The new M&A powerhouse

The new M&A powerhouse

The robust economic recovery in emerging markets has rekindled animal spirits in Asia. And nowhere is this more evident than the renewed urge to merge.

Bharti Airtel made an offer for Kuwaiti wireless operator Zain and Reliance Industries is still in the running for European chemicals company LyondellBasell. These are two of the biggest deals in play across the world and involve emerging market companies at both ends. Another big deal is the $35 billion that Prudential is paying for the Asian business of American International Group.

The New York Times reported on Friday that nearly one-third of the $395 billion of merger and acquisition deals announced in the first three months of 2010 had an Asian firm or business as either a buyer or seller, if not both. To be sure, too much should not be read into data about one quarter, but there is ample reason to ask whether the macro shift in economic power that so many people know about is also being translated at the company level.

Asian companies have come out of the recession relatively unscathed in financial terms, with low leverage and lots of cash. The stock market rally in emerging markets also makes stock an attractive currency to buy overseas assets, though most companies in the region tend to prefer cash to stock as acquisition currency since the latter involves dilution of control. Overseas acquisitions are tricky affairs and many Indian companies are still finding it difficult to digest the debt-funded purchases they made in 2007 and 2008. But this is a trend worth keeping an eye on.

A related possibility is that the shift of deal making to Asia could also result in the shift of deal makers to the region. Most Asian countries still have shallow capital markets, capital controls and almost non-existent bond markets. The only exceptions are Singapore and Hong Kong. They may be the initial beneficiaries of the shift of merger and acquisition activity to Asia. But other nations, too, should be aware of the possibilities here.

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