Wong: Technology and manufacturing sectors could see some pick-up in M&A activities.
PETALING JAYA: Valuations of companies and industry consolidation could be a key driver to mergers and acquisitions (M&As) in 2023.
Speaking with StarBiz, Ian Yoong Kah Yin, who is a high-net worth investor and former investment banker, said there are many small to mid capitalisation companies on the local exchange which are trading at handsome discounts to book value and low price to earnings ratio of around single digit or low teens value, making them attractive for acquisition or privatisation targets.
“Additionally, the slowdown in the global economy and a likely global recession in 2023 are compelling reasons for companies in the same industry to merge,” he said, adding financially weaker companies would seek strong companies to acquire them.
When asked which sector is likely to have more M&A activities, Yoong believes deals could emerge in the banking and packaging sectors.
He opined the passing of Public Bank Bhd
’s founder and chairman emeritus, director and adviser, Tan Sri Teh Hong Piow, could be a catalyst for heightened M&A activity in the banking sector.
Yoong cited Section 92 of the Financial Service Act which prohibits individuals from owning more than 10% of shares in a financial institution could pave the way for a corporate exercise.
In his opinion, the most popular reason for major shareholders to sell their controlling stake is lack of successors from their families or their heirs have little interest in managing their businesses.
“A wise major shareholder of a listed food and beverage manufacturer sold the family’s controlling stake to a multinational company recently because they treasured cordial family ties and were cognisant of family squabbles in second generations of other family businesses,” he said.
Yoong added the absence of a patriarch might lead to friction among the heirs, which would lead them to dispose of their shares.
That same thing could materialise for Public Bank, where the lack of cohesion among the family members will be an advantage to any potential acquirer.
“History has shown that founders of businesses are usually more successful in extracting better deals when selling the ‘family’ business. The second and subsequent generations are statistically less capable, adept and astute in selling off the businesses built by their corporate titan father or grandfather,” he added.
Yoong noted the finance sector is up by about 6.5% year-to-date in an underperforming market.
“This year is a bumper year for banks globally, where banks profitability reached a 14-year high, with expected return on equity between 11.5% and 12.5%,” he said.
“Tier-1 capital ratios for the banking system globally is at 14% to 15%, the highest Tier-1 capital ratios ever. The major shareholders of the family controlled banks might feel this is a good time to sell out,” he concluded.Yoong added the low interest rate regime for the past few years has brought weighted average cost of capital for acquiring companies to be viable and profitable, while a high interest rate regime will have a converse impact.
Tradeview Capital chief investment officer Nixon Wong opined the glove industry may see consolidation to cope with the oversupply situation and while valuations are attractive.
“Technology and manufacturing sectors could see some pick-up in M&A activities as it is the quickest option to gain access to the labour force, amid the labour shortage situation we are facing currently,” Wong added.
Commenting on the underlying factors that drove M&A activities locally in 2022, Wong said valuations were attractive as the market has been experiencing prolonged weakness amid global headwinds.
Additionally, Wong believe many took the opportunity to leverage on the still low interest rate as well as cheap cost of funding early-mid 2022 before the expected interest rate hikes kick in second half of 2022.
Among the notable M&A deal to take place in 2022 include the acquisition of four highway concessionaires by Amanat Lebuhraya Rakyat Bhd with a total enterprise value of RM5.48bil.
The four highway toll concessionaires are Lingkaran Trans Kota Sdn Bhd, Sistem Penyuraian Trafik KL Barat Sdn Bhd, Kesas Sdn Bhd and Syarikat Mengurus Air Banjir dan Terowong Sdn Bhd.
Other M&A activities include the acquisition of a 68.35%-stake in AHAM Capital, previously known as Affin Hwang Asset Management Bhd, for RM1.54bil by CVC Capital Partners, and the merger of Celcom Axiata Bhd and Digi.com Bhd’s telco operations that took place recently.
When asked if we can expect more mergers in the telco industry, owing to the Celcom-Digi merger, Wong said the intensifying competition in the mobile space may be capping the ability to yield higher operating cash flow and there will be limited capacity to take on more debt without generating more operating cash flow as most telcos are highly geared.
“Therefore, it makes sense for telco to consolidate further to create better cost synergies while rolling out 5G services,” Wong said.
As for the banking sector, Wong believes there will not be many M&A activities, unless banking valuations become more compelling.“Ultimately, there are still difficulties in determining the fair prices, as banks’ valuations are not attractive after the sector outperformance amid the rising interest rate environment,” Wong uttered.
On the table is Malaysia Building Society Bhd’s proposed purchase of Malaysian Industrial Development Finance from Permodalan Nasional Bhd for an undisclosed sum.
Wong added the emergence of new digital banking players in the coming two to three years will likely intensify competition in the banking space.
“Higher compliance costs and capital costs are factors driving the need of consolidation within industry with the aim to create cost synergies and promote innovations. However, M&A implies worker layoffs which does not bode well with the environment of a slowing economic growth in 2023,” he said.
