PE and M&A Evolving in Malaysia as Decline in 2018 Leads to a Rethinking of the Deal Market in the Country

KUALA LUMPUR,Aug. 28,2019 -- Malaysia experienced a slowdown in South East Asia's hot Private Equity investment market in 2018 with moderate corporate M&A activity,largely due to macro and political uncertainty in the lead up to the election. Stability in M&A in the country,while the industry is experiencing changes globally,has been largely focused outside of Malaysia,prompting insiders to look at how to grow local deals and the changes that are needed to be made in order to succeed. This is according to findings presented by Bain & Company in Kuala Lumpur today.

While Indonesia and Vietnam are proving to be the big winners in the South East Asia PE boom,there has been a decline in the number of deals in Malaysia,with PE investment deals declining by 34% in 2018 as compared to the last 5 year average. While most countries globally experienced solid PE growth in 2018,especially across Asia,uncertainty in the country caused this decline in Malaysia with deal value declining by 52% in 2018 as compared to the 5 year average. This is leading to a change in thinking,with value drivers shifting to a greater focus on M&A and operational efficiency as a result.

"Many executives are turning to scope deals as companies struggle to find organic growth," explained Suvir Varma,Senior Advisor of Bain's Global Private Equity Practice. "Locally,we believe this trend is still underleveraged,but it could prove to be an important area of growth in the future. However,given high pricing and a heavy concentration of tech deals,corporates will need to tread carefully."

Corporate M&A activity was also moderate,with macro softness and lack of deals seen as pain point by funds in the country. Of the major deals that occurred,70% were in Industrials,TMT and financial services,largely focusing on deals outside of the country,either elsewhere in South East Asia or further abroad. While Malaysian corporates were less active in domestic M&A in 2018,with fewer local acquisitions in the local market,there were sizeable M&A abroad. Regardless of this trend,domestic strategics will be key drivers of Malaysia's M&A,and are encouraging a rethinking of the current environment.

Globally,the trend in M&A has been of low growth which is affecting the nature of M&A. Scope has overtaken scale for the first time and is changing the nature of M&A around the world. This has proven to be relevant to Malaysian corporates who are also struggling to find organic growth in the domestic market. According to Bain & Company's inaugural M&A report,M&A In Disruption,released earlier this year,scope deals around the world outnumbered scale deals for the first time ever in 2018 and represent 51 percent of all strategic deals larger than a billion in deal value – possibly the biggest development in the M&A industry in the last decade.

Bain & Company has worked on more than 1,500 M&A projects globally with both strategic buyers and sponsors in the last year alone and has identified what the best are doing to succeed.This includes:

Retooling the approach to due diligence.

Evolving how to think about combined business operating models.

Developing different ways to approach business processes and systems integration.

Further,the firm's extensive research over the last two decades has uncovered an enduring truth: a repeatable M&A capability,developed through consistent M&A activity over economic cycles,contributes to higher shareholder returns. This finding holds up year after year,across industries. Deal success and failure is more a matter of cumulative experience and capability in doing deals,and less a function of standalone deal circumstances.

"In order for companies to get ahead they must focus on repeatable M&A capabilities across strategy,screening,due diligence & integration. It's essential,but not easy," said Francesco Cigala,Managing Partner of Bain Malaysia. "Companies will need to adapt and modify their diligence and integration playbooks,as they pursue scope deals for growth and,potentially,more transformative capability-driven scope deals."

Editor's note:To receive a copy of the report or arrange an interview with Mr. Varma or Mr. Cigala contact:Juliana Ong at juliana.ong@bain.com