China’s acquisition spree isn’t a bubble, it’s a boom, and one likely to grow 20pc this year, PWC forecasts
China shopping the world is picking up steam, PWC says
Even after a record year in 2015, PWC believes China’s outbound M&A momentum is far from peaking.
The momentum of Chinese buyers’ acquiring streak is set to sustain well into 2016, resulting in 20 per cent more deals than the all-time record of 382 deals amounting to US$67.4 billion in 2015.
Unlike the previous boom in leverage-driven M&A that peaked after 2007, China’s current acquisition spree is backed by hard cash - so while the wave of acquisition activity may be a little unusual, it shouldn’t be seen as a bubble.
Asked on how confident he is with PWC’s bullish forecasts, David Brown, transaction services leader for PWC in China and Hong Kong said he sees no cause for worry. What Chinese companies are buying these days is based on solid economic fundamentals, especially given their needs and the scale of the economic transformation underway.
“I’m running a M&A advisory business – and we are planning for that business to triple in size in the next five years,” Brown said.
“Four to five years ago, companies could grow organically at rates of 15 - 16 per cent. The economy then was very strong. But as the slowdown trend hits China, more buyers who may be inexperienced just four or five years ago now look to M&A as game changer.”
David Wu, ING’s head of corporate finance for China said in the US$100 - US$500 million deal bracket, Chinese clients typically target a minimum internal rate of return of 8 – 10 per cent as the investment hurdle that they could make back within a typical investment horizon of five years.
Aart Jan den Hartog, country manager and head of commercial banking, greater China at ING Bank said while the changes in exchange rates under the new forex regime can create “some influence”, that will be factored into the internal rate of returns (IRR).
There is now a bigger group of clients who are taking a long-term view, he added. These companies are eager to go into developed markets to buy into brands and technology that they can bring back home, to be leveraged in the China environment, den Hartog said.
“Within industries there is now a lot of excess capacity. Many of them are unable to grow that quickly. People have started to look to M&A as a source of growth and to squeeze the excess capacity,” Brown said.
“Ninety-nine per cent of the deals are made with medium term view, if not the long-term. The buyers aim to grow with the target company post-acquisition,” said Christopher Chan, advisory partner at PWC.
“Many Chinese companies are committed to using internal resources. We don’t see them relying on bank debt. There is already not a lot of leverage - most of the M&As are under-leveraged. A tightening of leverage is not going to prick the bubble,” Brown added.