M&A and Asia: Learning from the best

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M&A activity rose sharply in 2021, both in Asia and around the world.1 The number of deals in Asia was more than 20 percent higher than it had been in 2020—and not just because of a rebound from COVID-19: Asian deal volume for 2021 was 30 percent higher than it had been in the prepandemic period of 2019. Average deal size in Asia is also broadly on the rise; the value of such deals in 2021 was about 40 percent higher than 2019 levels and is trending up over a multiyear span.

Put in global perspective, however, the average dollar size of deals in Asia remains lower than in the American or European–Middle Eastern (EMEA) regions. While Asia, as measured by acquirer locations, contributed about 35 percent of global deal volume in 2021, it had the lowest average deal size: approximately $288 million, compared with $640 million in EMEA and $710 million in the Americas.

Asian acquirers are key players in the Asian M&A landscape, and many are setting their sights worldwide. To increase their odds of success, they’ll need to adjust how they approach deal making. Our research (lately, more markedly than ever) finds that the most effective dealmakers practice programmatic M&A tied directly to a stated strategy. These outperformers regularly and systematically seek moderate-size M&A opportunities, an approach that delivers about 2 percent more in excess total shareholder returns (TSR) annually than occasionally making a very large deal, taking a selective M&A approach (infrequent, smaller deals), or choosing to stick primarily with organic growth. Asian companies, however, use programmatic M&A less often than their Western counterparts; only 6 percent of large Asian acquirers are programmatic acquirers, compared with 14 percent of large acquirers globally (Exhibit 1). That’s a significant gap, but also a major opportunity. In this article, we explain how Asian companies can apply the lessons of the world’s most successful dealmakers—among them, Asian companies that are already applying programmatic M&A—in their pursuit of superior value creation.

Asian companies are less likely to engage in M&A, including programmatic M&A, than their global peers.

Taking a holistic approach

The most successful acquirers consider and then implement each deal holistically: they start with strategy, source targets to meet it, know what they are looking for (culture included) in due diligence, and realize synergies in a fast and disciplined way.

1. Consciously connect M&A to strategy

Each deal should be driven by strategy. Every acquirer must be able to answer one fundamental question: Why are we buying (or selling) this company? Western companies use M&A to fulfill a variety of strategic objectives, including to gain scale, to acquire talent and, increasingly, for growth.

Many Asian acquirers approach their acquisitions from a growth-first mindset. When we studied the 50 largest transactions of Asian acquirers in the past five years, we found that 72 percent of them had articulated at least some aspiration to focus on growth. A remarkable 48 percent focused solely on revenue growth (as opposed to cost synergies). Growth is not necessarily a wrong answer. Particularly in a challenging environment, growth can be a key driver of performance. But prioritizing growth must always be grounded in specific circumstances and conditions. Growth must also, of course, actually be realized, and sophisticated acquirers recognize how difficult capturing revenue synergies can be.

Aspirations for growth, like scale, must be driven by fundamental strategy. Effective dealmakers have a clear grasp of which synergies they wish to prioritize, when they expect to realize them, and how they will mobilize their organizations to get the most from a deal. Organizations that have a granular understanding of their core model, what a target will add, and how the companies can create value together are better positioned not only to validate (or reject) a deal thesis but also to realize value from the businesses they acquire.

One digitally oriented multinational bank based in Asia, for example, acquired a distressed legacy bank in a country where the acquirer previously had little experience. For this company, expanding to that new geography was essential. Because the target had more than 500 branches there, the deal gave the acquirer an opportunity to increase its own presence significantly and rapidly. The acquirer also made sure to maintain not just the local branches but also the key people in the target’s organization who managed critical relationships with customers. Investing in customer retention and improving the target’s existing lending business helped the acquirer to introduce new offerings successfully, gain additional market share, and preserve the target’s core operations.

2. Source targets proactively

Successful acquirers know that they have to find the right deals—and not wait for the right deals to find them. Targets usually don’t come knocking, and they rarely sit for long. Nor do they necessarily first appear in pitch books. Programmatic acquirers seek out companies that can match their own specific strategic needs and invest in developing relationships with key people at potential target companies. They also think of M&A as a long, iterative process. Individual deals are part of a longer transaction funnel, which must be viewed as a whole and updated rigorously. Sourcing and planning are continuous and proactive.

In Asia, deal making can be opportunistic, sometimes because credit becomes available and sometimes because a pitch catches a company’s eye. Acquirers are often reactive rather than proactive. While it’s important to be proactive wherever targets are located, it’s especially critical when they are in Asia, where information about companies and their owners can be less detailed or sometimes lacking altogether. Asian companies for which information is easily accessible tend to attract intense competition from potential acquirers. That can lead to unreasonably high valuations and deal prices, and ultimately depress transaction returns.

The good news for Asian companies is that geography can be a source of advantage, particularly compared with the experience of non-Asian acquirers. Because part of the deal cultivation process is social and language driven, Asian companies can have a head start in relating to prospective targets within their own countries and in developing meaningful interactions with people in these companies at the pre-deal stage. That requires a willingness to “put yourself out there”—leveraging individual networks within your home country and building up teams in potential target regions by networking, cold calling, and developing dialogues to build relationships.

Yet sometimes, these actions can feel difficult, particularly when transactions span borders and languages. One Japanese company, for example, had a clear mandate to explore opportunities in other countries. The executives it tasked for potential M&A transactions were not fluent in English and hesitated to send cold emails to potential targets or partner companies, to initiate dialogues, and to build relationships. As a result, its initial deal-making efforts stumbled. M&A teams need to be confident and dogged in their pursuit of deals.

Companies that lack employees with these capabilities can supplement their organizational skill sets, particularly at the start, by using external advisers to plug capability gaps in the short term and, over the longer course, work with internal teams to bring them up the learning curve and build experience—and confidence—to source deals in the future.

3. Use a microscope and a periscope in due diligence

Just as the deal sourcing of effective acquirers can be narrowly tailored and broadly oriented, so too is their due diligence. Programmatic buyers, in their assessments of specific transactions, think about a range of value unlocks and risks. They know that due diligence can’t be conducted on a one-size-fits-all basis; synergies vary from deal to deal. They know, too, that financial reports and company presentations are not the four corners of information. Because each individual acquirer has a unique strategy, set of needs, and culture, each target company (and the synergies the deal could generate) must be examined from the acquirer’s unique perspective. Getting to that level of insight requires not only hard analytics but also a deep understanding of the organizational norms of the target, including how it makes decisions (in a centralized or decentralized way) and how it motivates its employees and gives them incentives.

Many Asian companies, however, tend to treat M&A due diligence as a check-the-box exercise—sometimes without enough boxes. Some companies do less due diligence on large, cross-border targets than on internal projects in which they invest much less money. Their analyses can prioritize tax and financial issues and address commercial, operational, or technological considerations only superficially. And they rarely consider cultural due diligence.

What are the hallmarks of focused and broad-ranging due diligence? To start, get under the hood on valuation. Sophisticated acquirers take care to understand value not only from the perspective of the target and the market but also the value to the acquirer. That can be done only by considering the value of synergies—a value tailored to each buyer.

Second, effective acquirers dive into the assumptions behind deals and ask uncomfortable questions. What if key members of the management team leave after the acquisition? What financial and nonfinancial incentives can acquirers create to retain the key talent they have identified? And how will the target’s financial projections square with the reality of this deal? If a target’s business projections are based on adding personnel or capital, for example, and the acquirer’s plan is to trim business funding or reduce head counts, can the projections really be met?

Finally, effective acquirers bear down on how efficiently their teams and those of the target will work together. These experienced acquirers take care to select the appropriate high-ranking managers on the deal team—managers who conduct their own due diligence on the people at the target they’ll be working with. That’s not just a matter of speaking a language or being experienced in the same sector. It’s a matter of organizational culture and can be a particular blind spot for Asian acquirers. Thirty-two percent of the Asian company executives we surveyed said that they didn’t fully understand the target’s corporate culture.

Improving cultural due diligence presents a major opportunity for Asian companies to improve their odds of successful transactions. The analyses need not be a confounding abstraction or take a long time. For example, one Southeast Asian financial institution acquired two businesses with portfolios complementary to its own. It quickly homed in on the essence of how the targets operated (each with a centralized mode of decision making) and their preferred incentives (financial and aspirational). As a result, it recognized that the teams would indeed work well together—which, in the weeks and months following the close, they did.

4. Focus and follow through in integration

A critical part of being an effective acquirer is to identify which synergies will unlock the greatest value, and then to move rapidly to make sure that they don’t leak. These acquirers start the value-capture process early; they’re ready to go on Day One and rigorously measure progress over time to maintain momentum. The time to realize a critical mass of synergies depends upon the transaction. For example, for the “consolidation deal” archetype, our rule of thumb is that acquirers have 18 months to capture value from most synergies; wait longer, and value creation diminishes or disappears. Indeed, our research shows that these deals are 2.6 times more likely to succeed—delivering 40 percent more TSR—if the company meets its synergy targets within the first two years after closing.

Sophisticated acquirers understand that not all synergies are equal. Revenue synergies, for example, typically take three to four years to realize. Culture clashes in particular can throw synergies off the rails; frictions can reduce productivity, slow initiatives before they get rolling, and increase the risk that key talent will depart. Effective dealmakers recognize the challenges and quickly address them.

Asian companies tend to be slower and less focused in capturing synergies and not as rigorous in tracking and managing them. Sometimes, integration and value-adding activities can go entirely unimplemented. When we surveyed executives of Asian companies, two-thirds of them reported that they had done a cross-border deal in the past five years, but nearly 40 percent indicated that they had left the acquired business as-is after the acquisition.

One leading Asian food chemicals provider, for example, made a series of cross-border acquisitions to expand its international business. Many of those acquisitions, while understandable in theory, were not successful in practice, and the company had to take significant write-downs. This resulted primarily from taking too light a hand, because the acquirer failed to assert itself in the integration process: it didn’t fill key management positions or define incentives for the expected level of performance. The gaps between the expectations of the acquirer and the performance of the target only widened in the months after the closing.

The most effective acquirers make their expectations explicit. They measure how their synergy targets are met and make culture an engine for—not a brake on—value creation. These seasoned dealmakers cross-pollinate talent not just at top positions but also in middle management, to foster better understanding and knowledge sharing between organizations. They work actively to foster a “win–win” scenario for the acquirer and the target alike.

One tool is an earnout, which provides additional compensation if certain projections, milestones, or conditions are met. Leaders can also make an inspirational case. The CEO of one Southeast Asian financial-services company took on employee qualms directly. He achieved a high level of buy-in for a complex merger by making a strong case that after the merger, best practices would be brought to employees across the merged companies—both technological hardware and operational best practices across functions such as finance, IT, procurement, and HR.

Building the right model

Programmatic acquirers understand that M&A is a capability, not an event. Seasoned dealmakers set up an integration management office (IMO), develop an in-house integration playbook, have clear guidelines about how the IMO interacts with the rest of the organization, and involve targets in key decisions about the future of the combined organization. To capture knowledge and improve M&A on an ongoing basis, the most effective organizations also build in a feedback loop from past integrations. For programmatic acquirers, deal making—driven by strategy, proactive, confident, and not afraid to move fast and take calculated risks—becomes part of the company’s operating model.

Although some early adaptors of programmatic M&A in Asia have robust in-house capabilities, that is not yet the norm for Asian acquirers. Of the hundreds of Asian firms we surveyed, about half (and more than half in Japan, South Korea, and the countries of Southeast Asia) reported that they either don’t have an M&A department or that they have one with fewer than five employees (Exhibit 2). In fact, more than one-fifth of the Asian company executives we surveyed reported that their companies have no dedicated budget for M&A. Others described challenges such as a lack of management buy-in for M&A, unclear approval processes, and a pronounced lack of appetite among shareholders to pursue transactions.

Excluding China, most Asian companies do not have a function focused solely on M&A.

The lack of a well-developed M&A organization and a committed, deal-making model can feed a cycle of hesitancy and even inertia. Boards and management can be overcautious in transactions, slow in outreach, inconsistent in integration, and ultimately unable to institutionalize lessons from previous deals. On average over the past decade, Asian companies have tended to significantly underperform their Western peers in TSR from M&A.

Yet some Asian companies, leading the way, do adopt a systematic approach. Consider one integrated energy corporation based in Southeast Asia. The company expanded its core chemicals businesses—particularly its food, agro-industrial, commodities, and petrochemicals businesses—by acquiring some players outright and by purchasing minority stakes in others. It also formed joint ventures to take advantage of industry tailwinds and essentially create an ecosystem around its core businesses. The transactions generated strong returns as part of the company’s overall portfolio and contributed significantly to group net income.

Another effective acquirer, part of a larger Asia-based conglomerate, has recently made a series of bold, strategy-based deals to purchase companies with major operations in Asia and beyond. The company’s recent acquisitions include taking a majority stake in a European company, acquiring a US-based manufacturer, and, most recently, acquiring a North America–based mobility systems company. The acquired companies already provide broad, international reach and are moored in the acquirer’s core strategy. Asia-based companies such as these help set the bar for dealmakers not just in Asia but also worldwide.

With M&A increasing both globally and in Asia, Asian companies can improve their deal-making skills and join the ranks of the best acquirers. Research and experience show that successful dealmakers take a holistic approach to each transaction and invest in their M&A capabilities. Now it’s Asia’s turn to apply these lessons and unlock value for the long term.

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