EY has released research on mergers and acquisitions (M&A) activity in Asia-Pacific for the third quarter of 2020. The research indicates that the impact of the COVID-19 pandemic led to a faster decline in mergers and acquisitions (M&A) activity across Asia-Pacific countries and globally during Q3 2020 than during the global financial crisis of 2007-2008.

Global M&A volume fell by almost a quarter (23%) in the first half of 2020, with a 20% drop during Q1 2020 in Asia-Pacific - two years ahead of the decline recorded during the global financial crisis. However, divergences in the M&A recovery from the COVID-19 pandemic are emerging between Asia-Pacific and other parts of the world. For the first nine months of 2020, Asia-Pacific deal volume dropped by 8% year-on-year, while the decline in deal volume has been far more acute in the Americas (20% lower) and EMEIA (15% lower).

M&A activity is rebounding more quickly for some countries and regions in Asia-Pacific than for others. For example, China’s deal volume rose to the 2019 monthly average level in March and April 2020 and has remained relatively steady for the second half of 2020.

Early movers and bold decision-makers achieve better results

Reviewing transactions in the immediate period following the global financial crisis, EY research found that companies that were early movers and made bold choices on portfolio-transforming acquisitions saw a 26% increase in total shareholder return over the following decade, compared to those that did not.

Furthermore, companies that proactively reshaped their portfolios by taking steps to divest assets achieved 24% higher returns over the same period. The research also shows that companies that actively invested in their businesses through elevated capex and research and development (R&D) following the global financial crisis witnessed two-three times higher returns over those that took a more cautious approach.

“As lessons from the post-financial crisis period show, early and bold choices on portfolio-transforming investments, particularly acquisitions and divestments, can help reframe the future of a whole organisation and position it for growth beyond the crisis," said Yew-Poh Mak, Asia-Pacific Strategy and Transactions leader for EY. "Dealmakers have demonstrated the ability to close transactions despite travel restrictions in Asia-Pacific. As borders gradually re-open, we anticipate increased transaction volumes in the coming quarters both domestic and cross borders.”

Industry and corporate reorganisation driving up Asia-Pacific M&A value and volume

Asia-Pacific countries and regions have experienced the impact of the pandemic in different stages. While China’s M&A activity has already returned to pre-COVID-19 levels, Australia’s monthly deal volume has only begun to gradually recover in the most recent quarter.

Japan’s M&A activity was relatively unaffected in Q1 2020 compared with most other regions in Asia-Pacific, but it has since begun to slow as a result of the COVID-19 pandemic-related restrictions and the resulting impact on business. While outbound activity has declined and many deals have been put on hold due to travel restrictions, mega domestic deals have driven Japan’s domestic M&A value to a 15-year high in Q3 2020.

Overall, Asia-Pacific saw high value deals reach US$392bn in Q3 2020, the highest third quarter on record - driven by domestic combinations and technology deals. In particular, mega deals over US$10bn in China and Japan increased deal value in Q3 2020, with a Chinese oil and gas consolidation representing the largest deal globally to date in 2020. A telecommunications giant in Japan is also taking private its mobile unit business, which could lead to the largest-ever tender offer for a Japanese firm.

Positive outlook in Asia-Pacific 

M&A activity in many sectors across Asia-Pacific has been resilient during the pandemic. Sectors that have experienced growth in deal activity in the first nine months of 2020 year-on-year include telecommunications (19%), life sciences (9%) and power and utilities (9%). The most active sectors in terms of M&A deal volume within Asia-Pacific continue to be technology, advanced manufacturing and consumer. Notably, technology was one of the first sectors to rebound in Asia-Pacific, with deal volume returning to 2019 levels, and it continues to drive M&A as part of the transformation agenda across industries.