MERGER and acquisition (M&A) activity in Malaysia fell for the third consecutive year in 2020, hurt by the impact of the Covid-19 outbreak.

Experts have mixed views as to whether there will be a revival in dealmaking in the first half of this year.

Last year, there were 47 deals valued at US$4.3 billion (RM17.4 billion) compared with 52 deals valued at US$5.7 billion in 2019, according to data collated by Mergermarket.

The data is based on announced deals valued at more than US$5 million.

The M&A deal value and count last year were the lowest so far based on available data going as far back as 2013.

“Deal flow is expected to be more active in 1H2021 compared with 2H2020, with government-linked entities among the most active, as well as M&A in the manufacturing and healthcare-related space,” Tony Goh, a Mergermarket spokesperson, tells The Edge.

“While the political situation is expected to remain unpredictable in the near term, private sector deals are largely unaffected. In fact, the worsening pandemic is leading to higher interest in the glove, pharmaceuticals, technology and logistics sectors, where demand for these products and services is expected to remain strong.”

CIMB Investment Bank Bhd CEO Jefferi Hashim believes dealmaking in Malaysia will remain challenging in 1H2021, given the ongoing pandemic and a conservative approach by companies to shore up cash, owing to challenges arising from slower economic growth. This probably leaves less available cash for any near-term M&A.

“Select M&A activity is expected to be driven by acquisitive companies looking to strengthen their business or capitalise on lower valuations, consolidation among companies within similar verticals, and companies looking to diversify beyond their core vehicles to mitigate the impact of the economic slowdown,” he tells The Edge.

Jefferi says private capital will continue to stand ready with ample “dry powder” to provide options to companies that may have limited avenues to maximise shareholder value on their own.

“Furthermore, if valuation multiples become more reasonable and public companies are constrained in their ability to deliver capital appreciation on their own, there could be demand for privatisation. Companies that remain resilient during the pandemic are highly likely to be sought after, with headroom for premium valuations,” he notes.

Meanwhile, on the periphery, bargain hunters are constantly on the lookout for signs of stress in smaller companies, which may drive sector consolidation, he says.

“We are also seeing interest from strong Asian companies looking to invest in Malaysia as they look to diversify their geographic exposure into relatively stable economies and well-regarded labour markets. Key sectors in trend for now are tech and logistics. Consumer staples, healthcare and education continue to be favourites, owing to their resilience,” he adds.

The largest M&A deal last year, valued at US$2.72 billion, was in the agricultural sector. This was the planned takeover by Federal Land Development Authority (Felda) of FGV Holdings Bhd shares, as announced on Dec 8.

The second-largest deal, valued at US$254 million, was the planned takeover of TA Enterprise Bhd (TAE) by its major shareholder Datuk Tony Tiah Thee Kian.

Given the huge Felda-FGV deal in December, the country’s M&A deal value in 4Q2020 jumped to US$3.17 billion (across seven deals) from just US$215 million (10 deals) in the third quarter. In 4Q2019, deal value stood at US$268 million (11 deals).

How Southeast Asia fared

Meanwhile, M&A activity also fell last year across Southeast Asia.

The region saw 329 deals valued at US$51.45 billion, a decline of 24.4% year on year in terms of value, and 19.2% y-o-y in volume. This too was based on Mergermarket’s data of announced deals valued at more than US$5 million. In 2019, there were 407 deals valued at US$68.06 billion.

The region’s M&A deal value last year was the lowest since 2018.

“M&A activity in 1Q2021 is expected to remain tamed, following the discovery of new Covid-19 variants and new border closures even as mass vaccination rollouts start in Indonesia and Singapore,” Mergermarket says in a commentary on the region.

“Sources tell [us], however, that dealmaking might pick up later in the year, as delayed transactions might finally be finalised and several new deal opportunities emerge.”

The region’s biggest deal last year was Thailand’s Charoen Pokphand Group’s acquisition of Tesco’s Asian operations in Thailand and Malaysia for US$10.58 billion.

Singapore emerged as the top dealmaking country in the region, mainly because of the US$8 billion merger between CapitaLand Commercial Trust and CapitaLand Mall Trust.

The country is expected to continue to lead M&A activity in the region this year, as the rollout of its mass vaccination programme could revive tourism and enhance demand for aviation, hospitality, retail and food services.

“M&A activity in Malaysia will be dominated by domestic deals, owing to the impact of travel restrictions on inbound and outbound deals. State-owned funds such as the Employees Provident Fund, Permodalan Nasional Bhd and Khazanah Nasional Bhd are expected to divest some non-core assets,” Mergermarket notes.