Chinese companies well positioned to fulfil ‘going out’ strategy amid continuing global M&A boom

Chinese companies rank as the fourth biggest players in global mergers and acquisitions

PUBLISHED : Sunday, 24 January, 2016, 6:01pm
UPDATED : Sunday, 24 January, 2016, 6:01pm

Under the dual “Going Out” and “One Belt One Road” banners, and at the urging of the central government, Chinese corporates have become the fourth largest sets of mergers and acquisitions players globally, after the US, UK and France, according to M&A powerhouse Lazard.

In 2015 alone, there were 380 outbound deals amounting to US$67.8 billion by Chinese corporates. The total transaction value is up by 21 per cent and deal volume have risen 40 per cent year-on-year. This year PWC estimates US$40 billion worth of business involving Chinese state-owned firms are already under development.

Yan Lan, head of greater China investment banking at Lazard said the rise of China M&As is in line with global trends, which last year saw a historic US$4.4 trillion worth of deals. Jumbo-sized deals were common, with the Dupont-Dow Chemicals $130 billion merger announced at the end of the year, a case in point.

Former financial secretary Anthony Leung who now serves as chief executive of Nan Fung Group said the world is awash in liquidity looking for yield thanks to successive rounds of US and European quantitative easing over the years.

Chinese buyers have arrived at an unusual junction of economic opportunity and welcoming policies in Europe and some areas of the US , Lazard’s Yan said.

In 2016, the market will see further expansion. As China’s corporates rev up for more investment, she expects more jumbo-sized deals to emerge, even on a scale likely to eclipse the Dupont-Dow deal.

However, even as the deal pipeline grows, increasingly Western investment bankers are feeling left out.

In terms of Hong Kong-advised and Hong Kong-financed deals, mainland Chinese bankers have been taking a larger share.

Chen Shuang, executive director and chief executive officer of China Everbright says there’s still plenty of opportunity to go around.

“Chinese corporates are now operating in 184 countries around the world. But they cannot rely on mainland financial institutions– mainland banks are present only in 50 countries. There is an unmet gap that can be taken up by Hong Kong. And there are quiet a few areas where mainland corporate finance needs are just not met.”

“Hong Kong already does a lot – in debt capital financing, in equity financing, commercial banking. It also provides M&A financing for the ‘going out’ strategy.”

“There is a supporting cast of private equity players here that could make themselves useful. Once people hear of [China] M&A, they see sovereign risks. Many countries worry about their strategic industries or technology being taken over. But most Chinese companies are not that ambitious or patriotic about meeting grand state targets – they are just here to make money. In the mean time, China need not broadcast its ‘going out’ strategy’.”

Hu Zhanghong, chairman and chief executive at China Construction Bank International which now leads the M&A league table among Chinese financial players said: “Hong Kong should be more proactive in meeting Shanghai and Shenzhen’s challenges. We have over the years seen how Shanghai and Shenzhen combined have become leaders in foreign direct investment. We can do more.”

“Hong Kong will see challenges. To meet them, it should play up its advantages.” Hu reminds how fast Hong Kong has come around in becoming a global No 1 in the IPO market, along with its regulatory, legal and free capital control regimes.”

Chinese corporates because of policy reasons or for ease of doing business, frequently opt to conduct deals out of Hong Kong, which has helped lift the city to eighth place on the global M&A league table last year, chalking up $32.1 billion worth of business.

Hong Kong is also a good place to find experienced international personnel to help run investment banking operations, CCB’s Hu said.

“A lot of companies can be quite simple – they think about how many board seats to retain and reckon there would be control. The question should be focused two-way – how to internationalise but localise at the same time.... Using local management is a must. We rarely ever change management.”

Frank Lyn, China and Hong Kong markets leader at PWC said the approach used by Chinese companies tends to yield successful deals, as so few ever engage in hostile approach. Also, for as long as the financing is applied through normal channels, Yan said she has does not know of any instances where clients have been barred from shifting yuan out of China to buy foreign assets. The government is supportive of Chinese companies’ overseas activities.

“At the end of the day, they happen because there are genuine needs for financing for the corporates, overseas opportunities for the buyers and there is government and the financial institutions to support them,” she added.

Up to now, the industries most favoured by Chinese buyers are telecoms & media, followed by life science, energy and financial services. The majority of Chinese deal flow is directed at Western Europe, followed by 22 per cent into the US, 14 per cent in the APAC region and 13 per cent within Greater China.

Before the official inauguration of Asian Infrastructure Investment Bank last week, a total of US$14 billion worth of deals have been focused on the Belt and Road zone. But with a better ecosystem of M&A financing, this is set to change.