[INTERVIEW] M&A in materials, ESG, healthcare forecast to pick up

Samil PwC Deal Leader Park Dae-joon speaks during an interview with The Korea Times at Samil PwC headquarters in Seoul. Courtesy of Samil PwC

PE firms, middle market companies to lead further M&A market growth

By Anna J. Park

Despite the slowdown of global M&A transactions last year amid global interest rate hikes, Korea's M&A market is expected to continue to grow, particularly in the areas of materials, ESG-themed energy and equipment and healthcare sectors.

"Korea's M&A market has been steadily growing during the past decade, peaking in 2021. The market performed relatively poor in 2022, due mainly to global interest rate hikes and consequential increases in the financing costs for deals," Samil PwC's Deal Leader Park Dae-joon said during a recent one-on-one interview with The Korea Times. "Yet, it is forecast to maintain continual growth in the future," he stressed.

The M&A and corporate valuation expert, with over 30 years of extensive experience in both local and cross-border transactions, explained that Korea's M&A market has been showing similar patterns to those in global markets in terms of growth rate. The country's number of M&A deals last year fell by 19 percent compared to the previous year, while the aggregate transactional amount of deals decreased 33 percent to $71 billion. The figures are similar to those of global peers overall; the number of worldwide M&A deals fell 17 percent last year and the global transaction amount of the deals dwindled by 37 percent.

What is unique about the local M&A market is that deals are more prevalent in the industrial manufacturing and automobile sectors. In 2022, M&A in these sectors accounted for about 14 percent of the entire transactional amount in the global market. They accounted for 22 percent of the local market, 8 percentage points higher than the overall global market.

"Compared to the U.S. and European countries, the sectors of industrial manufacturing, equipment and materials take a higher proportion in the Korean M&A market, while service or healthcare sectors hold lower weight," Park said.

Yet, he does not think the current features will continue into the future. He sees more deals taking place in the local market, in the areas of materials, ESG-related businesses and healthcare. ESG-related deals include a broad range of industries, such as waste management, secondary batteries, electric vehicles and more.

Samil PwC Deal Leader Park Dae-joon speaks during an interview with The Korea Times at Samil PwC headquarters in Seoul. Courtesy of Samil PwC

He cited two main reasons behind the significant growth of the local M&A market during the past decade: globally low-interest rates and private equity (PE) firms' increased presence in the country. He believes that PEs will continue to lead the M&A market here with their strong investments in middle-market companies.

"PEs are expected to continue taking on leading roles in deals on middle-market companies, generating the further growth of the M&A market," he highlighted. "Conglomerates, meanwhile, are expected to focus on cross-border M&A deals for further business expansions."

Park pointed to the exponential growth of local private equity funds during the past 10 years. The number of general partners (GPs), referring to entities operating PE funds, exceeds several hundred, while they operate over 1,000 PE funds in Korea.

"The local PE market has very much matured both in terms of sheer numbers and size. Given the global economic conditions, a restructuring is likely to take place within the PE market up until next year. It doesn't mean a decline of the PE market; rather it will be restructuring for another leap forward," Park said, adding that the potential restructuring process itself could activate a secondary fund market in Korea.

"By and large, I think the PE market will continue to thrive in the future. Given that real estate and finance are two main pillars of investment, the proportion of financial investment will take up a larger portion. Out of the financial investment, the alternative investment will continue to attract the influx of money from both retail and institutional investors, as alternative investments have been posting better returns compared to direct investments in stocks or bonds," he explained.

In particular, he views that PE firms' active investments in middle markets ― companies smaller than conglomerates yet larger than small businesses ― have been leading the local M&A deal market's recent growth and that the trend will continue.

"Middle market deals ranging from 50 billion to one trillion won ($37-749 million) have led local M&A market's growth in recent years. Middle markets and PE firms are forecast to grow together in the local M&A market," Park said.

The valuation expert predicts that the local M&A market will slowly recover by next year, despite continued high-interest rates.

"Even if global interest rates remain high, M&A deals could thrive again if the markets are assured of stability, directionality and predictability of future interest rate moves," Park explained.

Regarding financial regulators' recent attempts to revise M&A-related laws, such as the adoption of the mandatory bid rule by as early as 2024, Park said it could temporarily hamper the growth of the local M&A market for the next two to three years, with an increased cost burden on buyers. Yet, he thinks policies aimed at strengthening the power of corporate boards are a move in the right direction for the long-term development of capital markets in Korea.

"In the end, I think it is going in the right direction in that a corporate board's authorities are to be further strengthened, protecting the rights of not only major shareholders but also minor shareholders. I think this direction will ultimately serve the positive development of the capital market in the long-term," the deal leader said.