Malaysia's M&A Outlook - What's the deal in 2023?

29/03/23

Alan Foo
Director, Transaction Services

Going into 2023, there were various predictions of a slowdown or recession for the year ahead. This sentiment reflects the expectation that global economic conditions from 2022 will carry over into the year, stemming from rising interest rates, geopolitical tensions and supply chain disruptions from the pandemic lockdowns. However, M&A can be a key strategy for businesses to reposition themselves in a changing market, invest in digital transformation and the green transition, and build resilience for the future. While deal activities tend to slow down during times of uncertainty, challenging conditions can alternatively create opportunities for better returns.

To set the scene for the Malaysia M&A outlook in 2023, we first look at the deals market in 2022. The Global M&A Industry Trends: 2023 Outlook illustrates a decline in both global deal volumes and values by 17% and 37% respectively from record-breaking levels in 2021. In Asia Pacific, the deal volumes and values have also declined by 23% and 33% in the same period; with deals in China showing the greatest decline (volumes and values decreased by 46% and 35% respectively), mainly due to the country’s prolonged COVID-19 restrictions and weakening demand for exports.

In contrast, the Malaysia deal volume remained robust in 2022 — potentially contributed by a few factors. Firstly, companies are increasingly looking to diversify their production base outside of China to countries within the Southeast Asia region, including Malaysia. Secondly, Malaysia continues to retain its reputation as an attractive investment hub for both foreign and domestic direct investments. And thirdly, companies in Malaysia are looking at deals as a strategy to expand their businesses quickly in the coming years or refocus on their core business activities. Nevertheless, although the Malaysian economy grew by 8.7% in 2022, it is anticipated that the slowing global growth in 2023 may dampen economic momentum in Malaysia.

In PwC’s 26th Annual Global CEO Survey, 74% of Malaysian CEOs surveyed believe that global economic growth will decline in 2023. This will present a challenge to the M&A market as decision-makers will become more cautious of making big investments in a downturn. However, another perspective that one can take is that this represents an opportunity for cash-rich companies and investors to take advantage of lower asset prices. In fact, in the same survey, 71% of Malaysian CEOs tell us that they do not plan to delay deals as a response to economic challenges in 2023.

Here are 3 key themes we anticipate in the 2023 Malaysia M&A environment.

Environmental, Social and Governance (ESG)’s growing influence in deal value - In addition to the shift in government focus and investor scrutiny in this area, stakeholders — including employees, customers, value chain partners and the media — are compelling businesses to consider ESG in their overall strategy. In any M&A, the ESG considerations covering non-financial metrics such as environmental sustainability and social disparities will need to be taken into account. An ESG due diligence would need to be undertaken by any investor to understand this aspect of an acquisition as ESG factors can preserve, destroy or create value.
Digital technology in deal analysis - A continued need for technology and data-driven assets will further drive transformational M&A. We also expect M&A in 2023 to leverage the use of data analytics to assess businesses' potential increase in value. Such data analytics tools will also be crucial post-deal when implementing a value creation plan.
Divestiture of non-core assets - Given the higher interest rates and the decline in consumer confidence in 2023, we anticipate this to impact businesses negatively. We expect highly leveraged corporates to actively pursue divestment of non-core assets across their portfolios as a means of strengthening their balance sheets.

The current market conditions present headwinds to deal making; however, times like these can also reveal more attractive valuations, lessen competition for deals and see new assets entering the market. Therefore, business leaders and investors who are looking to transform their business could find M&A to be a key tool in their longer-term strategy to achieve sustained outcomes.

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