FW speaks with Lim Jo Yan, a partner at MahWengKwai & Associates, about M&A activity in Malaysia.
FW: What do you consider to be the major trends shaping Malaysian M&A activity over the last 12 months?
Lim: Malaysian target companies have sought investment opportunities with strategic investors to leverage their expertise and experience in the target’s core business. Target companies are also diversifying into non-core areas through M&A. Private equity deal sizes are relatively smaller than previous years, though the smaller numbers have added to the volume of deals. Co-investments between private equity funds or venture capitalists are becoming more common in technology companies. Drivers are relying on special purpose acquisition companies (SPACs) to raise capital from the public for acquisition of assets of a specific nature. Malaysia has seen the introduction of SPACs for investment in oil and gas assets, which are typically located outside Malaysia. We should be seeing the entry of a real estate SPAC in the near future. We have also seen the emergence of family offices as a source of funds for private investments.
FW: Do transactions seem to be concentrated in particular sectors, or is this activity spread across a range of industries?
Lim: Transactions are generally found to be spread across industries. There were several notable transactions in the oil and gas sectors last year, particularly in upstream investment. We are finding that domestic oil and gas players are keen to consolidate their position not just regionally but also on a global level. In cases where companies are seeking to diversify into non-core investments, the real estate sector has emerged recently as a popular option. There has been considerable consolidation in the energy sector which has given rise to the possible listing of an independent power producer. On the private equity front, investments seem to be inclined toward the retail, technology and consumer sectors.
“In the past year, high value outbound investments were seen in the oil and gas and real estate sectors.”
FW: To what extent are Malaysian companies seeking overseas assets?
Lim: In the past year, high value outbound investments were seen in the oil and gas and real estate sectors. Malaysian oil and gas companies have sought investment opportunities as far as South America. The introduction of SPACs on the Malaysian stock exchange opens the door to more meaningful overseas acquisitions. Currently, SPACs have a mandate to invest in oil and gas assets. We have also seen interest by Malaysian companies in real estate opportunities in the United Kingdom, primarily in London. These include acquisitions of hotels, shopping centres and the redevelopment of a former power station area. We anticipate Malaysian companies to be more active in investments in South East Asia and China.
FW: Could you provide some insight into the key issues for dealmakers when negotiating and closing M&A transactions in Malaysia?
Lim: The pricing of a deal is typically based on a locked box approach, in which the purchase price is fixed at the time of signing of the definitive agreements. That said, depending on the industry in question, adjustments to the purchase price are becoming more common. While companies, particularly those which are still led by their founders, are cautious about investments by strategic investors, they are becoming more aware of the value that strategic joint venture partners can provide. Target companies are keen to work together with such partners. As such, joint ventures, rather than complete divestments are likely to be an outcome of a transaction structure.
FW: Have acquirers in Malaysia widened the scope of due diligence during M&A? Are they carefully evaluating aspects of the target company that could jeopardise their investment?
Lim: Due diligence exercises are becoming more comprehensive. In addition to due diligence being conducted on targets, we are seeing a higher level of scrutiny being placed on sellers and co-investors. Foreign acquirers are also focusing more attention on corporate compliance by the target, particularly on corruption and bribery issues, as the US Foreign Corrupt Practices Act and UK Bribery Act have far-reaching implications. Foreign acquirers are seeking to understand the efficiency of the group tax structure, foreign currency fluctuations and the remittance of money outside Malaysia, to minimise the risk of repatriated profits.
“Due diligence exercises are becoming more comprehensive. In addition to due diligence being conducted on targets, we are seeing a higher level of scrutiny being placed on sellers and co-investors.”
FW: In your opinion, are acquirers in Malaysia doing enough to minimise transactional risk? What fundamental steps should they take, including exploring insurance options, both in domestic deals and overseas?
Lim: There is increased awareness of insurance options for representations and warranties protection. Insurance may be relied upon where acquirers require a higher warranty cap and longer survival period than sellers are prepared to give. Unfortunately, the cost of representations and warranties insurance is relatively high and insurance is rarely taken. Generally, transactions are recommended to be above $25m before efficiencies may be seen in the cost of insurance. In the absence of insurance, parties may seek to retain parts of the purchase price until the expiry of a period of time without any claim for breach.
FW: What is your advice to buyers on planning for post-deal integration? How important is this process in unlocking future value?
Lim: M&A deal integration consideration should occur in the early stages of the transaction. An acquirer should formulate an integration plan at the due diligence stages so that any gaps may be addressed before completion of the transaction. Where the acquirer and target have similar businesses, it is desirable for operations to be integrated to save on costs and develop synergies. An acquirer should not overlook the importance of human resources, IT and tax concerns. In the case of an acquisition which results in a joint venture, it is important for the acquirer to consider whether it is possible for the joint venture parties to work together. Studies have shown that most M&As fail at the integration stage.
“We are cautiously optimistic about domestic and outbound opportunities in 2015. It will be a buyer’s market, especially for those with strong cash reserves, as funding will become more difficult.”
FW: What are the foreseeable regulatory changes that may affect Malaysian M&A?
Lim: A draft Companies Bill was published in July 2013 for public consultation. The Bill seeks to replace the current Malaysian Companies Act 1965 with a more modern and efficient approach to the corporate legal framework in Malaysia. The Bill will make it easier for companies to be incorporated with only a single shareholder and director. Further, shareholder written resolutions may be passed with only a majority vote, as opposed to the current unanimous vote requirement. As such, shareholder disputes may be resolved more efficiently. The par-value regime will be abolished and there are easier ways of reducing capital than going to Court, provided that the solvency rules are fulfilled. Further, the financial assistance prohibition will be relaxed. This will be useful in facilitating leveraged buyouts. As such, debt-push downs and target company assets being used as financing security are permissible under the Bill.
FW: What is a common forum for resolving Malaysian M&A disputes?
Lim: Arbitration is a common feature of resolving disputes in Malaysian M&A. Where target companies are in Malaysia, the choice of law is usually Malaysian and the forum is either in Malaysia or Singapore. That said, we are seeing more disputes occurring at the joint venture stage in respect of a joint venture or shareholders agreement, than in respect of the acquisition transaction documents. A common issue is the resolution of a deadlock or the implementation of an exit without the cooperation of the remaining shareholder.
FW: What are your expectations for Malaysian M&A, both domestic and outbound, over the coming months?
Lim: We are cautiously optimistic about domestic and outbound opportunities in 2015. It will be a buyer’s market, especially for those with strong cash reserves, as funding will become more difficult. It will be opportunistic for buy-side M&A. With the Ringgit weaker against the US dollar, we hope to see more foreign investment. We anticipate that there will be more private equity deals, though they will be in smaller valued transactions. Also, with Malaysia chairing ASEAN in 2015, we hope that this will generate more opportunities for collaboration and investment within ASEAN.
Lim Jo Yan is a partner at MahWengKwai & Associates. He heads the firm’s corporate and commercial practice group and advises on mergers and acquisitions, restructurings, competition, environmental, real estate, private wealth, family offices and general corporate and commercial transactions. He can be contacted on +6 03 7887 2706 or by email: joyan.lim@mahwengkwai.com.
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