Navigating the Asia M&A landscape

2024 has been a relatively subdued year for dealmaking in Asia, overall. The activity levels broadly reflect pressures on M&A seen in most parts of the globe – higher inflation, higher interest rates and increased geopolitical tensions – and there have also been Asia-specific factors at play: in particular affecting China M&A, both inbound and outbound. For us, valuation and execution risk have been the biggest challenges in putting deals together in Asia this year. While innovative deal structures – such as earn-outs, tranche deals and bespoke price adjustments – can mitigate and share risk to facilitate deal-doing, lower investor confidence and valuation issues have continued to hold back activity levels. Further, concerns about whether, in what timeframe, and at what cost regulatory clearances might be obtained have continued to stop parties agreeing deals (Chinese investment in the US being an obvious example), with Boards’ fears in this regard being fanned by some high profile deals being blocked post-announcement, including the Singapore government taking issue with Allianz’s bid for Income Insurance on public interest grounds.

That being said, there was a notable uptick in M&A activity in the third quarter, which we feel has continued into the final part of the year. This momentum, combined with expectations of improvement in the macroeconomic environment, makes us optimistic we will see higher deal levels in 2025.

The bright spots: Japan, India, Southeast Asia

Starting with the good news, there have been some notably bright spots of intense activity in the region.

Japanese outbound and inbound M&A have each been strong in 2024. Despite the weakened yen, Japanese buyers have continued to go outside their borders, in particular into the US and Europe, in a search for future growth in light of challenging domestic demographics. Japanese businesses have continued to be targets for both global PE and overseas corporates, with M&A activity being supported by factors including corporate governance reforms and the weak yen, added to which Japan is a natural beneficiary of slumping inbound M&A into China. This is reflected in some of the more notable deals seen this year, with KKR and Bain Capital locked in a bidding war for Japanese software provider Fujisoft and Canadian convenience store chain Alimentation Couche-Tard Inc. having launched a series of hefty offers for Japanese retailer Seven & i Holdings.

India has, unsurprisingly, been another major beneficiary of foreign investment shifting away from China. With the Indian economy running hot, investor confidence has been high. Continued inbound investment from financial sponsors wishing to be a part of India’s strong growth trajectory, as well as a growing appetite from Indian corporates to participate in domestic M&A, have driven increases in M&A activity for 2024. What is more, India’s buoyant capital markets – on track for a record-breaking year for capital raised in IPOs – have contributed to a virtuous cycle as multinationals have sought to tap into public markets for capital by listing Indian subsidiaries, PE investors have been provided with additional exit options and strong equities valuations have helped narrow M&A valuation gaps.

Southeast Asia is also rapidly becoming a global trade hub and attracting foreign investment focus due to its strong economic integration, population growth, and strategic location; while its proximity to China makes it ideal for multinational corporations (MNCs) that are looking to diversify their supply chains. Alongside growth in manufacturing, including high-tech areas such as electric vehicles, data centres and the digital sector more widely are driving overseas investment growth. Earlier this year, Microsoft and Amazon Web Services separately committed to multi-billion US dollar digital infrastructure investments in Malaysia and Google has said it will invest in a data centre and cloud region in Thailand. We are also seeing a lot of activity in the insurance sector, with insurers, especially in life and health, competing to capture slices of the growing demand for insurance being driven by demographic trends and the region’s rapid development.

China

The world’s second largest economy continues to grapple with an economic downturn, increased US-led investment and export restrictions, and ongoing geopolitical tensions. Unsurprisingly, against this backdrop, China’s year-to-date M&A deal volume and value have both fallen compared to 2023, and remain significantly lower than the high watermark years in the middle of the last decade.

China’s response has been mixed. While making efforts to encourage foreign investment, it has simultaneously been working to rebalance its economy to be less dependent on exports and external factors. In a bid to boost economic activity, foreign investment and M&A, Beijing has rolled out waves of economic stimulus and other wide-ranging measures. It has lifted merger control thresholds, introduced measures to encourage M&A for qualified listed companies, and further reduced the number of sectors off limits to foreign investors – meaning there are now more sectors open to foreign investment than ever before. China is also looking to its strengths in sectors such as renewable energy technology and high-end manufacturing to fuel economic growth.

A key trend for MNCs operating in China has been the strategic re-alignment of investments in the region, driven by macroeconomic headwinds and increasing competition from domestic market participants. It is projected that 2024 could be the first year of annual net outflow from China since comparable records began in 1990. This outflow illustrates the continued impact of “de-risking” and “China +1” strategies, but it is also partly attributable to significant outbound Chinese investment, in particular to Southeast Asia. MNCs’ responses to the current conditions have ranged from strategic divestments and “de-risking” efforts, to doubling down on existing investment, the formation of new strategic partnerships with leading Chinese players, and new investments into growth sectors. Despite the more dire predictions around “decoupling” and capital flight that peaked in the early COVID period, relatively few MNCs with established businesses have sought to exit China entirely at this point. AstraZeneca, though rumoured in 2023 to have drawn up plans to spin-off its China business, instead made further China investment – including a planned USD450m factory – and this year its CEO reaffirmed the company’s commitment to China. Where we have seen withdrawals, they have typically been in the private equity space and driven by specific sectoral investment restrictions – in 2023, Sequoia Capital announced it was splitting off its China business from its Europe and US partnership, citing an “increasingly complex” dynamic. On balance, while there has been a reduction in the amount of new inward investment, in our experience most MNCs operating in China who saw China as a key market before the last few years’ difficulties – whether for manufacturing, R&D or consumers – continue to do so.

Looking ahead

Under the incoming Trump administration, US policy towards China will continue to play an important part in the Asian business landscape. Donald Trump has pledged to make widespread use of tariffs, with targeted measures against China including a proposed levy of 60% (or more) on Chinese-made products. This is leading international and Chinese businesses to re-assess their supply chains and is already driving some M&A and investment activity around the region (albeit tempered by the fact that the detail of the tariffs and how they would operate in practice is not clear at this stage). It is also possible that Trump’s “America First” approach will strain the western alignment seen during the Biden administration around directing trade and national security restrictions against China. This may open up possibilities for the UK and the EU to take a position that creates more advantageous economic parameters for UK and EU businesses active, or looking to become active, in China.

Asia remains the growth engine of the world, and, as we look ahead in 2025, we expect M&A activity across the region to increase, notwithstanding the significant complexities attached.

Given that backdrop, those buying or selling assets in Asia will more than ever need the best advisers in the region to help to navigate through the complex and evolving landscape.