Deal-making in a pandemic

OBSERVING the transaction landscape covering mergers and acquisitions (M&A), private equity (PE) and venture capital (VC) investments in Singapore, Malaysia and Indonesia (the region) at the end of 2020, we noticed how different last year has been.

While past crises have affected specific industries, sectors or regions, the Covid-19 pandemic has had a wide-ranging impact across industries around the world.

As per the Duff & Phelps Transaction Trail Report, 2020 saw a 17 per cent reduction in transaction value in the region.

At a global M&A level, this decline was 24 per cent.

Notwithstanding this decline, a total transaction value of US$84 billion covering over 1,000 deals shows the resilience of the dealscape against the pandemic.

That there have been 15 M&A transactions and two PE/VC investments valued at over a billion dollars each, against 10 and three, respectively, for 2019, further underscores the resilience of the dealscape.

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Having said that, the pandemic has left a long-lasting impact and could potentially lead to long-term structural changes for regional deal-making.

Bottlenecks and delays

After starting on a positive note, 2020 saw some deal-completion delays because of the inability to complete onsite due diligence and uncertainties over business prospects. This led to indeterminable valuations, resulting in renegotiation, termination or even cancellation of deals and potential discussions.

Longer-term issues

The pandemic continues to last much longer than expected, with several countries seeing multiple waves of infection, the economic impact of which, including impairment issues, restructuring and bankruptcies, are expected to last beyond this year. Several economies have gone into recession and are starting to see a V- or a W-shaped recovery.

Market valuations

Public market valuations have been volatile, with several markets already catching up with value erosion and some even showing growth from last year. Private investments lag the public markets and can display more stability if they can demonstrate strong fundamentals.

Sectoral differences

Essentials, including healthcare, consumer staples and utilities, have started seeing growth. Early adapters, comprising of segments that can adapt faster to the new normal such as financial services and education, would see more transactions and possibly better valuations going forward.

Technology-related segments, including Internet-based services, software applications, communications infrastructure and IT infrastructure, have been defying the downtrend and the focus of transactions and investments.

On the other hand, sectors such as airlines, transportation, hospitality, leisure and entertainment, which have been among the worst hit by the pandemic, are expected to take more time to stabilise.

Varied drivers

Globally, while most sectors have shown a decline in deal values between 2019 and 2020, the technology sector has shown a 22.5 per cent increase during the same period. In the region, the technology sector has seen PE/VC investments of US$5.7 billion in 2020 - constituting 65 per cent of the total.

The sector's share of the PE/VC pie is higher, at 80 per cent, for Indonesia. This is one of the few sectors that has seen business and performance parameters for most segments grow despite the pandemic and possibly owing to the pandemic.

Meanwhile, the real estate sector accounted for 38 per cent of Singapore's and 43 per cent of Malaysia's M&A values last year.

One of the key reasons for the significant thrust in this sector could be the real estate price erosion across several countries.

More than US$340 billion of value was wiped out last year from an index tracking real estate investment trusts (Reits) globally, which offers a significant investment opportunity.

In addition to the CapitaLand Mall Trust and CapitaLand Commercial Trust merger valued at over US$6 billion, several Singapore companies - including GIC, Global Logistics Property, ARA Asset Management, Suntec Reit and Mapletree - have acquired sizeable real estate and logistics properties globally.

Looking ahead

The Regional Comprehensive Economic Partnership, the world's largest trade pact, has been signed by Singapore, Malaysia, Indonesia, the seven other Asean countries, Japan, China, South Korea, Australia and New Zealand. It is expected to have a positive impact on Asean business and transactions.

In addition, a better global political environment, higher technology adoption and increased availability of capital resources for the region are positive factors driving the transaction outlook.

On the other hand, irrespective of the pandemic, we are living in a world where business cycles will continue to get shorter and disruptions will remain, leading to more uncertainties.

The pandemic has taught deal-makers to adapt to uncertainties and adopt the new normal of deal-making with virtual due diligence, budgeting for uncertainty through scenario planning, and nuanced deal-structuring and financing. The resilience in the region's transaction landscape despite the pandemic is a testament to the importance of inorganic growth and investments - not only to strategic growth but also to the sustenance of businesses.

• The writer is managing director of Duff & Phelps, a global advisory firm.