Uncertainty kills deals’: finance M&A likely to stay subdued after Q1 decline
Mergers and acquisitions in Asia-Pacific’s finance sector are unlikely to pick up soon as economic uncertainties, higher funding costs and geopolitical risks dent dealmakers’ confidence.
Deal volume in the sector dropped almost 14% year over year during the quarter ended March 31, dragged by declines in mainland China and Australia, according to S&P Global Market Intelligence data that was compiled on a best-efforts basis.
Economic uncertainties, higher funding costs and increased volatility due to geopolitical risks are among the factors deterring M&A activity in the region, said Raghu Narain, managing director and head of investment banking for Asia-Pacific at Natixis CIB.
“These conditions are detrimental to M&A activity because they put a dent in confidence, and therefore the gap between buyers and sellers, valuations, and agreement of deals, persists — and that’s what we’ve been seeing in Asia-Pacific,” Narain said.
The finance sector includes banks, nonbanking financial institutions, and companies classified under the insurance, financial technology, payments and specialty finance sectors.
Deal activity in the region broadly mirrored global trends. Global M&A announcements in the quarter fell to 9,022, the lowest total since the onset of the COVID-19 pandemic disrupted markets in the second quarter of 2020, according to Market Intelligence’s M&A and equity offerings white paper. M&A and equity issuance is likely to pick up, but lingering questions over interest rates and other factors continue to cast a pall over future activity, the report said.
Headwinds
A turnaround in Australia’s M&A is expected as potential bidders adjust to greater certainty on interest rates, said Justin Tan, a partner at Mayer Brown, but deals are likely to remain muted in mainland China due to uncertainties around the country’s growth outlook.
“Uncertainty kills deals,” said Tan.
Alongside macro headwinds, the financial sector faces added challenges “due to increasing regulatory oversight and capital requirements especially in light of the higher cost of capital,” said Andre Gan, partner at Wong & Partners, a member firm of Baker McKenzie in Kuala Lumpur, Malaysia.
Mainland China has set its 2024 GDP growth target at about 5% after the world’s second-biggest economy beat a similar target and grew at 5.2% in 2023. The International Monetary Fund projects China’s GDP to grow 4.6% in 2024.
Just nine finance sector deals were announced in mainland China in the first quarter, compared with 24 the year before, Market Intelligence data shows. In Australia, investors struck 12 deals in the sector, down from 26 a year earlier.
Improvement in sentiment is needed for an across-the-board turnaround in finance M&A, according to Asialink Business CEO Leigh Howard.
“Investor confidence and sentiment are crucial drivers of M&A activity,” Howard said. “We’ll need to see an upswing in market sentiment for significant dealmaking to return.”
Bright spots
India, the fastest growing large economy in the world, could buck the trend, analysts said. It reported a one-deal increase in volume year over year in the first quarter, Market Intelligence data shows.
“Given India’s strong growth forecasts and resilience to global shocks, there’s a reasonable expectation for robust dealmaking,” said Howard, citing India’s favorable demographics, ongoing reforms and growth opportunities.
India expects its $3.5 trillion economy to have grown 7.6% in the fiscal year that ended March 31, compared with 7.0% in the prior fiscal year. In its April regional economic outlook report, the IMF raised its 2024 growth projection for India by 0.5 percentage point to 6.8%.
A backlog of deals and pent-up demand also provide grounds for optimism across the region about a turnaround in dealmaking in the coming quarters.
“The underlying dynamics of the Asia-Pacific finance sector — coupled with a strategic shift towards programmatic acquisitions and a potential resurgence in fintech M&A — suggest a cautiously optimistic outlook for finance M&A in the upcoming quarters,” said Oluchi Ikechi-D’Amico, partner and Asia-Pacific capital markets community leader at EY-Parthenon.
Ikechi-D’Amico said the outlook is contingent upon macroeconomic conditions stabilizing and geopolitical tensions easing.
*This analysis was produced by S&P Global Market Intelligence, not S&P Global Ratings, which is a separately managed division of S&P Global. Please attribute any commentary/data you cite from this analysis to S&P Global Market Intelligence.