The ASEAN countries have been growing rapidly in recent years, attracting a lot of attention from the rest of the world for their potential. Their GDP has grown, on average, by 8.2% a year in the last three years. The average annual growth rate of total direct investment in the countries has increased to 14%. These figures indicate that the region has become one of the most attractive investment markets in the world. Furthermore, the establishment of AEC (ASEAN Economic Community) scheduled for 2015 is expected to drive further growth, increasing the region’s appeal.
With the recovery of Japanese economy under way, Japanese companies have increased the number of cross-border M&A transactions and their value, especially in the ASEAN region. Their M&A investment targeted at ASEAN companies, which stood at 330 billion yen in 2011, increased to 754 billion yen in 2013. Furthermore, the share of their M&A investment in Asia that goes to ASEAN companies has expanded from 30% in 2012 to 91% in 2013. On the other hand, their M&A investment in Chinese companies decreased from 349 billion yen in 2011 to 14 billion yen, only 2% of the total investment in Asia. Likewise, their investment in Indian companies decreased from 83 billion yen to 33 billion yen, only taking up 4% of the total.
Our research shows that the success rate of M&A deals in ASEAN countries is around 60%. There are two factors that greatly contribute to the success of M&A deals: the acquisition price has to be within a reasonable range (avoid buying high) and post-merger integration has to be implemented appropriately. First, we will look at the acquisition price/ EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) multiple, a benchmark used to gauge the validity of the acquisition price. It was, on average, roughly 14 times globally last year while it was roughly 12 times in ASEAN as a whole, two points lower, which means that the acquisition price in a typical M&A deal in ASEAN was comparable to a global one and within a reasonable range. We will now focus on PMI (Post-Merger Integration), another big factor that increases the success rate of M&A deals.
1. Identify two drivers that impact enterprise value after the acquisition.
If a successful M&A is defined as increased enterprise value, then it is determined by the size of the profit and the timing of its generation. To create the added value, it is necessary to identify out of roughly 400 integration tasks those drivers that are the sources of value creation and those that determine the speed, and focus on maximizing the profit and minimizing the time it takes to achieve it. At Accenture we have termed those drivers “speed driver” (the one that determines the lead time to Day1) and “value up driver” (the one that realizes the value creation of Day2). Day1 indicates when the new company is established after the legal finalization of the M&A deal and Day2 when the new company achieves the integration’s strategic goal.
2. Establish and implement a global
Just identifying the two drivers that create value is not enough. It is necessary to operate the new organization according to plan. It is difficult enough to manage an organization in an environment where a variety of cultures, languages and customs co-exist. Needless to say, the job gets even more challenging in the integration process of M&A. To achieve a smooth integration, it is important to implement from the initial stage a management model which incorporates reporting line and key performance indicators (KPIs) and acts as a “common language,” and to build a mechanism that allows the organization to be run without being affected by the differences in the cultures, languages and customs.
ASEAN countries present challenges unique to the region that may serve as barriers: complicated regulations and their inconsistent application, and insufficient information about the companies. They can become great hurdles in identifying the above two drivers and establishing and implementing a global management model in the PMI process.
1. Establish a methodology to save resources in the journey to Day1, and concentrate them on Day2
The shortest route to Day1 while conserving resources to be spent on speed drivers is to develop and draw on a best-practice M&A methodology and playbooks by embedding past experience and know-how and proceed swiftly to the legal integration of the companies using minimum resources. Seasoned players such as GE have their own M&A organizations to work with outside consultants to build teams that each deal with Pre-M&A and PMI. They also take full advantage of their methodized unique experience and knowledge to speed up the Day1 process. Many companies tend to focus on the legal integration of Day1, allocating greater resources than warranted and end up making light of Day2, which is more important. Day1 is merely a milestone in the journey to Day2, which determines the success or failure of the integration. Therefore, it is necessary to allocate sufficient time to Day2 and so its work should start at the same time as that of Day1. The Day2 team needs to work separately from the Day1 team but alongside with it. The Day2 team must also be staffed with talent experienced in each area of value creation, with management supporting the team by allocating a greater portion of their time and effort to its work. Only by focusing on value creation in this manner, can the integration be completed successfully.
2. Make “installation” of a management model an imperative
To create value in Day2, it is necessary to leverage the advantages offered by the acquired company and adapt to the local culture and customs. However, as mentioned earlier, in an environment in which different languages, cultures and customs co-exist, the key to operating the organization according to plan is to establish a management model as a common language. This is more important in ASEAN countries where multiple languages and races exist side by side. Whether to inherit the way the acquired company was operated is usually discussed in Day1. It is important to respect its way of doing business but it does not mean leaving it untouched. What is important is to introduce a management model as a common language and respect each other on that basis. In negotiating an M&A deal, you must make it clear that the “installation” of a management model is an imperative and that you are not ready to make any compromise on it.