After a boom in 2021, mergers and acquisitions in the tech industry could slow in Asia this year amid worries over Russia’s invasion of Ukraine, inflation and interest rates, as well as a spotty recovery from the COVID-19 pandemic.
In China and South Korea, the rush for M&A deals has turned into a slow shuffle as investors weigh an investment landscape vulnerable to headwinds sweeping the global economy.
According to financial data provider Refinitiv, high-tech acquisitions in the Asia-Pacific region, excluding Japan, totaled USD 27.6 billion in the first three months of 2022—a year-on-year decline of 41.7%.
These deals covered segments like internet services, e-commerce and semiconductors—all hot spots of investor activity as the pandemic forced people around the world to stay at home, stoking demand for digital services and electronics.
Arij van Berkel, vice president at Boston-based advisory Lux Research, noted that after the tech-buying boom last year, companies need time to absorb merger activity, resulting in potentially slower quarters ahead as energy focuses on post-deal integration further dampening new investments.
“It is now amplified by the economic uncertainty caused by the war in Ukraine,” van Berkel told Nikkei Asia. “That war has consolidated already high inflation and that has, in turn, created doubts about interest rates. [The uncertainty] may well increase.”
“When interest rates increase, the cost of capital goes up either directly through debt financing or indirectly because companies will need to offer investors higher dividends to make the shares attractive compared to just getting interest,” van Berkel explained, highlighting why it might not be the ideal time for companies to increase debt or new funding, a sentiment that dampens the mood for new deals.
Hence, investor appetite to leverage gains of Asian tech companies could be weighed by pessimism in certain areas, as shocks continue to rattle economies struggling to recover from COVID-19.
According to DealStreetAsia, a Singapore-based financial news site, even fundraising by private companies in Southeast Asia has slowed over a six-month period.
Compared to the fourth quarter of last year, the value of equity funding in venture-backed companies, which are often regional tech startups, fell by nearly half to USD 4.19 billion in the first three months of 2022, though it was still comparable to the first quarter of 2021.
“A gradual rise in interest rates, the resurgence of COVID in some countries—particularly China—and economic uncertainty generated by Russia’s invasion of Ukraine are the primary factors for a slowdown in deal-making,” said Swarup Gupta, manager at the Economist Intelligence Unit, in comments to Nikkei.
“The slide was also attributable to tough comparisons to last year’s record-busting volumes, which are proving to be difficult to replicate,” Gupta added, noting how the breakneck pace at which tech deals were sealed in 2021 set a benchmark that would be tough to follow.
This seems to dovetail with Refinitiv’s data. Mainland China, which scooped up the biggest market share of tech deals in the Asia-Pacific region at 27.3% in the first quarter, saw the number of acquisitions more than halve to 162 from 427 in January-March last year. The cumulative value of the deals plunged to USD 6.9 billion from USD 23.7 billion during the same period.
According to Refinitiv, the top-valued tech M&A deal in China was by an investor group comprised of Shenzhen Yixin Investment, a unit of Chinese state-owned Shenzhen Capital Holdings, and Shenzhen Capital Holdings, both of which signed a letter of intent to acquire a 19.73% stake in Shenzhen MTC, a Shenzhen-based maker of audio and video equipment, for USD 692.3 million in a private transaction.
Some other Asian hubs have also seen a slowdown. Compared with the first quarter of 2021, the value of tech acquisitions in Hong Kong dipped to USD 1.1 billion from USD 2.4 billion, while South Korea dropped to USD 3.7 billion from USD 5.6 billion.
Refinitiv also showed that the top Hong Kong deal was China Gas Holdings’ acquisition of an additional 20% stake in Electronic Business Development, a provider of data processing and hosting services, for USD 383.7 million in a private transaction.
The highest-valued South Korea M&A deal was Doosan Group’s deal for a 30.62% stake in semiconductor testing company Tesna for USD 261.1 million.
“It’s safe to say the deal-making environment has changed dramatically over the last three to six months,” said Matthew Toole, Refinitiv’s global director for deals intelligence, in comments to Nikkei. “World conflict, volatile stock markets, and economic indicators have clearly caused boardrooms to evaluate the new landscape.”
But Toole noted that the search for growth by companies and investors will still drive deal-making. Singapore, Taiwan, and Indonesia all bucked downward trends in China and South Korea, logging increased overall M&A values in the first few months of this year compared with the same period in 2021.
This bullishness, however, faces the prospect of a drawn-out Russia-Ukraine war. Analysts are watching for signs of a global downturn because of the conflict, with energy and food costs driving up inflation around the world.
Conditions in China, which dampened overall M&A activity in Asia during the first quarter, are particularly challenging, with the economy stalled by lockdowns as authorities struggle with a zero-COVID policy.
“We very often see that, whenever sharp drawdowns materialize in any one given sector or market, it causes investor pessimism all around if not outright despair and capitulation,” said Martin W. Hennecke, head of Asia Investment Advisory at UK-based wealth management company St. James’s Place.
According to analytics company GlobalData, surging COVID cases across the globe and the Russia-Ukraine conflict have dented the aggregate market value of the top 50 companies in the Asia-Pacific region by about 6% in the first quarter.
GlobalData noted that tech companies that topped the list saw market capitalization fall during the period. Chipmaker Taiwan Semiconductor Manufacturing Co. saw its net worth shrink 6% quarter-on-quarter, while China’s internet giant Tencent Holdings contracted 18.4%.
Sankar Sharma, founder of UK-based markets analysis company RiskRewardReturn, estimated that in tech, areas like software and health care could still see “buoyant activity” this year, while other deals could be delayed as investors weigh global risks.
“If we examine the outlook for 2022, one will suspect that it is going to be a dampened year despite the capital being available in abundance,” he told Nikkei. “Food scarcity and the energy crisis could also dampen the sentiment, making the decision-making process complex.”