failures of these organisations in their home markets. However, the pricing on certain assets, some of which are now at levels not seen since the Asian financial crisis, may prove too tempting for institutions to ignore. Many have expressed interest and will look at targets but few will have the stomach and nerve to commit and close deals.


Oil & GasWhile 2008 may not have seen as much reported activity as other recent years for M&A in the oil and gas sector, companies across Asia were still active in seeking investment opportunities, and a number of Asian companies or assets were targeted for acquisition.

Chinese state owned oil and gas companies demonstrated continued interest in overseas investment in upstream assets, along with interest in midstream operations. Notable announced transactions in 2008 were Sinopec’s US$2 billion tender offer to acquire the shares of Canadian listed Tanganyika (assets in Syria), Sinochem’s acquisition of Australia’s SOCO Yemen (assets in Yemen), and PetroChina’s refining joint venture with Nippon Oil in Japan. Reported outbound activity in Malaysia and Singapore included entities acquiring an interest in Cairn India Limited.

Indonesia saw a number of significant domestic deals, including the multi-billion dollar acquisition and disposal of Bumi Resources’ interests and Bakrie & Brothers’ investment in Energi Mega Persada.

China reported inbound interest with Husky of Canada announcing plans for a significant gas pipeline and storage system on the Chinese mainland. Singapore and the Philippines also reported significant inward investment with over US$1 billion being invested into Pearl Energy and PACC Offshore Services of Singapore, and UK companies investing over US$2.7 billion in Petron of the Philippines.

While oil and gas prices remain volatile, the long term outlook for most players is bullish, and activity in 2009 is expected to be at, or higher than, that observed in 2008. There should be continued interest from Asian companies in assets outside of Asia, and, despite the economic conditions around the world, there will still be interest from outside in exploration, production, and services companies and/or assets based in Asia.

Ken Su Transactions PartnerOil & GasAsia Pacific

Comments from our industry leaders (continued)


Retail & Consumer According to a recent PricewaterhouseCoopers survey, CEOs of global retail and consumer companies currently consider penetrating existing markets as their main growth driver – as might be expected in a year of financial upheaval. M&A is seen by only 7% of retail CEOs, and 16% of consumer goods CEOs, as a growth strategy in 2009. In the Asia Pacific region however, the outlook is somewhat more optimistic.

Even though the survey revealed that acquisition is not the major strategy right now, acquisitions remain an effective means of entering and penetrating the high profile Chinese market. In the short term, the financial crisis has had a significant impact on the financing ability of investors, and some of them may postpone their investment plans. Private equity investors are still looking for good targets with growth potential and the ability to consolidate a particular market segment. However, most PE funds are being conservative in concluding deals, mainly due to the uncertainty in capital markets. There are some good domestic acquisition targets available in the market, and the financial crisis should bring down vendors’ valuation expectations. We still see a reasonable amount of M&A activity in the consumer goods market, especially in the food and beverage segment, e.g. the Coke/Huiyuan deal. Overall, we expect M&A discussions and initiatives to continue, but the number of deals closed in the next 12 months may decrease.

India’s retail and consumer M&A outlook remains interesting given its robust GDP growth and recent declines in valuations. We feel there may be some consolidation among retailers and increased transactions in the consumer sector. Retail deals in 2009 are off to a promising start with recent transactions/announcements from India-based groups such as Bennett Coleman and Company Ltd., Fabindia, and Aditya Birla Group. On the consumer goods side, India remains a market where penetration levels and per capita consumption in most product categories are low. 2009 is likely to see moderate transaction activity in this area. Hidden opportunities exist in the current economic climate – valuations are more realistic, and, consequently, we expect to witness increased inbound investment as foreign players look to enter India and develop a presence.

Despite the challenging market environment, the M&A outlook in Australia for 2009 is moderately optimistic. Sector consolidation, a plethora of potential acquisition targets (particularly distressed businesses), and attractive valuations will be the main catalysts for activity in the year ahead. That said, innovative funding structures will be necessary to overcome constrained liquidity in the debt markets. In particular, many of the larger deals executed in 2009 are likely to be structured on a scrip-for-scrip basis. Two sizable deals set to dominate the retail and consumer headlines in 2009 include Lion Nathan’s AUD$7.5 billion bid for Coca-Cola Amatil, and Asahi’s AUD$1.2 billion bid for the Australian Cadbury Schweppes business.

Carrie Yu Global Retail & Consumer Leader



Technology, InfoComm and Entertainment The overall outlook for M&A in the Technology, InfoComm and Entertainment (TICE) sector in the near term can best be described as difficult and uncertain, with poor sentiment and a lack of debt funding likely to dominate the next six months. Against that background it is however highly likely that we will see deals that are opportunistic or tactical in nature. Smaller-sized deals – under US$10 million – will still happen, particularly in the digital space, as the downturn is likely to accelerate the shift of traditional media to digital platforms, which offer greater targeting and interactivity. Collaboration is replacing outright M&A as the preferred approach across the TICE eco-system. This enables companies to grow revenues by taking advantage of growth opportunities, exploiting new technologies, and offering new value to customers, while at the same time sharing risk.

The tight credit markets will start biting telecommunication companies with heavy debt loads, and we could see some merger activity among the second, third, and fourth placed operators in any market. It goes without saying that balance sheet strength is the spring-board for being able to take advantage of the declining asset values that we are currently experiencing.

In the technology space, the large software companies, which are in large part ‘cashed up’, will hold back their acquisition activity for the better part of the year as they wait for bargains. Expect them to move aggressively though when the time is right as they likely already have their targets firmly in mind. Hardware companies are most likely to hunker down in the current environment, focusing on cost reduction while they ride out the storm. IT services and consulting companies will struggle over the next year as finalising large contracts becomes more difficult and competitive. This may drive consolidation – notably in India.

Equity market capitalisations of media companies have been very badly hit, but it is unlikely that media assets will actually sell at ‘bargain-basement’ prices as most have intrinsic values far higher than what the risk adverse investor is currently willing to pay. We are anticipating some ‘fire-sales’ of distressed assets and it is worth checking the financing structures of deals done in the past two years to identify potential targets. The deal activity in the short term is likely to centre on smaller companies which provide the opportunities for digital extension and for getting closer to the consumer – particularly the digital natives.

Marcel Fenez Joint Global Entertainment & Media Leader



“What keeps you awake at night?” It’s fairly easy to imagine that during the economic boom of the past few years, the response of many Asian business leaders would have involved a stare of disbelief and something along the lines of “Well nothing actually, our top and bottom lines beat expectations in another record breaking year!”

What a difference a year makes. The credit crunch, plunging financial and commodity markets, slowing or negative economic growth, failed or postponed deals, major frauds, failures of household names, rising unemployment, declining property prices and the resulting erosion of consumer confidence. “How long have you got… my Corporation faces a long and deeply distressing list of challenges, all of which keep me awake” might be the more common response to the same question if asked today. The rapid deterioration of the major global economies over the 2H08 and into 2009 is having a profound impact on all Asian corporations in one way or another.

In this atmosphere of uncertainty, the concensus is that economic conditions are not likely to get substantially better anytime soon. Asian corporations therefore face considerable challenges – and managing during these times of economic turbulence will be a new experience for many whose careers have been built in more benign times.

Corporations must consider the effects of the current economic conditions and what they mean for the survival of their business, but they cannot stop there: they also need to address several key questions – What do they need to do differently? What do they need to do better?

Often, the secret of survival will be to focus on getting the simple things right rather than embarking on wholesale radical change in every aspect of the operations. Many practical steps can be taken to position the business to emerge stronger once economic conditions improve.

In this context, PricewaterhouseCoopers has identified 10 key priorities for senior executives to consider in developing their action plans.

1. Strengthen oversight

It’s easy to jump to conclusions when under pressure to protect profits during a downturn. Many corporations will be tempted to freeze infrastructure investments, mothball new growth projects and defer integrating the latest acquisition. Advertising and recruiting investments are easily cut, as are loyalty programmes for customers and staff.

However, some will take a different approach and invest where others are cutting back. Cash-rich and far-sighted Asian corporations will take risks to benefit from the situation.

Businesses which understand the environment in which they operate can navigate a downturn in a way that makes the most of the opportunities arising; those who do not will be inclined to take the path of least resistance, leading to defensive and piecemeal actions. Most damaging of all, these businesses may incur the risk of losing out to their competitors.

This is where the senior executive teams must show their leadership qualities and add real value. Board members who may have the experience from previous downturns should help to stabilise the ship, boost confidence among staff and chart a course towards making competition irrelevant.

Leadership in times of turmoil

Keith StephensonGovernance, Risk and Compliance Leader Asia Pacific


The leadership team needs to take a closer look at the business to fully understand how it is being impacted and challenged by the downturn:

Is our current strategy still relevant?•

How healthy is the order book?•

Are there any funding concerns?•

Were any business fundamentals glossed over in a • rush for growth that now need to be elevated to front of mind issues?

Is our monitoring good enough in these new times?•

Do we have complex structures that currently limit • our options?

Should we be establishing an executive “turmoil team” • and if so what are its terms of reference and who should be on it?

It is also important for senior executives to ensure clarity of their role going forward vis-a-vis the Board’s. It is not unreasonable that Boards will want to increase their oversight of corporations and executives can expect both formal and informal interaction with Boards and their Committees to increase during this period. This change needs to be embraced rather than shunned.

What does the Board, and perhaps Non-Executive • Directors in particular, want now that they haven’t needed before?

How will the Board monitor the action plans that • address the current times?

2. Act decisively, focus on key drivers of value

Strong corporations won’t sit back and wait for the storm to pass. The winners will be those who take tough decisions and position themselves to take advantage of the upturn when it comes. Asian corporations that benefited from previous economic downturns were those that acted proactively and decisively, using the slump to steal a march on their competitors. Senior executives should be taking the time to consider their appetite for risk, its linkage to growth and potential returns and identify new concerns arising from the turmoil. This could possibly be achieved by establishing a temporary “turmoil committee” to oversee the various initiatives needed to steer through the impending storm.

Now is a very opportune time to introduce or review the organisation’s risk management systems in support of improved governance processes.

3. Cash is king

Financial pressure during the downturn will force many to re-examine and minimise their investment in working capital – cash is king.

Those corporations emerging as sector leaders from past recessions typically had an average net debt-to-equity ratio of about half of their less successful competitors before the downturn. Successful businesses also held more cash on their balance sheet than their competitors.

Managing cash is an everyday concern, but in a downturn it becomes a heightened priority:

reviewing the adequacy of financing arrangements •

monitoring performance against financial and non-• financial covenants

adopting a proactive hands-on approach to cash • management

developing aggressive working capital management • strategies

minimising discretionary and non-discretionary • expenditures

enhancing controls over purchasing and order • processes.

4. Manage your sustainable cost base

Corporations need to thoughtfully reassess the relationship between cost and profits, to reduce the sustainable cost base whilst maximising profitability. In good times, inefficiencies are tolerated more and unnecessary complexities built into the way corporations conduct business remain unnoticed. However, the competitive landscape is changing so fundamentally that previous business models may no longer be appropriate.

In an economic downturn, the emphasis must be on:

stemming value leakage•

simplifying and improving end-to-end business • processes and business structures

improving the overall cost control environment and • creating a cost culture.

Finance functions need to produce meaningful analysis of cost spend by business unit, to enable self review by the business and to help identify maverick spending and waste.


Times of crisis require extraordinary measures. Reports are now circulating that some executives are no longer waiting for outdated reports on the status of the cash balances from the cash book to materialise but are calling for daily or weekly updates on what the bank statement is currently showing. Similarly, some are making more use of (or reverting back to) spreadsheets to extract the relevant information needed to analyse their business.

7. Plan for different scenarios

Managing in a downturn requires flexibility and an ability to anticipate and react quickly to changing circumstances. This helps mitigate risks and better positions the business to seize new opportunities that may arise. To achieve this, management needs to invest time to assess operations and consider possible scenarios, challenging themselves with the what-if questions.

Nobody can fully predict what impact the current downturn may have on a sector or on a particular organisation. To survive, management needs to plan for the potential eventualities, and address the organisation’s resilience to handle the worst case and extreme scenarios.

A key initiative is also to establish or re-examine Business Continuity Plans which are often outdated and offer illusory comfort. Too few organisations in Asia fully work through how they will react in a crisis in advance of the crisis itself.

8. Recognise the value of your people

In tough market conditions, motivating employees and maintaining productivity levels is a major challenge. Whether the struggle is to deliver business as usual, or to manage a restructure, a critical first step is to identify talent that must not be lost during or after the downturn.

Having mapped the talent across the business and identified the potential human capital risks, effective retention strategies are needed which can be immediately put into action. Waiting until the economic climate changes is not an option. Innovative thinking is also required – use talent differently rather than adding to the headcount; offer internal promotions earlier than planned; offer employees new challenges in a different part of the organisation. Most importantly, continue demonstrating to employees that they are valued, offer them development opportunities and discuss their future with the organisation.

Transparent and robust performance management processes, with clear links to reward, help to ensure employees feel recognised for their contributions and encourage the necessary behaviours to deliver targets. Reward structures applied during boom times may no longer be appropriate. Taking time to introduce

The desire for cost optimisation and staying lean must be tempered by the threat of control slippage. If not well thought out, the rush to cut out processes or to retrench or re-deploy headcount, can unwittingly lead to serious quality, financial and reputational issues to name but a few. Well-designed control systems are a priority and should not be compromised. Such control systems will focus on preventing problems occurring in the first place, be supported by detection (monitoring) mechanisms and will reinforce senior executive accountabilities for maintaining effective control systems.

5. Focus on what really matters – prioritise

Customers are the number one priority in a downturn. Those supporting their customers through these difficult times will gain respect and benefit from mutual advantages. This is a good time to consider which customers or segments, products and channels are the most profitable. These will provide the critical volumes to drive the business through the economic turmoil.

Asian corporations need to rethink their investments and consider deferring projects until the economic landscape becomes clearer. More fundamentally, exit strategies for projects that are no longer relevant or critical should be considered. Senior executives, working with the Board, have a key role to play in establishing a culture of continually re-challenging and re-prioritising.

6. Reliable management information is key

As the affects of the economic slowdown start to be felt, Asian corporations will have an ever greater need for reliable and up-to-date information to support timely and informed decisions. Many executives are beginning to realise that their management information systems are woefully inadequate or not sufficiently well designed to manage key operational and cost levers.

Too often, the same reporting templates and key performance indicators (KPIs) are used regardless of changes in the external environment. To exacerbate matters, the information management relieson is often received late and out of date.

KPIs and critical reporting templates should be reconsidered and revised in light of changing circumstances. Increased emphasis should be placed on:

managing a smaller number of more reliable parameters •

accelerating reporting processes and increasing • frequency of reporting

ensuring more regular exposure for the senior • management and Board.


10 priorities for C-Suites to add value

1. Strengthen oversight

2. Act decisively, focus on key drivers of value

3. Cash is king

4. Manage your sustainable cost base

5. Focus on what really matters – prioritise

6. Reliable management information is key

7. Plan for different scenarios

8. Recognise the value of your people

9. Take your stakeholders with you

10. Take advantage of new opportunities

appropriate incentives will promote behaviours necessary for an organisation’s survival and motivate commitment among employees.

However market changes are responded to, communicating the business strategy and the employees’ role in enduring the turmoil can make a significant difference to the discretionary effort they will apply to help their organisation succeed. Regular communication with employees will reinforce their commitment to the business and increase the chances of retaining them now for when the upturn begins.

9. Take your stakeholders with you

Good stakeholder management is crucial to executing a winning strategy. It can enhance an organisation’s reputation when performed during difficult times.

Shareholders and debt-holders need to be engaged in a positive dialogue about how the downturn is being handled, the opportunities presented, what is being done to address any underlying weaknesses and the strengths that set the organisation apart from its peers.

Staying on customers’ agendas and rewarding loyalty is essential. Key account management programmes can be an effective way of identifying the most profitable customers and to ensure that adequate retention programs are instituted.

Open dialogue between employer and employees helps safeguard an organisation’s assets. When money is tight, it can be difficult to reward good performance, but there must still be advantages for key and reliable employees. Honesty with employees will engender trust and make it easier for the organisation to attract talents.

Be inventive – consider alternative approaches to business and financing such as barter and debt equity swaps to get through the current period.

10. Take advantage of new opportunities

In line with the classical trade-off between risk and reward, the economic downturn does present opportunities. Asian corporations that are in good shape can ride the downturn with greater flexibility to invest and are able to strengthen their position at the expense of competitors.

Difficult economic conditions do not mean that all investment programmes should be halted and future growth sacrificed. Rather, a clear understanding of the investment landscape and risk levels should be obtained to help make appropriate and informed strategic decisions. There are many opportunities to benefit from lower asset prices and reduced competition during this downturn.

Structural change in an industry can be accelerated by a slowdown, as the most progressive players implement strategies that made sense all along, but may have been difficult to push through in the good times because the ‘burning platform’ wasn’t there. A downturn can be the making of tomorrow’s market leaders, as the changes implemented at this time will make businesses stronger in the long term.

Challenge as opportunity

In a downturn, numerous difficulties will present themselves to Asian corporations – all important, all urgent. A natural response may be to “batten down the hatches” and focus solely on today’s problems. Prudent management is necessary but it is important to recognise the opportunities presented – to challenge old ways of doing things, to take advantage of weaker competitors, and to plan for the changed marketplace that will emerge.

Effective management will help ensure organisations are best placed to come through the bad times re-energised and fit for the future. Thriving in a downturn requires greater diligence and skill than during favourable economic times. However, the rewards can be greater as businesses that adapt quickly with the right strategies can not only grow, but position themselves strongly for the inevitable upturn that will happen.

Addressing any combination of the 10 priorities will enable organisations to do just that. It is now up to the corporate leaders to play an active role in operationalising them and to make it real.


Regional Economic IndicatorsAsia Pacific Macroeconomic Indicators – End-Year 2008

Nominal GDP US$’billionPopulation

(million)

Consumer Prices % Chg

YOY

Industrial Production %

Chg YOY

Real GDP Growth Chg

YOY Market

ExchangePPP

Australia 964.84 802.54 20.62 4.70 2.80 2.40

China 4,148.96 8,190.04 1,331.12 6.40 15.70 9.60

Hong Kong 217.64 314.14 7.02 4.50 0.40 3.80

India 1,186.14 3,392.62 1,148.00 7.80 4.70 6.30

Indonesia 493.34 922.30 237.51 10.50 1.60 6.10

Japan 5,058.83 4,420.52 127.29 1.80 -0.50 0.30

Malaysia 214.67 393.05 27.73 5.80 4.00 5.60

New Zealand 127.58 117.37 4.29 4.30 -1.20 0.30

Philippiness 161.57 322.90 92.68 9.60 4.60 4.40

Singapore 184.68 197.16 4.55 6.60 -5.80 2.00

South Korea 862.15 1,297.26 49.21 5.00 6.60 4.50

Taiwan 411.59 845.23 22.70 3.80 3.90 4.00

Thailand 272.40 560.49 67.00 5.80 7.00 4.50

Vietnam 84.70 243.69 86.12 24.50 16.70 6.10

Source: The Economist Intelligence Unit


Our unique approach to Post Deal Integration

Delivering the benefits whilst ensuring that focus is maintained on your core business growth opportunities, business as usual, activity and other change programmes

What is Post Deal Integration?

Acquisition identification &

assessment

Post Deal Integration

Transformation

• Industry/Market analysis, target identification

• Valuations and financial due diligence

• VDD/Buy Side DD

• Strategic market review and assessment

• Operational DD

• Synergy Review

• Integration fundamentals

• Integration programme design and mobilisation

• Day 1 readiness

• Synergy planning

• Synergy realisation and tracking

• Integration management office

• Change management

• Communications

• Cultural alignment

• Transition and end-state operating model

• Full operational integration eg. finance, HR, systems

• Product/Service

• Systems

• People

• Market

• Operations

Managing your key stakeholders through

the change: your employees, your

clients, your regulators

Maintaining strong control over the costs, benefit delivery, quality

and scope of the programme

Ensuring there are clear objectives and targets to focus activity and critical resources on areas that

add the most value

Effective management of

PEOPLE through a time of uncertainty

Objective challenge and robust process

to minimise expected RISK

Maximise the expected VALUE through focus on areas of benefit

Balancing integration with driving core business performance


North AsiaPeople’s Republic of China 20

Hong Kong 22

Taiwan 26

Japan 30

Korea 34

South and Southeast AsiaIndia 40

Indonesia 44

Malaysia 46

Philippines 48

Singapore 52

Thailand 56

Vietnam 60

AustralasiaAustralia 66

New Zealand 70

Regional Merger & Acquisition Contacts

Index


North AsiaPeople’s Republic of China

Hong Kong

Taiwan

Japan

Korea


Current EnvironmentA favourite slogan among Chinese people during the recent Olympic games was ‘中国人加油’ ‘Zhong Guo Ren Jia You’. This can be translated as ‘Go China!’ and literally ‘Jia You’ means ‘add gas’, for example to increase the heat or to re-fuel your car. Recent months have seen the need for the government to ‘Jia You’ as economic growth started to slow significantly.

In 2008, GDP growth was 9.6%, but this was slower than the record high of 11.4% in 2007, and by Q4 growth had slowed to 8% p.a. This reflected a slowdown across the economy but this was most pronounced in exports and fixed asset investment.

In November 2008, Chinese exports declined for the first time in seven years as China’s main trading partners in Europe and the US slipped into recession. At a national level this effect is being partly offset by declining imports as global commodity prices fall, but it is having a noticeable impact on major export areas such as the Pearl River Delta.

China’s industrial output growth in October was the lowest in seven years, as falling investment growth (both domestic as well as FDI) in apartments, factories and infrastructure resulted in a lower demand for steel, aluminium and cement.

However on the positive side, inflation, which reached a high in February 2008 of 8.7% p.a., was down to 4% p.a. by November 2008. This was due to reduced raw material import prices, as well as the alleviation of the inflationary spike caused by pork shortages earlier in the year. The fall in inflation has allowed the government to change its policy emphasis from cooling demand to stimulating the economy. Several policies introduced earlier in the year to prevent a bubble in the stock and real estate markets have been reversed, including a reduction in interest rates; easing of property down payment regulations; lowering of property transaction taxes; abolition of bank lending quotas; and a reversal of stamp duty tax on stock purchases.

To increase export levels, VAT rebates were re-instituted for export companies. After three years of gradual appreciation of the Rmb against the US$, a depreciation of the Rmb was noticed in November 2008. Although the increase in US$ value from 6.83 to 6.89 is small, it may have a positive impact on exports.

People’s Republic of ChinaAfter years of growing deal activity, China experienced a decline in transactions in June to November of 2008. Domestic M&A activity saw a rebound at the end of the year; however it is unclear whether this was caused by a general recovery or by a year-end rally also experienced in prior years

To accelerate investment and capital expenditure, a Rmb4 trillion (US$586 billion) stimulus package for national infrastructure and social welfare projects, including constructing new railways, subways, airports, and hospitals, was announced. US$100 billion was scheduled to be spent by the end of 2008.

Deal Activity

With 867 announced deals, deal activity in China’s M&A markets in the fourth quarter of 2008 was down by 4% compared to the same period last year. However, 2008 began strongly with 24% growth in deal activity in the first six months, to reach 1,476 announced transactions (valued at US$73 billion) in the first half of the year compared to 1,186 in the first half of 2007 (valued at US$40 billion). Activity levels dropped in the period June to November, resembling deal activity levels last seen prior to 2006, largely because of global financial uncertainty. While the ‘real’ economy remained relatively robust, both strategic and financial buyers were waiting on the sidelines to see how events developed. Deal activity in December 2008 was comparable again with activity levels experienced in December 2007, mainly driven by domestic deal activity.

Inbound deal activity decreased by 11% in 2008 compared to the prior year as foreign strategic buyers paused to see how far global events would affect China, and also looked to preserve cash to manage their existing operations ‘back home’.

The manufacturing sector was the most active sector by number of deals, while real estate was the biggest sector by deal value. Some sectors have shown growth in 2008 compared to 2007, mainly as a result of higher activity levels in the first half of 2008. Deals in media, textiles and infrastructure showed growth compared to full year 2007. This reflects some relaxation of foreign investment regulations related to advertising; a consolidation in the garment industry partly as a result of declining export demand; and the increased popularity of the infrastructure sector, which is likely to remain attractive after the announcement of the government stimulus plan.

Matthew PhillipsTransactions LeaderChina


China Deal Activity


No.

of d

eals

US

$ m

illio

n

1Q2007

3Q2007

1Q2008

3Q2008

2Q2007

4Q2007

2Q2008

4Q2008

50,000

30,000

45,000

25,000

40,000

20,000

10,000

35,000

15,000

5,000

-

1,000

700

400

900

600

300

800

500

200

100

-


The new anti-monopoly law which came into effect on 1st August 2008 has not obstructed companies from doing deals, with inBev’s acquisition of Anheuser Busch cleared by a Ministry of Commerce (“MOFCOM”) review. However, the approval differed in some respects from what is common in other countries. While approving this transaction, MOFCOM put in place restrictions on potential future acquisitions in China by inBev/Anheuser Busch.

The inBev/Anheuser Busch merger was a transaction of two foreign companies with activities/subsidiaries in China. The largest ever acquisition of a Chinese domestic company by a foreign company, Coca Cola’s proposed US$2.5 billion acquisition of Huiyuan Juice, announced in the third quarter of 2008, is seen as a real test case of the new anti-monopoly law. Huiyuan is a domestic company with a famous brand in the Chinese market, and the deal is therefore likely to be subject to significant scrutiny.

Private Equity

Both domestic and foreign Private Equity (“PE”) investors continued to raise China related funds (both Rmb as well as US$ funds) during 2008. In 2008, approximately US$14.4 billion was raised compared to US$7.3 billion in 2007.

Private Equity buyers see buying opportunities as valuations decrease and alternative sources of capital dry up, and have the cash to make acquisitions. However, vendors remain reluctant to accept lower valuations, leading to a ‘valuation gap’. Consequently, the number of deals fell by nearly 60% in the second half of 2008 compared with the same period a year earlier, and average deal sizes remained quite small for the industry at less than US$100 million, although this number is showing an upward trend.

Domestic Chinese PE funds are becoming more active, and, since they do not need some of the approvals that foreign funds need, they have a faster transaction execution time compared to their foreign peers. This could be a big advantage in current market conditions where growth deals with minority stakes continue to dominate, with few leveraged buy-outs.

Another reason for decreased financial buyer activity is that the IPO exit opportunities have ceased as a result of the current stock market conditions. Many of the deals done in 2007 were pre-IPO investments. This type of transaction is not currently viable, and many of the pre-IPO deals which were done in 2007 are now coming unstuck and need to be restructured.

Outbound

Outbound deal volume slightly decreased in the second half of the year compared to the same period last year, falling 7% to 96 transactions, again due to the impact of the global economic downturn. Chinese companies still have money and government support to invest abroad but have put M&A activities on-hold in the second half of 2008 to wait for overall

economic conditions to improve. Many of China’s outbound investments from earlier years are showing large unrealised losses, and while the current economic turmoil clearly represents an opportunity for well funded Chinese buyers, they are understandably wary about moving too quickly.

The European bank and insurance company Fortis NV/SA was nationalised by the Belgian government at the end of September, to prevent it from collapsing. Ping An Insurance was the largest shareholder, with 5% of the shares in Fortis, and has asked for support from the Chinese government to help negotiate with the Belgian government to have its losses compensated. Ping An is referring to a treaty between Belgium and China that was established to protect investors from losses resulting from nationalisation by the government.

As in earlier years, the main industries for Chinese acquisitions abroad were still mining and financial services. However, other sectors were evident, including deals in high-tech industries such as medical equipment, hardware/software, and biotechnology. This reflects the increased level of maturity of the Chinese economy and the shifting of China’s focus to industries higher up the value chain.

OutlookAlthough growth forecasts are being reduced, the World Bank still expects GDP growth of 7.5% in 2009. While this would be an enviable rate of growth in many countries, the government is keen to maintain a high level of growth to maintain rising living standards and prevent social instability. Most commentators expect a weak first half, followed by recovery in the second half as the government stimulus package takes effect.

Looking forward, overall M&A activity in China will remain slow in the first half of 2009 with some pickup anticipated in the second half as pricing expectations align, and both domestic and foreign buyers take advantage of opportunities to consolidate and restructure in sectors affected by the slowdown. The government has also been discussing permitting loans to finance M&A activity which would give the market a further boost.

We expect to see foreign investment into China increase as well as outbound deals to secure resources at relatively low prices. One possibility is Chinese buyers making tender offers for oil and mining companies listed abroad, benefiting from falls in stock market prices, and the same could happen in China with PE investors focusing on Private Investment in Public Equity. Within China, PE deals may be the first to recover. But given its much larger scale, domestic and foreign strategic buyer activity will need to stage a strong recovery if we are to see any growth at all in 2009.

Despite present difficulties, we expect M&A activity in China to recover more quickly than other regions of the world, largely due to both China’s comparatively strong current growth rate, and the longer term potential offered by the Chinese market.


Hong KongWeakening exports are likely to lead to negative growth. Conditions in 2009 will depend on the resumption of growth in key export markets including the US and China

Current EnvironmentHong Kong’s economy slowed notably in the third quarter of 2008 with GDP growth of 1.7% in real terms compared to the 4.2% growth seen in the second quarter of 2008. This was the slowest pace since 2003 when Hong Kong was hit by the SARS crisis. In November 2008, the HKSAR government lowered the GDP growth forecast from 4.0% – 5.0% to 3.0% – 3.5% in real terms for the full year 2008, implying negative growth in the fourth quarter of 2008 for the first time since mid 2003.

Total export of goods grew by 1.4% in real terms in the third quarter of 2008 compared to 4.4% growth in the second quarter of 2008, representing a deceleration from the first two quarters of 2008 and also the worst performance since the first quarter of 2002. Exports to the advanced economies, notably the US, were directly affected by the rapidly slowing demand in these economies as a result of the global downturn.

Growth in the export of services in the third quarter of 2008 softened to 5.3% compared with 8.1% in the second quarter of 2008 caused by the deceleration in exports of financial services amid the financial market distress and the notably slower pace of expansion in inbound tourism.

Overall consumer prices rose by 3.1% in November 2008 compared to the equivalent period in 2007. Netting out the effects of the Hong Kong SAR Government’s one-off relief measures, including the Government’s payment of three month’s public housing rentals, the implementation of an electricity charge subsidy, and a government rates concession, the increase in the composite Consumer Price Index in November 2008 was 5.6%, compared to 3.4% in 2007. The increase was due mainly to a surge in food and energy prices, as well as hikes in housing rent.

The seasonally adjusted unemployment rate in September to November 2008 was 3.8%, a slight increase from 3.6%


Hong Kong Deal Activity


30,000

25,000

15,000

20,000

10,000

5,000

35,000

-

No.

of d

eals

450

400

300

200

100

50

-

150

250

350

US

$ m

illio

n

1Q2007

3Q2007

1Q2008

3Q2008

2Q2007

4Q2007

2Q2008

4Q2008

in the same period in 2007, reflecting the slowdown in business activities in both the domestic and overseas trade sectors.

As a result of poor economic fundamentals, the Hong Kong stock market fell substantially in 2008, as the Hang Seng Index dropped by over 65% from the record highs of 31,000 in October 2007 to 10,680 in October 2008. Market capitalisation also dropped by over 39% from US$2,633 billion in the fourth quarter of 2007 to US$1,600 billion in the third quarter of 2008. In line with other exchanges, the market staged a modest rally towards the end of 2008.

The number of IPOs dropped significantly from 82 in 2007 to only 28 in the first three quarters of 2008. The funds raised through IPOs also fell significantly from US$37.2 billion to US$8.0 billion in the respective periods.

The Hong Kong property market has retreated in 2008 after a surge in 2007. Buying sentiment, particularly for residential properties, was dampened by the discouraging performance of the financial markets and the continued news of recession around the globe. The overall number of sales transactions on residential properties declined by nearly 40% during third quarter of 2008 compared to the same period in the prior year.

Deal Activity

The value of deal activity in the second half of 2008 decreased to US$25.3 billion from US$41.1 billion in the first half of 2008. For the full year 2008, deal values increased by 0.2%, or US$123 million, compared to 2007. However the number of announced deals decreased from 1,508 to 1,148. Some of the major deals in each industry sector included:

David BrownTransactions LeaderHong Kong


Telecommunications

China Unicom Ltd, the Hong Kong listed arm of Unicom Group, agreed to merge with China Netcom Group Corporation (HK) Ltd, a Hong Kong listed domestic counterpart in June 2008 for US$29.6 billion. The offer price represented a premium of 3.0% over China Netcom share’s closing price on 30 May 2008. After the merger, China Netcom became a wholly-owned subsidiary of China Unicom. The deal was completed in October 2008.

PCCW Limited announced in November 2008 a proposal to take the company private. This followed the unsuccessful sale of 45% of HKT Group Holdings Ltd, a subsidiary of PCCW Limited providing telecommunications services, media and information technology businesses, in October 2008 due to lower than expected offers from bidders as a result of the deterioration in market conditions. The proposed privatisation has been granted consent by the Office of the Telecommunications Authority, but is still subject to shareholder approval at the time of writing. If the privatisation proceeds, it is expected that companies connected with Richard Li would hold 66.7% while China Netcom would hold the remaining 33.3%.

Real Estate

Hong Kong listed real estate developer Franshion Properties (China) Limited agreed to acquire Wise Pine Limited, a Hong Kong real estate and hotel investment company, from Sinochem Hong Kong Group Company Limited and seven other shareholders for US$2.2 billion in June 2008. The acquisition will help Franshion Properties tap into the luxury hotel sector and strengthen its position in property and hotel operations. As at January 2009 the deal has not been completed and is still subject to regulatory approval.

Energy and Mining

Black Sand Enterprises Limited, a subsidiary of the Hong Kong listed investment holding company Intelli-Media Group (Holdings) Ltd. engaged in the distribution of video products, has agreed to acquire First Pine Enterprises Limited, a Filipino company engaged in mining activities, from Kesterion Investments Limited, a BVI based investment holding company, for US$730.7 million in May 2008. The acquisition is in line with Black Sand Enterprises Limited’s strategy to diversify into the business of exploration, drilling, mining, and trading of natural resources, particularly the mineral magnetite in sand form.

Jade Green Investments Ltd., a subsidiary of Hong Kong listed company Fushan International Energy Group Ltd., agreed to acquire three coking coal mines located in Shanxi from Fortune Dragon Group Ltd. for US$1.35 billion in May 2008. The acquisition will help Jade Green Investment Ltd. expand its business and strengthen its competitiveness in through economies of scale. The deal was completed in July 2008.

Financial Services

China Merchants Bank Co Ltd (“CMB”), a Shanghai and Hong Kong dual listed commercial bank, announced the acquisition of Wing Lung Bank Ltd, a Hong Kong listed bank for US$4.7 billion in June 2008, and the transaction was completed in October 2008. This acquisition offers CMB an opportunity to establish a sizeable customer base and distribution network in Hong Kong.

CITIC Group Holding, a China based investment holdings group, together with a listed Spanish bank, Banco Bilbao Vizcaya Argentaria SA (“BBVA”), proposed to take private CITIC International Financial Holdings (“CIFH”), a financial services subsidiary of CITIC Group Holding listed in Hong Kong, through a scheme of arrangement in June 2008 for US$1.5 billion. The transaction was completed in November 2008.

Retail

The Coca-Cola Company announced an offer in September to acquire the entire outstanding share capital of a Hong Kong listed company, China Huiyuan Juice Group Ltd. for US$2.5 billion. The Coca-Cola Company plans to leverage the position of Huiyan as a leading domestic juice maker in China, allowing it to be more competitive in terms of branding and sales effectiveness. The deal is currently under regulatory scrutiny, as it would be the largest foreign takeover of a local firm, and faces strong opposition from other domestic juice producers as it may threaten their market share in China.

Transportation and Logistics

Enric Energy Equipment Holdings Ltd, a Hong Kong listed company, agreed to acquire Sound Winner Holdings Limited, a Chinese transportation services provider owned by China International Marine Containers (Hong Kong) Company Ltd. and CIMC Vehicle Investment Holdings Company Ltd. for US$805 million in September 2008. The acquisition will enable Enric Energy Equipment Holding Ltd. to expand its business segments as well as strengthen its financial performance.


Private Equity

Morgan Stanley Private Equity Asia, a Hong Kong based private equity unit of Morgan Stanley and Shinhan Financial Group Co Ltd, agreed to acquire Norske Skog Korea Co. Ltd. from Norske Skogindustrier ASA, a listed Norway based producer of printed paper, for US$833.1 million in August 2008. The transaction is in line with Norske Skogindustrier ASA’s strategy to reduce its debt levels by approximately 25%.

Asia Packing Group Holdings Limited, a Hong Kong based investment holding company formed by CVC Capital Partners Limited, acquired a 53.9% stake in Hung Hing Printing Group Ltd, a listed Hong Kong based company engaged in the printing and manufacturing of paper and carton boxes, for US$112.2 million in April 2008. The transaction was completed in July 2008.

Outlook Hong Kong’s economy is still closely tied to the major economies around the world and the current global economic crisis is expected to have a significant impact on Hong Kong’s economy in 2009. Hong Kong’s export orders will likely decline, reflecting weak retail markets in the US and Europe. Companies with close ties to the Chinese economy are also likely to face challenges, particularly in the first half of 2009.

The Hong Kong government and Hong Kong Monetary Authority have recently taken measures, such as the HK$100 billion loan guarantee to non-listed companies, to unfreeze the credit shortage and inject liquidity back into the banking sector, and aid small and medium enterprises (“SMEs”). It remains to be seen whether these government measures will alleviate the financial crisis but it should at least provide relief to SMEs in the short term. However, all companies will need to manage their cash flow and working capital needs effectively, in particular assessing counterparty and supply chain risks. Steps to manage cost levels will also be imperative in managing the current downturn.

IPOs in Hong Kong are expected to rebound slightly in 2009, on the assumption that the economies of Hong Kong and China will stabilise in the second half of 2009.

In respect of M&A, both corporate and financial buyers continue to look for attractive deals despite the current environment. However, most transactions have been put on hold as buyers lower their prices but sellers are unwilling to lower their valuations significantly, creating a valuation gap. Most M&A deals are expected to be delayed in the first half of 2009, but there will be a quick recovery when the valuation gap starts to narrow sometime in the second half of 2009. Obtaining financing may continue to prove more challenging and costly. M&A activity in 2009 could see more of a shift to strategic investors with strong balance sheets looking for undervalued companies or distressed businesses.


TaiwanImproving cross-straits relationship with mainland China likely to enhance outlook for the economy and deal activity going into 2009

Current Environment

Taiwan’s GDP growth contracted sharply at an annualised rate of 1% in the third quarter of 2008, compared to 4.3% growth in the first half of the year. The CPI also registered a decline, by 1.3% p.a. in December. With consumer prices falling and the economy sliding rapidly, the government has launched a series of fiscal stimulus efforts, including consumption voucher distribution, a range of tax cuts, and injections of government funds into capital markets, all designed to bring Taiwan out of recession.

The global economic downturn has hit both Taiwan’s financial and non-financial industries. Taiwan’s moderately capitalised banking sector will be hard pressed to deal with the twin challenges of an imminent increase in provisions and government pressure to support distressed corporations. Meanwhile, Taiwan’s important semiconductor sector is expected to see a 4% reduction in revenue, according to the Industrial Economics and Knowledge Centre (IEK).

The Taiwan Stock Exchange Index (TAIEX) has declined 46% to the end of December, making its 2008 performance one of the worst in the past 30 years. The TAIEX currently trades at 1.3x PBR and 8.0x P/E, on a trailing basis. Given that stock valuations have fallen to an unprecedented level, this may prove a good time to look for M&A opportunities.

Deal Activity

The value of announced deals declined 56% in 2008 compared to 2007, with a total deal value of US$6.1 billion, comprising 210 deals. Following the global economic downturn and the credit crisis, the market has cooled, with buyers remaining wary of risk, and limiting investments and acquisitions, while optimistic sellers hold out for higher prices.

Here are some of the important deals in the second half of 2008:

Outbound activity

Magellan Navigation, Inc. announced it has entered • into a definitive agreement to sell its Magellan consumer products division to MiTAC International Corp. The transaction is expected to close in January 2009. The acquisition will give MiTAC a boost in market share and brand recognition in key markets like the US.

HTC has acquired the San Francisco-based firm • One & Company Design. The two have collaborated since 2006, jointly creating HTC Touch Diamond. One & Co will maintain its name and client base while it joins forces with HTC to create a significant player in global mobile design.

Peter YuCorporate Finance LeaderTaiwan

Taiwan Deal Activity


6,000

5,000

3,000

4,000

2,000

1,000

7,000

-

No.

of d

eals

US

$ m

illio

n

1Q2007

3Q2007

1Q2008

3Q2008

2Q2007

4Q2007

2Q2008

4Q2008

60

50

30

40

20

10

70

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Inbound activity

Micron Technology, Inc. announced that it is • expanding its partnership with Nanya Technology Corporation, and signing a definitive agreement to acquire Qimonda AG’s 35.6% stake in Inotera Memories, Inc., a leading Taiwanese DRAM memory manufacturer, for US$400 million in cash. To help fund the purchase, Micron has obtained US$285 million in term loan financing commitments from strategic sources at favourable terms.

Marubeni Corporation, a listed Japan-based trading • conglomerate, acquired a 21.4% stake in Hsin Tao Power Corporation, from China Development Industrial Bank (CDIB), Fubon Insurance, Fubon Life Insurance Co and TSRC Corporation (TSRC), for a total consideration of US$77 million. Hsin Tao Power Corporation is a Taiwan-based electricity utility company. China Development Industrial Bank (CDIB) is a Taiwan-based investment company. Fubon Insurance is a Taiwan-based provider of a range of insurance services.

Shin Kong announced it had signed a memorandum of • understanding with Japan’s second largest life insurer, Dai-ichi Life Insurance Company, regarding its planned TW$8 billion fund raising. The Japan-based life insurer will invest in Shin Kong FHC common shares, up to 14.9% of the outstanding shares (including its existing shareholding of about 6%).

Domestic deals

Fubon Financial Holding Co., Taiwan’s second-largest • financial services firm, agreed to pay US$600 million for ING Group NV’s Taiwan unit to boost its customer base by around a third. The acquisition will add TW$612 billion (US$19 billion) of assets, propelling Fubon to number four from number six, in Taiwan’s insurance market. Fubon will almost double its life insurance business, and ING’s customers are also potential customers to Fubon’s other financial service products, such as banking and stock transactions. ING will hold a 5% stake in Fubon and the company’s bonds after the transaction is completed.

China Times Group (CTG) entered into an agreement • to be acquired by Tsai Eng-Meng and his family. Tsai is the Chairman and an Executive Director of Want Want China Holdings, which is listed in Hong Kong and is the largest baked-rice foods firm in China. CTG operates various media businesses in Taiwan, including TV stations, newspapers, internet, and magazines. The US$475 million acquisition is a personal investment by the Tsai Family and is financed entirely by the Tsai Family’s own sources of funds.

WPG, the world’s third largest and Asia’s number • one integrated circuit (“IC”) distributor, announced its second transaction this year. Following the acquisition of Pernase Enterprise in the first half, WPG announced the acquisition of Asian Information Technology for US$199 million in October 2008. In recent years, WPG has actively merged with the other IC distributors through share swaps to quickly expand its scale and network.

OutlookM&A activity is expected to become moderately stronger in 2009, compared to the second half of 2008. Some cancelled or delayed deals from 2008 may re-emerge in 2009, particularly if there is a narrowing of valuation expectations between buyers and sellers. Asset deals, such as business diversification and subsidiary disposal, are likely to be more common than share deals in the coming year. In particular, overcapacity in the technology industry may lead to asset deals to solve this problem. Capital raisings are likely to remain problematic.

Financial sector

In the financial sector, there are likely to be three main drivers of increased M&A activity in 2009. Firstly, investment losses mean that some institutions now breach capital adequacy ratios, which will compel both capital raisings and the disposal of assets. This has already been seen in 2008 in the cases of Fubon Financial Holdings’ acquisition of ING Insurance Taiwan and the Japanese Dai-Ichi Mutual Life Insurance investment in Shin Kong Holding.


companies. The government is also encouraging integration among domestic manufacturers, and facilitating cooperation among domestic makers and their US and Japanese counterparts. Flat screen TV panel makers are also facing difficulties with panels approaching cash cost, and prices continuing to fall. Panel makers are reducing production, and this is putting pressure on TFT component companies, increasing the likelihood of consolidation in the future. We expect that Taiwan’s DRAM and TFT sectors will be able to develop in a positive direction in the long run, as a result of this consolidation opportunity.

As the downturn continues, cheaper stock valuation may entice cash-rich corporations in Taiwan to seek outbound opportunities. Taiwan’s MiTAC, which acquired the consumer products division of Magellan to expand its market, serves as a typical example. Recent outbound deals have also stemmed from Taiwan corporations wanting to move up the value chain or expand into international markets. In other cases, Taiwanese corporations have made outbound acquisitions in order to enhance their own operations, such as HTC acquiring One & Company Design.

M&A activity may also be driven by a number of companies, across a range of sectors, which issued convertible bonds during the boom years. These bonds often had put options attached which are now being exercised, since conversion to equity is unattractive at current prices. Companies having to redeem bonds are likely to have to raise funds from a number of sources and this is likely to drive deal activity.

Though not necessarily M&A transactions, investment deals in the financial sector are expected to continue, and put investors in significant minority positions post-transaction. Secondly, Taiwan has historically been over-banked. The ongoing process of consolidation, both by local and international players, is likely to resume, with smaller institutions being absorbed by larger companies.

Additional opportunities should arise from the easing of cross-strait investment restrictions which may facilitate the pursuit of investment targets in Taiwan by China-based financial institutions. With the recent signing of a memorandum of understanding on financial cooperation, alliance-building share swaps between cross-strait financial institutions could occur in the new year.

Finally, independent investment trust companies may attract the interest of foreign firms planning to enter the Taiwan and China asset management markets. Since the Taiwan government has stopped licensing new investment trust companies, the only way to enter the Taiwan market is through acquisition of existing local investment trust companies.

Non-Financial sectors

The downturn has severely impacted several sectors in Taiwan, especially semiconductors. Overcapacity and over-investment, combined with falling demand, have turned most DRAM and thin film transistor (“TFT”) makers into money losers in 2008. The Ministry of Economic Affairs has approved a rescue package for local Taiwanese DRAM


JapanThe economy continues to weaken, however the strong balance sheets of many Japanese companies may help to support outbound M&A

Current Environment The Japanese economy has experienced negative GDP growth since the second quarter of 2008 at an annualised rate of 0.4%, meaning the country is now officially in recession. A decrease in both corporate capital expenditure and net exports of services contributed to the decline, although consumer consumption has until recently remained relatively stable. However, consumer confidence is weakening, and with machinery investment also in decline, the economic outlook is not encouraging.

Outbound Foreign Direct Investment (“FDI”) increased during 2008 (peaking at US$23 billion during the third quarter), while inbound FDI declined to US$1.6 billion in the same period. Inbound FDI even turned negative in July 2008, showing an outflow of US$323 million, indicating that foreign investors were cashing out on their investments. The accumulated level of inward FDI stands at just over US$150 billion (year-end 2007). Although the government has launched a programme to encourage such investment, in the current economic circumstances it will be a challenge for the country to achieve its stated target of doubling FDI to 5% of GDP by 2010.

On the stock market, the Nikkei Index dipped to a low of 7,141 points at one stage in October, the lowest point since 1982, and the market ended the year at a level of around 8,800. The 10-year Government Bond (JGB) rate decreased to 1.3% by December, but did not stem a flow of pension funds from equities into bonds. Market analysts do not expect to see a marked recovery in the Nikkei Index over the near term.

The economy has been heavily impacted by a sustained appreciation of the Japanese Yen during the second half of 2008 against most major currencies. With the exchange rate hardening to a level of around ¥90 to the US Dollar, the strong currency has had a negative impact on the

Japanese export sector, with many major corporates struggling to remain competitive. Even Toyota is forecasting an 18% year-on-year sales decline, and a close to breakeven result (versus profits of US$17 billion in the prior year). In November, the Fitch credit rating agency announced a downgrade for Toyota to AA status.

The Bank of Japan has continued to move interest rates lower in an attempt to maintain liquidity and the target call rate ended the year at a level of 0.1%.

There are increasing examples of the impact of the downturn on the corporate sector, with Tokyo Shoko Research reporting that over 14,000 companies became bankrupt in the period from January to November 2008. Around 10% of this number had filed due to an inability to finance their working capital needs, and this trend has been increasing month on month. In addition, a total of 30 listed companies filed for bankruptcy, the largest number since World War II, while non-performing loan levels within the 11 major banks had risen to a reported level of US$43 billion at the end of the third quarter. In response, the Bank of Japan held an urgent monetary policy meeting on 2 December to establish emergency steps aimed at easing the situation for corporations, and improving their ability to finance working capital and capital investment needs. This move constituted the first emergency policy to be issued since 1998 when the Asian economic crisis hit Japan. The policy aims to inject US$30 billion for banks to provide loans to corporations.

Deal Activity

According to MARR (the M&A Research Report), total deal volume in the second half of 2008 was 1,199 against a level of 1,200 deals in the first half. The full year total of 2,399 deals in 2008 compares to a level of 2,696 deals in 2007.


Japan Deal Activity


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Matthew WybornCorporate Finance LeaderAsia Pacific


There were 199 reported outbound deals in the second half of the year, providing a full year total of 377 in 2008 (against 367 deals in 2007). Inbound activity included 100 deals in the second half, with the full year total of 198 deals in 2008, well down on the corresponding level of 309 deals in 2007.

The most notable trend in 2008 has been the acceleration of big ticket outbound transactions, although the announcement by Daichi Sankyo of a US$3 billion (60%) impairment write-down only months after their initial investment in Ranbaxy tempered the excitement somewhat. This trend was driven by major corporates taking steps to expand beyond a saturated domestic market and acquire brands or market share overseas. While the slowdown in global M&A hit Japan in the fourth quarter, there have still been signs of activity from consumer sector companies looking to take advantage of the strengthening Yen. The most notable outbound activity included:

Shionogi Pharmaceutical acquired Sciele of US for • US$1.5 billion. The deal brings an international sales force to help Shionogi penetrate overseas markets for its metabolic syndrome products. Shionogi had previously granted overseas distribution rights to Astra Zeneca, a relationship which will continue for existing drugs such as Crestor.

Kirin Holdings acquired Dairy Farmers, the second • largest dairy producer in Australia for US$570 million through its Australian subsidiary, National Foods. Subsequently Kirin has also announced an offer (as yet unaccepted) to acquire Coca Cola Amatil, the largest beverage maker in Australia, through another subsidiary, Lion Nathan. This activity is intended to build Australasia as an export base for Kirin to expand into Southeast Asian markets.

Suntory agreed to acquire New Zealand-based Frucor, • a beverages subsidiary of Danone, for US$750 million. Frucor holds the production license for Pepsi in New Zealand (as does Suntory in Japan). In addition, the deal provides a distribution channel for Frucor products into Asia.

Late in the year, Asahi announced that it had reached • agreement to acquire the Australian beverages business of Cadbury in a US$800 million transaction.

Japanese financial institutions were also prominent investors in cash calls by distressed US financial institutions:

MUFJ accepted a private placement in Morgan Stanley • for US$9 billion and now holds a 20% stake in the company, structured through a mix of common and preferred shares.

Nomura Holdings Inc. of Japan surprised the market by • moving rapidly in late September 2008 to acquire the European and Middle Eastern equities and investment banking operations of bankrupt Lehman Brothers Holdings Inc, a New York-based investment bank, for a nominal consideration of US$2.

Although much of the eye catching activity has been outbound, there have also been a number of major domestic deals, especially in the food, wholesale, and pharmaceutical segments. Significant domestic deals announced in the second half of 2008 include:

Meiji Dairies Corporation, the largest dairy producer, • agreed to merge with Meiji Seika, the second largest producer of cakes and baked goods, to form a new company, Meiji Holdings, in a stock swap transaction valued at US$1.8 billion. The revenues of the merged company will be in the range of US$11 billion, ranking Meiji Holdings as the fifth largest food and beverage company in Japan.

Nippon Oil Corporation, the largest oil wholesaler in • Japan announced a merger with Nippon Mining Holdings (the number six player), scheduled to complete in the latter months of 2009. The merger of the two companies will consolidate production capacity, and, at US$130 billion, the revenues of the merged company would rank it as the eighth largest oil/petroleum wholesaler in the world. However, given that the merged business would have a 33% domestic market share, the Japan Fair Trade Commission is still investigating the merger under Anti-Trust Laws.

Panasonic announced its intention to acquire shares • in Sanyo Electric from the three major shareholders: Goldman Sachs, Daiwa SMBC Securities, and Sumitomo Mitsui Bank Corporation (SMBC), each of which had previously invested in preferred shares under Sanyo’s business recovery plan. Sanyo has been in financial trouble for more than decade, and the proposed transaction would see consolidation through the reforming of a group that was broken up many years ago when Sanyo was spun out of Panasonic.

Activity in the inbound sector and by financial investors has been relatively muted during recent months, and it would appear that the focus of private equity, after some notable transactions closing in August 2008, is to focus on generating cashflow improvements in their existing portfolio in order to counter the risk of covenant breaches. One of the more prominent and active funds, MKS, has announced an intention to close. The period also has seen


the withdrawal of opportunist hedge funds and activist funds with The Children’s Investment Fund (TCI), divesting its 9.9% stake in JPower in November 2008, and Steel Partners reporting sales of several investments.

On the regulatory front, the Ministry of Economy, Trade, and Industry (METI) recently announced that it is continuing to work on plans for a Comprehensive Economic Partnership in East Asia (“CEPEA”). CEPEA is an economic strategy aimed at creating a virtuous growth cycle in Asia through the formation of an economically united region across 16 Asia Pacific countries (covering ASEAN, China, Korea, India, Australia, New Zealand and Japan). The plans represent a continuation of the progress achieved in 2008 upon the signing of the ASEAN-Japan Comprehensive Economic Partnership (“AJCEP”) Agreement with the 10 ASEAN member states and through the establishment of an Economic Research Institute for ASEAN and East Asia (“ERIA”).

In other areas, METI has also announced plans to amend tax regulations through the exemption from tax of dividends paid by overseas subsidiaries (with an equity investment of 25% or more) to a parent in Japan. The move is intended to facilitate efficient global fund flows for Japanese corporations. In December 2008, the Ministry of Finance also announced proposals to amend the rules governing foreign private equity and other fund investment into Japan, including changes to the determination of a permanent establishment and the application of the 25/5 rule to certain foreign partners.

Outlook Global economic prospects will continue to be the dominant factor influencing the M&A environment in 2009. Tightened liquidity and difficult trading conditions will place pressure on Japanese companies, although this will be mitigated to some degree by their cash holdings. The strong Yen also provides an advantage for companies looking outbound from Japan. However, given the economic environment, even with a relatively healthy financial standing and the backing of a strong currency, it is unlikely that conservative Japanese manufacturers will seek to engage in aggressive M&A activity at levels greater than their free cashflows.

In the outbound sector, we would expect to see a continuation of the trend for companies with a good domestic market position and adequate cash to seek opportunities to acquire overseas brands or patents and international market share. Active sectors are likely to include food and beverages, pharmaceuticals, chemicals and electronics.

The prospects for inbound investment will be limited given the strong Yen, although a further round of corporate restructuring brought on by the challenging economic circumstances will create opportunities in distressed situations. We may see activity in sectors such as construction, general manufacturing, retailing and wholesale distribution, especially in the areas around Tokyo and Osaka.


KoreaGDP growth is expected to remain positive but has decelerated sharply. M&A activity by value is also down but is likely to recover in 2009 on the back of distressed M&A opportunities and corporate divestitures

Current Environment The Korean economy is believed to have expanded 4.2% in 2008, nearly a percentage point below 2007. Based on preliminary figures, the economy maintained strong momentum in the first half, growing at 5.3% p.a., but economic growth appears to have sharply decelerated in the second half of 2008.

Overall, exports continued to be the economy’s main driver of growth, expanding 13.7% year-on-year in 2008. While the diversification of exports to emerging markets helped South Korea maintain growth through most of the year, export growth noticeably decelerated in November and December as global demand stalled. However, the global economic slowdown also provided some benefits for Korea, as the declining price of oil reversed escalating import prices and relieved inflationary pressures that had contributed to a burgeoning trade deficit and sapped domestic demand. Korea ultimately posted a US$13 billion trade deficit in 2008, and, more importantly, posted a current account deficit for the first time since 1997. A current account deficit, combined with market concerns over domestic financial stability, contributed to the Korean won’s 26% loss against the US Dollar in 2008.

Domestic demand remained weak because of poor consumer and corporate sentiment. Personal consumption expanded roughly 2% in 2008, while fixed investment grew by only 1%. Consumers scaled back purchases and firms cut capital expenditure as increased global financial

volatility spilled over into concerns about economic growth. In particular, investment in the construction sector, continued to contract in spite of government attempts to revive spending via numerous supply side initiatives. In addition, the unwillingness of banks to lend due to economic uncertainty severely hampered credit expansion, and initiated a painful deleveraging process towards the end of the year. While this economic scenario maybe similar to other countries, Korea faces additional challenges as total private sector debt (debt of non-financial firms and households), was approximately 176% of GDP at the end of the first quarter 2008.

The weakening domestic economy overshadowed other important developments during 2008. The Korean government announced a three-round privatization process in September that pledged to merge or privatise government ownership in over 100 state-owned enterprises, including a number of large financial institutions. The government also committed to strengthen trade liberalisation efforts by continuing efforts to finalise the free trade agreement (FTA) with the US and negotiations with the EU to sign an FTA. Announcements were also made for a new initiative to sign FTAs with other key emerging markets in 2009. Finally, relations between North and South Korea worsened in December as the North cut off rail transport links between the two countries.

Future prospects of decelerating economic growth, combined with substantial outflows of capital, led to a downturn in equity markets. The KOSPI was down 38% at the end of the year, while the smaller KOSDAQ fell 53%. Investor risk aversion sparked a global sell off in equities, particularly in emerging markets, negatively impacting Korean stocks; foreign investors were net sellers of roughly US$40 billion of Korean equities in 2008.

Two developments in 2008 will have long-term positive implications for the nation’s capital markets. Firstly, the Korean government raised the ceiling for equity purchases by state-backed pension funds, potentially strengthening the role of institutional investors. Secondly, the FTSE’s addition of Korea as a developed country to its index in September should lead to increased capital inflows over the long-term.

Sang-Tai ChoiTransactions Managing PartnerKorea


Deal Activity

Total deal value for the second half of 2008 fell 66% from the first half of the year to US$10 billion. For the year as a whole total deal value was US$40 billion, 37% lower than 2007 levels. A pronounced global economic slowdown and the unwillingness of domestic banks to fund large transactions contributed to the notable decline. Overall, domestic transactions totalled US$28.3 billion in 2008; cross-border deals totalled US$11.1 billion in 2008 only experiencing a marginal decline from 2007.

While the value of total deals declined noticeably, the number of transactions maintained an upward trajectory. Total deal volume increased 49% year-on-year to 1,095 transactions, and actually increased 72% in the second half of 2008 compared to the first half of the year. In particular, domestic transactions were up 51% in 2008, with cross-border deals up 42%.

As in other countries, deal value was depressed by the collapse of a number of high profile deals due to concerns over growth, funding, and valuation. Samsung made a bid for US NAND flash memory card and drive producer Sandisk in September 2008 which turned hostile before ultimately being dropped. After Sandisk’s management initially rejected an offer from Samsung, Samsung made its offer public to Sandisk shareholders offering US$26 per share (which represented an 80% premium at the time) to total US$5.9 billion. Ultimately, Samsung withdrew the bid in October over concerns that Sandisk’s risk profile had substantially increased given the slumping IT market.

Korean conglomerate LG entered into an agreement with German solar producer Coenergy Group in September to form a JV that would jointly produce solar batteries. LG planned to acquire a 75% interest in a solar module plant for roughly US$168 million. After a breakdown in negotiations, however, LG stated that it would not go forward with the deal due to uncertainty in global markets.

Finally, HSBC abandoned a US$6.3 billion bid to acquire 51% of Korean Exchange Bank (currently owned by Lone Star) in September. HSBC originally submitted the bid in September 2007, however, management dropped the bid when the initial price became untenable in the context of current banking valuations.

Domestic

Hite Brewery, one of South Korea’s largest liquor producers and wholesalers, spun off its core manufacturing business unit to its shareholders in July. The transaction, which resulted in the formation of a new company named HB, was valued at approximately US$1.8 billion. Hite hoped the transaction would provide greater focus for core operations and increase overall production efficiency.

Hanhwa, one of Korea’s largest industrial chaebols, was selected as the preferred bidder for Daewoo Shipbuilding and Marine Engineering (“DSME”) in October. DSME was initially put up for sale by Korea Development Bank and the Korea Asset Management, DSME’s two biggest shareholders, which own 31.3% and 19.1%, respectively. The transaction is speculated to close in a range from 6.0 trillion won to 6.5 trillion won.

Doosan Corp, the flagship unit of the Doosan Group, chose Lotte Group as the preferred bidder to purchase its liquor business December 2008. The liquor unit, which boasts soju brands such as Cheoum Cheoroem and Green, and the wine brand Majuang, is scheduled to be purchased by Lotte for a price between US$380 million and US$480 million in the first quarter of 2009. The sale is part of Doosan’s larger strategic plan to focus on heavy industry, selling off non-essential business units.

Private Equity

Morgan Stanley Private Equity Asia and Shinhan Private Equity acquired 100% of Norske Skog Korea, the leading global producer of newsprint, in September. The transaction was Korea’s largest domestic private equity deal of the year closing at US$830 million.

MBK Partners completed a cash tender offer for 30.8% of the shares of HK Mutual Savings Bank in November. MBK Partners, along with Hyundai Capital, had already purchased a 64.2% stake in the mutual savings bank in 2007. MBK plans to delist HK Mutual from the KOSDAQ, which if successful, would mark the first public to private transaction by a Korean private equity fund.

Doosan Group sold its packaging unit, Doosan Techpack GG, to Korean private equity firm MBK Partners for roughly US$270 million in November 2008.

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the Capital Market Consolidation Act (CMCA) in February 2009 even in the midst of continued volatility in domestic and global financial markets. The CMCA, originally passed in 2007, will promote a substantial diversification of financial products available to consumers and, in theory, break down barriers between financial services providers such as brokerages, insurance providers, and commercial banks. While there is a general consensus for implementing the CMCA, support for substantial deregulation in the financial sector, particularly to allow the integrated “investment bank” model, has clearly eroded after the collapse of several similarly structured institutions in the US. This perceived policy shift away from promoting financial liberalisation and towards strengthening risk management, will have implications for the government’s planned privatisation of large domestic financial institutions. Indeed, the privatisation plan of Korea Development Bank (“KDB”) was originally based on the notion of creating a domestic “investment” bank through a merger with Daewoo Securities. Currently, the privatisation of KDB is slated before 2012.

M&A in the financial sector, however, will still likely pick up in 2009. Firstly, industry consolidation will continue. While financial firms may hold back from diversifying operations, consolidation between commercial banks and mutual savings banks is expected to accelerate. Second, some chaebols are selling financial subsidiaries in order to raise cash and reduce their overall risk profile. The Kumho Asiana group is selling its 69.9% stake in the unlisted life insurer Kumho Life to boost overall liquidity after its purchase of Korea Express in 2007. The Eugene group, an industrial chaebol, is selling Eugene Securities in a bid to focus on its core operating activities.

Outside of the financial services sector, the government announced initial privatization plans for roughly 100 firms in September, although the timeline and structure of sale will likely be delayed due to the depressed market. According to the current government plan, there will be three different “rounds” of privatisation, many of which will include previously scheduled sales of domestic enterprises such as Hynix Semiconductor, as well as infrastructure including the Incheon Airport.

Outlook Korea’s economy is forecast to expand 1.5% in 2009 on the back of decelerating exports and a further deterioration in domestic demand. Korea, as one of the most trade dependent countries in Asia, will be particularly hard hit by a slowdown in global demand; exports are forecast to grow around 2% in 2009. In addition, the won is expected to gradually appreciate against the US dollar in 2009 as the nation’s trade and current account deficits swing into surplus. A stronger won would hurt Korean goods’ export competitiveness.

Domestic demand is expected to remain sluggish in 2009 as customers and firms retrench.

Personal consumption is forecast to expand 0.5% in 2009 due to a weak labor market and stagnant wage growth. Fixed investment is expected to contract 0.5% as firms slash capital expenditure budgets due to falling demand worldwide. This loss in demand may be partially compensated for by the Korean government’s planned 33 trillion won (US$22.7 billion) fiscal stimulus package and tax cuts to be implemented in 2009. The government also announced a 43 trillion won (US$32.7 billion) “green” program to promote employment in environmentally friendly projects over the next four years. In light of this outlook, the Bank of Korea, which has already undertaken an aggressive monetary easing campaign at the end of 2008, is forecast to further reduce interest rates in 2009 cutting the base interest rate below 2.0%.

M&A activity will likely remain depressed in the first quarter of 2009. However, moving forward into the second and third quarters of 2009, corporate divestitures, especially amongst chaebols, may well increase as firms shed non-core businesses to boost liquidity and cut operational costs. Indeed, many chaebols such as Doosan and Hanhwa have announced sales or planned sales of subsidiaries to focus on core operations. Private equity deals will also likely pick up as distressed firms enter workouts and restructuring. Finally, mid and large sized Korean firms will continue to go abroad in order to diversify and find new sources of revenue.

Opportunities will likely exist in the financial services sector. The Korean government has pledged to implement


South and Southeast Asia India

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Vietnam


IndiaDown, but not out

According to the World Investment Report 2008 released by United Nations Conference on Trade and Development (“UNCTAD”) in September, India has retained its position as the second most preferred global location for foreign investment in 2008. Foreign Direct Investment (“FDI”), at US$17.2 billion, went up by a staggering 137% in comparison to the same period the previous year. A large part of this was directed at greenfield projects in the telecommunications, construction, and software segments. The government expects the year to close with FDI flows in excess of US$35 billion.

Deal Activity

2008 witnessed a significant fall in deal activity, both in value and volume terms, as the impact of economic slowdown spread across emerging markets. While the total number of transactions fell slightly from 1,327 in 2007 to 1,254 in 2008, aggregate deal value declined by over 20% from US$61 billion in 2007 to US$47.4 billion in 2008. The average deal size also fell from approximately US$46 million in 2007 to US$38 million in 2008. This was attributed to fewer large outbound deals in 2008 vis-à-vis 2007. In addition, extremely high price expectations for the most part of 2008, combined with a lack of liquidity, made private equity and outbound transactions tougher in 2008. Pharmaceuticals, financial services, telecommunications and the IT/ITES sectors were the most significant contributors to deal activity during the year.

Private equity transactions accounted for around US$11 billion of deal activity in 2008. Although a weak secondary market resulted in some correction of valuations, this was largely restricted to the public markets. In the private markets, promoter valuation expectations remained relatively unchanged, and this resulted in considerably fewer PE deals. As a result, private equity investors appear to have turned their


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Bharti Gupta RamolaTransactions LeaderIndia

Current EnvironmentThe Indian economy grew by a little under 8% p.a. during the first half of fiscal 2008/09 (April to September 2008), as compared to the 9.3% p.a. growth registered for the same period the prior year. This marked the first time in 10 quarters that the Indian economy grew at less than 8% p.a. The key contributors to this drop were the agriculture sector, which registered a growth of 2.9% p.a. compared to 3.7% p.a. in the previous fiscal year, and manufacturing which grew by 5.3% p.a., significantly lower than the 9.7% p.a. in the first half of the previous fiscal year. The services sector continued to be the main driver of growth recording 9.8% p.a. growth; albeit lower than the 10.7% p.a. seen during the same period in the prior year. Growth in the services sector is attributed to the double digit growth of 11% p.a. in the trade, hotels, transport, and communications segments. The construction sector also witnessed significant growth at 10.5% p.a. during this period versus 9.7% p.a. during same period last year.

Inflation peaked at 12% p.a. during the period, primarily attributed to the rising crude oil prices, but had declined to approximately 6.4% p.a. by the end of December, with a further correction expected in January. The fall in crude oil prices, together with the measures taken by the government (primarily raising interest rates and restricting export of commodities) have helped to lower inflation levels.

The Indian stock markets have been severely impacted by the global credit crisis, and saw significant selling pressure by foreign funds, causing some panic-selling by local investors as well. The Bombay Stock Exchange, which touched a high of 21,700 points in January 2008, plummeted to below 8,500 in November. It has since made a partial recovery, but continues to stay range bound. With foreign institutional investors being net sellers in the Indian equity markets, and the rupee depreciating by over 25% against the US Dollar during 2008, India’s foreign exchange reserves fell from approximately US$300 billion to US$254 billion by end December 2008.


attention to PIPE deals, where valuations have corrected, the investee managements are known to them, and exit routes are visible. ChrysCapital acquired around a 5% stake in HCL Technologies for approximately US$220 million, and slightly more than 1% in Infosys for about US$200 million during 2008, through secondary market transactions. Some of the notable PE transactions during 2008 were:

Providence Equity Partners’ investment of • US$640 million in Aditya Birla Telecom Ltd, a wireless telecommunication services provider, for a 20% stake.

Farallon Capital’s investment of around US$246 million • in Indiabulls Power Services Ltd.

Government of Singapore Investment Corp’s • (“GIC”) investment of US$209 million in apparel firm, Reid & Taylor India.

Goldman Sachs’ investment of US$172.5 million in • Mahindra & Mahindra Ltd.

International Finance Corporation’s investment of • US$120 million in Polycab Wires, which is one of India’s largest cable manufacturing companies.

TPG Capital’s investment of US$120 million in Shriram • Retail Holdings Pvt. Ltd.

Outbound investments accounted for US$12.9 billion of M&A activity in 2008, spread over 227 deals, representing a fall of over 10% in value terms. Significant outbound deals, announced during the year include:

Tata Motors Limited acquiring Jaguar and Land Rover • of Ford Motor Company for US$2.3 billion.

Great Offshore Limited acquiring Seadragon Offshore • Limited for US$1.4 billion.

GMR Infrastructure Limited acquiring a 50% stake in • InterGen NV for US$1.1 billion.

Tata Chemicals Limited acquiring General Chemical • Industrial Products Inc for approximately US$1.1 billion.

Suzlon Energy Limited acquiring a 30% stake in • Repower Systems AG for US$546 million.

RFCL Limited, a subsidiary of ICICI Ventures, • acquiring Mallinckrodt Baker for US$340 million.

Siva Ventures Limited acquiring JB Ugland Shipping • A/S for US$300 million.

Jubilant Organosys Limited acquiring Draxis Health Inc • for US$255 million.

As both the equity and debt financing options dried up, outbound acquisitions were adversely hit, despite much lower valuations in the Western markets. Volatility in the foreign exchange rate, the depreciating rupee, rising inflation and its impact on domestic demand and exports has created an environment of conservatism, with Indian corporates following a ‘wait and watch’ approach at the moment. While companies are open to opportunistic purchases, the outlook for outbound M&A will depend on the impact that the financial crisis has on the rest of the economy.

Domestic deal activity remained more or less stagnant in 2008 compared to previous years. 2008 saw the value of domestic deals at US$13.9 billion, spread over 706 deals compared to US$14.5 billion spread over 721 deals in 2007. Key domestic deals during 2008 included:

Tata Consultancy Services’ acquisition of Citigroup • Global Services Ltd, for an estimated consideration of US$505 million.

WNS (Holdings) Ltd’s acquisition of Aviva Global • Services Pvt Ltd, for a consideration of approximately US$228 million.

IDFC’s acquisition of Standard Chartered Mutual Fund, • a financial services provider, for a consideration of US$205 million.

State Bank of India’s acquisition of a 91% interest in • Global Trade Finance Pvt. Ltd., for a consideration of around US$132 million.

Inbound transactions also fell. The total value of overall inbound deals announced during 2008 was US$20.5 billion; a fall of over 35% versus 2007. Similarly, total inbound deals in volume terms declined by 14% from 2007 to 2008. Some key strategic inbound deals announced during 2008 were:

Daiichi Sankyo’s acquisition of a 63.2% stake in • Ranbaxy Laboratories, for a consideration of approximately US$5.1 billion.

NTT DoCoMo Inc.’s acquisition of a 26% stake in • Tata Teleservices for a consideration of approximately US$2.6 billion.

Telenor ASA’s proposal to acquire a 60% stake in • Unitech Ltd’s telecoms arm for around US$1.2 billion.

CRH Plc’s acquisition of a 50% stake in My Home • Industries Ltd, for a consideration of US$452 million.

Lafarge SA announced the acquisition of the ready mix • concrete business of Larsen and Toubro (L&T) for approximately US$350 million.


OutlookThere is definite slowdown in economic activity which is expected to continue into the first half of 2009. The Reserve Bank of India (“RBI”) has forecast GDP growth for the current fiscal year ending March at 7.5% to 8.0%; some analysts place this lower. The government has been working on the twin tasks of controlling inflation (in which it has met with fair amount of success) and also ensuring a step up in demand, to boost growth in the economy. As a result, it has recently announced measures to provide growth stimulus to the economy, and has also attempted to ease financing options for Indian corporates. In addition, RBI has eased a number of regulations, which include reducing lending rates, advancing more credit to productive sectors, special treatment for commercial real estate exposure, and encouraging banks to consider applications for the buyback of foreign currency convertible bonds.

While outbound M&A is likely to be challenging in the first half of 2009, private equity investments are expected to pick up from the second quarter, though deal activity may actually be more visible in the second half of 2009. PE investors continue to wait for promoter expectations to moderate. Sectors expected to see particular activity this year include education, healthcare, and infrastructure. Domestic M&A activity is also expected to pick up, as businesses try to consolidate operations, and exit operations which are not adequately profitable. Inbound transactions will possibly comprise a very significant component of the M&A activity for the year, as overseas investors continue to be excited about the large domestic market, and the cost arbitrage opportunities available in a number of sectors, in particular IT and pharmaceutical R&D. This is likely to be aided by “realistic” valuations in the Indian market.


The government has also introduced regulations restricting speculative conversion of the currency. Purchases of foreign currency have been limited to US$100,000 per customer per month, unless a substantive underlying transaction can be proved. To help stimulate trading on the stock market, the government is encouraging state-owned companies to buy back shares.

Deal Activity

Despite the slowing economy, deal activity has remained relatively buoyant, although the average deal size has declined substantially. During the second half of 2008, there were 161 deals announced with a total estimated value of US$4.9 billion, compared to 100 deals announced with a value of US$12.3 billion in the first half, and 73 deals with a value of US$4.1 billion in the second half of 2007.

Financial Services

In the first half of the year, Malayan Banking Bhd (“Maybank”) announced that it would acquire a 55.7% stake in Bank Internasional Indonesia (“BII”), one of the largest banks in Indonesia. Later in the year, Maybank agreed to expand its shareholding by 16.2% for US$190.9 million.

In December, Maybank put in a tender offer to purchase minority shareholders’ shares. As a result, Maybank now effectively holds approximately 97% of the equity interest in BII. Following the acquisition and the completion of the tender offer process, the new shareholders plan further corporate action by studying a possible merger with the subsidiary company in Indonesia, Maybank Indocorp.

IndonesiaIndonesian M&A activity is expected to continue to slow down amid the global financial crisis and the upcoming parliamentary and presidential elections

Current EnvironmentThe global economic slowdown affecting developed countries started to impact the Indonesian economy in the second half of 2008. Indonesia’s real GDP grew by 6.1% year on year in the third quarter, the slowest pace of expansion since the first quarter of 2007.

Global sentiment has made foreign investors, who provided much of the liquidity for Indonesia’s investment boom in 2007, risk averse. The outbreak of the global crisis has prompted investors to move their portfolios out of Indonesia, setting off a wave of capital outflows. This behavior has triggered a weakening in the Rupiah and a collapse in the Indonesian stock market.

Starting in October 2008, the Indonesian Rupiah exchange rate underwent significant depreciation. The Rupiah depreciated by approximately 20% from Rp9,272/US$1 at the end of June 2008 to Rp10,950/US$1 in December.

The Indonesian stock exchange index also significantly weakened during the second half of 2008. The stock exchange index decreased by approximately 40%, from 2,300 in June to approximately 1,300 in December. The exchange was even closed for a few days in October to avert panic selling by investors.

Several measures have been taken by the government of Indonesia to influence the Rupiah exchange rate, the stock market index and the economy as a whole.

Effective October 2008, the government increased the maximum deposit amount guaranteed by the Deposit Insurance Corporation from Rp100 million to Rp2 billion for every bank customer. By increasing the guaranteed limit, the government expects that it will assuage depositor worries about bank failures, thus reducing capital flight and negative pressure on the exchange rate.

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Mirza DiranTransactions LeaderIndonesia


Malaysia’s Commerce International Merchant Bankers Sdn Bhd (“CIMB”) completed the merger of its subsidiary CIMG Niaga Bank with Lippo Bank after acquiring 51% of the Lippo Bank’s stake from Santubang Investments BV. CIMB Group now holds a controlling share ownership of 77.8% of Bank CIMB Niaga. This was the first banking merger under the government’s single presence policy. The policy prohibits shareholders from having controlling stakes in more than one bank. The controlling shareholder must either divest their stakes, merge the banks into a single entity, or establish a bank-holding company.

CIMB Niaga Bank is now the nation’s sixth largest bank by assets. The merger results in a bank with Rp100 trillion (US$1 billion) of assets, serving customers through 650 branches, run by almost 11,000 employees in approximately 120 Indonesian cities. After the merger, Lippo Bank shares were delisted from the Indonesian Stock Exchange.

United Overseas Bank (“UOB”) Ltd of Singapore completed a tender offer for the shares of PT UOB Buana, buying 37.9% of Buana’s shares from the public for approximately US$346 million. This took its ownership of Buana to 99%, and it will now propose delisting Buana from the Indonesian Stock Exchange.

Woori Investment & Securities Co. (“Woori”), the brokerage unit of South Korea’s top financial services group bought a controlling (60%) stake in an Indonesian securities firm, PT Clemont Securities Indonesia. The acquired company will be renamed PT Woori Korindo Securities Indonesia. The acquisition is a result of Woori’s strategy to expand into investment banking and securities operations in Indonesia.

Energy and Mining

Kalimantan Gold Corporation Ltd (“Kalimantan Gold”) completed the acquisition of a 25% interest in Kalimantan Surya Kencana Contract of Work (“KSK COW”). Kalimantan Gold already owned the remaining 75% interest through its wholly owned subsidiary, Indokal Limited. KSK COW holds a mining licence covering a total area of 941 square km, which comprises a total of 38 mineral prospects located in Central Kalimantan, Indonesia. Of the 38, Kalimantan Gold has identified several which it considers as having the potential to host world class copper-gold porphyry deposits.

Consumer and Industrial

The South Korean hypermarket giant Lotte Group announced that it will buy a 55% stake in PT Makro Indonesia (“Makro”) for US$146.8 million. Makro operates 19 wholesale outlets in Java, Bali, Sumatra, Kalimantan, and Sulawesi and serves around 500,000 customers. Lotte Group is the second foreign retailer to enter Indonesia, after PT Carrefour Indonesia. The Government allows foreign companies to control 100% of the shares in hypermarkets or supermarkets with shopping area size of more than 1,200 square meters and in department stores with shopping area size of more than 2,000 square meters.

In another tender offer in Indonesia, PT Bogamulia Nagadi, the majority shareholders of PT Tempo Scan Pacific Tbk, a listed Indonesian pharmaceutical company, are offering to buy 1.04 billion shares, equivalent to a 23.2% stake in the company held by the investing public.

OutlookThe Economist Intelligence Unit (“EIU”) forecasts that annual average GDP growth will decrease to 3.5% in 2009, the economy’s slowest rate of growth since 1999. The EIU also estimates that growth will be barely higher in 2010 (averaging 3.6% that year). The slowdown in 2009-2010 is due to the global crisis which has resulted in decreased external demand. Although imports are likely to slow significantly, exporters are also likely to struggle, resulting in a negligible contribution to growth from net exports

Consumer price inflation is expected to average 6.1% a year during 2009-2013. The rate of price increases will be slow between 2009 and 2013 as upward pressure on wages remains weak (owing to high levels of unemployment) and as global commodity prices stabilise.

M&A activity is predicted to slow down due to the global financial crisis and the upcoming parliamentary and presidential elections in 2009, with most investors expected to take a “wait and see” position due to the uncertain situation.


MalaysiaOverall domestic and inbound deal activity has declined, although outbound activity remains buoyant. Prospects for 2009 are cautiously optimistic

Current Environment After registering a strong rate of growth of 7.1% in the first half of 2008, Malaysia’s economy is expected to have expanded at a slower rate in the second half, in light of the global financial crisis and a slowdown in the manufacturing, export and tourism sectors. Latest figures for third quarter growth were 4.7% p.a., while full year growth is estimated to have been 5.0%.

Despite the global financial crisis, domestic demand is projected to continue to grow, with contributions mainly from the services sector, private and public consumption and investment. The government’s additional US$2.0 billion stimulus package is expected to boost consumer spending and drive economic activity in the construction and property sectors.

Malaysia recorded encouraging foreign direct investments, with approved foreign investments in the first three quarters of 2008 totalling US$11.3 billion, exceeding FDI for the whole of 2007 of US$9.7 billion. The basic metals, electrical and electronics, and chemicals sectors were among the top three investment categories during this period.

Inflation in 2008 reached a peak of 8.4% p.a. in August at the height of the oil and commodity prices boom. It is anticipated to slide to between 3.5% p.a. and 4.5% p.a. in the fourth quarter of the year, with petrol prices reverting back to US$0.51 per litre from a high of US$0.79 per litre.

Malaysia’s stock market performance was weak mirroring the impact of the global financial crisis on international markets. The KLCI index reached a peak of 1,249 points in January but at the height of the crisis fell to a low of 829 points in October 2008. The market has subsequently recovered to trade between 850 to 890 points in December 2008.

The local currency, the Ringgit, also experienced high volatility. It hit a peak of RM3.13/US Dollar in April 2008 before reaching a low of RM3.62 in November due to lower investment confidence in Asian economies and currencies. The Ringgit is currently trading at 3.45 and is expected to

weather the current financial turmoil with Malaysia’s substantial foreign reserves amounting to US$93 billion as at 15 December, which is sufficient to finance 7.8 months of retained imports and 3.4 times current short term debt.

In politics, Malaysia’s Deputy Prime Minster, Datuk Seri Najib Razak is expected to replace Datuk Seri Abdullah Badawi as the next Prime Minister in March 2009. The proposed timeline is intended to pave the way for a smooth transition of leaders.

Deal Activity

Compared to 2007, the value of deals in Malaysia halved in 2008 to US$20.4 billion, largely due to the absence of large deals greater than US$1 billion. Four such mega deals occurred in 2007 accounting for US$13.0 billion in deal value. However, the decline in deal volume in 2008 was less significant with only a 5% drop. The global financial crisis has lowered M&A deal expectations with corporates taking a cautious stance on both the market outlook and cash conservation. In this challenging environment several major deals were aborted, including:

MISC, the national shipping company aborted its • reverse takeover (US$907 million) of oil services firm Ramunia Holdings

IOI Corporation, a leading plantation and oleochemical • producer called off its offer to acquire a prime location office in Kuala Lumpur for US$166 million

Mulpha International terminated its proposed acquisition • of a Chinese coal company, Winfame International, for US$129 million

Despite the significant drop in M&A value in 2008, Malaysian companies are investing more overseas, with the value of outbound deals doubling in 2008 to US$13.7 billion and even surpassing the combined value of domestic and inbound (US$6.7 billion).


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Paran PuvanesanCorporate Finance LeaderMalaysia


Key sectors targeted for outbound M&A include oil and gas, telecommunications, banking, and power led by leading local companies such as Petronas, TM International, Maybank, CIMB and YTL Corporation

Petronas, the national oil and gas company, is acquiring • a LNG project in Australia and an oil and gas exploration project in India for a combined US$3.1 billion

TM International, a division of the national • telecommunication company, Telekom Malaysia, has acquired a 15% stake in India’s Idea Cellular Ltd for US$1.7 billion and an additional 17% stake in Indonesia’s PT Excelcomindo Pratama for US$440 million, raising its stake to 84%

Maybank, Malaysia’s largest bank, is spending a total • of US$3.6 billion to acquire stakes in three banks: Bank Internasional Indonesia, Pakistan’s MCB Bank Ltd, and Vietnam’s An Binh Rural Joint-Stock Commercial Bank

CIMB, the country’s second largest bank, is acquiring • BankThai and stakes in China’s Bank of Yingkou Co Ltd for US$469 million

YTL Corp through its subsidiary YTL Power • International is purchasing Singapore’s second biggest power producer, PowerSeraya Ltd, for US$2.6 billion. YTL Corp also took control of Singapore’s Macquarie Prime REIT and its management company for US$195 million

Domestic M&A was relatively quiet in 2008, with the few major M&A deals mainly involving group restructurings and public to private initiatives to take advantage of low market valuations and the low cost of borrowing. The key deals included:

TuneAir intends to take low cost carrier AirAsia private • for US$1.6 billion

A restructuring of UEM Group involving public to private • deals for both UEM Builders, a construction company, and Cement Industry of Malaysia

MMC Corp to acquire Senai Airport Terminal Services, • an aviation service provider, from a company related to its shareholder, Tan Sri Syed Mokhtar Al-Bukhary for US$582 million

Property deals continued to remain significant with a number of foreign acquirers, although the bulk of them were announced in the first half of the year. Some of the key property deals were:

Kuwait Finance House planning to acquire an • office building in Kuala Lumpur (Menara YNH) for US$281 million

Singapore-based CapitaLand acquired a major retail • centre in Kuala Lumpur (Sungei Wang Plaza) for US$185 million

Abu Dhabi-Kuwait-Malaysia Investment Corp buying • a stake in UBG Bhd, a property holding company, for US$141 million

Besides property, other notable M&A sectors in 2008 included industrial products, healthcare, marine transportation, manufacturing, and building materials.

Outlook As with the rest of the world, the volatile and uncertain financial environment globally will impact Malaysian M&A into the next few years. Economic growth in 2009 is likely to be weaker than 2008, with EIU forecasting growth of 3.1%. Weak equity market conditions should, however, see the continued trend of companies being taken private during 2009.

With difficult external conditions, we expect Government policy to focus on enhancing Malaysia’s economic resilience, and improving the competitiveness of Malaysian industries, via fiscal reforms and stimulus across economic sectors including services, manufacturing, agriculture and utilities. This will present M&A opportunities.

Already, mobile carrier TM International Bhd (TMI) is reviewing all its assets, particularly non-mobile units, and intends to dispose of those that are not viable for the long term.

Meanwhile, with Asia’s longer term growth trend intact, private equity funds like Navis, Actis, and Standard Chartered Private Equity continue to seek investment opportunities in the region. In fact, with lower valuations and favorable exchange rates, cash-rich Malaysian corporates are even seeking deals in Australia and to some extent, Europe.

Despite the global financial turmoil, Malaysia is viewed as not just having attractive valuations but strong and sustainable long-term growth prospects. In particular, we expect continued active interest by Middle Eastern and Japanese funds who are seeking long-term investment prospects in Malaysia. Overall therefore, the outlook for Malaysian M&A appears cautiously optimistic.


Economic growth has remained relatively strong, and transaction volumes have held up despite a decline in overall deal value. The energy sector should continue to provide deal activity in 2009

Philippines

Current EnvironmentGDP growth in the Philippines is expected to have been positive at 4.4% for 2008. Downward revisions from projections as high as 6.2%, are a direct result of the difficult external environment in the second half of the year.

Philippine exports have been hit by the global downturn. Electronic goods exports specifically, which comprise approximately 60% of export earnings, shrank 18.9% in October. Some segments of the service sector of the economy have also been affected. Contraction took place within the transportation, financial services, and trade services sectors during the third quarter of 2008. The slowdown in these sectors was mitigated by increased construction spending. This took the form of increases in spending for government priority infrastructure projects and private residential construction.

Inflation levels have eased since reaching a peak of 12.5% p.a. in August. Decreasing food and oil prices have contributed to inflation declining to 9.9% p.a. in November and further to 8% p.a. in December. Average annual inflation for 2008 is estimated to have been 9.3% compared to 2.8% in 2007.

Foreign Direct Investment (FDI) flows contracted for the first nine months of 2008. Despite strong inflows in the final month of September, January to September net flow totals amounted to $1.4 billion, 45% less than the $2.5 billion net inflows recorded last year.

The government’s planned response to the global downturn includes increased infrastructure spending, financed by government borrowing. The budget deficit goal for 2009 has been increased to 1.2% of GDP, as opposed to the original ceiling of 0.5%.

A bright spot of the local service economy remains the Business Process Outsourcing (“BPO”) industry.

A November survey conducted by the Business Processing Association of the Philippines (BPAP) resulted in two-thirds of respondents reporting at least a neutral if not positive effect of the US financial crisis on their operations. The industry continues to develop more BPO sites, attract more foreign investors, and hire more workers.

Foreign exchange remittances from overseas Filipino workers continue to buoy the local economy. The Central Bank reported robust growth amid worsening global economic conditions. Inflows for the first ten months of 2008 grew 15.5% from the same period last year to US$13.71 billion.

The Philippine Stock Exchange (PSE) tracked global exchanges and closed at 1,873 on 31 December 2008, a decrease of 48% from the 31st December 2007 close of 3,622. The Philippine Peso/US Dollar foreign exchange rate was at Php47.49/US$ on 31 December 2008, a depreciation of 15% from last year’s end close of Php41.28/US$.

Listing activity dried up for 2008 as companies continued to hold out for better prospects. All listing activity took place in the first half of the year as San Miguel Brewery, Inc. and Pepsi-Cola Products Philippines, Inc. listed on the exchange, while Sultan Mining and Energy Development Corporation and Viva Communications, Inc. applied to list.

Deal Activity

Total transaction value shrank to just US$5.6 billion for the whole of 2008, as opposed to US$11.5 billion for the whole of 2007. The total number of deals fell slightly from 188 for the whole of 2007 to 176 for the whole of 2008. Domestic and outbound deal activities led the decline, but were offset by a slight increase in inbound deal activity.

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Mary Jade T. Roxas-DivinagraciaTransactions LeaderPhilippines


Government Divestment of Power Assets

The national government has been exiting the power sector via its policy of privatisation of generation assets and through divestment of its ownership in private distribution companies. Concurrent with the government’s divestment efforts, large private holding companies are seeking to diversify their business by entering into this sector.

The Aboitiz Group has been involved in the largest deals for acquiring government power assets, increasing its footprint into power generation while moving away from its transportation services business.

Aboitiz Power Corporation acquired the Tiwi-Makban • Geothermal Power Plants from the Philippine state-owned Power Sector Assets & Liabilities Management Corporation as a result of the latter’s mandate to privatise government power assets. These two geothermal plants had a combined value of Php19.7 billion (US$447 million).

SN Aboitiz Power acquired the Ambuklao-Binga • Hydropower Plant for Php14.8 billion (US$235 million).

KGLI-NM Holdings agreed to acquire a 49% stake in • Aboitiz Transport System Corp for Php1.8 billion (US$47.3 million).

In 2007, San Miguel Corporation divested large portions • of its overseas drinks and beverage business in order to generate funds to enter into the power sector and other utilities.

San Miguel Corporation agreed to acquire a 27% • stake in the Manila Electric Company (Meralco), an electricity utility company, from Philippine state-owned Government Service Insurance System (GSIS), for Php27.1 billion (US$552.8 million).

Ashmore Investment Management Ltd & Petron Corporation

In March, Ashmore Global Special Situations Fund 4 Ltd Partnership, a unit of Ashmore Investment Management Ltd, acquired a 40% stake in Petron Corp (PC), a petroleum products refiner, wholesaler and retailer, from Aramco Overseas Co BV for Php22.8 billion (US$550 million).

In October Sea Refinery Holdings BV, a unit of Ashmore Investment Management Ltd acquired a further 40% stake in Petron Corporation from Philippine state-owned Philippine National Oil Co for Php25.7 billion (US$544.2 million). In a separate transaction in June, Sea Refinery had previously acquired a 10.6% stake in Petron for Php6.5 billion (US$146.6 million).

In December, San Miguel Corporation agreed to acquire Sea Refinery’s entire 50.6% interest in Petron Corporation for Php32.5 billion pesos (US$669.6 million).

Mining

Philex Mining Corp acquired Anglo American Exploration (Philippines) BV, a gold mining company, from Anglo American PLC, for Php2.5 billion (US$55 million), while First Pacific Co Ltd agreed to acquire a 20.1% stake in Philex Mining for Php6.2 billion (US$124.1 million).

Other Significant Deals

Metro Pacific Investments Corp acquired a 98.1% interest in First Philippine Infrastructure Inc, a toll road services provider, from First Philippine Holdings Corp and Benpres Holdings Corp for Php12.3 billion (US$280.6 million).

EHS Acquisition Co LLC, a special purpose acquisition vehicle formed by Ayala Corp, launched a tender offer to acquire eTelecare Global Solutions Ltd, a call center services provider, for Php13.7 billion (US$292.0 million).

EGCO International Ltd acquired a 90% interest in electric utility company GPI Quezon Ltd for Php6.1 billion (US$124.2 million ).

SM Prime Holdings Inc acquired the entire share capital of Mega Make Enterprises Ltd, a shopping malls owner and operator, from Oriental Land Development Ltd, in exchange for the issuance of 372.5 million new ordinary shares valued at HK$661.9 million (US$85.1 million).


OutlookIPO activity will be dependent on the state of confidence in the local equities market, as many firms are uncertain as to whether the market has stabilised. Most firms who listed in 2007 have stocks trading below the original listing price. No firms have announced IPOs to take place in 2009. To stimulate activity in the equities market, the Philippine Stock Exchange is considering a proposal to give corporations who list the ability to benefit from income tax rates below current levels. Such a proposal is at the preliminary stage however, and would have to attract support from legislators and the government; this appears unlikely at this stage.

Privatisation of power generation assets by the state-owned Power Sector Assets & Liabilities Management Corporation will continue through early 2009. Due-diligence and pre bid conference stages have begun for the following power assets:

700 MW Contracted Capacity of Pagbilao Coal Fired • Thermal Power Plant

1000 MW Contracted Capacity of Sual Coal Fired • Thermal Power Plant

Structures, Plant Equipment, Auxiliaries and • Accessories of the 225 MW Bataan Thermal Power Plant

Structures, Plant Equipment, Auxiliaries and • Accessories of the 54 MW Cebu Diesel Power Plant

100 MW Power Barge 118 in Compostela Valley•

100 MW Power Barge 117 in Agusan del Norte•

Deadlines for final bid submissions fall in January and February 2009.

Activity in the alternative energy sector is expected to ramp up in 2009 as a result of the passage of the Renewable Energy Act. The Senate ratified the act in October and it was signed into law in December.

The legislation provides incentives for developers of alternative energy. This includes a seven year income tax holiday for renewable energy developers, and a 10% corporate income tax, as opposed to the standard 30% rate, once the income tax holiday expires. Further tax incentives granted are exemptions from carbon credits generated from renewable energy projects, a 1.5% realty tax cap on energy infrastructure, and import duty exemption for equipment and material used for renewable energy purposes. These measures are expected to generate significant investor interest in the sector, although this may be offset to some extent by recent declines in energy prices.


SingaporeSingapore’s exposure to the global economy has led to declines in both economic growth and M&A. Lower valuations and distressed companies could provide M&A opportunities in 2009

Current EnvironmentThe Singapore economy grew by 1.2% in 2008, down from 7.7% in 2007. Its heavy reliance on the export markets of the US and Europe meant that it was one of the first Asian economies to slide into a recession in the third quarter of 2008, following two consecutive quarters of economic contraction.

The manufacturing sector, which accounts for about 25% of Singapore’s economy, experienced the largest decline with a 4.1% contraction. The service sector contracted in the second half of 2008, as financial services, transport and tourism experienced a slump. In line with the contraction of the manufacturing sector, non-oil exports plunged, particularly to the key markets of the US, Europe and China.

The CPI reached a historic high of 7.5% in the second quarter, as oil, rice and commodity prices skyrocketed. However by the third quarter, inflation was less of a concern as the economy slowed and global oil and commodity prices retreated. The CPI is expected to be around 6% – 7% for 2008, which is still high compared to 2007, but is expected to fall to 1% – 2% in 2009.

The appreciation of the Singapore dollar against the US dollar in the first half of 2008 was reversed in July, when the US dollar started to rise as a result of repatriation of funds back to US. The Singapore dollar reached its lowest level of S$1.53 against the US dollar in November. Since then, the Singapore dollar recovered slightly to an average level of S$1.48 against the US dollar in December. Given the easing of inflationary pressures, the Monetary Authority of Singapore (“MAS”) shifted its foreign exchange rate policy from a modest and gradual appreciation of the Singapore dollar against a trade-weighted basket of foreign currencies to a zero percent appreciation, in order to maintain export competitiveness.

As stock markets around the world crashed in the aftermath of Lehman’s collapse, the benchmark STI fell 1,600 points in October to its lowest level in more than five years. It has since improved slightly to 1,762 points by December.

Deal Activity

The M&A market still performed strongly in the first quarter of 2008, when the total deal value was 21% higher than that in the same period of 2007. M&A activity slowed down after the first quarter. The US credit crunch and the expectation of a global recession took their toll on M&A. Buyout and private deals in particular, virtually ceased as a result of the credit freeze and volatile stock market post Lehman’s collapse. Total deal value in the last three quarters of 2008 fell by 57% from the same period in 2007.

Total value of deals in 2008 was US$44.9 billion, representing a 35% drop from 2007. While the amount invested in Singapore by foreign investors has increased, there was a significant fall in the amount invested by Singapore investors in domestic and foreign companies. Deals announced in 2008 were fewer, and, on average, smaller than in 2007. The number of deals shrank from 826 in 2007 to 674 in 2008 and the average deal size decreased from US$83 million in 2007 to US$67 million in 2008. In 2008, the top 10 deals contributed to just over half of the total deal value, most notable of which was the purchase of a 4% stake in Citigroup for US$6.9 billion by the Government of Singapore Investment Corporation (GIC) and Temasek Holdings’ sale of its three power generating companies in Singapore.

Several big deals were also withdrawn this year, including F&N cancelling its sale of Times Publishing, its print and publishing business, SNF Corp Ltd’s US$366 million offer

Chao Choon OngTransactions LeaderSingapore & Asia Pacific

Singapore Deal Activity


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for a reverse takeover of Healthway Medical Services, Albedo Ltd’s offer of US$152 million for HealthTrends Medical Investment, a Singapore-based owner of medical clinics, as well as Auston International Group’s proposed acquisition of Singapore-based M2b World Asia Pacific for US$107 million.

Inbound

Total inbound deal value of US$18.1 billion represented an increase of 71% from 2007, although this was driven by Temasek Holdings’ sale of its three power generating companies:

Tuas Power Ltd, the first to be auctioned, was acquired • by SinoSing Power Ltd, a wholly-owned unit of Chinese state-owned Huaneng Group for US$3.1 billion

Senoko Power Ltd, Singapore’s biggest power • generating company, was sold to Lion Power Holdings Ltd, a French/Japanese consortium led by Japanese trading house Marubeni for US$2.8 billion.

YHL Power International Bhd paid US$2.4 billion for • PowerSeraya Ltd, after the auction was cancelled due to poor market conditions

Separately, Mapletree Investments entered into a joint venture with Arcapita Bank to form a private real estate company which would hold the US$1.3 billion portfolio of high-rise, ready-built industrial properties acquired from JTC Corporation, Singapore’s largest developer of industrial properties.

Outbound

The value of outbound investments was US$17.2 billion in 2008, down by 63% from a year ago. This was largely driven by GIC whose total deal value amounted to US$11.5 billion, or 67% of the total outbound investments. Some of GIC’s major transactions were:

The acquisition of preferred shares convertible into an • estimated 4% stake in Citigroup for US$6.9 billion

A planned acquisition of a 14% stake in infrastructure • holding company, Sintonia, for US$1.5 billion

The acquisition of ProLogis’ property fund interests • in Japan and as well as its China operations for US$1.3 billion

Other notable transactions include Showy International Ltd’s US$485 million reverse takeover of Fortune Court Holdings Ltd, owner of a real estate development company in Chongqing, China, and UOB’s purchase of a further stake in Bank UOB Buana for US$450 million.

Domestic

The domestic M&A scene generated a total deal value of US$9.6 billion, which is 21% lower than in 2007. The property sector contributed to the bulk of the total deal value, with significant deals including:

Tecity Group’s acquisition of a further 67% interest in • Straits Trading, a Singapore-based tin metal and tin-based products manufacturer with hotel and property operations, for a total of US$1.0 billion, thereby raising its interest to 89%

CapitaCommercial Trust exercised its option to acquire • the 1 George Street Building, an office building owner and operator, from George Street Pte Ltd, a wholly-owned unit of CapitaLand Ltd for US$845 million

CapitaLand increased its stake in Ascott Group Ltd, • the world’s largest serviced apartment operator outside of the US, from 67% to 98% for US$623 million. CapitaLand took Ascott Group private after the transaction was completed

Singapore Airport Terminal Services (SATS) announced • the acquisition of Singapore Food Industries (SFI), valuing the company at US$323 million

Private Equity

The value of private equity-linked deals in 2008 amounted to US$1.2 billion, a significant fall from the total investment of US$5.3 billion in 2007. As credit became increasingly difficult to obtain to finance buyout transactions, and a valuation gap developed as the global economic outlook deteriorated, private equity deals slowed and came to a standstill as credit froze and stock markets nosedived in the fourth quarter. The exit environment also deteriorated significantly as Singapore witnessed a dearth of private equity-backed IPOs.

Some of the notable PE deals in 2008 included:

Kohlberg Kravis Roberts’ (“KKR”) general offer for • Unisteel Technology, a Singapore-listed engineering solutions company, for US$575 million.


MBK Partners’ offer of US$253 million to purchase • Asiapharm Group Ltd, a Singapore-listed pharmaceutical group

98 Holdings, whose major shareholders include General • Enterprise Management Services Limited (“GEMS”) and Standard Chartered Private Equity, made an offer to increase its stake in NatSteel Ltd from 51% to 81% for US$119 million

OutlookThe IMF has forecast that advanced economies will register negative growth in 2009. As Singapore’s economy is closely intertwined with the global economy, a prolonged global recession is expected to delay the recovery of the economy. The Ministry of Trade and Industry projects that Singapore’s economy will grow between -5 and -2% in 2009.

The Singapore government took decisive steps to cushion the impact of the recession by dipping into its sizable reserves to the tune of S$4.9 billion in its 2009 budget, designed largely to preserve jobs and keep businesses afloat. At 8% of GDP, Singapore’s package is significant compared to other countries such as the US, Germany and Taiwan which have announced fiscal packages or stimulus plans. The budget includes a Resilience Package of S$20.5 billion, of which S$4.5 billion finances the Jobs Credit Scheme, which gives employers a 12% cash grant on the first S$2,500 of wages for employees, thus reducing business costs. Another notable measure is the Special Risk-Sharing Initiative through which the government will set aside S$5.8 billion to stimulate bank lending to businesses. Other measures include easing business cash flow by reducing the tax burden, supporting families and communities and expanding infrastructure spending, particularly on healthcare and education.

In addition, this year’s Singapore budget sees further liberalisation of incentives for both foreign and approved Singapore-resident funds, and more favourable rules for use of tax losses on acquisition:

Funds constituted as limited partnerships (LPs) will be • entitled to tax exemption under Singapore’s tax incentive regime without the need to restructure their operations into a ‘corporate’ or a ‘trust’. This should encourage relocation of senior decision-making staff to Singapore.

Approved Singapore-resident funds have been given • partial relief on the GST incurred on ‘prescribed expenses’. This should encourage funds to use Singapore platforms for their investments, and avail themselves to Singapore’s wide treaty network.

Certain restrictions will be lifted to allow Singapore • companies to invest in funds managed by Singapore based fund managers without being penalised. This widens the pool of money that Singapore based fund managers can tap on.

A new framework will be released to provide greater • clarity and minimise tax consequences of amalgamating companies with tax losses. This would have positive valuation impact on some distressed assets.

The Singapore M&A sector is still expected to be slow in the first half of 2009 as the stock markets and bank credit will take some months to stabilise. From the second quarter onwards, we expect an increasing number of stressed and distressed companies putting up assets for sale. We also expect Temasek, GIC and cash-rich Singapore corporates to make overseas forays in the second half, as they did in past regional recessions.


ThailandCivil unrest and uncertainty dampened M&A activity in 2008; there is cautious optimism for 2009

Current Environment 2008 was an uneasy year for the Thai economy. Despite a hopeful beginning, with an elected government replacing a military-installed interim administration in January, political divisions once again emerged to weaken an economy already battered by a worsening global recession.

The second half of 2008 saw continued street protests disrupting the ability to govern. In late August, protestors began a weeks-long siege at the Government House and, ultimately, the new Bangkok international airport, leaving hundreds of thousands of travellers stranded for days, and bringing the economy, heavily dependent on tourism, to a near standstill. Protestors retreated in early December, when the Constitutional Court ordered the governing party banned for election violations during the December 2007 elections. Estimates put the monetary impact of the airport seizure at approximately THB150 billion (US$4.3 billion) – or 1.5% of GDP. Repercussions for the tourism industry as a whole are likely to be felt far into 2009, with hotel staff cutbacks being implemented to offset plunging occupancy rates and weakening room rentals during what is normally peak season.

Ebbing foreign demand saw Thailand’s exports recording lower than expected growth of 5.2% year-on-year in October, the lowest in more than six years. While some estimates put overall export growth for 2008 at 19%,

attributed mainly to ASEAN and new markets, 2009 is likely to see exports fall as the global economy slows sharply.

The Stock Exchange of Thailand (SET) saw a steady decline in 2008, losing around 50% of its value during the course of the year. Although confidence was at a high at the beginning of the year, with the SET standing at just under 800 points, renewed political unrest, compounded by the global financial crisis, became a drag on the index, which plunged to below 400 points in November. Although the market recovered slightly following the formation of a new coalition government in mid-December, it is unlikely that any significant improvements will be seen until the second half of 2009. Meanwhile, the risk of further political protests is still present.

Foreign direct investment was sluggish in 2008. While Board of Investment (BOI) applications between January and November increased by 2.2% compared to 2007, in value terms they decreased by 38% to THB290 billion (US$8.3 billion). Applications were concentrated in the industrial metals and transport equipment sectors, and mostly originated from Japan, Europe and ASEAN.

After appreciating strongly in 2007 and the first few months of 2008, the Thai baht began depreciating heavily against the US dollar later in 2008 – the result of a growing trade deficit and the outflow of foreign capital. However, the third week of December saw the Baht rise to the highest level since October, reflecting the optimism surrounding the new administration.

Core inflation surpassed the central bank’s target rate in June, prompting the central bank to raise its policy interest rate in July and August by 25 basis points each time, to 3.75%. Headline inflation moderated to 2.2% p.a. in November, the lowest level in 14 months, in large part due to falling oil and raw material prices. Unemployment in 2008 remained steady at around 1.4%; however further layoffs are expected as the ramifications of the world recession and domestic political strife make themselves felt. Positively, however, net NPLs in the third quarter of 2008 stood at approximately 3.3%, considerably lower than 4.4% in the third quarter of 2007, although this may not be sustainable as the global economic recession bites.

Gary MurphyDeals LeaderSEAPEN* Region

* The PwC South East Asia Peninsula Region (SEAPEN) comprises Malaysia, Thailand and the Indochina countries of Cambodia, Laos and Vietnam.


Deal Activity

M&A activity in Thailand for 2008 declined in terms of deal value while the number of deals increased. The total number of deals was reported as 316 in 2008, up from 289 deals in 2007; the value of deals dropped to US$4.8 billion as opposed to US$13.2 billion in 2007. However, total deal value for 2007 was surprisingly high, and was achieved through a few large domestic transactions and strong activity in the financial services sector. For 2008, deals in the financial services sector continued to be strong with another solid contribution from the energy sector. Telecommunications companies appear to have stalled investment activities this year, stemming from unclear policies towards 3G licensing, looking instead to explore opportunities for partnerships or alliances, possibly resulting in future deals.

Financial Services

The Financial Institutions Development Fund (FIDF) • entered into a Share Purchase Agreement with CIMB Group Sdn Bhd (“CIMB”), the 2nd largest Malaysian bank, to sell its 42.1% stake in Bank Thai (“BT”), the 9th largest Thai bank, for an estimated THB5.9 billion (US$185 million). CIMB has also launched a tender offer for the remaining 57.8% stake of BT shares outstanding with the offer to expire on Jan 6. The transaction was subject to regulatory approvals.

Thailand Deal Activity


No.

of d

eals

US

$ m

illio

n

1Q2007

3Q2007

1Q2008

3Q2008

2Q2007

4Q2007

2Q2008

4Q2008

120

100

80

60

40

20

-

7,000

2,000

3,000

8,000

1,000

-

4,000

6,000

5,000


Bangkok Commercial Asset Management Co., Ltd • (“BC”) and Sukhumvit Asset Management Co., Ltd (“SA”) acquired NPLs for an estimated THB3.9 billion (US$122.4 million) from BT’s Sathorn Asset Management Co., Ltd., an asset management service provider. The distressed asset sale was a condition of the CIMB investment in BT. BC and SA are 100% and 99.9% owned, respectively, by the FIDF.

Siam Commercial Bank Plc sold a tranche of NPLs to • Alpha Capital Asset Management and Morgan Stanley for an estimated THB8.0 billion (US$253.7 million) as an attempt to reduce its NPL portfolio to under 5% this year.

Amalgamation between Phatra Insurance Plc and • Muang Thai Insurance Co. Ltd: The two non-life insurance companies partially held by Lamsam family have merged to compete in the insurance market. The merger has made the new company, Muang Thai Insurance Plc, the 7th largest company in the market, holding a 3% market share with paid-up capital of THB590 million. Its major shareholders include Muangthai Fortis Holding Co., Ltd. with a 25.2% stake, the Lamsam family with 15.4%. and Fortis Insurance International N.V. with 10.0% of the company’s shares.

Energy and Mining

PTT Chemical PCL acquired a 50% interest in Cognis • Oleochemicals (M) Sdn Bhd, a 50:50 joint venture between Cognis GmbH (“CG”) and Golden Hope Plantations Bhd (“GH”), from CG, for 493.2 million Malaysian ringgits (US$152.1 million). Originally, GH was a wholly-owned unit of Synergy Drive Sdn Bhd.

BP Overseas Development Co Ltd (“BP”), a wholly-• owned unit of Banpu PCL, acquired the remaining 78.4% interest which it did not already own, in Asian American Coal Inc (“ACCI”), a coal mining company, for a consideration of approximately US$420 million in cash. BP previously owned 21.6% of AACI, and has been a major shareholder in the company since 2003. The selling shareholders are reportedly mainly private equity funds and US investors.


BC Ltd (“BC”), a wholly-owned unit of Asia Thai Mining • Co Ltd, acquired all the outstanding common stock of Pan African Mining Corp (“PA,”) a mineral mining company, via a tender offer, for a total value of US$132.4 million. The offer was conditioned upon at least 66.6% of PA’s shares being tendered. The transaction was effected via a scheme of arrangement, and was subject to regulatory and shareholder approvals, but has now been completed.

Other Sectors

Always Rich Holding Ltd. has acquired a 78.5% stake • in Advance Agro Plc (“AA”), a paper mills owner and operator. The transaction size is estimated at over THB16.0 billion (US$ 550 million). AA was subsequently de-listed from the SET.

Cementhai Ceramics Co. Ltd. (“CC”), a majority-owned • unit of Siam Cement PCL, has acquired 45.9% of Thai-German Ceramic Industry Plc. (“TG”). CC subsequently launched a tender offer to acquire the remaining interest in TG, a ceramic wall and tiles manufacturer and wholesaler.

Outlook There is a sense of hope that the recent appointment (16 December 2008) of a new coalition government will help to calm the political turmoil that has plagued the economy for the past three years. The new administration has recently announced a new cabinet line-up, and the economic team has broadly met with approval from the commercial sector.

Many express cautious optimism that the new prime minister will be able to implement the policies necessary to bring the economy back on track. However, the road ahead will not be easy. The economy is slowing, and new stimulus packages and measures will need to be implemented without delay in order to avoid a further slide into recession. In addition, the new prime minister will still need to win the support of the rural majority and demonstrate the he is a prime minister for all Thais, in order to detach himself from the controversial protestors – and thus maintain some semblance of political stability. Described by one political analyst as a “goldfish amongst sharks”, the prime minister will need to be prepared for further political wrangling.

By some estimates, growth in 2009 is forecast to average at around 3.1%, down from 4.5% in 2008. While a depressed market may open up M&A opportunities for cash-rich companies looking for strategic bargains, potential investors will still be wary of the fragile political situation.

In the context of M&A, the prime minister’s most urgent task will be to reassure foreign investors that Thailand is, once again, open for business. This means that the global business community will need to believe that the rule of law will be upheld, and that the prime minister will bear full responsibility for it. It is difficult to expect significant increases in activity or deal values until local politics settle. Until then, we continue to expect that deals in Thailand will be dominated by local activity, traditionally at low deal values.


Vietnam2008 deal value was lower than 2007, but economic growth remains robust. Relaxation of foreign ownership regulations will have a positive impact on M&A in 2009

Current Environment Despite the severity of the global financial crisis in the second half, the General Statistics Office (“GSO”) of Vietnam’s initial estimate of economic growth was still a respectable 6.2% p.a.

Inflation peaked in August at 28.3% p.a., before declining to 19.9% p.a. in December. According to the GSO, the average CPI growth for the whole of 2008 was 23.0%. The prime interest rate set by the central bank peaked at 14.0% in the summer before being cut back to 8.5% by the year end.

There was a sharp slowdown in the licensing of new FDI commitments in the last quarter of 2008. According to the year end estimates from the Ministry of Planning and Investment, total annual licensed FDI commitments reached US$64 billion, over three times the level in 2007.

The benchmark stock exchange indicator, the VN-Index, closed at 315.6 on the last trading day of December falling from 918 points at the end of 2007. The rate of listings was slower than originally anticipated, however the longer term policy of further transfer to private ownership remains in place. The listing of Vietnamese companies on overseas stock exchanges also remains a hot topic.

As in many other countries around the world, the government of Vietnam is also working on the details of various stimulus initiatives to mitigate the worst consequences of the global financial crisis, with the government apparently looking to invest some US$6 billion into the economy.

In January 2009, Vietnam concluded two full years of membership in the World Trade Organization. One of the most significant regulatory developments in connection with WTO membership obligations in 2008 was the granting of licences to wholly foreign owned financial institutions.

On 1st January 2009, legislation came into force making a number of service industries significantly more open to participation by foreign businesses. These include architecture, engineering, computer and related services, advertising, market research, construction, education, franchising, and distribution services. Government decree 139 also became effective on 1 January 2008. This decree, in principle, removed limits on foreign ownership in Vietnamese companies, except in relation to the 49% limit in public listed companies, and a 40% limit in public non-listed companies. In addition, sector specific limitations, most importantly in telecoms, financial, and other services remain.

However, while these changes provide good examples of the government following up on WTO commitments, there is still a lack of guidance available regarding the execution of other commitments.

Overall, Vietnam continues to aim to live up to the high expectations international investors have from the “next Asian tiger”. The government continues to participate in and encourage forums facilitating consultation between investors and regulators, in order to address ways in which to improve the business climate.

Deal Activity

There has been a very strong level of interest in M&A in Vietnam during 2008. Successful domestic companies have been increasingly open to deal making as they pursue expansionary strategies, while companies faring less well were more open to discussion of equity stake sales to domestic and foreign investors.

Market participants generally agreed that valuations were much more realistic during 2008 than in 2007, as the stock

60

50

40

30

20

10

-

Vietnam Deal Activity


No.

of d

eals

US

$ m

illio

n

1Q2007

3Q2007

1Q2008

3Q2008

2Q2007

4Q2007

2Q2008

4Q2008

700

200

300

800

100

-

400

600

500


Stephen GaskillTransactions LeaderVietnam


market declined to an average PE ratio close to 10, and access to credit became significantly more difficult. Furthermore, there has been an increase in the level of understanding regarding the mechanics of deal making, including the importance of due diligence, and an improved appreciation for valuation techniques, although there is still plenty of scope for improvement. The government in general remains supportive of market entry by way of acquisitions. Foreign acquirers continue to be behind many of the bigger deals despite the remaining ownership restrictions for example in the financial sector and in the case of listed companies.

Strong interest in deal making unfortunately did not translate to growth in all measures of M&A activity. While the number of announced deals increased to 150 compared to 111 in 2007, the total value of these announced deals came to only US$1.0 billion compared to US$1.7 billion in 2007. This reflects a lack of larger deals and the slow pace of privatisation, since most of the large deals in 2007 were privatisations of SOEs.

Financial Services

In August, France’s Société Générale announced the acquisition of 15% of Southeast Asia Bank (SeABank). It is understood that Société Générale may raise its holding to 20% at some point, the maximum allowable under the current regulations.

Also in August, HSBC became the first foreign bank in Vietnam authorised to hold a 20% interest in a domestic bank by increasing its stake in the Vietnam Technological and Commercial Joint Stock Bank (“Techcombank”) from 14.4% to 20%.

United Overseas Bank (UOB) announced an increase in its shareholding in The Southern Commercial Joint Stock Bank of Vietnam (Southern Bank) from 10% to 15% in October 2008. The deal value was US$15.6 million.

Ocean Bank sold a 20% stake to Vietnamese state-owned Petrovietnam Oil & Gas Corp for 400 billion Vietnamese Dong (US$24 million) in October 2008.

Other Sectors

In July, Jardine Cycle & Carriage Limited (“JC&C”) announced that it had acquired a 12% interest in Truong Hai Auto Corporation (“THACO”), a leading Vietnamese automotive company, for a cost of approximately US$41 million and in August JC&C acquired a further 8% stake for US$39 million.

A significant domestic deal announced in August, Petrovietnam Drilling & Well Services Joint Stock Company

(“PvD”) acquired the remaining 49% stake not already under its control in Petrovietnam Drilling Investment Corp, a rig owning entity.

Also in August, in a deal valued at approximately US$9.1 million, Daikin Industries Ltd. of Japan bought Viet Kim Co., a Ho Chi Minh City-based air conditioner distributor.

Finally in the same month, in another important deal, Holcim Vietnam acquired COTEC Cement from the Vietnamese owned COTEC Group for an estimated US$50 million.

In October, the Asian operating arm of Bunge Limited announced the acquisition of a 50% stake in the owner/operator of Phu My Port.

Also in October, Nippon Steel Corp signed a memorandum of understanding to acquire a 10% – 20% stake in POSCO-Vietnam Co. Ltd., a cold-rolled steel manufacturer and a wholly-owned unit of POSCO Co. Ltd., of Korea. A US$530 million plant owned by POSCO-Vietnam Co. Ltd., is under construction in the south of the country and is expected to start production in September 2009.

In December, TBWA Worldwide announced the acquisition of a “significant shareholding” in Biz Solutions. TBWA is committed to bring its global integrated marketing brand “Tequila” to Vietnam by rebranding Biz Solutions as Biz Tequila.

In December, Watson Wyatt Worldwide Inc. announced that it had acquired SMART Human Resource Vietnam Company Limited (“SMART HR”), an HR consulting services firm.

Private Equity

In July, IDG Ventures Vietnam, which announced three investments in the first half of the year, has in July announced a strategic partnership with Mua Ban Joint Stock Company, the operator of the popular classified website Muaban.net. Terms were not disclosed.

In August, VinaCapital acquired an undisclosed minority stake in Phu My Bridge Corporation for US$10.8 million.

BankInvest, a fund management company owned by 53 Danish banks, remains active via its Private Equity New Markets (PENM) fund. In October, it acquired a 20% stake, valued at US$2.7 million, in Son Kim Fashion, an apparel manufacturer and distributor.

In December, the Mekong Enterprise Fund II invested US$5 million in Digiworld Corporation, an electronics distributor. Also in December the Mekong Enterprise fund sold its investment in Saigon Gas to Total of France.


OutlookUncertainty resulting from the global financial crisis makes predictions regarding 2009 M&A activity extremely difficult. However, in our view, interest in Vietnam remains high as foreign investors continue to see the underlying long term potential of the economy in a positive light. Accordingly, fund management and commercial companies will continue to pursue and complete significant numbers of M&A deals in 2009. It appears likely, however, that most investors will move forward on deals more cautiously than they did prior to mid-2008 and that negotiations on pricing and deal terms will in general be tougher and more time consuming to conclude.

Much will also depend on the pace of privatisation of major corporations such as MobiFone and on whether

already equitised SOEs such as Vietinbank and Sabeco close deals to sell significant stakes to foreign investors. The size of these potential deals is such that they would have a considerable impact on the overall value of deal activity.

In the view of recent changes in local legislation, we would also expect increased foreign investment via M&A in those sectors now open to 100% ownership by foreigners. Subject to improved consistency in the application of this new legislation, we expect to see a number of the joint ventures established under the previously more restrictive legal environment being converted into 100% foreign owned companies. There may also be further realignment and consolidation amongst Vietnamese companies operating in those sectors most affected by the economic downturn.


AustralasiaAustralia

New Zealand


AustraliaThe outlook for 2009 remains uncertain, but the M&A market may be supported by distressed sales in a number of sectors

Current EnvironmentThe economy has slowed significantly, with quarterly GDP growth of 0.1% in the third quarter of 2008, and annual growth slowing to 1.9% p.a. from 2.9% p.a. in the second quarter. The economy was impacted by uncertainty driven by the global financial crisis, resulting in a continued decline in consumer confidence and weaker household spending. Excluding the farming sector, third quarter GDP growth would have been negative, with non-farm GDP dropping by 0.3%, the first decline since the December quarter in 2000. Motor vehicle sales in November dropped by 9.4% to be 22.2% lower than in November 2007. Residential house prices reduced due to increasing unemployment and distressed sellers being forced to sell properties at discounts in order to meet financing obligations.

The Consumer Price Index (“CPI”) rose by 0.4% in the third quarter, with annual inflation standing at 4.1% p.a., well down from 5.8% p.a. at the end of 2007. The decrease in inflation was driven by a reversal in petrol prices, lower car prices, lower air fares and weak retail-sector demand. These factors are forecast to continue to drive inflation down further in the near term. This has allowed the Reserve Bank of Australia (“RBA”) to make four consecutive interest rate cuts totalling 3.0% since September, as it changed its focus to stimulating the slowing Australian economy. Interest rate futures markets are pricing in another 0.75% to 1.25% cut to the cash rate by mid-2009.

The labour market remained relatively strong, with the participation rate stable at 65%, although the unemployment rate increased slightly from 4.1% in July to 4.3% in October. Further pressure on employment is expected as the impact of the credit crisis forces companies, particularly those in the financial sector, to review their headcount. ANZ and Macquarie Group were two high profile Australian banks to make significant job cuts, along with the local subsidiaries of foreign investment banks. In December, mining giant Rio Tinto announced its plan to cut 14,000 jobs, indicating that employment pressure will be felt across non-finance

industries. Pressure on the retail, tourism and manufacturing sectors is also negatively impacting employment levels.

The current account deficit (“CAD”), seasonally adjusted, contracted to AUD$9.7 billion in the third quarter from AUD$14 billion in the second quarter. The trade balance improved by AUD$2.7b to record a AUD$1.4b surplus, with export prices increasing 10.2%, offsetting import price increases of 4.4%.

The Australian Dollar weakened significantly against all major currencies since mid-2008, driven largely by the decline in commodity prices, currency traders unwinding AUD investments, and the significant interest rate cuts undertaken by the RBA in the second half of 2008. This has sheltered the Australian economy to a certain degree, particularly with regards to mining and farming exports.

In the second half of the year, the Australian equities market accelerated its first half decline, with the ASX 200 dropping another 32% in H2 2008 to be down 44% for the year. The declines were across the board but finance and resource stocks were the main fallers. Indices indicate that market confidence is at a record low while volatility is at a record high.

Deal Activity

Deal activity fell in the second half of the year, with only AUD$57 billion worth of transactions, down 10% from the first half. This was partly due to the collapse of a number of major deals including Centro Properties and ABC Learning Centres, and the M&A led business models of Babcock and Brown and Macquarie coming under pressure. The highest profile casualty was BHP’s withdrawal of its US$137 billion bid for Rio Tinto. BHP stated that the deal was no longer in the best interests of shareholders given Rio’s debt levels and falling commodity prices.

Australia Deal Activity

Deal values Deal volumeN

o. o

f dea

ls

US

$ m

illio

n

1Q2007

3Q2007

1Q2008

3Q2008

2Q2007

4Q2007

2Q2008

4Q2008

50,000

20,000

40,000

60,000

30,000

10,000

-

900

600

500

400

300

200

100

-

700

800


Tom FentonCorporate Finance LeaderAustralia


On the 1st of December, St George and Westpac officially merged, in what was Australia’s largest banking merger and the largest domestic Australian deal of all time, creating Australia’s second largest bank with a market capitalisation of US$45.8 billion, marginally behind that of Commonwealth Bank (US$46 billion). The deal left St George shareholders owning 30% of the combined entity, and while there is a potential for job losses, Westpac has given a commitment to maintain net branches, and minimise job losses through natural attrition and redeployment wherever possible. Further activity in the banking sector included the Commonwealth Bank acquiring HBOS PLC’s Australian operations for a total of $2.1 billion, while Suncorp considered the sale of its insurance businesses. However, following the implementation of the Government deposit guarantee, this did not proceed.

In November Qantas and British Airways (“BA”) announced their plans to possibly merge in what would be an $8 billion tie-up. These talks were subsequently called off in mid December with both parties unable to agree on terms of a deal. Commentators continue to identify Qantas as a potential player in further industry consolidation, and have highlighted a number of Asian airlines as potential targets.

Other significant bids and deals announced during the second half of 2008 included:

Coca Cola Amatil (“CCA”) said it did not consider an • AUD$8 billion merger proposal from brewer Lion Nathan to be compelling, after the soft-drinks maker said the scheme was “not attractive’’ to its largest shareholder

Speculation emerged that China National Petroleum • Corp (“CNPC”) was considering potential partners for an AUD$8 billion-plus takeover bid for the oil and gas producer Santos

ConocoPhillips agreed to pay up to AUD$10.1 billion • to join Origin Energy in a natural gas venture in Queensland, potentially trumping a hostile takeover bid for the company from Britain’s BG Group

BG Group also agreed to buy Queensland Gas Co. of • Australia for AUD$5.6 billion, to strengthen its position in Asia’s fast-growing liquefied natural gas market

The world’s largest listed uranium company, Cameco • Corp, teamed up with Mitsubishi Development to acquire Rio Tinto’s Kintyre uranium project in Western Australia for AUD$518.3 million, despite a state ban on uranium mining

OutlookThe outlook for the Australian economy remains one of deep uncertainty. Key drivers of growth in recent years have been the commodities and financial sectors, which have been among the hardest hit by the downturn. However the reduction in interest rates by the RBA, the depreciation of the Australian Dollar, and the government’s recently announced AUD$10.4 billion stimulus program should all help to offset economic weakness.

In terms of M&A, we believe the following industries may generate the most activity during the first half of 2009.

Financial Services

There are a number of distressed assets currently for sale in the Australian market, such as Allco and Babcock and Brown, and other distressed players are likely to emerge. At present, funding difficulties across the sector are preventing bids, but buyers may emerge if credit conditions improve.

Property

With high levels of gearing, and commercial and industrial property prices falling in Australia, downgrades and write-offs across the property industry are likely to drive forced asset sales, capital raisings, and consolidation in the property sector in 2009. During the second half of 2008, a number of listed property trusts, including Macquarie Office Trust, GPT, Dexus, Mirvac, Goodman, and Australand, have successfully raised equity via rights issues, placements or a combination of both. This activity is likely to continue into 2009. There is also potential for forced asset sales from within the sector in 2009, including Centro Properties and Babcock and Brown.

Private Equity

Private equity (“PE”) deal flow in 2008 slowed significantly from 2007, as the increased cost of and limited availability of debt, along with the general economic uncertainty, forced many PE firms to sit on their hands. While there are a number of interesting opportunities arising, the limited amount of finance available will make large transactions very difficult to complete in 2009. PE firms are also expected to focus their attention on improving the performance of their existing portfolio companies, many of which are being challenged by the combination of slowing economic conditions and relatively high levels of debt.


Mining and Energy

The second half of 2008 saw the resources sector lose some of its momentum from the first half of the year, as a result of falling commodity prices and lower than expected demand from China and other trading partners. Resource companies are scaling back and deferring planned capital expenditure and expansions. Consolidation in the sector is expected to continue well into 2009, as companies seek to increase size to improve efficiency and provide higher levels of liquidity. Among the resource companies likely to be involved in M&A activity are Felix Resources and Perilya Ltd.

Infrastructure

2008 saw several infrastructure and utilities funds, such as Babcock and Brown Infrastructure, Babcock and Brown Power, and Babcock and Brown Wind indicate plans to deleverage through asset sales. Yet another example of the pressure being felt in the infrastructure sector was speculation that the underwriters of BrisConnect, Macquarie Capital Advisers and Deutsche Bank, could seek to delist or buyout the toll-road group. The slowing global economy and contracted debt markets are likely to continue to place pressure on the infrastructure sector in 2009, and a large number of capital raisings and distressed asset sales are expected. Asciano is one high profile transport company under pressure from its bankers, as the listed infrastructure company, with a primary focus on transport, must refinance around $2.8 billion of its debt in May 2010, and is expected to face debt covenant challenges in 2009.


New ZealandGDP growth has decreased due to a slowing retail environment and the tightening of credit lines, as the full impact of the credit crunch flows into the New Zealand economy. Private equity deals and transactions in general have decreased significantly

Current EnvironmentThe latest gross domestic product figures released by Statistics New Zealand indicate a slowing of economic activity. GDP declined 0.4% in the September quarter. This follows falls of 0.3% and 0.2% in the first and second quarters respectively. Annual GDP growth the year ending Q3 was 1.7%.

A key driver of the decline was the decrease in manufacturing volumes, which fell 2.3% in the third quarter, following a decrease of 1.1% in Q2, taking output to its lowest level since the first half of 2003. Despite the fall in the volume of sales, price increases led to a rise of 1.3% in the seasonally adjusted value of manufacturing sales in the September quarter.

Meat and dairy product manufacturing were relatively flat over this quarter, with a seasonally adjusted volume rise of 0.3%. The major fall in volume came from paper and paper products, structural, sheet and fabricated metal products and machinery and equipment, which each contributed about a fifth of the decrease.

GDP was also affected by the fall in retail sales of NZ$69 million or 1.3% in the month of October 2008. This fall was primarily driven by a reduction in motor vehicle retailing. In the year ending September 2008, motor vehicle retailing fell by 19.6% taking it to its lowest level since 2001. Automotive fuel retailing also fell by 2.2% in October as petrol and diesel prices fell. A further cause of the downturn has been the dwindling supply of credit. While firms are still able to utilise existing lines of credit, new credit is more difficult to obtain, and this is reducing investment.

Declining output has been accompanied by rising prices, with the CPI increasing 5.1% over the year to September, the highest increase since the year to June 1990. A major constituent of this has been food inflation with prices increasing 10.3% to the year ended November 2008.

One area of deflation has been property prices, which have reacted to the weakening economy, falling 9% in the third quarter. However lower prices, tax cuts and lower interest rates have increased housing affordability in recent months, and may help to support the market going forward.

Economic weakness was also seen in the unemployment statistics which rose 0.3% in the September quarter to 4.2% (94,000 people). The government has introduced the ReStart assistance package, a package for workers made redundant by the slowing New Zealand economy. ReStart will be available to people who have been in work for the last six months, including self-employed people and those who have changed jobs or employers during that time.

In order to combat the downturn, the Reserve Bank has cut the official cash rate by 325 basis points since June from 8.25% to 5%. The 23 October cut of 100 basis points followed by the 4 December cut of 150 basis points were successively the largest changes in the benchmark rate since its introduction in March 1999. Reserve Bank Governor Alan Bollard commented that the ongoing financial market turmoil and the marked deterioration in the outlook for global growth played a large role in the recent cuts. Economic activity in New Zealand’s major trading partners is expected to contract over the next few quarters, which will further constrain economic activity in New Zealand. Inflationary pressures, which saw the official cash rate raised four times during 2007, are abating, and inflation is expected to return to sit within the 1 – 3% target band within the first half of 2009. There are still however concerns over the effect of electricity prices and local property taxes on domestically generated inflation.

The six months ending 30 November 2008 saw a considerable fall in the value of the New Zealand dollar relative to the US dollar. The New Zealand dollar traded between a high of US$0.79 on 3 June 2008 and a low of US$0.53 on 21 November, a fall of 32%. The decline is attributable to the reduction in interest rates, which has made the New Zealand dollar less attractive for the carry trade, and this has been exacerbated by the deleveraging of many hedge funds involved in this trade.

In the year to date, the NZX50 Index has fallen from a high of 4,069 at the beginning of the year to 2,569 in November, a fall of approximately 37%. It experienced a sharp decline of approximately 25% in the six months to December.

2008 also saw a change in the government of New Zealand. The left-wing Labour Party Government, in power since December 1999, was defeated in the 8 November general election by the right-wing New Zealand National Party.

Mark AverillCorporate Finance LeaderNew Zealand


Deal Activity

Deal activity in New Zealand has slowed significantly, as the number of deals fell 44% in the third quarter of 2008. Deal value also fell significantly from US$2.7 billion in the second quarter to US$0.36 billion in the third, but rose again in the fourth quarter, mainly on the back of the acquisition of Frucor Group by Suntory Limited for NZ$1.2 billion, the largest transaction in the New Zealand market in the past six months.

Japanese brewery, Suntory Limited reached an agreement with the France-based Danone Group to acquire 100% ownership of Frucor Group, owned by the Danone Group, for a total consideration of around NZ$1.2 billion. Over the past six years Frucor has played a major role in Danone’s growth strategy, with its energy drink brand “V” being a major driver of growth. The “V” brand currently has 60% of the New Zealand energy drink market and about 50% of the Australian market. The divestment of Frucor comes out of a recent refocus by Danone on spring water and natural mineral water-based beverages. The proceeds of the sale will be allocated to debt repayment. The acquisition, allows Suntory to further diversify both its product offering and geographic reach.

Fonterra Co-Operative Group Ltd acquired the yogurt and dairy dessert business of Nestle Australia Ltd, a food and beverage producer, and a wholly-owned unit of Nestle SA, for an estimated AUD$36 million.

Simplot Australia Pty Ltd, a wholly-owned unit of JR Simplot Co aquired Mr. Chips Holdings Ltd, a potato chip manufacturer and wholesaler for NZ$65 million. Mr Chips manufactures over 25,000 tonnes of frozen and chilled potato products annually in its Auckland and Christchurch

plants. Half its sales are in exports to Australia, where it has had a supply arrangement with Simplot, which has a wide range of food brands including Leggo’s, Edgell and Birds Eye.

ING Property Trust divested its property portfolio in December to an undisclosed acquirer, for NZ$49.4 million. Included in the transaction were five properties in Garnett Avenue, Hamilton; Hawkeston Street, Wellington; McCormack Place, Wellington; Park Avenue, Grafton; and The Strand, Parnell.

Through its wholly-owned GPG Twenty One Limited, Guinness Peat Group, acquired an additional 5.3% stake in Tower Ltd, an insurance company, for NZ$67.5 million, taking its shareholding in the company to 35%.

Over the last six months, PwC New Zealand has advised on the sale of La Bonne Cuisine to Heinz Watties, the sale of Packsys to Aperio Group and the sale of Howick and Eastern to Souter Holdings. PwC New Zealand also advised Archer Capital on its successful acquisition of Australian Helicopters.

OutlookThe economy is expected to recover in 2009 with growth forecast by the EIU at 1.1% for the year.

The outlook for transactions remains uncertain. One deal which may re-emerge is Australia’s Woolworths and New Zealand-owned Foodstuffs’ interest in acquiring The Warehouse. In the previous edition, we noted that the Commerce Commission launched an appeal to block any takeover bids. The hearing took place in April and it was announced on 31 July that the Court of Appeal had blocked the supermarket giants, who each own 10% of the company, from launching takeover bids. The key issue to any takeover has been the recent introduction by The Warehouse of its “Extra” stores, which have a full grocery offering. The Commerce Commission believed that if left independent, The Warehouse would continue to develop this format and increase competition within the supermarket sector, where Woolworths and Foodstuffs control almost the entire market. However, The Warehouse Extra has recently announced that they will withdraw from selling food, reverting to just general merchandising. This has changed the market characteristics on which the commission based its rejection. It is likely that Woolworths and Foodstuffs will re-apply for clearance.

120

100

60

80

40

20

140

-

New Zealand Deal Activity


No.

of d

eals

US

$ m

illio

n

1Q2007

3Q2007

1Q2008

3Q2008

2Q2007

4Q2007

2Q2008

4Q2008

3,500

1,000

1,500

4,000

500

-

2,000

3,000

2,500



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Asia Pacific Chao Choon Ong +65 6236 3018 [email protected] Nick Dignan (M&A Tax) +852 2289 3702 [email protected] Matthew Wyborn (Corporate Finance) +81 (3) 6266 5740 [email protected]

North Asia

China Matthew Phillips (Transactions) +86 (21) 2323 2303 [email protected] Danny Po (M&A Tax) +852 2289 3097 [email protected] Xie Tao (Corporate Finance) +86 (10) 6533 2002 [email protected]

Hong Kong David Brown +852 2289 2400 [email protected] Nick Dignan (M&A Tax) +852 2289 3702 [email protected]

Taiwan Peter Yu +886 (2) 2729 6157 [email protected] Steven Go (M&A Tax) +886 (2) 2729 5229 [email protected]

Japan Matthew Wyborn +81 (3) 6266 5740 [email protected] Kazuya Miyakawa (M&A Tax) +81 (3) 5251 2462 [email protected]

Korea Sang-Tai Choi +82 (2) 709 0403 [email protected] Sang-Keun Song (M&A Tax) +82 (2) 709 0559 [email protected]

South and Southeast Asia

India Bharti Gupta Ramola +91 (124) 462 0503 [email protected] Hiten Kotak +91 (22) 6689 1212 [email protected]

Indonesia Rizal Satar +62 (21) 5289 0351 [email protected] Mirza Diran +62 (21) 5289 0950 [email protected]

Malaysia Mohd Anwar Yahya +60 (3) 2173 1811 [email protected] Frances Po (M&A Tax) +60 (3) 2173 1618 [email protected] Paran Puvanesan (Corporate Finance) +60 (3) 2173 1383 [email protected]

Singapore Chao Choon Ong +65 6236 3018 [email protected] Chris Woo (M&A Tax) +65 6236 3688 [email protected] Amitava Guharoy (Corporate Finance) +65 6236 4118 [email protected]

Sri Lanka Ravidu Gunasekera +94 (11) 471 9838 ext 506 [email protected] Daya Weeraratne (M&A Tax) +94 (11) 471 9838 [email protected]

Thailand Gary Murphy +66 (2) 344 1137 [email protected] Paul B.A. Stitt (M&A Tax) +66 (2) 344 1119 [email protected] David LaChina (Corporate Finance) +66 (2) 344 1423 [email protected]

Philippines Mary Jade T. Roxas-Divinagracia +63 (2) 459 2060 [email protected] Alex Cabrera (M&A Tax) +63 (2) 459 2002 [email protected]

Vietnam Stephen Gaskill +84 (8) 3823 0796 [email protected] Richard Irwin (M&A Tax) +84 (8) 3823 0796 [email protected] David LaChina (Corporate Finance) +66 (2) 344 1423 [email protected]

Australasia

Australia Sean Gregory +61 (2) 8266 2253 [email protected] Mark O’Reilly (M&A Tax) +61 (2) 8266 2979 [email protected] Tom Fenton (Corporate Finance) +61 (2) 8266 2752 [email protected]

New Zealand Mark Averill +64 (9) 355 8682 [email protected]

• Regional Merger & Acquisition Contacts •

Asia P

acific M&

A B

ulletin – Seeking op

portunity in crisis Year-end

2008

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Asia Pacific M&a Bulletin Year End 2008

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