The Synergy of Digitalisation and Decarbonisation in APAC M&A Deals

Businesses’ pursuit of digital transformation has been driving dealmaking activity in Asia Pacific and several experts predict it will continue to do so for the remainder of 2023.

FREMONT, CA: Dealmaking in the Asia Pacific region has been fueled by the relentless pursuit of digital transformation by companies. This trend is expected to persist throughout the remaining months of 2023, as stated by industry experts. Among the various sectors, the technology, media, and telecom (TMT) industry emerged as a powerhouse, facilitating two of the most significant acquisitions in the region. Notably, the TMT sector also claimed the top spot in terms of deal volume, boasting an impressive 622 transactions in the first quarter alone.

According to Sapana Maheria, director of thematic research at GlobalData Plc, tech acquisitions have been a consistent driver of mergers and acquisitions (M&A) activity. In recent years, the future of work and artificial intelligence (AI) have been dominant themes in M&A agreements. Automation and cybersecurity have also played significant roles in shaping M&A deals. Additionally, the cloud has emerged as another prominent topic in the M&A landscape.

The future of work and AI have captured the attention of companies as they seek to enhance productivity, streamline operations, and leverage emerging technologies. M&A deals focused on acquiring AI startups, talent, or technologies allow companies to gain a competitive edge and integrate AI capabilities into their business processes.

Generative AI applications, such as ChatGPT, have gained significant popularity in recent times. In the view of industry experts, innovation and technology are poised to be the driving forces behind mergers and acquisitions (M&A) in 2023. The upcoming year is expected to witness a heightened focus on automation and the adoption of innovative and collaborative tools, leading to a surge in M&A deal trends. Firms are increasingly prioritising cost-cutting measures, making automation and efficient tools key factors in their decision-making processes. The integration of such technologies will enable organisations to streamline operations, boost productivity, and achieve greater cost efficiencies, thereby driving M&A activities.

Sapana mentioned that within the Technology, Media, and Telecommunications (TMT) sector, there is expected to be a significant number of acquisitions targeting companies involved in cloud computing, cybersecurity, artificial intelligence (AI), big data, and 5G connectivity throughout the year.

Automation has been a key driver for M&A activity as companies look for ways to improve efficiency, reduce costs, and optimise their operations. Acquiring companies with automation expertise or technologies enables organisations to enhance their capabilities and meet evolving customer demands.

With the rise in cybersecurity threats, companies are actively pursuing M&A deals to bolster their cybersecurity defences. Acquiring specialised cybersecurity firms or technologies helps companies strengthen their security infrastructure and protect sensitive data from breaches and cyber attacks.

The cloud has become a vital component of modern business operations, offering scalability, flexibility, and cost-efficiency. Companies are engaging in M&A deals to expand their cloud capabilities, acquire cloud service providers, or integrate cloud technologies into their existing offerings. This enables organisations to leverage the cloud's benefits, such as improved data storage, enhanced collaboration, and seamless access to services.

Tech acquisitions have been a consistent driver of M&A activity, with the future of work, AI, automation, cybersecurity, and the cloud standing out as prominent themes. Companies are strategically pursuing M&A deals to stay competitive, enhance their technological capabilities, and address evolving market demands.

While digitalisation continues to play a significant role in driving mergers and acquisitions (M&A) in the Asia-Pacific (APAC) region and globally, Sapana noted that decarbonisation is also experiencing an upward trend. As the year 2030 approaches, decarbonisation is expected to become a primary driver of M&A activity, according to Sapana. She added that many companies have set environmental, social, and corporate governance (ESG) goals for the next seven years.

Market makers' data revealed that the largest deal in Greater China, in terms of value, involved the merger of Wuhan-based luxury electronic vehicle (EV) manufacturer Lotus Tech with Singapore-based special-purpose acquisition company L Catterton Asia Acquisition Corporation, totalling USD5.5 billion (SG USD 7.39 billion/HK USD 43 billion). The region's fourth-largest deal also revolved around an EV manufacturer, with WM Motor Global being acquired by Hong Kong's Apollo Future Mobility for USD 2 billion (SG USD 2.69 billion/15.63 billion).

Sapana highlighted the automotive sector as another industry poised for growth, driven by factors such as autonomous vehicles and electric vehicles. The sector has witnessed significant investments in these areas. Currently, decarbonisation is more prominent in venture capital deals, where companies invest in businesses and products that enable them to track their emissions or achieve their environmental goals.

ESG-related pressures from shareholders also drive companies to address various aspects of sustainability. Sapana emphasised that Generation Z, soon to make up the majority of the workforce, is highly aware and conscious of a company's carbon footprint. Therefore, companies need to actively invest in reducing their carbon emissions.

Furthermore, Sapana predicts that the power sector will experience growth in M&A deals due to the ESG movement. Energy transition, along with hydrogen and renewable energy, are significant themes in the sector and are attracting substantial investments. Therefore, it is expected that M&A activities in the power sector will either remain consistent or increase in 2023.

In addition to decarbonisation and digitalisation, analysts are suggesting that the resurgence of China's economy will also play a significant role in driving transactions in 2023.

However, Sumit Punwani, Partner for Corporate Finance, Deal Advisory at KPMG Singapore, cautions that China's recovery may not be as seamless as anticipated. He points out that while China's reopening in the fourth quarter of 2022 led to a notable revival in consumer consumption, particularly evident in the robust performance of the domestic tourism sector during the "golden week" in early May and increased luxury goods spending, there are challenges in the manufacturing industry. China's manufacturing PMI declined from 51.9 in March to 48.8 in May, leading to subsequent declines in key commodities such as crude oil, Newcastle coal, and copper.

Considering these factors, Punwani believes that the interest of China-based companies in participating in M&A activities will likely increase moderately rather than experiencing a sharp V-shaped rebound.

Sapana emphasises that Chinese firms face greater scrutiny when it comes to acquisitions, given the geopolitical tensions involving China as an APAC superpower. Acquisitions of UK-based or US-based companies, especially those with patents, often face obstacles and blockades. It is expected that this trend will continue in 2023 and for several years to come.

The regression of M&A transactions in the Asia-Pacific (APAC) region during the first quarter of 2023 can be attributed to a combination of geopolitical tensions and macroeconomic factors. These elements are expected to continue affecting deal sentiments throughout the year.

According to Punwani, recent developments in the financial services sector, concerns about a potential recession, and geopolitical issues such as China's economic recovery and the Russia-Ukraine situation have influenced market sentiments among C-suite executives in the APAC region. Given the heightened global macro uncertainty, companies are anticipated to exercise greater caution in their M&A strategies and adopt a prudent approach, particularly until the end of the third quarter of 2023.

Furthermore, Sapana highlights that supply chain issues may tamper with the M&A market in the short term.

In light of the uncertain macro environment, Punwani advises companies to take a long-term perspective when evaluating deal opportunities. He highlights that in the event of a further economic downturn, the timeline for extracting value may be prolonged. Additionally, companies should ensure that they have sufficient margins of safety to meet their cash flow requirements when considering funding an acquisition. This aspect is often overlooked, and underestimating the cash flow needs of the target company post-acquisition can lead to financial strain during an extended economic downturn.

However, Punwani notes that the current environment can present significant opportunities for companies, particularly those with strong balance sheets and funding capabilities.

Sapana shares a similar perspective, noting that valuations have declined, making it an opportune time for strategic acquisitions. She recalls a quote from Warren Buffett, stating that during a recessionary environment when valuations are lower, it is the ideal time to pursue acquisitions as companies can acquire the same capabilities or businesses at a reduced price.

She predicts that critical acquisitions will undoubtedly occur, with the Asia-Pacific (APAC) region playing a significant role in such transactions.