M&A activity in Indonesia bounces back from recent slump

18 December 2017 Authored by Consultancy.asia

After its 2015 slump, last year’s dramatic upsurge in Indonesian M&A activity looks set to continue according to a report from consultancy Solidiance, coming on the back of government reforms and driven by the tech sector.

A recent report from Solidiance, a pan-Asia focussed strategy consulting firm with twelve offices across Asia and the Middle East, has outlined the recovery of Indonesia’s merger and acquisition (M&A) market after a brief but sharp period of poor results.

Despite strong historical performance and a promising economic future (with GDP growth at 5% CAGR from 2014-2016 and a projected 37 million new middle-class consumers before 2020), the M&A space in Indonesia saw a sharp decline of -69% in 2015 to $1.5 billion (through 104 closed deals), down from the 2014 figure of $5 billion.

The slump in prices of international commodities (oil and coal plummeting by a respective 51% and 23%) and a general local and global economic slowdown were considered the primary factors in the M&A downturn, yet post-election uncertainty from 2014 and other political and bureaucratic barriers could also be seen to have impacted M&A sentiment in the country.

Indonesia M&A deals overview 2014-2016

However, on the back of the incoming Widodo government delivering on a suite of economic reforms (enacted through parliament last year), and a continuing state commitment on infrastructure spending, 2016 saw a remarkable year-on-year M&A surge of 438% with a total value of $8.4 billion across 131 deals.

The impressive growth figure is somewhat tempered by the single acquisition of Newmont Nusa Teneggara, one of the country’s largest gold and copper mines, by MedcoEnergi, contributing a whopping $2.6 billion to the overall 2016 M&A total – rendering it somewhere closer to par with 2014’s pre-slump numbers.

Nevertheless, the mining and energy sectors led the way last year, combining for 72% of the M&A deals completed – up from just 9% the previous year in a reversal of BFSI (Banking, Financial services and Insurance) and Real Estate prominance (a combined 66% down to 6%).

Indonesia deals per industry 2015-2016

While mining is expected to continue strongly as a contributor to M&A, along with an uptick in the infrastructure category, the authors of the report believe that the technology sector will be the major driver going forward, citing three contributing factors; the projection of internet (65%) and smartphone (39%) penetration by 2020; a population of 270 million by the same year, with an estimated 50% falling within the middle affluent class, and; regulatory government incentives, such as allowing full foreign business ownership in certain tech sectors.

And the signs are already there, with the tech sector contributing 32% of the M&A value in the first half of this year (sitting at $4 billion already); the recent $1.2 billion deal between the Chinese Tencent Holding and Indonesian based ride-hailing app Go-Jek leading the way.

Overall, the recent recovery in M&A activity has been driven at a local level, with domestic transactions (deals between Indonesian domestic entities) at 60% of total value eclipsing inbound deals (acquisition of Indonesian entity by foreign entity) on 30%. This is a significant turnaround from 2014, where domestic deals accounted for only approximately $1.9 billion of the total and against roughly $2.9 from inbound transactions.

M&A deals in Indonesia based on country border

Here, the authors point to a recent tax amnesty which was enacted as part of the government’s economic incentives package and allows taxpayers to write off outstanding tax debts after disclosing their assets; an inducement which is particularly favourable for local business entities.

Ultimately, however, Solidiance believe that Indonesia will be an increasingly attractive M&A market for local and foreign businesses alike. This is due, in part, to general demographic and economic factors, such as a dense population and the 9% increase in household consumption already seen to the first half of this year, but is importantly backed by proactive government policy, with sizeable bumps to “infrastructure level improvement” (from 60th place in 2016 to 18th position this year), and the “improvement for ease of doing business index” (15th from 91st) already paving the way. 

Summarising the M&A outlook, the authors conclude: “Companies, both domestic and foreign, will consider inorganic growth through deal making to tap on the growing market in a short period of time and avoid losing on the current positive momentum to seize opportunities for business expansion…. Indonesia is expected to become a major battleground for deal making.”

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