Asian Mergers and Acquisitions on the Up

Merger and acquisition (M&A) volume in the Asia-Pacific region actually rose in 2009 and accounted for an increase share of global volume, even though the number of deals dropped. The large-scale deal between Rio Tinto and BHP Billiton was just one of more than half a dozen valued at over US$40bn.

2010 looks to be another good year for M&A in the Asia-Pacific region. Along with company goals to increase size or market share, various markets have additional reasons for growth. Chinese firms may want to deploy extra cash for strategic advantage or to purchase natural resource supplies, for example, and Japanese firms may plan to take advantage of a strong yen to grow, despite a slowing domestic economy. Firms in other markets may seek to expand their regional footprint.

Yet M&A isn’t as simple as buying a company abroad, as several Chinese firms trying to invest in the US or Australia found when they ran into broad-based opposition. When companies are looking at potential merger or acquisition targets, then, three factors stand out as being especially important for success.

First, the companies should have a clear strategic objective for the deal. The goal may be to increase scale, as Vodafone did in merging with Hutchison 3G Australia, or to acquire resources, as Minmetals did with OZ Metals. Other companies may want to grow revenue, increase efficiency, add expertise or enter a new market. Clearly articulating the goal and getting everyone to work towards it can increase the chance of success. As Bain & Company has said, “Every merger or acquisition needs a well thought-out deal thesis – an objective explanation of how the deal enhances the company’s core strategy.”

Second, cultural sensitivity is more important than ever. A key part is understanding the culture in the target company and country well enough to make the acquisition happen in the first place. Chinalco’s bid for Rio Tinto in Australia failed, at least in part, because of a lack of understanding of cultural or national issues. Along with helping to make the deal happen, cultural understanding is important for successful management. McKinsey & Company has said that that for Chinese companies, “the keys to success include hiring a chief executive in the local market of the acquired company and actively managing the differences between Chinese and Western business cultures and practices.” The same concept applies to M&A in other markets.

And finally, the acquirer needs the management expertise to make it succeed. Putting the right leaders in place for the integration, making sure that local labour issues are dealt with appropriately and resolving questions about peoples’ jobs quickly can increase the chance of success. As HR consultancy Mercer has said, “the difference between success and failure comes down to how well M&A leadership manages the most pressing people issues.”

The strong yen and Australian dollar, large amounts of capital at corporations, and surplus funds in China, appear to be precursors to expansion in 2010, according to many analysts. As Asian firms gain experience, and if they focus on these key areas needed for success, volume records could be broken in 2010 and the level of success could well rise even further.

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