Shifting sands: changes in trade and investment in an uncertain world

Unparalleled economic disruption, a resurgence in COVID-19 cases and heightened trade tensions are stealing newspaper headlines but also mask fundamental developments in trade and investment. In this piece, we examine some of the latest market trends that are taking place in Asia and globally against a backdrop of increased economic uncertainty and geopolitical tension.

The Asian Century
The rise of Asia remains undisputed and will continue to power global GDP growth going forward. A brief glance shows unparalleled milestones:
– 50% of world GDP is expected to be Asian by 2024, and drive 40% of the world’s consumption
– 21 of the top 30 largest cities are now in Asia
– From 2000 to 2019, China increased its GDP from just over US$1trillion to US$14trillion

While 2021 will see some rebound in western economies as they emerge from COVID, this economic growth is likely to be lacklustre compared with mid and long-term growth rates in Asia.

In our latest piece, Shifting sands: changes in trade and investment in an uncertain world, the BDA team examined some of the latest market trends that are taking place in Asia and globally against a backdrop of increased economic uncertainty and geopolitical tension. We look forward to helping you make sense of these changes and navigate through uncharted waters.

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We hope you find it helpful. If you would like to discuss, please contact us:

Jonathan Aiken, Managing Director, London: jaiken@bdapartners.com

Simon Kavanagh, Managing Director, Hong Kong: s kavanagh@bdapartners.com

About BDA Partners

BDA Partners is the global investment banking advisor for Asia. We are a premium provider of Asia-related advice to sophisticated clients globally, with over 24 years’ experience advising on cross-border M&A, capital raising, and financial restructuring. We provide global reach with our teams in New York and London, and true regional depth through our seven Asian offices in Mumbai, Singapore, Ho Chi Minh City, Hong Kong, Shanghai, Seoul and Tokyo. BDA has deep expertise in the Chemicals, Consumer & Retail, Health, Industrials, Services and Technology sectors. We work relentlessly to earn our clients’ trust by delivering insightful advice and outstanding outcomes.

BDA Partners has strategic partnerships with William Blair, a premier global investment banking business, and with DBJ (Development Bank of Japan), a Japanese government-owned bank with US$150bn of assets.

US securities transactions are performed by BDA Partners’ affiliate, BDA Advisors Inc., a broker-dealer registered with the Securities and Exchange Commission (SEC). BDA Advisors Inc. is a member of the Financial Industry Regulatory Authority (FINRA) and SIPC. In the UK, BDA Partners is authorised and regulated by the Financial Conduct Authority (FCA). In Hong Kong, BDA Partners (HK) Ltd. is licensed and regulated by the Securities & Futures Commission (SFC) to conduct Type 1 and Type 4 regulated activities to professional investors. www.bdapartners.com

BDA Co-Founder and Senior Managing Director Charlie Maynard talks about opportunities in the Asian M&A market and how BDA runs an excellent sellside process and delivers the best results for clients.

In this working-from-home chat with BDA senior leadership, we talked to Charlie Maynard. Charlie co-founded BDA Partners with Euan Rellie 24 years ago in Singapore and New York. He has spent many, many years in different countries in Asia before and after founding BDA. We talked about the opportunities he sees in the Asia M&A market, and how BDA runs excellent sellside processes and delivers the best results for clients.

What opportunities did you see in the Asian market when setting up BDA in 1996?

We realised that there was a gap in the market, because the big banks were talking about being interested in global M&A and how important Asia was to them, but in reality they were much more focused on Western M&A and Chinese IPOs, where the big bucks were. While we understood that Asian M&A was a tough market, but we reckoned we could build a business by entirely focusing on it.

How has BDA evolved over the years?

When we started out in 1996, we were largely a buyside shop, working for large, primarily Western MNCs looking to acquire in Asia. The buyside work was very useful in terms of helping us understand sectors and what clients wanted. For the first ten years of BDA, the sellside market and particularly the private equity buyout based sellside market didn’t really exist. But around 2006-2007 there were signs that it was beginning to take off, and that was when we made the switch to focus on the sellside which is 80% or more of our business today.

The other two big changes were a few years back when we started both to build out and focus on our six core sector expertise including Industrials, Chemicals, Health, Technology, Consumer & Retail and Services as well as to set up a dedicated financial sponsors group coverage team which would focus full time on our relationships with sponsors.

How are BDA set up to deliver the best results for clients?

To run excellent sellside deals, you need to have global reach in order to access all buyers and be agnostic as to where the buyer comes from. There are very few parties that can really access all relevant buyers, regardless of geography, and why this business that we’re selling is attractive. We are one of the very few M&A advisories who can do that.

You also need to have the sellside process nailed. We are very, very process oriented. We systemize and automate the basic bits of a sellside process, which are normally repetitive, so we can focus on the difficult, critical bits which are specific to individual transactions and help our clients as fully as possible by adding real value. This is another key differentiator that we have in terms of systems and processes compared to our peers and competitors.

What can we expect from BDA Partners for the next five years?

If you do M&A, you want to be doing sellside M&A. The growth in the buyout market over the last 5- 10 years has been enormous in Asia. And if you look at the capital that has been raised over the last 1-3 years, it’s clear what we have seen to date is only a fraction of what we are going to see in the future. It’s a huge and rapidly growing market, but because of the complexity and global reach required, there are very few advisors that can effectively service this market. Sellside M&A advisory will remain our core business and we’ll continue to focus on raising our deal size.

Beyond that, we started to get involved in debt advisory and restructuring by a partnership with Zerobridge, as well as trying out principal investing with BDA Capital Partners. There are quite a lot of exciting opportunities for other avenues of growth in addition to the core M&A business.

What have been the biggest challenges in BDA’s journey so far?

The hardest challenge has been creating the global network we have today, where each person in each office can deliver much more than they are able to do individually. This has taken a lot of time and it is completely and utterly about the people inside BDA. It’s ever evolving and must always be improving and progressing through our team efforts. Keeping the team moving forward and focused across nine different offices and 12 different time zones will always be challenging.

What are you most proud of about BDA?

It is the team that has created this seamless global network that allows us to deliver the best results for our clients. I love our team and I love our team spirit. Very, very few organisations have as diverse and international a team which truly works together in a fast, coordinated and intelligent way. I love the fact that we have so many people from so many countries liking each other and enjoying working as a team – and that this teamwork delivers great results.

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Latest insights from BDA

About BDA Partners

BDA Partners has a long track record of completing complex cross-border carve-outs. As one of the most active M&A advisors in Asia, we complete several carve-outs for clients each year. We share our insights below on how to complete a cross border M&A carve-out transaction successfully.

Carve-outs are a growing feature in the current M&A deal market for multi-national corporations (“MNCs”) and financial sponsor-backed companies, particularly as CEOs and shareholders assess non-core segments and assets and look to improve financial return metrics.

Acquiring a carved-out business is attractive. Significant value can often be created through margin improvements and revenue / cost / operational synergies with the new owner. Carve-out transactions require buyers who are experienced with reviewing, diligencing and identifying the value-add opportunities, and have an experienced investment team to implement changes from day one. These criteria make financial sponsors ideal acquirers of carved-out businesses. The growth in dry powder with private equity funds, estimated at US$830 billion for buyout funds at December 2019[1], is increasing deal volumes and competition between private equity funds searching for acquisitions to put committed equity to work. This in turn is having a positive impact on the valuations MNCs can realise.

During the current COVID-19 pandemic, we see management teams and shareholders using this time to identify any non-core segments and assets which could be carved out in the future; either to raise cash to improve liquidity; or as part of a wider restructuring of the Group. If the potential carve-out is not urgent due to a distressed financial position, this time during the COVID-19 pandemic is being used to assess and plan for future carve-out transactions when local and global economies begin to recover.

Carve-outs are not for the faint of heart. They present the seller with a range of complex, time consuming and potentially challenging deal hurdles from day one. Deal complexity arises from company business operations including international subsidiaries, logistics, procurement, HR, back office functions and IT systems, resulting in an array of deal challenges. No carve-out deal is the same, which means customised solutions will be needed to bridge the needs of the buyer and seller of each deal. Early preparation with an experienced financial advisor is critical in order to avoid potential pitfalls.

Being poorly prepared for a carve-out can have a major impact on the chances for success. Poor preparation or neglect of key areas may jeopardise the transaction itself, and will certainly:

Increase scope and time of buyer due diligence
Lead to value mismatch between the shareholders and the buyer
Damage potential post deal synergies
Impair post transaction relationship with the seller where Transitional Service Agreements (“TSAs”) are required

We believe there are a number of common themes and actions which can be considered to help address these risks and challenges of completing a carve-out transaction, and ultimately increase the likelihood of successfully completing the transaction.

Appoint experienced external advisors as early as possible

Areas of deep complexity and risk include standalone financials, legal risk and integration planning / implementation with the new owner, employee transfer and shared IT/compliance. In advance of a process we recommend appointing a financial advisor and other sell-side advisors to help manage the process in a disciplined approach. This would include a Big 4 accountancy firm and a legal firm as a bare minimum, but IT and HR advisors may also be needed. Advisors who have past experience in carve-outs will help maximise value and provide confidence to buyers about the carved-out business they want to acquire.

Identify the carve-out business senior management team early

The senior management team of the carve-out business needs to be identified and aligned with the carve-out transaction and strategy early in the process. The potential buyers will need to meet and hear the management team discuss the business early in the process and give the buyer confidence about the carved-out business they are looking to acquire, including the short-to-medium term strategy and growth opportunities.

To ensure the management team are aligned and motivated, the seller should ensure there are transaction and retention bonuses in place as part of the sale process. This will motivate the senior management team to get the deal done, but also provide confidence to the buyer they will inherit a senior management team that knows the business inside out and will drive the integration and growth plans from day one.

To the extent there are full time employee (“FTE”) gaps in the senior management team being carved-out, it is best to be upfront and communicate this early in the process to the buyer, so they are aware the positions which need to be filled on day one. However, the costs for such unstaffed positions, should always be included in the historical and forecast financials.

Finally, if needed, the seller should bring in dedicated cross departmental support as part of the sale process to help buyers understand a particular area if not covered by the senior management team. For example, the seller may have a Group Head of IT who is not transferring with the carve-out transaction, but they will be important for educating the potential buyers on the IT framework / systems in place.

Prepare a “what’s in, what’s out” analysis

Early in the sale process, the seller along with external advisors should prepare a detailed “what’s in, what’s out” analysis setting out all the assets including real estate, contracts, back office / IT services and people by entity / location that will be included in the transaction perimeter. This exercise is fundamental to complete early in the sale process as it will dictate how you approach preparations of the historical / forecast financials and how you sell the equity story to potential buyers as you take the carved-out business to market. If this analysis is detailed, thorough and well thought through, it will give buyers confidence about the business they want to acquire. This analysis will help identify any services such as IT, finance, procurement, contracting, etc. that might need to be covered by a TSA on day one.

Prepare the standalone financials

Once the “what’s in, what’s out” analysis is completed, the preparation of the financials will be somewhat easier. To the extent possible, the financials should be prepared and presented with the buyer and its due diligence in mind. For example, the financials should be split by key segment, geography and even a customer / products / services / SKU level, if possible.

You should ensure that the carved-out financials have all the costs required to run the business on a standalone basis from day one, post carve-out. For example, if a sales or finance person previously spent 50% of their time working for both the carved-out business and the parent group, then you should include the costs for one full FTE and not a half FTE in the carved-out financials. This will be a key focus of due diligence for a buyer, so it is important standalone costs are detailed and well thought through.

In the current COVID-19 environment, forecasting the financial performance of the carved-out business will be inherently challenging and difficult to set out accurate and reliable assumptions. Time should be taken to assess the impact of financial forecasting under COVID-19, and if needed, you should delay the process until the financial forecasts can be modelled accurately with solid underlying assumptions, and when the local / global economies have stabilised.

In our experience, the carve-out financials and operating model are certainly the areas where clients believe there would be significant room for improvement if they could start the sale process again.

While this may appear straightforward, accumulated habit and internal company shared resources may give a false impression of true standalone costs and requirements. Deep review and analysis are required to verify the completeness and accuracy of the standalone accounts.

Prepare the equity value add story for a new owner

There will be a fundamental reason why the MNC or private equity fund wants to divest the carve-out business, and this could include being a non-core business, lack of senior management focus, lack of investment, better management of asset portfolio, or struggling financial performance in the face of market competition. It is critical to tell the equity story to the buyers as to why it is a great business to own and how under the right owners, the business has great growth opportunities and can create significant value for the new owner. This could be achieved through investments in new plant & equipment, geographical growth, product development, or from positive market forecasts. If required, consider engaging commercial due diligence providers to prepare a report to help tell the market story.

Legal, tax and jurisdiction complexities

The legal aspects of a carve-out transaction tend to be one of the more complicated areas. This is largely associated with how to separate the in-scope legal entities (or assets) from the wider Group, along with how to legally separate customer & supplier contracts, IP, fixed assets and employment contracts. Critical assets or employees may fall out of the perimeter of the carve-out and may need to be re-assigned to the carved-out entity before or on closing. There may also be change of control clauses in customer, supplier or lender contracts which need to be communicated. Furthermore, there may also be tax implications for the seller or the carved-out business from the carve-out, and if so, internal or external tax advisors should be consulted.

As the business is being carved-out from a wider Group, it is likely there could be legacy issues or provisions from the prior owner or day-to-day operations, such as legal or environmental provisions. Assessing these legacy issues early in the process can help to prevent further value erosion from material debt-like items.

For a successful outcome of the transaction, to preserve value and provide protection to the seller, it is crucial that the Sale and Purchase Agreement (“SPA”) is prepared early and sufficient time is provided for sell-side and buy-side lawyers, consultants, and investment professionals to negotiate and share the mark-ups back and forth. Furthermore, schedules to the SPA should be added which set out the assets, customer & supplier contracts, and IP for example, that will be included in the transaction perimeter.

Finally, it is crucial to have the TSA designed, planned and fully costed for immediate implementation. Drafting should begin early, with a draft TSA in the dataroom, as part of the buyer’s due diligence will be understanding how quickly and challenging the separation transition period will be, and what the associated costs, penalties, services provided, and performance reporting are. There will be significant additional one-time start up transitionary costs to be borne by the buyer and seller in preparation and implementation of the TSA.

Despite rigorous preparation for a corporate carve-out, flexibility is needed by both buyer and seller to arrive at an agreement. TSAs may include sharing of commercially sensitive information, IT infrastructure, expose the seller’s customers to a new party in the form of a buyer, and lead to potential legal ramifications if handled poorly. A well-designed and managed process will build trust which is the essential ingredient to achieve agreement.

If you would like to discuss carve-outs further, or if you are considering a carve-out transaction, please reach out to any of the BDA Partners team members listed below.

Jonathan Aiken, Managing Director, London: jaiken@bdapartners.com

Ruari Sinclair, Vice President, London: rsinclair@bdapartners.com

[1] Bain Global Private Equity Report 2020

About BDA Partners

The COVID-19 pandemic has already caused significant damage to the global economy. All markets and sectors have been affected. Asian countries are working with some success to revive their economies, and to begin to loosen lockdowns across the region, although we have seen numerous setbacks.

The pattern today feels like two steps forward, one step back.

Technology and the practices developed in past pandemics have enabled governments to track potential infection cases, trace their close contacts, and quarantine all affected individuals to stop the virus from spreading in the community. Singapore’s contact tracing application, TraceTogether, uses Bluetooth technology, as does Australia’s COVIDSafe app. South Korea’s drive-through testing centres have enabled testing for large sections of the population. In China, the government has used a combination of QR codes, colour-coding, and the ubiquitous Alipay and WeChat apps to track and permit healthy travellers.

Several Asian countries, including China and South Korea, have experienced an uptick in cases sometime after restrictions were eased. In several instances, authorities have re-imposed measures to restrict interactions between citizens, to fight secondary spread of the virus.

For most of the past month, China has reported very small numbers of daily new cases, most of which were “imported”. In recent days, the Chinese government has found new local clusters in cities including Wuhan and Shulan. The global press has been sceptical as to the true number of China cases, but the country has taken dramatic and extensive steps to regulate and monitor all its citizens so businesses can largely return to work. Businesspeople are now able to travel around the country via cars, trains, buses, aeroplanes, etc.

South Korea managed to lower the number of new cases without fully locking down its economy. Instead, the South Korean government responded quickly to ramp up testing capacity and aggressively trace and isolate every potential case.

In Japan, Prime Minister Shinzo Abe has extended the nationwide state of emergency to 31^st May. Japan’s Economy Minister Yasutoshi Nishimura has said the declaration will be lifted in many regions outside Tokyo, this week.

Singapore’s citizens will soon be able to get a haircut and visit bakeries, as the government loosens restrictions slightly. Despite an upsurge in cases due to an outbreak among foreign construction workers in crowded dormitories, transmission in the local community has dropped. Singapore has reported 26,000 infections, the most in Asia, after China, India, Pakistan and Qatar. But it has a low fatality rate, with only 21 deaths.

As of 12^th May, Vietnam has, according to official statistics, still suffered no deaths from the virus, and has limited total infections to just 312, despite its shared border with China, and its role as a popular regional holiday destination. Vietnam has managed a rigorous pandemic control strategy including extensive structures of control and tracking via mobile phones.

Despite rising numbers of COVID-19 cases, both India and Pakistan are loosening their strict lockdowns, hoping that deaths will remain low and their hospitals will be able to cope with the serious cases. The surprisingly low level of South Asian deaths so far, may signal a milder pattern to the disease outbreak, which has convinced authorities the economic harm of extended lockdown is not justified when set alongside the apparently manageable health risks. Official statistics in both countries show a relatively low level of infections to date, but analysts suggest that a growing number of infections may be lurking undiagnosed.

We see many bright spots in key BDA markets.

Financial sponsors have been resilient and quick to act. Initially they performed triage on their existing portfolios, but already they are beginning to explore new growth opportunities including looking at prospective acquisitions. Global sponsors have been particularly aggressive in Japan, with local government support. Notably, Bain Capital has acquired Showa Aircraft Industry and Nichii Gakkan. Private equity firms are increasingly looking at take-privates and PIPE transactions.

As in all downturns, we see the strongest and best capitalised, most differentiated players, as benefitting and often growing market share aggressively. Tech-enabled businesses, and those which sell online, have become markedly more successful.

We see some price dislocation, slowing the progress of deals: sellers do not want to accept a significantly lower price, but buyers are looking for bargains. Realism is seeping through, and the most sophisticated players are looking beyond the crisis. Stock markets have bounced to some extent off their low.

We are seeing some distressed seller activity, and evidence of business groups looking to sell certain assets via carve-outs to generate cash or refinance existing debt facilities.

Life goes on, for now, in the new abnormal.

Notwithstanding lockdowns and social distancing, BDA is succeeding in helping clients to close transactions. Buyers are hiring third parties to carry out site visits, to be their eyes on the ground, when the buyer is unable to travel. Management presentations are being done virtually as video conferences with Microsoft Teams and Zoom. BDA is proud to have advised on transactions involving India, Vietnam, Thailand, China, Germany and the US in the last two months:

We have been monitoring each sector and geography, working to provide timely insights to help our clients understand and weather the storm.

We have published the following reports which you may find useful:

BDA has a track record of providing high-quality M&A advice, over 24 years. We have built scale, focus and connectivity between sellers and buyers across Asia, and worldwide. We will continue providing premium, Asia-related advice to clients globally, to achieve the best transaction outcomes – including walking away from deals which don’t make sense.

We are available at short notice to discuss what we are seeing, and how we can assist with your strategies and potential transactions.

We trust that you and your families are staying safe and healthy. We are operating well, across all our offices, and from our homes. We are confident we are well placed to help our clients achieve their goals during the rest of this year and beyond.

Please let us, or our senior colleagues, know if we can help you in any way.

Euan Rellie, Charlie Maynard, Andrew Huntley and Paul DiGiacomo

Senior Managing Directors
BDA Partners