How AI is Transforming Asia's Dealmaking Landscape

AI is transforming Asia's M&A landscape, creating new opportunities for financial sponsors and strategic investors. Robert Wright and Theodore Heng of our M&A and Private Equity Practice Groups highlight the key trends in an interview with IFLR:

• M&A opportunities span across the AI supply chain on a cross-border basis. Businesses with AI capabilities or enabling the necessary infrastructure and hardware for AI have generally seen an uptick in market valuations. Looking down the supply chain, digital infrastructure players and semiconductor manufacturers are among the top beneficiaries of the growth in AI developments.
• The fast-growing digital economy and the need to future-proof organisations drive AI investments across industries. Financial sponsors and strategics are particularly active across a number of AI innovation verticals, from AI-enabled software-related technologies through to data centres and other digital infrastructure, fuelled by a fast-growing digital economy. Traditional industries, such as banking and financial services, are also expected to continue to deploy capital in AI adoption initiatives with a view to future-proofing organisations.
• Investors in the technology sector increasingly require broad support across a range of issues to navigate a complex and fragmented regulatory landscape. A key challenge is understanding and keeping pace with the rapidly changing AI developments across the various local markets. The Asia Pacific region is host to a number of emerging AI technologies and core components of the AI supply chain. Reverse CIFIUS, geopolitical tensions and increasing antitrust scrutiny are among some of the key considerations when companies look to invest in AI in the region.
• Deals involving businesses with AI capabilities raise new issues and considerations. As an example, when conducting legal due diligence, in addition to a customary review of the target's data protection policy and procedures, a heightened review of certain data collection processes may be required if third-party data is used to train a target’s AI systems. Investors should also consider whether targeted AI representations and warranties may be required for businesses that may have exposure to certain outputs from generative AI tools. It is particularly important to have a clear understanding of the investor's priorities and of the underlying value proposition of the target business.
• Innovative features are increasingly adopted to bridge valuation gaps and enhance flexibility in AI-related deals. With investors seeking to bridge potential valuation gaps and structure for greater flexibility in AI-related deals, we expect to see continued use of minority or staged investments as well as other innovative stock or cash combinations deployed in deals in this sector. Across the early-stage and growth segments of the market, debt instruments remain a key feature, including convertible loan notes and combinations of debt and warrants, where the warrants serve as a sweetener for a potential upside in price.