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Materi

Cross-Border M&A Trends & Issues


in Indonesia

Cross-Border
M&A Trends & Issues
in Indonesia
Mark Innis, Foreign Legal Consultant, Jakarta

KPPU Merger Control Seminar


Jakarta
26 October 2016

Agenda
Indonesia Economic Overview
Overview of Indonesia M&A Activity in 2016

M&A Deal Issues

2016 Hadiputranto, Hadinoto & Partners

Indonesia Economic
Overview

Indonesia Economic Overview


First signs of pickup in growth

GDP growth is set to level off in 2016 after five years of


deceleration. The economy is forecast to expand by
+5% this year after +4.8% in 2015.

Exports still struggle but as commodity prices edge up,


one can see first signs of improvement.

Private investment crawls upward but improved


economic conditions suggest a gradual increase.

Domestic demand is on the rise, supported by strong


fiscal spending and higher private consumption.

Domestic credit conditions have eased thanks to lower


interest rates.
Source: Euler Hermes

2016 Hadiputranto, Hadinoto & Partners

Indonesia Economic Overview (contd)


First signs of pickup in growth

Moreover, streamlined regulations for foreign investors,


an under control current account deficit, and better
demand prospects should translate into a gradual
increase in foreign inflows. Risks include yet another
drop in commodity prices, lower external demand
growth, and tighter global financing conditions

Source: Euler Hermes


2016 Hadiputranto, Hadinoto & Partners

Source: The Central Statistics Agency (BPS)

2016 Hadiputranto, Hadinoto & Partners

Source: The Central Statistics Agency (BPS)

2016 Hadiputranto, Hadinoto & Partners

Indonesia Economic Overview (contd)


Adequate policies enhance the economic outlook

The monetary policy is flexible and appropriate. A tight


approach in 2015 helped the economy to (i) navigate
through external turbulences (lower commodity prices,
Fed tightening) and (ii) reduce inflationary pressures. In
H1 2016, a combination of lower inflation and a slight
improvement in external conditions allowed the Central
Bank to ease its monetary policy.

The countrys business environment is significantly


improving. Indonesia is now ranked 109th (up from
120th) in the World Banks Doing Business 2016 survey.
It ranks better on Paying taxes, Dealing Construction
and Getting Credit Sub-components.

Source: Euler Hermes

2016 Hadiputranto, Hadinoto & Partners

Economic Overview
Adequate policies enhance the economic outlook

The deficit is set to widen in the short run. Reasons


include government increases in expenditures to support
economic growth and lower commodity prices which
translate into lower fiscal revenues.

External position is improving

External pressures on the currency have abated thanks


to the cautious monetary stance. The external debt to
GDP ratio and the import cover ratio (above 6 months)
are at acceptable levels. Furthermore, the current
account balance has improved and stabilized above -3%
GDP. Lower exports were compensated by lower
imports.
Source: Euler Hermes

2016 Hadiputranto, Hadinoto & Partners

Overview of Indonesia M&A


Activity in 2016

Source: Transaction Trail Half Year Issue 2016 by Duff & Phelps
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Source: Transaction Trail Half Year Issue 2016 by Duff & Phelps
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Source: Transaction Trail Half Year Issue 2016 by Duff & Phelps
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Indonesian Active Sectors


Low M&A activity

For the past 24 months more foreign direct investment


(August 2014 currency wobble)
Uptick in transactions 2016

Why?

Certain sectors down globally, commodities as an example


Economic and political uncertainty
now much improved
Valuation gap is still wide, strategic entrants maintain
expectations
Quality assets few and far between mid tier assets, tax and
compliance issues
Stresses on balance sheets exist but appear to be
manageable

2016 Hadiputranto, Hadinoto & Partners

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Indonesian Active Sectors


Most active

Industrials

Consumables

Real estate (not reflective in figures)

FIG (not reflective in figures)

Looking forward

Consumables, real estate, natural resources (bottom


fishing), FIG, telecommunications, airlines, e-commerce
(although deal size small)

Impact of tax amnesty

Prior deals revived

2016 Hadiputranto, Hadinoto & Partners

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Indonesian Active Sectors


Private Equity

A lot of interest, much money available

No longer just equity investors

Keen participants in management and bringing real skills


and global network

Usually joint ventures

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M&A Deal Issues

M&A Deal Issues


Compliance

Compliance is a key focus especially tax and licensing

Prudent for Indonesian sellers to spend some money


fixing compliance before a sale

sellers due diligence


alters perception

Related party arrangements a concern

Past transactions, and pricing

Looking forward transitional arrangements

Management teams staying on

Knowledge, HR management and customer contacts

Work permits an issue

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M&A Deal Issues


Documentation

Like comprehensive documents, warranties and


recourse

moreso Europe, US, Singapore/Malaysia/HK


less so China, Japan, Thailand
board and investment committee approvals require
comprehensive documents

Indonesian sellers reluctant however

legal community has grown in skills and appropriate legal


advice can minimize risk
warranty limitations, no small claims (0.1%), claims above
a threshold only (1-2%), cap on claim amounts, time
limitations (to notify and to commence proceedings)
disclosure letters

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M&A Deal Issues


Purchase Price Retention

Buyers want a retention of purchase price

warranties untrue, value adjustment from signing until


closing, future creditworthiness of seller
ask upfront if this is a condition foreign investors
assume it is market practice
consider use of bank escrow and terms of release
carefully
in joint ventures, perhaps the money is reinvested into the
joint venture

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M&A Deal Issues


Material Adverse Change Clause - beware

General covering everything including Indonesian


economy

Just company circumstances, and even narrower acts


of God

Bring Down/Confirmatory Due Diligence

Indonesian transactions take time to close but even


longer if pre-closing KPPU approvals

Buyers concerned about changes in circumstances

disclosure letters can it be updated as well?

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M&A Deal Issues


Employee Issues

Whether an asset sale or a share sale potentially a large


cost Indonesia is somewhat unique

Indonesian sellers must argue not a valuation issue as


there are accruals
rather cash flow and human capital/talent management
issues
avoid the cost affecting transaction pricing be open in
initial negotiations on issue
employees look to past precedents within group or
company

Merger

voluntary redundancy programs


harmonization of employee benefits not easy

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M&A Deal issues


Data Privacy/Confidentiality/Gun Jumping

Black boxes in data rooms

avoids allegations from regulators that critical


industry/company information is being shared amongst
competitors
allows company confidential data to be released closer to
execution of transaction documents
assists in dealing with confidentiality provisions in
commercial agreements

Data privacy restrictions

general consents
breach

2016 Hadiputranto, Hadinoto & Partners

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M&A Deal Issues


Anti-Trust Merger Control

Indonesia is one of the few countries with mandatory


post-closing merger review

Proposed amendments

mandatory pre-closing merger review


joint ventures
asset acquisitions

could impact on timing unless approvals prompt - timing


could be deal breaker

Uncertainty over standard for change of control (<50%


stake is acquired

More clarity on market definitions

Uncertainty on treatment of foreign-to-foreign


transactions; are they subject to KPPU filing?

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M&A Deal Issues Emerging Trends


Caps on Liability

No longer 100% of purchase price global trend down


to 50% - Indonesian sellers should seek lower
percentage

Lockbox Approach to Deals

Usually in auction sales where buyer has no choice

Buyer takes the risk on business from signing to closing

No completion accounts prepared no completion


adjustments

More common overseas as time between signing and


closing short

Not really adopted in Indonesia but perhaps adopt it as


an Indonesian seller

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M&A Deal Issues Emerging Trends


Disclosure of Data Room

Indonesian sellers should a full disclosure of everything


in the data room a well prepared data room allows the
argument to be made

Long Closings

To minimize liability consider handing some control to


the buyer consultative or joint management before
closing

Allow bring down/confirmatory due diligence but push for


additional disclosure as well

2016 Hadiputranto, Hadinoto & Partners

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M&A Deal Issues Emerging Trends


Valuation Uplifts Earnouts

Consider a valuation uplift if selling in a distressed


situation (or as a seller you are management and
staying on)

Needs to be carefully documented as buyer controls


company

2016 Hadiputranto, Hadinoto & Partners

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THANK YOU
For more information, please contact:
Mark Innis
Foreign Legal Consultant
mark.innis@bakernet.com
Wimbanu Widyatmoko
Senior Partner
wimbanu.widyatmoko@bakernet.com
Mochamad Fachri
Associate Partner
mochamad.fachri@bakernet.com
2016 Hadiputranto, Hadinoto & Partners

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www.hhp.co.id

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Being global is part of our DNA. Our difference is the way we think, work and behave we
combine an instinctively global perspective with a genuinely multicultural approach, enabled by
collaborative relationships and yielding practical, innovative advice.

Hadiputranto, Hadinoto & Partners is a member firm of Baker & McKenzie International, a Swiss Verein with member law
firms around the world. In accordance with the common terminology used in professional services organizations,
reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an
office means an office of any such law firm.
2016 Hadiputranto, Hadinoto & Partners
All rights reserved.

Materi
MERGER & ACQUISITION
Competition Policy Perspective

MERGER & ACQUISITION


Competition Policy Perspective

M. Nawir Messi

KOMISI PENGAWAS PERSAINGAN USAHA


Gedung KPPU
Jl. Ir. H. Juanda No. 36
Jakarta Pusat
Indonesia 10120

Introduction
To bring into implementation of Articles 28 & 29 of Law
No. 5/1999, govt regulation (PP 57/2010)
was
introduced in 2010 11 years after the law.
Post merger notification regime, what was the historical
consideration?
Merger Control has been implemented for about 6 years.
Hundreds of merger transaction were notified every
years.
Notified transactions include those taken place at such
global level as in Europe, USA, Japan, South Korea,
Malaysia, etc.
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KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

M&A CASE
Company A
(Multinational
Conglomerate)

Acquired
Domestic Market

Company Z

International Market

Produce Essential Product

3
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

4
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

EASY TO MERGE ??

5
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

INITIAL MERGER WAVES


(History of merger control)
M&A Wave I
1897-1904 Merger Creates Monopoly

M&A Wave II
1916-1929 Merger occurred on Oligopolistic Industry

M&A Wave III


1965-1969 Trend Conglomerate Merger

M&A Wave IV
1981-1989 Trend Hostile Take Over
6
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

MERGER WAVES IMPACT

7
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

Why the
business
Merge?

Growth, Increase revenues, & market


share
Expansion
Economies of Scale
Economies of Scope
Vertical Integration
Increase production, capacity, obtain
distribution channel
Innovation
Exit from the market to focus elsewhere
Sale instead of liquidation
Taxation
Increase market power

8
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

ROLE FOR COMPETITION AUTHORITY:


Preserve effective competition in the marketplace

Many transactions have


beneficial effects of M&As

Efficient
New Products
Pro-competitive

Some transactions may have


adverse anti-competitive effects
Restrict competition
Raise entry barriers

Increase prices
Limit choice

9
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

10
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

MERGER CONTROL FOR ECONOMIC IMPROVEMENT


Lower inflation
Increased
competitiveness

Fair price

Poverty reduction

Fair
competition/
merger control
Increased quality
and quantity of
goods and services

Increased job
opportunity (reduce
unemployment)

INCREASED
WELFARE OF THE
SOCIETY

Economic growth

Better services

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KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

What is the objective of Merger Control?

Is to preserve competition and prevent


economic dominance of a firm or a group of
firms;
Our job here, as set out by law, i.e. to
determine whether merger results in a
Substantial Lessening Competition (SLC) and
the vast majority do not;

12
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

Standard of Review

Pre-merger market might be highly competitive or rather


uncompetitive we are only interested in the change caused by a
transaction. SO, FOR THOSE PRE-MERGER DOMINANCE FIRMS THERE
IS NO NEED TO SO WORRY
Two standard of review:
1. Dominance (the creation or strengthening of a dominant position);
2. Possible SLC (significant lessening of competition);
* unilateral conducts:
* potential coordinated actions
13
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

WHAT WE OBSERVE

Market Definition
Calculate the Market shares and concentration levels as a result of the merger
Nature of competition betwen firms
Homogeneity, proximity of products
Barriers to entry
Barriers to expansion

Symmetry of size/power
Price transparency
Switching cost
14
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

Question to Address

If the merger firm tries to raise prices, what will happen?


Will its costumers stay and pay the higher prices?or they just switch to
the remaining competitors?
How do customer make their choices?
What are the conditions of production?
Has something special been lost by merging the two firms? Were they
significant competitors to one another?
Does the industry already (pre-merger) appear to be exhibiting tacit
collusion?
Or, if the industry does not appear already to be exhibiting tacit
collusion?
How about countervailing buyer power?
Efficiencies?
If large buyer s oppose the merger, might they sponsor entry? Senior
management leaving target company?
Etc.

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KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

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KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

Formalities
Obligatory (not optional);
Threshold for notification: asset or sales basedthreshold;
Asset 2,5 trillion rupiahs (non bank)
Sales 5 trillion rupiahs (non bank)
Asset 20 trillion rupiahs (bank)
Primary indicator: changes in HHI (150);
Timeframe for Review : 90 days
Data requirement: obligatory;
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KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

Outcomes and Remedies


Possible outcomes following competition assessment:
A. The proposed merger does not raise competition concerns;
B. The proposed merger raises competition concerns;
Possible decisions:
A. To approve the proposed merger without remedies;
B. To approve the proposed merger with remedies;
C. To block the proposed merger;

In the case of remedies:


- imposed by authority, but merging parties may propose
remedies that may consider by the authority;
18
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

Issues to Concerns
Availability of data???
Availability of business plan for merged
firms???
Inconsistency between Objectives of Law No.
5/1999 and Govt Regulation (PP 57/2010)
Concerning Merger;
Post Merger regime has been less effective???

19
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

Effective merger review is an important component of a


competition regime as it can help to prevent consumer harm from
anticompetitive transaction which likely would reduce competition
among rival firms and/or foreclose competitors (OECD
Recomendation on Merger Review)
Asses and control external growth of companies with a view to
preserve competition and prevent economic dominance of a firm or a
group of firms

20
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

MERGER NOTIFICATION 2010-2016


70

60
5
0

50

40

69

30

53

50
43

43

20

34

10
0

0
3
0
2010

0
2011

1
2012
Merger

1
2013

1
2014

Acquisition

Consolidation

3
2015

1
2016 (Oktober)

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KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

NOTIFIED TRANSACTIONS BASED ON ORIGIN


COUNTRIES 2016
Foreign Companies

Domestic Companies

31%

69%

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KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

F A I R

C OM P E T I T I O N
for
SOCIAL
WELFARE
23
KPPU & COMPETITION POLICY

Komisi
Pengawas
Persaingan
Usaha

Terima kasih

KOMISI PENGAWAS PERSAINGAN USAHA

http://www.kppu.go.id

DISCLAIMER:
The opinions expressed in this presentation and on the previous slides are
solely those of the presenter and not necessarily those of KPPU. All
information included here falls under the fair use of the Indonesian law for the
openness of public information. The presenter strives for accuracy of any
data and information in these slides, but cannot be held responsible for any
errors in those featured. Any quotation from the slides is allowable by
mentioning or referring to the source. Thank you.

ADDRESS:
KPPU Building
Jl. Ir. H. Juanda No. 36
Jakarta 10120, Indonesia
P. +6221-3507015/16/49
F. +6221-3507008
E. infokom@kppu.go.id
E. international@kppu.go.id

KPPUINDONESIA
@KPPU
KPPUOFFICIAL

For more information, annual reports, articles, and other publications, please
visit our official web page.

KPPU & COMPETITION POLICY

24

Materi
Notifikasi Merger
Komisi Pengawas Persaingan Usaha

NOTIFIKASI MERGER

KOMISI PENGAWAS PERSAINGAN USAHA

MERGER
PENGGABUNGAN

PELEBURAN

PENGAMBILALIHAN

PENGGABUNGAN/MERGER

PERUSAHAAN
X

PERUSAHAAN
Y

PELEBURAN/KONSOLIDASI
PERUSAHAAN
Y

PERUSAHAAN
X

PERUSAHAAN
Z

PENGAMBIALIHAN SAHAM/AKUISISI
PERUSAHAAN
X

PERUSAHAAN
A

PERUSAHAAN
Y/INDIVIDU

PERUSAHAAN
B

PERUSAHAAN
B

REGULASI MERGER DI INDONESIA

NOTIFIKASI MERGER KPPU

KONSULTASI
EFEKTIF
YURIDIS

PEMBERITAHUAN

Maksimum 30 Hari Kerja

MERGER YANG WAJIB


DINOTIFIKASIKAN KEPADA KPPU

PENGHITUNGAN ASET DAN


PENJUALAN

Perusahaan A

Perusahaan B

PENGHITUNGAN ASET DAN


PENJUALAN
Kelompok
Usaha/Group A

Perusahaan
X

Perusahaan
Y

MERGER ASING
ULTIMATE PARENT
COMPANY

ULTIMATE PARENT
COMPANY

COMPANY A

COMPANY V

COMPANY B

COMPANY C

ULTIMATE PARENT
COMPANY

ULTIMATE PARENT
COMPANY

COMPANY A

COMPANY V

COMPANY W

COMPANY B

COMPANY C

COMPANY W
PENJUALAN

Indonesia

PT D

PT X

ULTIMATE PARENT
COMPANY

COMPANY V

COMPANY A

COMPANY V

COMPANY W

COMPANY B

ULTIMATE PARENT
COMPANY

COMPANY A

PT D

COMPANY C

Indonesia

PT D

ULTIMATE PARENT
COMPANY

ULTIMATE PARENT
COMPANY

COMPANY B

Indonesia

PT X

Indonesia

COMPANY C

COMPANY W

PENJUALAN

AKUISISI DENGAN UNSUR JOINT VENTURE


A

50%

50%
X

50%

A
50%

100%

50%
X

50%
X

KONSULTASI
Rencana Merger Sudah Ada

Memenuhi
Syarat

Konsultasi Tertulis ke KPPU

PEMBERITAHUAN
Merger Telah Efektif Yuridis

Memenuhi
Syarat

Pemberitahuan ke KPPU

Penilaian Awal
Penilaian
Penilaian Menyeluruh

Pendapat KPPU

Pendapat KPPU

AMANDEMEN UU 5 TAHUN 1999


TENTANG MERGER

TERIMA KASIH

DIREKTORAT MERGER
KOMISI PENGAWAS PERSAINGAN USAHA REPUBLIK INDONESIA
GEDUNG KPPU LANTAI 4
JL. IR.H. JUANDA NO. 36 JAKARTA PUSAT
0213507015 EXT (311)

Alur Penilaian Merger