India will rule M&A street in 2008

HONG KONG: Asian companies andgovernment funds are set to keep up their global buying spree in 2008, poweredby a sagging dollar, cheap targets in the financial sector and strong balancesheets. India and China's hunger for foreign assets and a frenzy of activity inthe booming commodities sector triggered record merger and acquisition volumesin Asia outside Japan in 2007, with outbound acquisitions on track to triplelast year's total. That momentum is poised to continue as Asian buyers usingswelling foreign exchange reserves look for natural resources, brands,distribution and know-how.

Banks and government funds, meanwhile,are stepping in to bail out Western financial institutions reeling from thesubprime mortgage crisis. "Asian buyers are seeking (financial institutions),natural resources, and consumer plays in the west," said Kalpana Desai, head ofAsia M&A for Merrill Lynch. "M&A volumes will be higher in 2008 than in2007, and will be more China-driven than India-driven," she added.

On Monday, the Government Investment Corp of Singapore (GIC), paid$9.75 billion for 9 percent of subprime-battered UBS AG. Another Singaporegovernment fund, Temasek Holdings, is believed to be eyeing stakes in banksincluding London-based Barclays, which it already owns 2.1 percent of, and Usinstitutions such as Merrill Lynch.

GIC's deal tops the recent $7.5billion investment by the government of oil rich Abu Dhabi in New York'sCitigroup, another casualty of the subprime mortgage meltdown. "The reason whyyou've seen increased acquisitions taking place in the financial servicesindustry is partly because people don't want to hold US dollars in the form ofTreasuries," said Colin Banfield, head of Asia ex-Japan M&A at LehmanBrothers.

"If you're going to hold US dollars you might as wellinvest in an actual operating entity given what's happened to relativevaluations on assets and the weakness of the U.S. dollar," he said. The dollarhas fallen almost 10 percent this year against a basket of currencies, while theyield paid on benchmark 10-year Treasuries has declined to around 4.15 percentfrom a peak above 5.30 percent in June.

BIGBUYERS

The buyout firepower wielded by big Asian companiesand wealth funds, including Beijing's new $200 billion China Investment Corp,has meant names from the region crop up as potential buyers whenever a big assetcomes on the block. China, for example, is seen as a would-be participant in thebattle for miner Rio Tinto, which is trying to fend off a $140 billion bid fromBHP Billiton. Chinese banks, meanwhile, were invited to look at struggling UKlender Northern Rock, sources have said. "One major theme, we believe, will bethe acceleration in the number, size and profile of outbound Asian deals," saidEd King, head of Asia-Pacific M&A for Morgan Stanley.

This yearsaw Industrial and Commercial Bank of China, the world's most valuable lender,pay $5.6 billion for 20 percent of South Africa's Standard Bank .Earlier, China Investment Corp invested $3 billion in US buyout firm BlackstoneGroup.

LOOKING ABROAD

Asia ex-Japan M&A volumes have surged 77 percent to$751.5 billion this year, data from Thomson Financial show, including outbounddeals that tripled to $375 billion.

The figures include BHP's offerfor Rio and other pending deals. UBS, Morgan Stanley and Goldman Sachs were thetop advisors in Asia this year. Given high valuations in China and India, aswell as the difficulties of making acquisitions in China, overseas purchases areexpected to predominate among cross-border deals in 2008.

MainlandChinese and Indian companies are trading on multiples of 40 and 23.5 timesforecast earnings, respectively, compared with price-to-earnings ratios ofaround 13 times in Europe and 16.3 times in the United States. The deals keepcoming. On Friday, China's Sinosteel offered $1 billion for Australian iron oreminer Midwest Corp. On the same day, China Minmetals Nonferrous Metals Co andJiangxi Copper launched an agreed $450 million offer for Canada's Northern PeruCopper Corp.

In India, Tata Motors Ltd and rival Mahindra &Mahindra are vying for Ford Motor Co's Jaguar and Land Rover brands in a dealthat may fetch $1.5 billion. "Chinese and Indian companies have solid balancesheets and lots of cash. If the renminbi continues to strengthen, that couldgive China an edge," said Jason Rynbeck, head of Asia M&A at ABN Amro,referring to the Chinese currency, also called the yuan.

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SouthKorean firms are also expected to step up their shopping overseas, followingDoosan Infracore's $4.9 billion purchase of construction gear maker Bobcat fromIngersoll-Rand , in the country's largest outbound deal. "There is ample fundingand financing and government support for Korean corporates to become much moreinternational," said Lehman's Banfield.