Southeast Asia, Japan, UK and Middle East primed for deal-making in 2023

Deal activity by value in Southeast Asia and India fell in the second half of 2022, mirroring the overall downward trend.

However we expect this to reverse in the year ahead; both markets have been boosted by their greater recent openness to foreign capital relative to China and have seen strong interest from investors in sectors including financial services, logistics, tech and infrastructure.

Japanese corporate overcome their aversion to sales

M&A in Japan, by contrast, rose slightly in Q4, and we expect it to be a market to watch in 2023.

For the past decade the Japanese M&A story has been largely about outbound investment, driven by a stagnant domestic economy, a general lack of demand from Japanese shareholders for buybacks and a preference for top-line growth over cost-cutting.

Fast-forward to today and the landscape has shifted dramatically.

Japanese corporates appear to be overcoming their cultural aversion to sales, while inbound investment is on the rise as they refresh their balance sheets and belatedly embrace the shift to digitalization.

The yen – for so long one of the world’s most stable currencies – has dropped heavily against the dollar.

Japan’s central bank has had to hold interest rates down due to the sheer scale of the national debt, which is the highest in the world relative to GDP.

On the flip side, Japan’s economy is large, its infrastructure is good, its laws and courts are reliable and it has few restrictions on foreign investment.

These factors combined with the currency effect will drive M&A activity through 2023 and beyond.

UK opportunities to invest at attractive values

Much has also been made of the weakness of the pound and the opportunities this presents to buyers, particularly from the U.S.

However this driver needs to be weighed against the expected near-term recession and overall confidence in the economic outlook.

M&A remains the key tool for growth and we expect cash-rich corporates to take advantage of the value opportunities that exist in the UK market.

We also predict an uptick in combinations that seek to realise synergies where buyers are prepared to take a longer-term view on the deployment of capital.

Foreign direct investment (FDI) rules have been strengthened with the introduction of the National Security and Investment Act (NSIA), but the UK remains a relatively benign environment for FDI screening outside of truly sensitive areas.

We foresee interest in public companies being focused on the FTSE250, where values are most attractive, and that the U.S. will remain the dominant source of inbound investment.

However, the deals that are being done are often executed at premiums above historic averages, suggesting boards are adopting a robust position in relation to opportunistic approaches based on current market values.

Gigaprojects create opportunities in Saudi Arabia

The success of energy producers has a regional dimension, too, with the Middle East one of the most buoyant markets for both M&A and IPO activity in 2022.

In the period to mid-November, private equity funds invested more than USD14bn in a record 64 buyouts in the Middle East.

The region’s sovereign wealth funds are also cash rich as a result of higher oil and gas revenues, and are in a strong position to selectively target foreign assets.

In parallel, many oil-producing states are seeking to diversify their economies away from fossil fuels.  

In Saudi Arabia, for example, Crown Prince Mohammed bin Salman’s reform programme and initiatives such as Neom, the largest gigaproject in the world, are creating significant opportunities for overseas investors.