Asian Capital Markets - Financial Times, May 19
Japan's equity markets are powering ahead and the mergers and acquisitions scene is changing beyond recognition
by Rahul Jacob and Naoko Nakamae
Asia's capital markets have not looked so promising in years, except for a looming question mark about the havoc a steep drop on the US stock market might wreak on Asian markets and the bulging new issue pipeline in Asia.
Japan's equity capital markets are still powering ahead despite market volatility, driven by a rising stock market and structural changes, such as liberalisation in the financial sector. The improving environment for issuers and investors is likely to help the market grow even bigger in the coming months.
A sea change in attitude on the part of investors and Japanese corporates suggests this trend is here to stay. Corporations are cash- strapped and no longer able to rely on banks for money. Meanwhile, the mergers and acquisitions scene is changing beyond recognition. Renault is buying a stake in Nissan and DaimlerChrysler's stake in Mitsubishi Motors are signs of the times.
The market is being driven by significant funds from a diversified range of sources which are pouring into the sector. Individuals are shifting their savings away from near-zero interest rate deposit accounts into equities and mutual funds.
There have also been recent signs that institutional investors are slowly increasing equity weightings in their asset portfolios.
Issuance has also been lifted by reforms to Japan's unwieldy financial system, that was traditionally dominated by big banks which provided cheap lines of credit to its favoured customers.
Young start-ups in Japan are rushing to raise funds in the equity markets. They benefit from the emergence of new stock markets such as Mothers, the Tokyo Stock Exchange's market for growth stocks, and Nasdaq Japan, which will be launched in June.
Although Mothers, which was launched last December, has had a rocky start with many of its stocks trading below their offering price, some investment bankers say this will help to discipline investors - and the market - in the future.
In contrast to the large parts of the Japanese economy which are languishing amid the worst recession of the postwar era, a handful of sectors are growing and expanding their business.
To finance new projects, these sectors, which include technology and telecommunications, are rapidly moving away from bank loans to direct equity issuance.
Over the past several months, a two-tiered capital market has emerged in Japan and elsewhere in Asia, replicating the trend elsewhere in the world.
There is one market for technology and telecommunications and a rather less inviting environment for everything else.
China's ambitious plans for privatising large state-owned enterprises in the oil and gas industry and in steel have had to be delayed, despite initial predictions by bankers that there was a huge investor appetite for such companies.
Earlier this year, the HKDollars 22.5bn IPO of PetroChina, the main unit of China National Petroleum Corporation, needed large investments by half a dozen strategic investors to keep the listing on track. China's securities watchdog has read the writing on the wall and such old economy companies as Bao Steel have been asked to delay their listing plans.
Asian M&A (outside of Japan) has similarly taxed bankers' ability to predict the future. In the aftermath of the Asian financial crisis, 1998 was expected to be the year of the deal but valuations by buyers and sellers were too far apart.
The year 1999 duly saw M&A deals in the region accelerate from USDollars 59bn in 1998 to USDollars 87bn last year, according to Thomson Financial.
Most bankers are predicting that 2000 will be even busier, but Warburg Dillon Read believes yet another surprise is on the cards. It argues that the prospects for increased M&A may prove "disappointing". In a recent report, it argues that "Asian M&A is likely to plateau rather than accelerate further in 2001. The increased activity levels are fairly narrowly based".
The bankers disagree. Harry Van Dyke, head of Morgan Stanley Dean Witter's M&A team, says that he expects his firm's business to increase some 20 to 40 per cent this year. In countries such as Korea, he says, MSDW is getting more domestic business at the expense of local advisers. He says the firm's business in Asia-Pacific now consists of roughly 40 per cent domestic M&A, another 40 per cent cross-border deals in Asia and 20 per cent multinationals buying into Asia.
The restructuring is driven by companies in developing Asia increasingly benchmarking themselves against their international peers.
"There is a growing desire by Asian companies to catch up after the crisis. They are now saying 'our overseas competition has moved ahead and we didn't'," says Stephen Schiller, head of Asian M&A for Salomon Smith Barney.
M&A has become part of the Asian manager's toolbox to raise competitiveness, says Mr Van Dyke, but it still has a way to go.
"In Korea people say 'if a business isn't performing let's think about selling it'," he says, but unlike the US and Europe, "it is not the first thing people think about or even the second thing."
The WDR report says that M&A is likely to be limited to government-instigated banking mergers and the telecoms sector. Korean M&A activity may be losing momentum and Singapore's government, it says, is pushing for consolidation in the corporate sector.
It also likes the prospects of Hong Kong but says it may be held back by family dominance of companies in sectors such as banking and property. Mr Van Dyke says India has had a flying start this year.
However, the aggregate of all deals in Asia is still small change compared with the merger activity in the west. Mr Van Dyke observes that the M&A business worldwide amounted to USDollars 3,000bn in 1999 of which Asia's share (excluding Japan) was USDollars 150bn. He recently put together a chart comparing Morgan Stanley's deal volume in Asia (excluding Japan) in 1999 with the closest annual equivalent for the US and Europe. Asia's M&A activity in 1999 was the equivalent of Europe's in 1986. |
