Deal-making in Asia got off to a strong start in 2011, with cashed-up companies tapping investment opportunities in sectors from energy to industrials, and bankers say the transaction pipeline for the rest of the year looks healthy.
Volatile stock markets, rising oil prices and higher interest rates in many Asian economies are risks that could derail the region's rapid economic growth and slow down deal activity.
But for now, deal makers are upbeat about the outlook.
"The M&A activity level remains quite high," said Anjani Kumar, head of India M&A at RBS. "Numerous discussions are going on, not only in energy and resources, but also in industrials, telecom, IT, infrastructure and others. The pipeline is strong," he added.
Announced M&A in Asia ex-Japan rose 9.7% in the first three months of 2011 to $129.1 billion, according to Thomson Reuters data. That makes it the busiest start to a year since the first quarter of 2008 when deals worth $133.4 billion were announced.
China accounted for about a fifth of the total M&A volume, followed by Australia and India. The three countries cornered 45% of the deals in the first quarter.
Materials, energy and power sectors contributed 38% of total M&A volumes and bankers says natural resources will continue to be the dominant sector in Asia. That holds particularly true for countries such as India and China, where the rapid economic growth is driving up energy needs.
"Resources will remain one of the most important theme for outbound acquisition by Indian corporates. Coal is a recurring theme for power producers, steelmakers and miners. We expect to see a lot of action from large corporates as well as public sector clients," Kumar of RBS added.
Indian bidders are circling the $3.5 billion sale of Australian coal miner Whitehaven Coal Ltd, sources familiar with the situation told Reuters earlier this week.
Financials, the fourth most active sector in the first quarter, holds a lot of promise, bankers say. Already, Australia and New Zealand Banking Group Ltd has expressed desire to increase its stake in Malaysia lender AMMB Holdings.
"There is significant interest in Southeast Asian financial institutions from Chinese, Japanese the Koreans and also from stronger European institutions," said James Ankers, director financial institutions group at Rothschild.
"But there are two issues which in particular continue to be a break on deal activity. One is the regulatory environment and the second, valuation expectations," he added.
Last year, Indonesia's Gunawan family called off plans to sell its 46% stake in PT Bank Panin after the bids fell short of its expectations.
"There are a number of institutions that want to get into Indonesia but which struggle with valuations. I think on balance, the sellers will prevail because there aren't many opportunities and many institutions see this region as strategically important," Ankers added.
The hunger of natural resources is also making Indonesia a hot target of inbound M&A activity, and bankers predict a pick-up in dealmaking in the resource-rich country.
"Indonesia continues to be a highly active in-bound market attracting strong multinational interest," said Mayooran Elalingam, head of M&A, South East Asia for Deutsche Bank.
"We believe that industries which will continue to be most active in Indonesia will be those that play into the China/India growth story and Indonesia's growing middle class - for example, natural resources, financial institutions and consumer-related companies."
Japanese corporates have been scooping up assets in Southeast Asia lately, but the devastating earthquake in that country is likely to slowdown that trend in the short-term, bankers said.
Despite slipping to the tenth place globally, Goldman Sachs was the top M&A adviser in Asia, followed by Barclays Capital and Morgan Stanley, according to the data.
While the number of announced deals rose, M&A advisory fees fell 26% to $928.7 million, according Thomson Reuters/Freeman Consulting estimates. Fees are paid once deals close, so banks may see a boost in coming quarters.
Blackstone Group's $9.4 billion purchase of US shopping malls from debt-laden Centro Properties was the biggest Asian deal of this quarter, followed by BP plc's purchase of a 30% stake in Reliance Industries Ltd for $7.2 billion came in at the second place.