Financial services Mergers and Acquisitions in Asia
By Jon Fernquest[Introduction | Vocabulary | Article | Reading Questions | Answers]
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The financial services industry has been changing rapidly in Asia.
Foreign firms are buying into the financial services markets of Asian countries with joint ventures and partnerships.
Mergers and Acquisitions (M&A) activity in the financial sector of Asian economies is increasing.
Why are Asian governments allowing more foreign M&A in the financial sector?
Freeing up capital flows between countries is less of a goal nowadays than increasing competition and the quality of product offerings within Asian domestic markets.
M&A activity has been faster paced in East Asian economies such as China and Taiwan than it has been in South Korea or Southeast Asian economies. Consolidating over-serviced financial services markets has been top priority in Indonesia and Malaysia.
Today's article is part one of a two part introduction to the report.The full PricewaterhouseCoopers report is available for free online.
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What will the timing of foreign M&A activity in Asian countries such as China and India depend on?
2. Do western financial services firms that plan to expand into Asia want to do it alone or with local partners?
3. Why do financial services firms want to expand into Asia? List some reasons.
4. What will likely give momentum to financial services M&A in Asia?
5. Where has the most aggressive liberalisation taken place?
6. Has there been a a lot of M&A activity in Southeast Asia'a financial services industry recently?
7. What has driven consolidation in the financial sector recently in Thailand?
8. What are the current regulations regarding foreign m&A activity in Thailand's financial sector?
9. Is it likely that Thailand's financial services sector will be liberalised in the near future?
10. Is all financial sector regulation protectionist?
11. Will deregulation allow free operation of financial firms across national borders in the near future?
12. What are some of the goals driving deregulation nowadays?
Bangkok Post Article: October 10, 2006
LeadingTHE WAYFinancial services M&A: Coming soon to Asia
PRICEWATERHOUSECOOPERSThis is the first of two articles based on PricewaterhouseCoopers' survey "Going for Growth*: The Outlook for M&A in the Financial Services Sector".
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According to a recent survey of financial services executives by PricewaterhouseCoopers and the Economist Intelligence Unit, 68% of respondents said that joint ventures and partnerships were central to their firms' expansion plans in Asia. The drivers - the pursuit of new markets and new customers, the constant drive to improve process efficiencies, and the realisation of economies of scale - are familiar. But the urgency is new.
M&A activity among financial institutions in Asia is expected to gain momentum, spurred by the promise of market liberalisation - whether real or imagined. Even so, the depth of market liberalisation in Asia's banking and finance industry varies greatly.
The most aggressive policy reform has taken place in East Asia. In China, reform of the larger state-owned banks saw several institutions introduce foreign capital. Across the strait, Taiwan has been busy liberalising its financial-services sector. Reforms have set specific targets for consolidation, including a reduction in the number of state-run banks and financial holding companies.
In contrast, Southeast Asia's financial-services industry remained relatively quiet in 2005. From an M&A perspective, Indonesia's market was perhaps the most active, with continued consolidation among the country's more than 130 banks, in accordance with the central bank policy. A similar drive to consolidate an over-serviced financial sector is under way in neighbouring Malaysia.
In Thailand, the financial sector master plan implemented two years ago has driven domestic consolidation among the country's financial institutions. Regulators have given clear signals that it is only a matter of time before they will liberalise the market. While there are still ceilings on foreign direct investment of 25% with a limited equity stake where any one bank can buy only 5% in another, the Bank of Thailand has readily approved exceptions on a case-by-case basis. The recent GE-Bank of Ayudhya deal was one such case, and it is expected that more will be approved and supported by both the BoT and the Ministry of Finance in the near future.
In South Korea, the climate continues to favour domestic financial holding groups over foreign entities.
There are some liberalisation moves afoot in South Asia as well, albeit less monumental ones. In March 2004, the Indian government raised the ceiling on foreign direct investment in private banking from 49% to 74%, but the Reserve Bank of India (RBI) subsequently limited the equity stake that any one bank could buy in another to 5%. The RBI has since announced that the limit is discretionary, and that it will consider applications to buy more than 5% of a private bank on a cases-by-case basis, looking at the standing and reputation of the foreign buyer both in India and globally, as well as the bank's plans for India.
Despite some bold moves, protectionism still abounds in the region and is in danger of escalating. While stringent state regulation and oversight aimed at protecting consumers is increasing and should be supported, regulation aimed simply at protecting local business is still common.
Will regulatory constraints truly relax to the point where these firms can operate freely across borders? This is neither a bet anybody would be willing to take, nor really the point. In contrast to years past, the importance of regulatory liberalisation as a driving force for restructuring pales in comparison with that of competition and customer demands (see chart).
Fewer than a quarter of the respondents to our survey cited uncertain regulatory requirements as a main obstacle to increased M&A. In fact, regulatory barriers elicit far less fear and loathing today than they did five years ago. Today's financial executive has learned to look beyond a target country's regulatory environment, to consider long-term political opportunities, demographic and macroeconomic trends, and opportunities to leverage core strengths in new areas and markets. Smart institutions anticipate situations where regulatory change will help them, and attempt to influence the process.
As market windows open across Asia, those who wait for all regulatory hurdles to come down will miss opportunities. Competition for assets will only intensify. It makes little sense to allow regulatory issues to dictate M&A strategy.
Investors have been willing to engage regulatory authorities over the long haul, either directly or through an influential local partner. Negotiating regulatory hurdles has become just another cost of doing business. In two weeks' time, the second article in this series will look at M&A success strategies for financial-services executives in Asia. To download the full survey, visit www.pwc.com/th
Chanita Saicheua is a partner at PricewaterhouseCoopers Thailand. Comments are welcome at leadingtheway@th.pwc.com
Vocabulary
financial services - services to manage money offered by companies such as banks, investment banks, insurance companies, credit card companies and stock brokerages (See Wikipedia on financial services)
Mergers and Acquisitions (M&A) - the aspect of corporate finance strategy and management dealing with the merging and acquiring of different companies as well as other assets. Usually mergers occur in a friendly setting where executives from the respective companies participate in a due diligence process to ensure a successful combination of all parts.(See Wikipedia)
at stake - at risk
core competencies - The things that a company can do well and: 1. provides customer benefits, 2. is hard for competitors to imitate, 3. can be leveraged widely to many products and markets. For example, technical/subject matter know how, a reliable process, and/or close relationships with customers and suppliers, product development, or corporate culture such as employee dedication. Activities that are not part of a company's core competency should be outsourced.(See Wikipedia)
Economist Intelligence Unit - the business intelligence unit of The Economist magazine which sells advice and research (See Wikipedia)
economies of scale - "Economies of scale refers to the decreased per unit cost as output increases. More clearly, the initial investment of capital is diffused (spread) over an increasing number of units of output, and therefore, the marginal cost of producing a good or service decreases as production increases" (See Wikipedia on returns to scale)
gain momentum - go faster and faster
spurred by - driven by, set in motion by, changes caused by
market liberalisation - reducing regulation in a market so companies have more freedom of action (as the article points out, some regulations just protect older companies from competition, other regulations protect consumers from being abused by powerful companies)
the strait - the water that separates Taiwan from mainland China
ceilings on - upper limits to
an equity stake - owns a large portion of the company's stock shares
on a case-by-case basis - look closely at each case (and make decisions based on the unique charasteristics of each case rather than a general rule)
the climate continues to favour - the business environment makes it easy to do a certain kind of business
foreign entities - foreign companies
there are some liberalisation moves afoot in - market liberalisation is taking place in
albeit - although (qualifies what you just said by pointing out exceptions)
foreign direct investment (FDI) - when a foreign company invests in a business or fixed assets in a foreign country, rather than just buying stock shares on a stock exchange (See Wikipedia)
the limit is discretionary - exceptions will be allowed
standing - reputation, status
escalating - becoming greater in size, seriousness, or intensity
stringent - strict and severe rules
oversight - making sure it works correctly, efficiently, and fairly
elicit a reaction - makes people react or respond in a specific way
fear and loathing - fear and dislike
demographic trends - increases or decreases in population
leverage core strengths - use your strongest abilities to solve a problem
regulatory hurdles - regulations that are difficult to follow
over the long haul - over a long period of time
process efficiencies - business process efficiencies, efficiency in processing financial transactions
over-serviced - too many service providers (consolidation and merger probably needed)
Answer Key:
1. What will the timing of foreign M&A activity in Asian countries such as China and India depend on?
It will depend more on "core competencies, corporate culture, and product and market expertise," than on policies and regulations.
As the baarriers graph below indicates
lack of attractive investment opportunities is a greater factor holding investment back than regulatory uncerainty.
2. Do western financial services firms that plan to expand into Asia want to do it alone or with local partners?
With local partners. They see "joint ventures and partnerships were central to their firms' expansion plans in Asia."
3. Why do financial services firms want to expand into Asia? List some reasons.
a. Pursuit of new markets
b. Pursuit of new customers
c. The constant drive to improve process efficiencies.
d. The realisation of economies of scale.
4. What will likely give momentum to financial services M&A in Asia?
"Market liberalisation in Asia's banking and finance industry"
5. Where has the most aggressive liberalisation taken place?
In East Asia. China and Taiwan are notable examples, however in Korea
domestic firms are still favored over foreign firms.
6. Has there been a a lot of M&A activity in Southeast Asia'a financial services industry recently?
No, 2005 was a quiet year. Indonesia and Malaysia have undergone some consolidation and reduction in the number of banks in their over-serviced financial sectors.
7. What has driven consolidation in the financial sector recently in Thailand?
The two year old financial sector master plan is the force behind consolidation.
8. What are the current regulations regarding foreign M&A activity in Thailand's financial sector?
a. Ceilings on foreign direct investment of 25%
b. Limited equity stakes where any one bank can buy only 5% in another.
9. Is it likely that Thailand's financial services sector will be liberalised in the near future?
Yes, "regulators have given clear signals" that liberalisation will happen in the near future. Exceptions to M&A regulations are now given on a case-by-case basis such as the recent GE-Bank of Ayudhya deal.
10. Is all financial sector regulation protectionist?
No, much recent regulation is aimed at protecting consumers rather protecting local businesses from competition (protectionism). For example, earlier this year Easy Buy faced critical scrutiny for violating laws that regulate consumer interest rate laws.
11. Will deregulation allow free operation of financial firms across national borders in the near future?
Probably not. ("This is neither a bet anybody would be willing to take, nor really the point.")
12. What are some of the goals driving deregulation nowadays?
Deregulation encourages competition which encourages financial firms to do a better job satisfying customer demands. The goal of deregulation in the retail sector also seems to be to benefit consumers rather than protect local businesses from competition. ("In contrast to years past, the importance of regulatory liberalisation as a driving force for restructuring pales in comparison with that of competition and customer demands.")
