This article was first published in the June 2012 Singapore edition of Accounting and Business magazine.
Significant changes to the Singapore Code on Take-overs and Mergers, issued by the Monetary Authority of Singapore, were introduced in April. The move coincides with the announcement of several high-profile investments, as the city-state sizes up ways to become once more a hotbed for merger and acquisition (M&A) activities.
DBS Group Holdings’ US$7.3bn bid for PT Bank Danamon Indonesia and San Miguel Corp’s US$500m investment in Philippine Airlines signalled a promising start to the second quarter for M&A activity in the region, after a rather dull first quarter. In Malaysia, CIMB Group is also reported to be on the acquisition trail, looking for stakes in more of the region’s lenders, while media group Media Prima has indicated its interest to expand overseas via M&A.
According to Deloitte’s recent report, Riding the Dragon: Will Asian Mid-market M&A Prosper?, mid-market M&A acquisitions of Asia-Pacific assets accounted for 32.4% of all mid-market M&A transactions globally in 2011. This represented more than 2,000 deals with a combined worth of US$143.2bn, down 3.6% on the previous year. In South-East Asia, close to 300 mid-market deals were undertaken last year, with a value of US$22.9bn, the report indicated.
According to the report, many of these transactions were buoyed by a relatively frothy valuation environment, a fact that Jeff Pirie, executive director in Deloitte Southeast Asia’s corporate finance practice, ascribes to increased overseas interest in the region. ‘Inbound interest from foreign corporations eager to gain some level of exposure to the region, combined with a relative dearth of quality targets for sale, means that crossborder transactions – when they occurred – tended to be at higher valuations,’ he explains.
With cash-rich companies looking to enhance their presence in Asia, the region is likely to hold on to its top spot in terms of M&A volumes in 2012, and South-East Asia will get its fair share of interest.
Against this background the recent changes in Singapore’s Code on Take-overs and Mergers boost the city-state’s aim of cementing its status as an international capital market, while progressively improving corporate governance.
The changes help codify existing practices and enhance disclosure, while keeping pace with product innovation and market development. They bring regulation up to speed with recent product innovations and market developments, Pirie says, adding that they will ‘raise the bar for performance of those involved in takeovers in Singapore’.
‘Singapore’s changes to the code were important to keep pace with international market developments,’ says Andrew Martin, principal, Baker & McKenzie.Wong & Leow. In recent years, international markets such as Hong Kong, London and Australia have made similar changes to reflect market innovation.
‘Such codification and clarification provides transparency and greater certainty for the market and for professional advisers,’ Martin adds.
While not having a direct drastic impact on M&A activity in Singapore, the changes do help codify and clarify procedures and practices to get deals done, says Stella Wong, corporate finance associate at Deloitte Singapore.
Luke Pais, Transaction Advisory Services partner at Ernst & Young Solutions in Singapore agrees, noting that while M&A activity is primarily driven by commercial and economic parameters, it is also influenced by many other factors. ‘A strong regulatory environment that offers clarity on various issues that impact deal structure is one of them,’ he points out.
‘The code was last revised in 2007 and while practice statements had been issued by the Securities Industries Council (SIC) since then to deal with specific issues like a takeover or merger transaction involving a REIT [real estate investment trust], the M&A market and transaction structures in Singapore and internationally have evolved,’ Pais explains.
He added: ‘Practice statements have now been incorporated into the code and more clarity has been given to deal with certain issues, including disclosure of interests in the offeree company.’
Martin also notes that the SIC had considered whether the use of certain derivatives and long options is prevalent in Singapore takeover situations. While it concluded that the use was limited, it has made certain important clarifications, notably from a disclosure perspective.
‘The revised code includes a new definition of derivative to capture instruments that are cash-settled, and persons holding 5% or more in the offeree company’s issued share capital will be required to disclose dealings in long options and derivatives during the offer period,’ he explains. ‘Disclosure is limited to derivatives which cause the holder to have a long economic exposure to the underlying securities. The revised code sets out guidance on what constitutes dealings in relation to derivatives, including acquiring, selling, closing out or varying a derivative.’
Among the key changes is the clarification that the SIC may take further actions against a person who breaches the code, in addition to depriving him of his ability to enjoy the facilities of the securities market in flagrant cases. Benjamin Ong, M&A partner at KPMG Corporate Finance, considers this to be the most important change.
‘The code now provides for SIC to have recourse to further actions against the offender in flagrant cases and also states that advisers may be required to abstain from code-related work as a sanction,’ he notes.
‘It now also lists the rules for which a breach might result in SIC making a compensation order. This will make both offerors and advisers more mindful of adhering to the code and ensure better compliance and disclosure. It will also better protect minorities, particularly as SIC is now able to make compensation orders,’ Ong adds.
Other significant changes include updating the language to incorporate current practices on the takeover of REITs and business trusts, setting out when collective shareholder action amounts to acting in concert, and dealing with joint offers and the acquisition of derivatives, explains Andrew Ang, deputy head of WongPartnership’s corporate/M&A practice, and a leading expert in both domestic and crossborder M&A in Singapore and other jurisdictions in South-East Asia.
Pais of Ernst & Young believes that there is now more clarity on issues such as joint offerors, disclosures of shareholdings by the offeror and transactions involving REITs and business trusts, ‘which are useful for practitioners in structuring and executing deals’.
‘Singapore offers a very favourable REIT and business trust environment compared to most countries,’ he continues. ‘Given the increasing prevalence of such companies in the market, we expect increasing M&A activity with these companies. The framework of rules laid out for REITs and business trusts will greatly assist practitioners in structuring and executing deals.’
The new code also clarifies what constitutes collective shareholder action. Now, when some shareholders have an agreement or understanding to requisition, or threaten to requisition resolutions at a general meeting with the purpose of seeking control of the board, they may be presumed to be acting in concert. Once the presumption arises, subsequent acquisitions of interests in shares by any member of the group could give rise to an obligation to make a general offer.
The new code also lowers the shareholding threshold, from 10% to 5%, for a person to be regarded as an associate. ‘Accordingly, any person holding 5% or more of the equity share capital of the offeror or offeree company will be required to disclose dealings in the offeree company during the offer period. ‘The objective of this disclosure is to allow offeree company shareholders and the investing public to gauge how the trading in offeree company shares during the offer period has been affected by the trading of such shareholders. Investors buying shares in a listed company should therefore be mindful of the changes which are in line with the statutory thresholds for substantial shareholding notification requirements in Singapore,’ Martin says.
KPMG’s Ong notes that these changes should not impact on M&A activity in Singapore as none is fundamental. ‘Better governance of the offer process and disclosure requirements’ can only be a positive development for the overall market.
optimism grows in south-east asia
South-East Asian corporations are increasingly showing confidence in the economic prospects in the region, yet they are still treading carefully with merger and acquisition (M&A) activities. According to the third edition of Ernst & Young’s bi-annual South-East Asian Global Capital Confidence Barometer, large corporates are hesitant to engage in major M&A activities despite a more favourable deal-making environment. Only 48% of companies in the region – down from 53% in October 2011 – plan to pursue M&A activities in the next 12 months. This is still more optimistic than the outlook among global companies, with only 31% expressing the same interest.
‘There is a disconnect between the level of confidence in deal fundamentals, ie good cash reserves on balance sheets, stable access to credit and the high-growth prospects of the local economies, and the sentiments influencing decision making in the boardrooms of these companies,’ notes Harsha Basnayake, Transaction Advisory Services leader for Singapore and Southeast Asia at Ernst & Young.
‘The majority of respondents are also saying that they now see a good number of deal opportunities, good-quality businesses and chances of closure to be healthy,’ Basnayake says. ‘I think what we are coming to terms with is the new norm that is driving these trends: optimism and confidence about the big picture, but a sense of cautiousness in decision making.’
Among South-East Asian companies looking to pursue M&A activities, a majority 61% are driven by the need to access new markets, and are primarily looking at Asia Pacific as their key investment destination.
Thanks to its growth potential, Indonesia is now one of the top five investment destinations globally. Singapore and Vietnam, however, have lost some momentum for very different reasons, Basnayake says, explaining that while business-friendly fundamentals remain strong in Singapore, the relative high cost is a drawback, while in Vietnam market volatility is dampening investor sentiments.
According to data from Thomson Reuters, the total value of announced Singapore M&A deals in the first quarter registered a 36.5% year-on-year fall and a 24.6% quarter-on-quarter decline, to US$5.7bn. Singapore companies were also targeted less by overseas acquirers, with 30 inbound M&A deals in the first quarter compared to 50 in the previous quarter, while Singapore companies slowed down their buying spree abroad, with the overseas deal count falling to 68, although the aggregate value of these deals was 12.3% higher year on year at US$2.9bn.
Sonia Kolesnikov-Jessop, journalist