Finance sector M&A in the Asia-Pacific region will stay subdued after deals fell 28% year over year in the quarter ended Sept. 30, weighed down by economic weakness and geopolitical uncertainty.
The region's finance sector reported 138 M&A deals in the July-to-September quarter, down from 193 in the prior-year period, dragged by a slowdown in activity in the financial technology and insurance sectors, according to S&P Global Market Intelligence data. The ongoing war in Ukraine, rising inflation, interest rate hikes and a bearish market environment will continue to weigh on investors' appetite for deal-making.
M&A activity in the Asia-Pacific financial services sector likely will remain muted through the first quarter of 2023, said Mark Uhrynuk, corporate and securities partner at law firm Mayer Brown.
"There will continue to be activity […] but the combination of geopolitical uncertainty and macroeconomic volatility has tempered ambitions and appetite for risk," Uhrynuk said. "So, buyers are more cautious."
Bright spots
Southeast Asia continues to be a bright spot for M&A, owing to a growing middle class and supply chain diversification, analysts said. The region recorded 21 deals in the third quarter, compared with 35 in the second quarter and 31 in the year-ago quarter.
"We've talked a lot about Southeast Asia recently, in terms of supply chain diversification or the rising of the middle class, whether it's Singapore or the VIP [Vietnam, Indonesia, the Philippines] countries, it's all getting more and more attraction in the market," said Miranda Zhao, head of M&A for Asia-Pacific at Natixis Corporate & Investment Banking. Southeast Asia's continuous growth has naturally attracted investors globally to the region, Zhao said.
Similarly, Australia saw several deals in the quarter, including Australia and New Zealand Banking Group Ltd.'s purchase of Suncorp Group Ltd.'s banking arm. The acquisition is the country's biggest banking deal in more than a decade.
Longer horizon
A likely comeback from special purpose acquisition company macro factors, such as rising inflation and rate hikes, and a push toward digitization could help drive M&A activity in the financial services sector in the months to come, analysts said.
SPACs are publicly listed corporations that have no commercial operations and are formed to raise capital from an initial public offering, after which the entity acquires or reverse merges with an existing company in what is commonly known as a de-SPAC transaction.
"The drivers behind high-profile deals in the coming months could be the wave of newly listed SPACs in 2020 as they look to de-SPAC within their two-year window," said Stephen Chan, partner at Dechert LLP Hong Kong. "Many of [Asia-Pacific's] startups and IPO-ready unicorns in high-growth sectors such as tech and fintech will be attracting a lot of attention from SPACs as potential targets."
Lingering caution
The financial sector may also garner more attention due to lingering caution in other sectors that were hit more by the most recent market tumults, such as technology, healthcare and education, said Steven Sha, a partner at law firm White & Case. The same macro factors that dampen investor sentiment — rising inflation and interest rate hikes — would continue to introduce dynamic elements into the financial industry, which could lead to more M&A opportunities in the sector, Sha said.
"The push toward digitization over the pandemic may also continue to push fintech growth, possibly leading to consolidation across regions within [Asia-Pacific], where there may be less geopolitical uncertainty or regulatory scrutiny," Sha said.
Likewise, as corporates and investors focus more on their core businesses and regions, more deals may happen.
"We may see some banks divest their asset management arms, while some major players with solid capital structure [may] pick up such [assets] at the right price in [the] current market," Zhao said.
