Contemporary approaches to cross-border M&A and rapid new innovations in technology-based services make Indonesia a catalyst for change
According to the data of the Indonesian Business Competition Supervisory Commission (Komisi Pengawas Persaingan Usaha, or KPPU), Indonesia’s M&A market in 2018-2019 seems to be focusing more on private rather than public M&A.
KPPU’s website registered 69 M&A deals in 2018 that are subject to the merger notification, with a total value of approximately IDR150 trillion (about US$10 billion). The Indonesia Investment Co-ordinating Board’s (Badan Koordinasi Penanaman Modal, or BKPM) data on the other hand show investments of IDR721.3 trillion from January to December 2018, and IDR195.1 trillion for January to March 2019. One of the reasons of concentration on private M&A is the complex regulatory framework and procedures for public M&A, which often leads to lengthier deal times and costlier transactions.
In terms of the national legal framework for investments, the Indonesian government has taken great efforts to create a more transparent environment by implementing the Online Single Submission (OSS) system, which allows companies to obtain their various business licences electronically and through an online system.
Another highlight of Indonesian M&A transactions is that M&A deals involving financial investors tend to have a quicker decision-making process compared to those involving traditional companies, and the short-term investment/portfolio investment nature of financial investors has made Indonesian M&A more dynamic.
Recent notable transactions
One notable M&A transaction in the Indonesian market was the acquisition by Hokkan Holdings Corporation (Hokkan), one of the largest Japanese bottling and packaging companies, of the beverage packaging manufacturing business from seven companies belonging to Deltapack Industri (DPI Group) for IDR1.26 trillion. The transaction included the transfer and assignment of a substantial portion of DPI Group’s moveable and immovable assets, as well as business portfolios, which involved complex structuring and sophisticated multi-layered transfers of assets.
Other notable M&A transactions in 2018 were the acquisition of Freeport Indonesia by Indonesia Asahan Aluminium for IDR54 trillion, and the acquisition of Bank Danamon Tbk (Danamon) by Bank of Tokyo-Mitsubishi UFJ Financial Group (MUFG). MUFG successfully purchased 20.1% of the shares in Danamon for IDR17.18 trillion to secure control of 40% of the shares.
The acquisition of Prima Top Boga by Nippon Indosari Corpindo Tbk (Sari Roti) also made an impact on the Indonesian market because the KPPU imposed a fine of IDR2.8 billion on Sari Roti due to its negligence to submit the mandatory merger report to the KPPU.
Political and regulatory environment
As typically found in developing countries (commonly set as the target M&A market), a sudden change in government policy and/or regulation have the most crucial influence on M&A deals. These factors have a direct impact on financing strategies and how a deal should be structured.
Indonesia has quite a unique and complex regulatory and government monitoring system. There are many layers of regulations depending on the type of business, nature of investment, company status (private or public), and geographical location (central or regional). The government supervisory authorities are also divided, depending on the business characteristics. For example, foreign investment in Indonesia is subject to the BKPM’s regime, while other specific types of businesses, particularly in the banking and non-bank financial institution sectors, as well as public companies, fall within the authority of the Financial Services Authority of Indonesia (Otoritas Jasa Keuangan, or OJK).
In addition, regional governments also have specific authorizations for specific activities. One issue that has been a classic issue in many sectors is the multi-interpretation on regulatory requirements. Therefore, it is very important for investors to have full support from the relevant local counsel (both financial/tax and legal) who understand the practical policy beyond the literal text of the regulation, which in turn will enable the counsel to bridge the communication and advise clients of the reality in practice, and ultimately the most appropriate and legally doable structure for the contemplated M&A transaction.
The key regulation applicable to all M&A transactions involving limited liability companies, regardless of the type of business, is Law No. 40 of 2007 (and its implementing regulations) concerning limited liability companies. Specifically for M&A relating to foreign investment/foreign investment companies, they are also subject to the rules and regulations of Law No. 25 of 2007 (and its implementing regulations) concerning investments, as well as the rules and regulations issued by the BKPM, while public companies, bank and non-bank financial institutions are subject to the specific OJK regulations, depending on the type of activities.
Recent regulatory updates
There are two significant regulatory updates that have had an impact on M&A transactions, namely the new Government Regulation No. 24 of 2018 on Electronically Integrated Licensing Services, and BKPM Regulation No. 6. Since the issuance of these regulations, investment and business licences are now obtained electronically and integrated through the OSS System, rather than through manual applications as in the past.
It has been reported that the government of Indonesia is also looking at amending the current Indonesian Investment Negative List to allow full foreign ownership in a greater number of business sectors.
Finally, practitioners are now expecting the new Anti-Trust Law to be enacted in 2019 (after several years of postponement). Two significant changes in this law would be: (1) the amendment of the merger notification requirement from post-notification to prior approval; and (2) the introduction of a leniency programme. It would be interesting to see how the KPPU enhances its infrastructure to accommodate the applicability of pre-M&A approval requirements.
Pricing, closing structure of private M&A
The tools and techniques used in private M&A really depend on the characteristics of the business of the target, and the negotiating circumstances of the parties.
A locked-box mechanism is more common for transactions that involve companies with dynamic business activities and a wide range of customer portfolios, such as banks or multi-finance companies.
An escrow is common for specific deals where certain conditions or procedures are to be fulfilled by the buyer and seller within the same timeframe, or in interconnected deals that require payment to be fully paid up/made before the other connected deal is completed, or where there is a price adjustment agreed by the parties after the completion.
Another alternative is a price adjustment mechanism, which allows the parties to adjust the purchase price after completion (if, for example, the valuation of the assets/shares decreases).
Fundamental pre-closing conditions, depending on the characteristics of the deal and business line, are: government approvals (if required by specific regulations); the internal corporate approval of the parties and acquired company; creditors’ consent; and announcements to the creditors and employees.
Post-closing conditions are more administrative requirements by nature and include, for example, a notification to the authorized government and the creditors, and a newspaper announcement. This includes a merger notification report to the KPPU when the threshold set under the regulation is met. Other contractual conditions between shareholders include non-competition clause (between the business of the shareholders and the acquired company) and price adjustment conditions. It is common to include foreign jurisdiction in the conditional share purchase agreement, although for the deed of transfer it must be governed by Indonesian law.