By Brian Chia / Wong & Partners

• M&A activity  expected to increase through the year
• Private equity investments to also rise
• Legal market likely to see recalibration of players

As we enter 2012, the general sentiment appears to be a positive one. Amidst uncertainties in the global economy, M&A activity is expected to increase through the year in Malaysia in addition to an uptake in private equity investments. Malaysia’s legal market is also likely to see a recalibration of players in the coming year.

Changes in the legal landscape

In 2009, the Malaysian government had announced that it would gradually liberalise the legal market. It is believed that this liberalisation will take the form of either permitting foreign laws firms to establish a presence in the market, or via international partnerships with a foreign equity limit of 40 percent. It appears that a maximum of five licences will be issued for the former, and that these licences will only cover the practice of Islamic financing with the view of promoting Malaysia as an Islamic finance hub. However, the international firms that this move is aiming to attract have expressed the view that launching a pure Islamic finance practice is not a viable or worthwhile venture for them without the opportunity to provide full-service capabilities as well. The cost of establishment and overheads will not be justified for such a small piece of the pie. Furthermore, most of these international firms already have established offices in locations currently active in Islamic finance such as the Middle East and London.
It is not known when the market will actually be liberalised or which form the liberalisation will take, but if the liberalisation takes the form of the options presented, it is not expected to cause much waves in the market.

Mergers & acquisitions (M&As)

M&A activity is predicted to increase in all regions around the world except in Europe, where the sovereign debt crisis is producing a destabilising effect on the economy. It is forecasted that the energy and mining, financial services, as well as the industrial and manufacturing sectors will be vibrant with M&A activities. The energy and mining sector has recently increased in prominence due to a greater focus on renewable energy sources, whereas the industrial and manufacturing sector is seen as a major growth area for emerging markets such as China and India. However, the financial services sector is - to a large extent - seen as the most difficult sector to complete deals in because of regulation or government intervention despite relatively higher levels of predicted M&A activity.
Cross border M&As are expected to account for a high percentage of total M&A activity; a rise of  up to 45 percent in the Asia Pacific region. This is due to the fact that the emerging markets in Asia are seeing unprecedented growth rates. Firms in countries such as China, India and Indonesia are seen as prime targets with promising growth potentials. However, there will be challenges in cross border M&A activities, the three main concerns being (a) lack of clear regulatory framework; (b) complexities of legal due diligence; and (c) foreign investment policies.

Private equity

Equity financing is predicted to be utilised just as much as debt financing in respect of M&A activities in 2012. However, it is anticipated that corporate firms, as opposed to private equity firms, will be the main drivers of cross border M&A activities. Corporate firms, such as blue chip European companies, are flushed with cash and want to put their cash to work in order to achieve further growth. M&A is seen as a popular and viable growth vehicle amongst executives. It is estimated that corporate America alone has an unprecedented $1.9 trillion of capital, whereas private equity firms have $500 billion. Statistics also demonstrate that private equity transactions have generally not recovered to levels recorded between 2005 and 2008 since the market downturn in 2009. According to the Asia Business Outlook Survey performed by the Economist Corporate Network, Malaysia has become one of the top markets which is becoming more attractive for sales growth and manufacturing. This works hand in hand with the Malaysian government’s policy to liberalise foreign investment restrictions in various industries to attract even greater investments into the country.