Unruly markets hit Asia dealmaking in 2013

Asia is on course for its worst year of mergers and acquisitions activity since 2009, as volatile markets sap confidence and dampen deal-making.

Asian companies have bought fewer assets both within the region and elsewhere, while the total volume of announced deals targeting companies in Asia - excluding Japan and domestic Chinese deals - is at its lowest since 2009, according to data from Dealogic.

Deals within mainland China are running at record levels, making it by far the region's largest market. However, among western banks only the joint ventures run by UBS and Goldman Sachs have licenses to advise in mergers between public Chinese companies.

Excluding Chinese domestic deals, M&A targeting Asia ex-Japan totals $218bn so far this year, down from $237bn for all of 2012 and the lowest since 2009's $191bn.

While a handful of large deals in December could still change the outcome for 2013, the current total would represent the fourth straight year of waning volumes since a recent peak of $272bn in 2010.

Morgan Stanley was the lead adviser for the region working on $40bn worth of deals, according to Dealogic, followed by Goldman Sachs and JPMorgan.

Bankers say a big issue has been the caution among Chinese groups in the wake of the leadership transition, as Xi Jinping took over as China's president in March and installed a new administration.

"There has been limited risk appetite among Chinese state-owned companies looking outside of China this year," said Richard Campbell-Breeden, head of M&A Asia ex-Japan at Goldman Sachs. "People had expected more M&A activity after the leadership change earlier in the year but that hasn't been the focus."

Nevertheless, outbound Chinese deal activity has been decent. Total volumes for the year to date are $67bn, just ahead of last year's $65bn, helped by Shuanghui's $4.7bn takeover of fellow US pork producer Smithfield Foods.

As for western groups considering Chinese acquisitions, one banker put it this way: "The new administration has come in and scared the shit out of everyone. They've been putting people in jail and that doesn't instill a lot of confidence."

Onshore Chinese deal volume hit a record of $193bn, up by almost one-third from $148bn for full-year 2012. The surge has been led by the real estate sector, which accounted for $38bn of the total, more than double last year's level, according to Dealogic.

The biggest Chinese deal was the $16bn acquisition of a 13.5 per cent stake in Shanghai-listed electricity company Huadian Power International Corp by its parent, China Huadian Group.

Rob Sivitilli, head of M&A for Asia ex-Japan at JPMorgan, also noted a theme this year of Chinese groups shuffling assets into or out of Hong Kong vehicles.

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"What we have seen a lot of is Hong Kong-related business with Chinese and local groups reorganising assets," he said. "This is not going to sustain our business so it's good to see more diverse activity coming."

Colin Banfield, head of M&A Asia ex-Japan at Citigroup, expects more private sector-led deals in the year ahead and says activity has already picked up following the big Communist party policy-setting meeting that took place in November.

"Following the third plenum and the commitment to market reform, we have seen a noticeable pick-up in dialogue with Chinese private sector and [state-owned enterprises] regarding a wide range of M&A situations," he said.

Mr Campbell-Breeden said: "I think in 2014, we will see much more emphasis on the private side looking to do more deals overseas to get technology, expertise and raw materials as well as the more politically driven state-owned enterprise interest".

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