The way back to health in Asia will be a slow process

June 30, 1998 For all those expecting a wave of mergers and acquisitions to sweep through Asia, the year so far has been a disappointment.
Crashing currencies have wiped out virtually all equity in Asia's crisis economies and foreigners were expected to leap into the breach and help supply the $ 100 bn or more that experts reckon the region needs.
But few deals have been completed despite the arrival of planeloads of potential purchasers early this year.
Reality quickly hit home as the difficulties of doing business in Asia became evident. Experts said that borders had opened to foreign investment but attitudes had not. And in most countries, legal and regulatory frameworks have yet to change.
Successful deals have required great flexibility and commitment from purchasers, and a lot of announced agreements have subsequently - and quietly - failed.
"After the initial euphoria, a lot of people who would have participated have backed away," said Steve Schiller, head of mergers and acquisitions for Salomon Smith Barney.
"And the euphoria let Asian decision-makers believe it would be easy, and people would hit their value expectations."
The problems for those without an existing foothold in Asia - or a solid understanding of its character - are basic.
"In many cases, the information people need to make decisions just isn't available," said Schiller. "People just say 'I can't deal with this' and walk away."

SBC Warburg Dillon Read estimates that $ 109 bn is needed to recapitalise listed, corporate Asia. South Korea, Thailand and Indonesia account for 75 % of that figure.
So far, only $ 9 bn to $ 13 bn has been raised, about half of it via equity issuance and half in foreign direct investment (FDI), SBC Warburg said.
The broker said it could find evidence of only $ 5.5 bn in FDI so far but conceded that as much as $ 10 bn might have been invested, taking into account unpublished deals.
"We have a long way to go in rebuilding balance sheets."
Valuation, structure and information are the 3 biggest hurdles for Western deal-makers working in Asia, said Schiller, and structure is the toughest of them.
"In many Western economies when you buy businesses, you buy 100 %. In Asia, that is less likely to be true," he said
But ultimately, the biggest difficulty for Asia as it recapitalises is the absence of a coherent banking system and mature capital markets to provide financing alternatives to bank loans, such as high-yield debt.
Experts credited Asian governments with moving swiftly to sort out the banks, which are essential as the sole intermediary between borrowers and savers in a region where debt markets remain in their infancy.
But for Asia to succeed and find the money it needs to fund recovery, the pace of change must remain relentless, said Mark Hopkinson, investment banking head at Schroders Asia.
"What should have happened 2 years from now is major foreign borrowing by the government sector in most countries, probably in the debt markets, to take bad and problem debts off the books of the local banking systems," Hopkinson said.
If governments resist loading up their balance sheets with bad bank debt, privatisations of public utilities and other government assets will be the only option, Hopkinson said.
SBC Warburg Dillon Read estimates that Asia's banking crisis will cost $ 115 bn, of which $ 38 bn will be needed quickly to recapitalise the banks.
Other brokers, such as Goldman Sachs, estimate recapitalising the region's banking systems excluding China will cost at least $ 90 bn.
This level of fund-raising is expected to allow debt to take on a new lease of life, with great benefits for Asia.
"What we are talking about is the ability of institutional investors to do something with their money other than put it in the bank," said Raja V, vice president of fixed income research at Bank of America. The problem with banks is that withdrawal is the only possible response to increased risk, he said.
But bond markets allow people to trade money, establishing appropriate interest rates through market-established risk premiums.
"This has really been lacking in Asia," Raja V said. "It shows you the cost of capital. That was the single, largest contributing factor to the crisis in Asia - people were not compensated for the level of risk."
Corporations as well as governments are expected to tap debt markets, often in domestic currencies.
"In the middle of next year, the companies in economies that are bottoming out will have to start borrowing again, and when they do they will have the option to go into the bond market rather than the banks," Raja V said.
Who will buy this debt remains a very large question, with South Korea expected to flood the market with new issues over the next couple of years as it recapitalises its banks.
Foreigners are expected to step into the breach but mobilisation of Asia's famously high domestic savings through the bond market will be essential to Asia's drive to recapitalise, analysts said.
For equity investors, the opportunities are expected to emerge outside share markets, which experts expect to remain speculative for at least 2 years while earnings remain elusive.
Thai Farmers Bank and Bangkok Bank have both raised about $ 1 bn in straight equity so far. But successive equity issues would tend to drive down share prices, deterring this type of fund-raising.
Analysts said preferred shares and convertible bonds, both of which offer a stronger claim on assets, are expected to play a bigger role in equity fund-raising than straight equity.
In the meantime, direct equity will remain a major focus as multinationals try to exploit this unprecedented access to Asia.
"Two years may be too early for wholesale return of private equity capital," Hopkinson said.