M&A Landscape – Trends & Future

M&A Landscape – Trends & Future

Malaysia's central bank, Bank Negara Malaysia, has projected the growth for Malaysia in 2021 to fall between the range of 6.5% and 7.5%.

The Landscape in Malaysia

When the World Health Organisation (WHO) declared Covid-19 a pandemic in March 2020, countries rushed to close their borders and enforced lockdowns in a bid to contain and prevent the spread of Covid-19. Economic activities ground to a near halt and the world economy took a nose-dive. Malaysia was no different and commenced its "movement control order" in March 2020 which restricted all movements and economic activities save for essential activities such as purchasing daily necessities and seeking healthcare services. 

Compounding this health and economic crisis was the political turbulence which arose after Tun Mahathir resigned as Prime Minister. This resulted in the collapse of the less than 2-year old Pakatan Harapan coalition government which had come into power after toppling Prime Minister Najib, who was during this period, prosecuted and convicted of 1MDB-related corruption charges although it is still subject to appeal.

The Perikatan Nasional coalition government came into power in February 2020 amid allegations that the lockdown restrictions were introduced to prevent Parliament from sitting and voting on a no-confidence motion to remove this Muhyiddin-led coalition. Following an increase in Covid-19 daily cases, the King assented on 12 January, 2021 to the Government's request for a state of emergency which would not last beyond 1 August, 2021. This would confer emergency powers on the Prime Minister including ordering the government to take over private healthcare facilities to relieve the strain on public hospitals. It would also prevent Parliament from sitting during this period.

Many businesses and individuals struggled during this period and the government like many other governments around the world, introduced multiple economic stimulus packages in 2020, aimed at stimulating economic growth and stabilising the economy. Despite the Malaysian government's efforts, the Malaysian economy contracted by 5.6% in the whole of 2020.

M&A Transactions in Malaysia

Merger and acquisition ("M&A") activity in Malaysia was also adversely impacted by the pandemic, falling in line with reduced M&A activity in South East Asia. Public data of announced deals in 2020 valued at more than US$5 million per deal showed the lowest deal value and deal count based on available data going as far back as 2013.

The value of takeover deals in Malaysia in 2020 was nonetheless substantially bolstered by the ongoing takeover of one of the largest palm oil plantation owners in the world, FGV Holdings ("FGV"), by the Government agency, Federal Land Development Authority ("Felda"). The takeover offer was announced on 8 December, 2020 and the transaction is valued at US$2.72 billion. This takeover is in fact to aid a debt-laden Felda as FGV had been expecting Felda to terminate their land lease agreement which would give rise to compensation of approximately RM4 billion payable to FGV.

To shore up their cash position impacted by the pandemic, companies took to divesting their non-core assets and consolidating their portfolios. Sime Darby sold off its 30% stake in Tesco Stores (Malaysia) Sdn Bhd for RM300 million resulting in its exit from a non-core hypermarket business at a reasonable valuation. This divestment constituted part of South East Asia's biggest deal in 2020, namely Thailand's Charoen Pokphand Group's acquisition of Tesco's Asian operations in Thailand and Malaysia for US$10.58 billion.

Similarly, Khazanah Nasional Berhad ("Khazanah"), one of Malaysia's sovereign wealth fund, was busy re-balancing its portfolio of investments. There were announcements in October 2020 of a proposed merger between UEM Sunrise Bhd and Eco World Development Group Bhd which would create a property giant with the second-largest land bank in Malaysia. If the merger succeeded, Khazanah's stake will be diluted in the enlarged UEM Sunrise, via UEM Group, from 66% to 43%. Like all property developers in Malaysia, both UEM Sunrise and Eco World Development had faced challenging times following the property down cycle which had started since 2014 and which worsened because of the pandemic, as affordability and tighter mortgage financing conditions have capped property sales. Both these property developer companies subsequently called off the merger talks in January 2021.

Despite this setback, Khazanah announced in February 2021, its acceptance of the Dagang NeXchange Berhad (DNeX)-led consortium's bid to acquire Khazanah's wholly-owned 200mm semiconductor wafer foundry and loss-making company, SilTerra Malaysia Sdn Bhd. Although the deal value was not disclosed, Bloomberg reported that the deal could be worth about US$150 million (RM610.5 million).

Not surprisingly, the aviation sector, which was crippled by the global travel restrictions arising from the pandemic, swirled with rumours of talks of a merger between the national carrier, Malaysia Airlines Berhad and the regional low-cost carrier AirAsia Group Berhad. These eventually dissipated and recently, the parent company of Malaysia Airlines Berhad, Malaysia Aviation Group, received formal approval from a UK court to proceed with its restructuring plan. This includes an arrangement between its leasing unit and most of its aircraft lessors, as well as a capital injection of US$891 million from Khazanah. This deal is expected to reduce Malaysia Airlines Berhad's liability of over US$3.7 billion and fund the business through the restructuring period until 2025. Thus, if M&A is not possible, a company would have to look towards restructuring instead.

AirAsia however managed to dispose of 32.67% of the 49% stake it held in AirAsia (India) Ltd to Tata Group for US$37.66 million.

M&A Trends in Malaysia

While Christopher & Lee Ong saw some clients deferring their M&A divestment transactions as valuations were impacted by the lower revenue numbers, our M&A teams remained busy during 2020 as many other clients especially, funds, which had ample "dry powder" and cheap money, saw opportunities amidst lower valuations. Christopher & Lee Ong worked on M&A transactions in the "hot sectors" including technology, logistics for e-commerce, healthcare, pharmaceutical, manufacturing and service sectors.

Our M&A lawyers discovered it was possible to conduct entire M&A transactions from start to end while completely working from home (WFH)! Legal due diligence has been conducted through virtual data rooms for some time now. Negotiations can be conducted in different time zones via Zoom or MS Teams platform. Signatures on share purchase agreements signed in counterparts can be affixed digitally. Even our Malaysian government's revenue body, the Stamp Office, has an electronic platform for the submission of share transfer forms for adjudication of stamp duties payable on a share transfer and payment for stamp duties paid electronically. Filings of change in shareholding can also be lodged on-line with the Companies Commission of Malaysia.

Christopher & Lee Ong also worked with our regional M&A colleagues from Rajah & Tann Asia on South East Asian centric transactions. These larger transactions typically involve another rising trend, namely W&I (warranties and indemnities) insurance to cover transactions where sellers invite bids for their shares for the best price with minimal exposure to the sellers who would agree to provide only minimal warranties and indemnities. Partly due to this, the timeframe needed from the time of opening of the data room by the sellers to the signing of the share purchase agreement has also been reduced.

Future of M&As in 2021

Although Malaysia (as in many other countries) saw a resurgence of Covid-19 cases from the fourth quarter (Q4) of 2020 resulting in a re-introduction of lockdowns and a slowdown in the economic recovery, news of vaccine rollouts has improved business sentiments. Malaysia's central bank, Bank Negara Malaysia, has projected the growth for Malaysia in 2021 to fall between the range of 6.5% and 7.5%.

While Malaysia is expected to receive its supply of vaccines as are sufficient for the population to achieve herd immunity only in the first quarter (Q1) of 2022, we predict M&As to gain momentum going into the second half of 2021 as the economic recovery of China and the Western world is expected this year with their more advanced vaccine rollout plans and central banks around the world continue with their low interest rate environment, which would in turn fund more acquisitions.

These are however uncertain times. As we know, no one foretold what had happened in 2020.