Southeast Asia – An Emerging Bright Spot in Asia-Pacific M&A

Southeast Asia has a lot to offer. Its six core economies comprise more than 600 million people, delivering a combined GDP of over USD4.2 trillion (2023), and it attracts almost one-fifth of global FDI inflow annually, positioning the region as one of the most dynamic and fastest growing in the world.

Against a promising economic backdrop, Abbas Rangwala, Head of M&A, Southeast Asia & India, shares his thoughts on the M&A outlook for SEA in 2024.

Why is Southeast Asia such a promising market?

Southeast Asia has consistently demonstrated robust economic growth, driven by factors such as its burgeoning middle class, growing population and rapid urbanization, as well as a developing digital economy.

And despite facing major challenges including climate change, biodiversity loss, and increasing inequalities that were only further reinforced by the COVID-19 pandemic, Southeast Asia has weathered recent global macroeconomic headwinds with more resilience than many other regions around the world.

Southeast Asia has weathered recent global macroeconomic headwinds with more resilience than many other regions around the world.

GDP growth remains between 4-5%, while inflation has come down to 3% and interest rate increases have been relatively modest compared to the US. Compared to pre-pandemic (2019), there have been encouraging upswings in regional FDI inflows (+36%), regional exports (+32%), and travel demand (+40%) in 2023. Consumer confidence also began to rebound in the second half of 2023.

What factors are driving M&A in South Asia?

The above economic factors create an attractive market for M&A with companies seeking to capitalize on emerging opportunities and expand their market presence.

If we take a step back and look globally, according to Mergermarket, M&A volumes fell by 11.5% in 2023 year over year, and this trend persisted in Southeast Asia too, where volumes declined by 16.9% over the same period. Yet, in Southeast Asia, there has been some encouraging pick up recently thanks to lower equity market volatility and a potential return of IPOs.

With that in mind, navigating the regulatory landscape too is a critical aspect of M&A in Southeast Asia. Each country within the region has its own set of rules and regulations, and companies need to carefully assess and comply with these requirements. Regulatory changes can significantly impact deal structures and timelines and it is important to understand these early and adapt M&A strategies accordingly.

Where is investment/activity coming from?

Southeast Asian countries are continuing to take significant steps to remove barriers to investment. We also see increasingly proactive government involvement in driving investment into strategic sectors by providing increased transparency and regulatory policy support.

Southeast Asian countries are continuing to take significant steps to remove barriers to investment.

Prominent Sovereign Wealth Funds in the region too have led sizeable M&A deal activity in recent years. And despite a decline in funding, significant dry powder remains in the Private Equity and Venture Capital space, with over US$15bn of capital committed to Southeast Asia as at the end of 2022, boding well for the year ahead. 

As such, the deal environment remains competitive for high-quality investments.

What lies ahead for M&A activity in the region?

Recent deal activity suggests that Southeast Asia M&A volumes likely bottomed in the first half of 2023 and there are promising signs of recovery in 2024. Rising consumer confidence, stabilized inflation, reducing interest rates, and a pick-up in IPO markets are sparking optimism for the year ahead.

Although it remains relatively muted, 2023 also saw the return of Chinese investment into the region, which had been subdued over the past two years, in part due to strict COVID-19 restrictions in China.

The region’s diversified conglomerates have also capitalized on these economic factors, expanding into areas such as green business, financial services, and healthcare. It is expected that these conglomerates will continue to pursue acquisitions in new economy sectors and divestitures to bolster growth and reshape their businesses.

Which areas can we expect to see more activity in 2024?

  • Renewables and Green Tech: Southeast Asia will continue to see growth in the renewables space. Vietnam, for example, is planning rules and regulations to encourage foreign investment alongside established local partners in the sector.
  • Healthcare and financial services: Large and growing populations, higher disposable income growth as well as urbanization trends, will drive increased deal activity in healthcare, financial services, insurance as well as the technology companies supporting these industries.
  • Electric mobility: EV-related investments are likely to pick up in Indonesia, which is a major global source for nickel, a key raw material for EV batteries, and in Thailand, a regional hub for combustion engine vehicles, as it transitions to EVs.
  • Digital infrastructure: With large population and increasing internet penetration in the region, as well as low per capita data consumption, significant growth in investments in data centers, fiber & subsea cables and telecom towers infrastructure will continue regionally.

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