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Asia Pacific – USD1.1 Trillion M&A Warchest Locked By Regulatory, Political And Economic Uncertainty.

 

12 October, 2012
 
  • New report amongst global corporates reveals appetite for deal making remains high, despite M&A activity running at a third of the level of five years ago
 
  • Cash on balance sheets for the top 500 global corporates estimated at US$4tn (US$1.1tn in Asia)
 
  • Economic and political uncertainties are the biggest barriers to investment for Asian corporates   

 

A new report by global law firm Hogan Lovells, based on 160 interviews with the most senior figures in companies across the UK, US, Continental Europe and Asia, has revealed a surprising level of optimism amongst global companies, particularly in Asia where nearly three quarters (73%) of global corporates say they plan to enter new geographical markets over the next two years as part of their business growth plans. Additional research by Hogan Lovells also indicates that at the end of August, the 500 largest non-financial companies in the world had short and long term cash reserves of around US$4 trillion (US$1.1tn in Asia). 

 
However, political and economic uncertainties currently remain the biggest barriers to investment for Asian corporates.  Against this backdrop M&A deal activity is currently running at little more than a third of the level of five years ago.
 
Andrew Skipper, Co-Head of the Corporate Practice Group at Hogan Lovells said:
 
“With the OECD and others predicting a marked decline in cross-border M&A in the next year it is surprising that so many organisations in the report expressed a measured optimism towards their growth prospects in the next two years. The money and the appetite for deal making is there, with our estimate of the cash on the balance sheets of the top 500 global corporates in the region of US$4tn – huge figures when you consider the size of the current eurozone debt is US$8.2tn. Yet the report also highlights that there are major barriers preventing  deals taking place – what executives say they want to do is hindered by serious concerns about on-going economic uncertainty, rising regulation and government intervention.”
 
Protectionism and politics 
 
The findings of the report suggest global corporates remain cautiously optimistic and eager to expand. Four in ten (40%) Asian corporates say they plan to enter new areas of business over the next two years, superseded only by the US (45%), with a third of companies (35%) in Asia saying they sense rising pressure from shareholders to invest their cash piles. However, protectionism and government intervention are key issues hindering this moving forwards. Over half (53%) of Asian companies say China is the most difficult market, where protectionism is increasing at the fastest rate, followed by North America (28%).  
 
Financial regulation (40%) and labour laws (43%) top the list of legal and regulatory requirements that Asian companies see as creating significant issues for their businesses, followed by competition policy (35%) and trade barriers (35%) and other forms of protectionism. Almost nine in ten Asian companies (85%) identify economic uncertainty as a key barrier to investment with over half (55%) saying political uncertainty is a big problem.  In addition financial repression is biting most painfully on companies in Asia, 83% said they are being hurt to some degree, with 38% saying the impact is either big or huge.  Whilst there is very little that can be done by corporates about political and economic uncertainty, companies are clearly taking increased precautions against risk wherever they can. Three in ten Asian companies (30%) said in the survey that they are mitigating their exposure to the eurozone.
 
 
Andrew Skipper concludes:
 
"Economic uncertainty is unsurprisingly the key barrier to investment: this is why corporates are sitting on such huge balance sheets.  They are keen to spend, with corporates in Asia and the US in particular sensing the pressure to do so from shareholders. 
 
“Our analysis also confirms that senior management see no return to the heady M&A days pre-2008 and instead are resigned to an economic environment where activity may be subdued for some time.  Success requires a clear strategy, a robust balance sheet, a focus on talent management and the right technology, and an understanding of regulation and protectionism. The appetite is there for renewed investment, especially among emerging nations. The question persists: when?”
 
If you would like to have a copy of the report please email [email protected] 
 
 
 
 
 
 
 
 

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