Oil and Gas M&A in Asia: Interesting Times for Treasury
by David Andrada, Regional Sector Head – Natural Resources & Utilities, Global Liquidity and Cash Management, HSBC
In common with other regions, the decline in oil prices has been a major factor driving extensive M&A activity in Asia. While post-M&A integration planning is clearly desirable anywhere, in Asia the sheer diversity of regulation and business practices adds additional complexity.
Perhaps unsurprisingly, the upstream oil business in Asia has been heavily impacted by the substantial fall in crude prices. Many capital intensive projects in the region began when oil was above $100 per barrel, but at current price levels are not viable. This has triggered a spate of divestments of assets now considered non-core. According to a report by law firm Eversheds and Mergermarket  56% of Q1 2016 divestment activity was motivated by this. The decline in prices has also severely hit demand for oilfield services, so this is another subsector seeing appreciable M&A activity.
This rationalisation and streamlining extends beyond just business operations into areas such as corporate treasury. Here, there is now heavy emphasis on reducing working capital requirements and adapting to an environment where financing is far more limited than previously. As the prospect of oil prices remaining lower for longer gathers credence, there is also a growing realisation that quick fixes are insufficient. Making process improvements that will deliver savings in the long term is therefore becoming a greater priority.
The key differences
Nevertheless, achieving these improvements immediately post-M&A is no easy task in Asia. For a multinational acquiring assets in Asia is very different from elsewhere given the multiplicity and probable unfamiliarity of regulations, currencies and business practices.
Furthermore, much Asian M&A activity currently consists of large non-Asian multinationals acquiring smaller assets in the region. Therefore, the business being acquired typically has treasury operations that are considerably less sophisticated than the acquirer's. Instead of an ERP or treasury management system (TMS), spreadsheets and manual processes are a distinct possibility. Smaller acquisitions will commonly have their primary banking relationships with local banks.
This poses a number of problems for the treasuries of large multinational acquirers. Apart from the technology mismatch, treasury personnel will be accustomed to very different working practices. Plus, a multinational acquirer is likely to have treasury policy specifying that only a relatively small number of global banks may be used. None of these points is particularly easy to deal with, but there is the additional complication that the acquirer is unlikely to have personnel with the necessary in-depth expertise to address them.
- 'Searching for solutions: Energy asset sales in Asia Pacific' June 23, 2016