Rising protectionism could kill off some multi-billion-dollar international takeovers this year, bankers say, noting that governments are increasingly keen to protect their national icons.

Industries that are seen more prone to protectionism include natural resources, agricultural commodity-related sectors, and defense-related companies. In some parts of Asia, banks and stock exchanges are also seen as vulnerable to protectionism.

Ideally in a free market economy, governments rarely stand in the way of foreign acquirers. But, protectionism is rearing its head, particularly as takeovers get larger and attract greater public and political scrutiny.

Singapore Exchange Ltd's proposed $7.8 billion takeover of Australia's stock market operator, ASX Ltd, has already run into opposition from Australian lawmakers who may block legislative changes needed for the deal to go ahead.

Sovereign risk has always been part of politically sensitive takeovers, but bankers say this threat has been heightened since the global economic downturn because many governments pumped money into private enterprises to save them from collapse.

"We have seen increased level of scrutiny and governmental control being applied to cross-border and M&A transactions and there is a more protectionist flavor currently than what we have seen in the past," said Colin Banfield, Citigroup's head of M&A for Asia-Pacific.

"Part of it is just waking up to the fact that after many years you may have been too free in allowing unequal access to your own home market and that has not been reciprocated in other markets. There is the political overtones of all this as well," he added.Canada's decision to block BHP Billiton's $39 billion bid for Potash Corp surprised the business world in November and hurt the nation's business-friendly image. The notion of the world's largest producer of fertilizer, a vital commodity in global agriculture, falling into foreign hands had swung the decision against BHP, analysts say.

Size Matters
When it comes to protectionism, deal size also plays a crucial role: bankers say any deal over $10 billion now attracts a huge amount of public and therefore political scrutiny.

"Regulatory issues and sovereign concerns are a natural part of large cross-border transactions and won't go away," said Todd Marin, J.P. Morgan's head of investment banking for Asia Pacific ex-Japan.
"As companies engage in such transactions, they will naturally attract more attention from shareholders and regulators alike," he added.

BHP and Rio Tinto in October ditched plans to form the world's biggest iron ore joint venture after European regulators indicated they would block the deal.

Another deal running into political problems is U.K explorer Cairn Energy's plan to sell a $9.6 billion majority stake in its Indian unit to Vedanta Resources. The Indian government has delayed making a decision on the deal until March 2011, saying there are many complications.

Vietnamese state oil group Petrovietnam said in October it still has the option to buy the offshore oil projects BP agreed to sell to its Russian joint venture TNK-BP.

History shows that while some deals fail to clear government hurdles, many others succeed after acquirers make some changes. Politically sensitive deals have to be packaged as a merger, with benefits flowing to the vendor's home country.

One source said the SGX/ASX deal had been well flagged to Australian bureaucrats and politicians before it was launched, but others said the lobbying began too late.

"It is not a done deal yet, but increasingly more and more people are coming around to the idea," said one banker involved with the deal. He did not wish to be quoted as he was not authorized to speak to the media on the matter.

Few believe that cash-rich Asian companies or even state-owned enterprises will sit quiet on worries their attempts will be turned down. Acquirers will, however, expand their horizons and turn their attention to new opportunities.

For instance, resource hungry Chinese firms are increasingly looking at mining opportunities in Africa where there is less political red tape as opposed to Australia, some bankers say.